Shiv Dayal, J.
1. This appeal is from the dismissal of the appellants suit for recovery of 115 bales of cotton, or, alternatively, Rs. 39,143 and paise 25 with interest at the rate of paise 50 per cent, per month against the 5 defendants.
2. The plaintiff firm Poonamchand Sakarlal and Co., is a registered partnership firm carrying on business in cotton seeds, etc., at Bombay, Ladabhai (defendant No. 1) and his son Dhanji (defendant No. 2) are carrying on business as Adhatiya (commission agent) in the name and style 'Dhanji Ladhabhai at Ujjain. Dhanji was the Karta of the joint Hindu family firm Dhanji Ladhabhai. The plaintiff firm used to purchase and sell cotton and cotton seeds through Dhanji Ladhabhai after getting it ginned and baled at Ujjain. The plaintiff's case was that on being informed by defendant No. 2, Dhanji, that he had 279 bags of loose cotton in stock in balance of account and no purchaser was available at Ujjain, (Dhanji's letters dated March 3, and March 23, 1952), the plaintiff directed him to get the cotton baled and to deliver for that purpose the bags of cotton to M/s. Sukhdeo Cotton Press Company, Ujjain. Later on, the plaintiff directed the firm Dhanji Ladhabhai to transfer 100 bales to M/s. Mangoolal Treekamlal of Bombay inthe account of M/s. Sukhdeo Cotton Press Company, Ujjain. But these instructions were flouted by Dhanji Ladhabhai. Eventually, the plaintiff came to know that the said firm had fraudulently managed to pledge the bales with the firm Deepchand Siremal, Ujjain (defendant No. 3) and the latter had pledged them with the Punjab National Bank Ltd., Ujjain (defendant No. 4). The plaintiff then served defendants Nos. 3 and 4 with notices intimating them that defendant No. 2 had no title to the goods and he had wrongfully and dishonestly converted them to his own use. The bales ought to have been restored to the plaintiff firm free of all encumbrances but the defendants paid no heed to the plaintiffs' notices. The bales had been ultimately sold to Khan Saheb Seth Nazar Ah Alabux, Cotton Weaving and Spinning Mills, Ujjain (defendant No. 5). The plaintiff laid his claim against all the defendants primarily on the ground that defendant No. 2 had no title to the goods and, therefore, no right to pledge the plaintiffs bales; alternatively on the ground that the pledge transactions were sham and fictitious and as a result of fraud and collusion between defendants 1 to 4.
3. The suit was resisted by all the defendants. Firm Deepchand Siremal (defendant No. 3) denied that there was any fraud or collusion or that defendant No. 2 had no right to pledge the bales. It was specifically pleaded by that defendant that defendant No. 2 had been carrying on business as Pakka Adhatiya for some years and there was no reason to suppose that he was not the owner of the bales. The defendants took the plea of being bona fide transferees in good faith for value and without notice of the plaintiff's title.
4. The trial Court held that the plaintiff firm was the owner of the suit goods (115 bales of cotton), that the title in the goods remained vested in the plaintiff firm and did not pass to the firm Dhanji Ladhabhai and that the latter fraudulently and without any right pledged the goods with the firm Deepchand Siremal (defendant 3); but the pledge by the latter firm in favour of the Punjab National Bank was neither fraudulent nor dishonest. The trial Court further held that there was no collusion between the defendants. On these findings it held that the plaintiff was not entitled to the price of the goods from defendants Nos. 3, 4 or 5 and in the result it dismissed the suit against them. However, it held defendants Nos. 1 and 2 liable to pay the plaintiff firm Rs. 37,925/- as price of US cotton bales with interest by way of damages at the rate of 6% per annum upto the date of the suit and future interest on that sum at the rate of 4% per annum from the date of the suit (October 16, 1952) till realization.
5. Aggrieved by the dismissal of their suit as against defendants 3, 4 and 5, the plaintiff-firm preferred this appeal.
6. The appellant's contention is that on the findings arrived at by the trial Court that the appellant-firm was the owner of the goods in suit and that title did not pass to the firm 'Dhanji Ladhabhai', the appellant firm was entitled to follow the goods in the hands of the respondents and was entitled to the return of the goods or recovery of their price. In support of their contention two arguments were advanced. It was urged for the appellant that Section 178 of the Contract Act was not attracted, inasmuch as the defendants Nos. 1 and 2 were not mercantile agents and secondly defendant No. 3 was not a bona fide pledgee as in the circumstances of the case the respondent should have been held to have had notice of the plaintiffs title.
7. In our opinion, the appellant's contentions must be rejected. In the first place, it now stands as an admitted fact (to which admission we shall advert later on) that defendant No. 2 had the authority to sell as adhatiya of the plaintiff-firm the goods belonging to the plaintiff-firm. That being so, if the defendant No. 2 pledged the goods with defendant No. 3, the plaintiff-firm cannot claim any decree against defendant No. 3 on the ground that defendant No. 2 acted contrary to any special directions of the plaintiff firm. It is only defendant No. 2 which is liable and a decree has in fact been passed against defendants Nos. 1 and 2 and in favour of the plaintiff-firm. Consequently, defendants Nos. 3, 4 and 5 are protected by Section 178 of the Contract Act.
