Write a Note on Pledge by Mercantile Agent
Introduction
The concept of pledge is a special kind of bailment under the Indian Contract Act, 1872. A pledge involves delivering goods as security for the repayment of a debt or performance of a promise. Normally, only the owner of goods or someone authorized by the owner can pledge them. However, there is an important exception—a mercantile agent can also make a valid pledge under certain conditions.
What is a Mercantile Agent?
According to the Indian Sale of Goods Act, 1930 (Section 2(9)), a mercantile agent is a person who, in the customary course of business, has the authority:
- To sell goods
- To consign goods for sale
- To buy goods
- To raise money on the security of goods
Examples of mercantile agents include brokers, commission agents, auctioneers, etc.
What is a Pledge?
A pledge is the delivery of goods by one person (called pledgor) to another (called pledgee) as security for payment of a debt or performance of a promise. The ownership of the goods remains with the pledgor, while possession is transferred to the pledgee.
Legal Provision: Section 178 of Indian Contract Act
This section allows a mercantile agent to make a valid pledge of goods under specific conditions:
- The agent must be in possession of the goods with the consent of the owner
- The agent must act in the ordinary course of business as a mercantile agent
- The person to whom the goods are pledged (the pledgee) must act in good faith
- The pledgee must not be aware that the agent has no authority to pledge
Example:
A is a mercantile agent with possession of B’s goods. A pledges those goods to C to get a loan. If C acts in good faith and does not know A was not authorized, the pledge is considered valid. B cannot recover the goods unless the debt is repaid.
Importance of Good Faith
The pledge will only be valid if the person taking the goods (pledgee) believes honestly that the agent has the authority to pledge the goods. If the pledgee knows that the agent is unauthorized, the pledge is not valid.
Rights of Pledgee
- Right to retain the goods until the debt is repaid
- Right to recover expenses incurred in protecting the goods
- Right to sell the goods after giving reasonable notice
Case Law: Lloyd v. Grace Smith & Co.
This case established that if a mercantile agent acts within the scope of his apparent authority, then the principal is bound by the agent’s actions, even if the agent misuses his position.
Conclusion
The Indian law recognizes the pledge made by a mercantile agent as valid, provided it is done in the usual course of business and the pledgee acts in good faith. This rule balances the protection of third parties and ensures smooth functioning of commercial activities. It is a useful provision in trade, especially when dealing with agents and intermediaries.