Indemnity and Gaurantee Main

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INDEMNITY AND GUARANTEEGajananMoreshwarParelkar v. Moreshwar Madam Mantri

FACTS:

P wants to enforce an indemnity. P entered into agreement with Corp of Bombay for lease of land-for 999 years. P was put in possession of land. D requested P to transfer the benefit of the lease to the D. D entered into the possession and commenced to erect a building. The materials were-supplied by KM-5000bucks. For payment, P at the request of Mortgaged the property for that sum. P was supposed to pay the amount by some day. Then, again D had to pay 5K to KM. P again effected a charge on the property in favour of KM.

P also wrote-D would be responsible for discharging the mortgage and D execute another mortgage in favour of the mortgagee in place of those executed by P.

Then, P wrote a letter to Bombay municipal-to transfer the plot of land to D (request of D). transfer was duly sanctioned. P hence asked D to release the P from his liability under the mortgage. When D failed to do so, P filed a suit.

D’S ARGUMENTS:

It was a premature suit. The indemnified has not suffered any loss, hence he is not entitled to sue the indemnifier –hence no cause of action. Relies on S124 and S125.S1240defines indemnity-promise to safe guard the other from loss caused to him by the conduct of any other person.

JUDGE:

However, indemnity is worth very little if the indemnified could not enforce his indemnity till he actually paid the loss. If a suit was filed against him, he had actually to wait till a judgment was pronounced-then only he could sue on his indemnity. Hence, the D must transfer all the liability to himself. Not a premature suit.

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1. Lala Shanti Swarup v. Munshi Singh &Ors

FACTS:

P owned some property and executed a simple mortgage in favour of 2 persons for a sum of 12K. Then, a sale deed was executed by P (half the land which was mortgaged) in favour of the A.

Consideration was 16K and 13.5K was left to pay. The A were put in possession of the property and then later, the 2 mortgagees sued the R because no payment was made to them.

The main issue is that, the A were like, they suffered a loss and injury when they were compelled to execute the mortgage. It was contended that was no express contract of indemnity. However, under S124-a contract of indemnity-it would be implicit.

HELD:

It was a contract on indemnity. This contract could be implied.

Gray v Lewis and Lewis v Parker

Court of Appeal

Facts: Laffitte was a company formed to purchase the business of C.Laffitte & co. of Paris. For this the they were in negotiations with Ottoman Financial association, of which Lewis, Henshaw were directors and it was agreed that Ottoman Co. should take 35,000 shares in C.Laffittee & Co. but the principle promoter in C.Laffittee would not agree to sell his business unless he was assured 40,000 shares in the company would be subscribed. Ottoman Co. thereupon called for the assistance of International Contract co. who on their behalf “guaranteed the subscription of 40,000 shares, by executing a promissory note worth 200,000 at the National Bank to be credited to the new co.” . Later a similar guarantee was executed by Ottoman for securing the subscription of 35,000 shares to International Contract co.

To show in the prospectus that 40,000 shares had been subscribed, C.Laffittee requested the National Bank to discount the notes of International Contract co., and secured the payment of

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such notes by agreeing not to withdraw the credited amount until the notes were duly paid for. Lewis, Henshaw were directors of C.Laffittee & co., Of Ottoman and of National Bank. Thus the bank in the meeting of Board of Directors on this issue authorized the discounting of the bill by the vote of Lewis, Henshaw and other directors. Thus the prospectus showed International Co. had applied for 40,000 shares and the allotment money was obtained by discounting of bills. On the day of application to stock exchange the National Bank granted certificates for C.Laffitte co. certifying the balance standing to the credit of their account, but no information was given about the fact that National Bank had lien [A right to keep property belonging to another person until a debt is paid] on the funds. Consequently an order was passed to wind up C.Laffittee [which had never acquired the paris business it was set up for], the International Contract co. and Ottoman Co.

In short: The agreement is that the bank shall discount bills of the International Contract Company to the amount of £200,000; that the International Company shall pay the same £200,000 back again into the bank in payment of £5 per share on 40,000 shares in Charles Laffitte & Co., to be allotted to the nominees of the International Contract Company;that that sum so paid in shall remain to the credit of Charles Laffitte & Co. nominally in the books of the bank until the promissory notes should become due, and when the promissory notes should become due, then it should be applied in payment of the notes.

Grey v Lewis stems from the suit by one shareholder of C.Laffittee co. [ CLC] on behalf of all others alleging a breach of trust on part of directors Lewis and Henshaw and also on part of National Bank to apply company’s assets for payment of ICC’s dues and prayed for a declaraion that they had no power to bind shareholders for such transaction and that both and the bank are liable to make good the loss of the shareholders. A decree was passed accordingly. But it never went on further appeal even though the Bank and Lewis wanted to do so because an out of court settlement was reached between gray and Parker, the public officer of NB.

