Page 109 - DCOM103_COMMERCIAL_LAW

Commercial Law

Notes of goods. For a pledge by a mercantile agent to be valid the following conditions must be
satisfi ed:
(a) Good faith: The pledgee must have acted in good faith and must not have at the time of
the pledge notice that the pawnor had no authority to pledge the goods. The onus of
proving both these facts rests upon the person disputing the validity of the pledge.
(b) Acting in the ordinary course of business: The mercantile agent must have acted in
the ordinary course of his business. Therefore, if he does the business outside his
business premises or out of business hours, such a transaction would fall outside this
section.

2. Pledge by seller or buyer in possession after sale: Under s.30 of the Sale of Goods Act, a
seller left in possession of goods after sale, and a buyer, who obtains possession of goods
with the consent of the seller, before sale, can create a valid pledge. Once again, for the
pledge to be valid the pledgee should have acted in good faith and without notice of
previous sale of goods to the buyer or of the lien of the seller over the goods.

3. Pledge by a person in possession under a voidable contract (s.178-A): Where a person
obtains possession of goods under a voidable contract the pledge created by him is valid
provided: (a) the contract has not been rescinded before the contract of pledge and (b) the
pawnee acts is good faith and without notice of the pawnor’s defect of title.
4. Pledge by co-owner in possession: One of several joint owners of goods in sole possession
thereof with the consent of the rest may make a valid pledge of the goods.
5. Pledge by a person having limited interest (s.179): Where a person pledges goods in which
he has only a limited interest, the pledge is valid to the extent of the interest. Thus, a pledgee
may further pledge goods to the extent of the amount advanced thereon.

11.3 Rights and Duties of a Pledgor and a Pledgee

According to s.176 in case the pledgor fails to pay his debt or complete the performance of
obligation at the stipulated time, the pledgee can exercise any of the following right:
1. Bring a suit against the pledgor upon the default in redemption of the debt or performance
of promise and retain possession of goods pledged as a collateral security; or

2. Sell the goods pledged on giving the pledgor a reasonable notice of sale.
In case the goods pledged when sold do not fully meet the amount of the debt, the pledgee can
proceed for the balance. If, on the other hand, there is any surplus, that has to be accounted for
to the pledgor. Before sale can be executed, a reasonable notice must be given to the pledgor so
that:
1. The pledgor may meet his obligation as a last chance;
2. He can supervise the sale to see that it fetches the right price.

Example: A trader pledged certain goods in favour of a bank. On default to return the
loan, the bank sold the goods without giving a notice of sale to the trader as the loan agreement
specifically excluded it. Held, that such an exclusion clause is inconsistent with the provisions of

the Act and as such void and unenforceable.
However, the sale made by the pledgee without giving a reasonable notice to the pledgor is not
void, i.e., cannot be set aside. The pledgee will be liable to the pledgor for the damages.

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