Morvi Mercantile Bank Ltd. v. Union of India - Case Note - Contracts II - Pledge

Morvi Mercantile Bank Ltd. v. Union of India

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Facts – A firm sent six boxes of menthol crystals worth Rs 35,500/- from Thana (Maharashtra) to Okhla (New Delhi) via Indian Railways. The boxes were marked with the name of the said firm and were consigned to "self".  The firm later endorsed the railway receipts of the boxes in favour of Bank against an advance of Rs 20,000/- made by the Bank to the firm. These boxes did not reach Okhla. Later Railways offered to hand over few boxes to the Bank but the Bank refused delivery on the ground that they were different from the boxes consigned to them.

Trial Court Holding:-

        i.            Railways had misplaced the original boxes

      ii.            Boxes offered by Railways to bank were different from the boxes firms had consigned to the bank (They contained caustic soda instead of menthol crystals)

    iii.            The owner of the goods i.e. the firm had endorsed railway receipts in favour of the bank

     iv.            Bank as endorsee of railways receipts was not entitled to sue the railways for the loss of consignment

Bombay High Court Holding:-

        i.            Affirmed ruling i, ii, and iii of the Trial Court

       ii.            Reversed the iv ruling holing in effect that bank as endorsee of railways receipts is entitled to sue the railways for the loss of consignment but only to the extent to the loss of its security (Rs 20,000/- and not Rs 35,500/-)

Issue & Holding (Majority Opinion - Subba Rao, Raghubar Dayal and Bachawat, JJ) –

        i.            Whether endorsement of railway receipt constitutes a pledge?

o   Yes , endorsement of railway receipt constitutes a valid pledge. This is based on

§  Prior decisions - Ramdas Vithaldas Durbar v. S. Amarchand & Co – Judicial Committee held that the railway receipts were ‘instruments of title’ within the meaning of the Indian Contract Act, 1872

§  Parliament while enacting Indian Sale of Goods Act, 1930, presumably borrowed the definition of "documents of title to goods" from the Indian Factors Act and the English Factors Act noticed by the Judicial Committee, but expressly included in the definition the railway receipt

§  The same definition was incorporated by reference in the Explanation to Section 178 of the Contract Act as amended in the year 1930. This definition is also in accord with the definition of "mercantile document of title to goods" in the Explanation to Section 137 of the Transfer of Property Act.

      ii.            Whether endorsement of a railway receipt for consideration constitutes a mere pledge on the railway receipt or on the goods covered by it as well?

o   Court after noticing all the relevant provisions of the Contract Act, the Transfer of Property Act and the Sale of Goods Act held that railway receipts were documents of title and the goods covered by the documents could be pledged by transferring the documents. Court held that if it is not allowed then a reading of Section 178 of the Contract Act would suggest that an owner of goods cannot pledge the goods by transferring the documents of title, whereas his agent can do so.

    iii.            Whether the person in whose favour railway receipts are endorsed has the right to sue for loss of goods?

o   Court held that as per Section 180 of the Contract Act, a pledge being a bailment of goods as security for payment of a debt, the pledgee will have the same remedies as the owner of the goods would have against a third person for deprivation of the said goods or injury to them. Accordingly, he Bank, being the pledgee, can maintain the present suit for the recovery of the full value of the consignments amounting to Rs. 35,500/-.

     iv.            Whether Bank is the pledgee of the goods or is only the pledgee of the documents of title and accordingly could only keep the documents against payment by the firm?

o   The Court held that on the basis of the facts of the case, the firm by endorsing the railway receipts in favour of the Bank for consideration pledged the goods covered by the said receipts to the Bank.

       v.            The court did not answer the questions whether if the transaction was not a pledge of the goods, the Bank would be entitled to sue on the basis of the contract entered into between the firm and the Railway.

Holding (Dissenting Opinion - Mudholkar and Ramaswami JJ.) –

        i.            After the passing of the Indian Contract (Amendment) Act, 1930, the legal position with regard to the pledge of railway receipts is that the owner of the goods cannot, pledge the goods represented by the railway receipts in the present case unless the railway authorities are notified of the transfer and they agree to hold the goods as bailee for the pledgee. Therefore, there is no valid pledge of consignments of goods between the Bank and the firm and Bank cannot sue the railways for the loss of goods.

      ii.            Bills of lading are mere promises by the seller, being the issuer or transferor, to deliver, or authorise the buyer to receive possession. Railway receipt has been specified in Section 2(4) of the Sales of Goods Act and has been assimilated to bills of lading for the purposes of the right of stoppage in transit but not for all purposes.

    iii.            There are no rights created merely by the reason of the endorsement of a Railway Receipt between the endorsee (bank) and the railway company which has issued the railway receipt to the consignee (firm), the only remedy of the endorsee being against the endorser (firm).