Parker v Lewis ; where Parker sued Lewis, Henshaw and McKenna [another former director {all forced to leave because of supporting the fraud}; he alleged that Lewis and Henshaw agreed to become directors of CLC and were to be paid 5,000 from ICC for supporting the new co. at the board of NB meeting, Mc also agreed on similar proposal. The transaction engaged into was illegitimate out of the scope of their work and power as directors, and thus they were to make good the loss that NB faced in the out of court settlement. Thus because of these circumstances and allegations

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Grey v Lewis

Issues:

1. whether the plaintiff had locus standi to file the suit on behalf of all shareholders.

2. whether the company had suffered any actual loss in which case the shareholders could succeed on their claim.

Arguments:

Plaintiff:

The directors as per the Memorandum of Association, [which specifies the internal relationship and powers of employees of a co.] had no powers in first place to write that letter authorizing the discounting of promissory note, thus as they had acted outside the scope of their employment , the transaction was ultra vires and thus could not bind the shareholders of the company, but however as the assets of the company were used to make good the loss. They are claiming the alleged loss from the directors who are the masters of this illegal transaction.

Def:

1. The co. could not have any claim against NB , the money in their account never really became their money because of the arrangement between them and NB.

2. the court of Exchequer chamber virtually overruled the lower courts decision in this case.

3. the company ought to have filled the bill[case]

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Parker v Lewis:

Issue:

1. whether the directors were liable for a breach of trust as alleged by the plaintiff.

2. whether there was any actual loss suffered by the bank in which case the directors would be liable.

Argument:

Plaintiff:

1. The defendants were liable for a breach of trust committed against the bank and as trustees of the banks money they are liable to make good the loss sustained by the bank due to the compromise.

2. They also argued on the principle of indemnity, on the basis that the directors very well knew about the compromise entered into by the bank, now they cannot deny their liability to indemnify the bank for such losses on the argument that the judgment of the first court was wrong and that there was no need to compromise in any case.

Defendant:

1. we never acted mala fide, we thought that the transaction was in best interest of the bank and thus cannot be held responsible for breach of trust.

2. even if we acted mala fide, the bank cannot recover unless it shows that some loss has been suffered. In this case money was just being shifted from one account to another, there was no loss suffered because the bank could recover the money transferred to the new company’s account as was given in the arrangement.

Rationale and Analysis:

Suit dismissed on lack of locus standi to appeal. : It was held that the plaintiff had no locus standi because as per the previous cases where there is a corporate body capable of filing a bill for itself to recover property either from its directors or any other person,

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that body is the proper plaintiff. Each person deceived must prove his own particular circumstances that deceived him to purchase the shares and each individual could file a personal claim against the directors, but one could not file a suit on behalf of all.

Even if the company sued it would not succeed : Also on the issue of whether the company will succeed if it files a suit, the judge expressed his doubts because they cannot sue for recovery of a property which was never its, because as per agreement it could never have withdrawn this money because of its own request, also the representation in the prospectus was false because they had no right to allot shares until they received application and allotment money, but the money they projected in the prospectus and to the stock exchange was borrowed in such a way that it was not lent at all, because they could never use this money as per their agreement with bank and the bank had lien over it, in such a case the maxim in pari delicto would apply because the transaction was merely a conspiracy between the directors of the 3 companies for the purpose of deceiving the committee of stock exchange by making it appear that CLC had the money which they did not actually have, thus the entire transaction is illegal and ultra vires.

Rule: In cases of express contract of indemnity, if a person has agreed to indemnify another against a particular claim, and an action is brought on that demand, he may give a notice to the indemnifier to come and defend the suit, and if he does not come in and defend the suit he may compromise on the best terms he gets. On the other hand he may also defend the suit, and then if a verdict is obtained against him. That judgment is conclusive for the purpose of indemnity because . It is obvious that when a person has entered into a bond, or bought land, or altered his position in any way on the faith of a contract of indemnity, and an action is brought against him for the matter against which he was indemnified, and a verdict of a jury obtained against him, it would be very hard, indeed, if, when he came to claim the indemnity, the person against whom he claimed it could fight the question over again, and run the chance of whether a second jury would take a different view and give an opposite verdict to the first.

The purpose of giving notice is not in order to give a ground of action, but if a demand be made which the person indemnifying is bound to pay, and notice be given to him, and he refuse to defend the action, in consequence of which the person to be indemnified is obliged to pay the demand, that is equivalent to a judgment, and estops the other party from saying that the Defendant in the first action was not bound to pay the money.