8. When a pledge is made in the ordinary course of business by a mercantile agent who is known to be carrying on busi ness as such and who is in possession of the goods pledged, the pledgee is protected if subsequently it is discovered that the goods pledged really belonged to a third person and that the pledger had no authority to pledge them. In such a case the pledge will be as valid as if the pledgor had been specifically authorised by the owner to pledge them. Section 178 of the Contract Act enacts as follows:--
'178. Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the pawnee acts in good faith, and has not at the time of the pledge notice that the pawnor has no authority to pledge.' This section provides an exception to a fundamental rule of the law of transfer of property that no man can give a better title than he himself possesses, the Latin maxim being 'Nemo Dat Quod Non Habet'.
As a corollary of this fundamental rule, no one can pledge goods unless he is the owner or lawfully represents the owner. Consequently, if a person obtains a pledge of goods from another who has no valid title to make a pledge, the former acquires no security over them. But another principle of law came to be developed for the protection of commercial transactions. That other principle is that a person who takes from one who is known to be mercantile agent and who is in possession of the goods. gets a good title provided he acted in good faith and had no notice that the pledgor had no title or authority to pledge. Under the first principle if a person deals with goods of another without his authority or consent, the transaction is nugatory against the owner. The second principle steps in to protect those who in good faith deal with a mercantile agent who is known to them as such and who is in possession of the goods. The reason of, this second rule which is embodied in Section 178 of the Contract Act is that trade will be hampered and business will be deranged and great loss will be caused frequently to innocent persons acting in good faith. But for the rule contained in Section 178, merchants will not lend money on pledge because they would be afraid that the person offering the pledge might not be the real owner of the property and ordinarily it is not easy to ascertain the ownership with certainty. The law, therefore, makes possession as conclusive evidence of ownership so far as it is necessary to protect a pledgee who acts in good faith and has no notice that the pledgor has no authority to pledge. The principle underlying this second statutory rule is that when one of two innocent persons has to suffer the loss occasioned by an act of a third person, such loss must be borne by the owner because by appointing him as agent he brought about the loss to the third person and because he placed the agent in the position which enabled him to do an act causing the loss to an innocent party.
9. Section 2(9) of the Sale of Goods Act, 1930, defines a mercantile agent as follows:--
'(9) 'Mercantile agent' means a mercantile agent having in the customary course of business as such agent authority either to sell goods or to consign goods for the purposes of sale, or to buy goods, or to raise money on the security of goods.'
10. In the present case, it is not disputed that the goods pledged by Dhanji Ladhabhai with firm Deepchand Seramal as mercantile agent of the plaintiff-firm (defendant No. 3) were in the possession of the former with the consent of the plaintiff-firm.
11. Further, the evidence of Gopaldas (P. W. 7), a partner in the plaintiff-firm, clearly contains admissions on which it is fully established that firm Dhanji Ladhabhai was carrying on business as adhatiyain the Ujjain market and was, therefore, a mercantile agent. The learned trial Judge held that even if defendants Nos. 1 and 2 were carrying on pakki adhat business they were not pakka adhatiya of the plaintiff-firm. What the learned trial Judge means to say is that although the business of the firm Dhanji Ladhabhai may have been that of a pakka adhatiya in relation to other constituents, that firm did not act as a pakka adhatiya so far as the plaintiff-firm was concerned.
12. In our opinion, as we shall presently point out, apart from the uncontroverted evidence of Dhanji (D. W. 1), there are clear admissions of Gopaldas (P. W. 7) that Dhanji Ladhabhai was their kaccha adhatiya, but even as Kaccha adhatiya it was entitled to sell and purchase goods in its own name. He clearly stated that the only difference between the pakka adhatiya and a kaccha adhatiya is that the former invests his own money in purchasing the goods for his principal while in the case of the latter it is the principal whose money is invested in purchasing the goods.
13. For the application of Section 178 of the Contract Act even this much was sufficient that firm Dhanji Ladhabhai was usually carrying on business of a pakka adhatiya because in that case a pledgee from that firm would be fully protected merely on showing that the goods pledged were in possession of that firm. But more than that in the present case it is an admitted fact that Dhanji was acting as plaintiffs adhatiya in purchasing and selling cotton at Ujjain, and also that a kaccha adhatiya can purchase goods in his own name and can sell in his own name the goods of his principal.
