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CMA Foundation · Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Mehta, a mercantile agent, is in possession of Gupta's textile bales with Gupta's consent. Acting in the ordinary course of business of a mercantile agent, he pledges them to Bank X, which acts in good faith and has no notice of any lack of authority. Gupta had not authorised pledges. What is the position of the pledge?

The pledge is valid as if Gupta had expressly authorised it. Section 178 protects a pawnee who acts in good faith without notice of lack of authority when a mercantile agent, in possession with the owner's consent, pledges goods in the ordinary course of business.

  1. AVoid, because Gupta never authorised the pledge
  2. BVoidable at Gupta's option within a reasonable time
  3. CValid, as if Mehta were expressly authorised by GuptaCorrect
  4. DValid only up to the value of Mehta's commission

Explanation

Under Section 178, a pledge by a mercantile agent in possession of goods with the owner's consent, acting in the ordinary course of business, is as valid as if expressly authorised. The pawnee must act in good faith and have no notice of lack of authority, which is satisfied here. Lack of actual authority therefore does not defeat the pledge.

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