Where a mercantile agent is, with the consent of the owner, in possession of goods or the document 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 not authority to pledge.
Explanation. — In this section, the expressions "mercantile agent" and "documents of title" shall have the meanings assigned to them in the Indian Sale of Goods Act, 1930 (3 of 1930).
Legal Commentary & Landmark Judgments: Section 178
A pledge executed by a mercantile agent who is in possession of goods or the documents of title to goods with the consent of the owner is valid and binding on the true owner, provided the agent acts in the ordinary course of business of a mercantile agent and the pawnee acts in good faith without notice of any lack of authority. This statutory exception to the maxim nemo dat quod non habet protects trade and commerce by securing commercial credit transactions.
Section 178 is critical in commodity finance and warehouse receipts trading. Lenders advancing funds against warehouse receipts, bills of lading, or railway receipts are fully protected under Section 178 against secret title reservations of the original owner.