14. Gopaldas (P. W. 7) states that the plaintiff-firm, used to purchase and sell cotton through Dhanji Ladhabhai who used to carry on business of adhat, Dhanji Ladhabhai entered into business transactions on behalf of the plaintiff-firm. The plaintiff-firm paid them commission. The business dealings between the plaintiff-firm and Dhanji Ladhabhai started in 1947. 279 bags of cotton remained to be realised from Dhanji Ladhabhai which after being pressed would have been 115 bales (279 bags). In cross-examination he says:
'I have already stated that Dhanji was acting as my Adhatiya in purchasing and selling cotton at Ujjain ..... I didnot know what Adhat Pakki or Kacchi hewas carrying on as for other constituents. Asfor ourselves he was our Kaccha Adhatiya..... I agree that according to me aKaccha Adhatiya can purchase goods in his own name for the clients. Similarly he can sell in his own name the goods of the clients. According to me, the only difference between the two Adhatiyas is that Kaccha Adhatiya does not finance where as Pakka Adhatiya can. Other things are similar...'
It is clearly seen from the above statementthat Dhanji Ladhabhai was entitled to sell the goods in suit in its own name. That being so, the plaintiff-firm has no case against the pledgee or the subsequent pledgee even if it proves that the goods were purchased with the plaintiff's money and that the plaintiff-firm was the owner of the goods.
15. Dhanji (D. W. 1) states that he was carrying on business as a Pakka adhatiya for selling and purchasing cotton from the year 1947-48 to the year 1952. He further States that according to the law prevalent at Ujjain at the material time no one could purchase or sell goods in the Mandi at Ujjain without a licence issued in his name by the Mandi Committee, Ujjain, Dhanji states that he has such a licence. There is no evidence to rebut this statement. Gopaldas (P. W. 7) was directly asked about this. He evaded a clear answer. He stated that he did not know whether Dhanji was carrying on the business of Pakki adhat, or Kacchi adhat for other constituents. But he Stated that so far as the plaintiff-firm was concerned, Dhanji was a Kaccha adatiya and not a Pakka adhatiya. It is a significant admission of Gopaldas that the plaintiff-firm did not obtain a licence from the Mandi Committee, Ujjain, for carrying on the business of sale and purchase of cotton. He stated that he did not know whether it was permissible to sell and purchase cotton at Ujjain market without taking a licence from the Mandi Committee, Ujjain, although he admitted that he had asked Dhanji to obtain a licence from the Mandi Committee. Dhanji clearly stated that he pledged the goods in the suit with firm Deepchand Siremal representing to the latter that thegoods belonged to him and he asserted in is deposition that he had the right to do so. He denied that there was any collusion between him and firm Deepchand Siremal.
15A. Learned counsel for the appellant strenuously contended that for two reasons it ought to have been held that firm Deepchand Siremal had notice of the plaintiff's title to the goods. It was argued that the goods had the mark 'PU.SA' which denoted the name of the firm 'Poonamchand Sakarlal' so that defendant No. 3 ought to have known that the goods did not belong to the firm Dhanfi Ladhabhai but belonged to the plaintiff-firm. In the first place, there is no substance in this argument. It is not the plaintiffs case that the letters 'PU,SA' constituted either the trade mark or that those letters were otherwise so well known at Ujjain market to indicate the plaintiff's ownership and that defendant No. 3 must be taken to have noticed that the goods offered for pledge belonged to the plaintiff-firm. Consequently this loses all importance when it is an admitted fact that Dhanji Ladhabhai had the right to sell the goods in its own name.
16. The other argument for the appellant is that the goods in suit stood insured in the name of the plaintiff firm so that defendant No. 3 ought to have known that the goods belonged to the plaintiff-form. This argument is also devoid of substance. Firstly, because Dhanji Ladhabhai had taken the entire reponsibility to indemnify the pledgee firm in case of shortage in goods and also against loss due to fire and burglary. Secondly, there is nothing on record, to show that the pledgee firm had any notice or knowledge that the goods stood insured in the name of the plaintiff-firm. Thirdly, even if the. policies of insurance showed that the goods belonged to the plaintiff-firm, it did not matter. As already pointed out, firm Dhanji Ladhabhai was entitled to pledge the goods in its own name irrespective of the plaintiff-firm being the owner.
17. Section 178 of the Contract Act has five elements: (1) the pledger must be a mercantile agent, (2) the pledgor must be in possession of the goods or of title deeds within the meaning of Sale of Goods Act, (3) the mercantile agent was in such possession with the consent of the owner, (4) the mercantile agent made the pledge while in the ordinary course of business of mercantile agent and (5) the pledgee acted in good faith and had no notice at the time of the contract of pledge that the pledgor had no authority to pledge. In Nippon Yusen Kaisha v. Ramjiban Sarowgee, 65 Ind App 263 = AIR 1938 PC 152, the Privy Council held that the party who seeks to impugn what is ex facie a valid disposition, must be held to assume the burden of showing bad faith. We hold that in the present case all the five conditions are satisfied.
18. No other point was urged.
19. The appeal is dismissed with costs.