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But in the present case, there was no express contract of indemnity on which the bank sued, failing which these principles could not be applied. Thus the only case that they could make out was one of breach of trust on which they sued, but as they failed to prove it and by the very fact that the first case of Grey v Lewis failed, the defendants lost the case.

Conclusion: the first suit failed on the lack of locus standi of Grey. The second suit also feel because the plaintiff bank could not discharge the burden of proving breach of trust on part of Lewis and also by the very fact that the previous judgment basing which they put forward their case fell.

LEP Air Services Ltd. & Another v. Rolloswin Investments Ltd. and Another

Court: Court of Appeal

Date: 10 March 1971

Judges: Davies, Karminski, Megaw

Citation: [1971] 1 W.L.R. 934

Facts: The plaintiffs were forwarding agents of the defendants company wherein they would hand over

imported goods to Rolloswin and as consideration would receive 40000 pounds from the debtor which

would be paid in six weekly instalments of 6000 pounds each and one 4000 pound payment. In addition

to this, Mr.Moschi, who owned Rolloswin, acted as a guarantor of the defendant company in paying the

instalments. The debtor company i.e. Rolloswin defaulted on its instalments and after 3 weeks had paid

only 10000 out of the total which was due. The creditor company LEP treated that as a wrongful

repudiation and accepted said repudiation. They then brought action against the creditor and guarantor

for the full amount of instalments minus the amount paid. The official referee held that the guarantor

was liable to pay for the amount pending up until the moment of repudiation but not for the instalments

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that were due post that date as LEP had voluntarily accepted the repudiation and discharged the

obligations of the guarantor from that time. The guarantor appealed stating his liability to pay even the

instalments due prior to the repudiation stands extinguished and the creditor company cross-appealed

stating the guarantors liability extended even to the payments due after the date of repudiation.

Defendants arguments (On appeal): The defendant guarantor Mr.Moschi contends that the acceptance

of the wrongful repudiation on the part of Rolloswin as accepted by LEP resulted in the guarantor being

freed from any liability even with respect to instalments that were already due prior to the date of the

acceptance of repudiation. The defendant Moschi says that the reason this is so:

1. Because after the repudiation is accepted, Rolloswin can only be sued for damages and not the

instalments and even though the instalments that were unpaid would be included in the damages

the essential nature of the debt has changed to damages for which Mr.Moschi was not the

guarantor.

2. The acceptance of repudiation amounted to a material variation to the terms of the contract

between LEP and Rollowsin i.e. creditor and debtor respectively. The result is that Mr.Moschi is

prejudiced and hence released from his contract.

Appellants arguments (On cross appeal): The primary contention of LEP is that the guarantor is not only

liable for the unpaid instalments prior to acceptance of the repudiation but for the entire 40000 pounds

with interest.

Held: The guarantor is liable for the instalments both before and after the date of acceptance of

repudiation.

Judgement: The first argument of the defendant regarding the unpaid instalments being changed to

damages is rejected. According to the court liability for breach cannot change the existing liability of the

guarantor as the creditor company has merely exercised a legal right conferred upon him by law. Merely

because there is the additional cost of damages, that doesn’t change the pre existing liability of

instalments. In any case, a change of form is not a change of substance. With regards to the second

argument the court says that when the debtor fails to carry out its obligation, which is guaranteed by

the guarantor, the exercise of the right extended to the creditor by the law of contract cannot be

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regarded as a variation of the material terms of the contract so as to release the guarantor. In other

words the court just says no (Chatterton v Maclean is cited).

The court rejects the referee’s judgement and accepts the contention of LEP. According to the court, the

referee’s judgement redress a guarantee obsolete as, if the creditor exercises his lawful right to accept

repudiation, he forfeits the right to get payment for the instalments due after the repudiation, and if he

doesn’t, he must continue to perform his end of the contract at considerable loss. The court also clarifies

that when the debtor breaches the contract and the repudiation is accepted, the obligations of the

debtor do not disappear. The obligations must remain as it on this basis that damages are assessed.

Since damages are to be assessed on the date of performance of the obligations, the future instalments

need to be factored in to the liability of the guarantor.

1. Lakeman v Mountstephen

FACTS:

P was employed by the local board to construct the main sewer of a town. After the completion, the board directed the owners and occupiers of adjacent property to connect their drains within 21 days. Board requested P to do this. P objected and insisted on proper order from proper authority. P agreed when D assured him and said “you go on do the work, and I will see you paid”. After completion, when P asked for the charged, D refused to pay saying they had not ordered the work and denied all the promises.

Issue:

How to interpret “I will see you paid?”

I) Queens Bench:

D’s promise did not amount to an undertaking to be primarily liable for the work, but only to an undertaking that, if P would do the work on the credit of the board, D would pay P if the board did not. This way D has undertaken a liability on behalf of the Board and acted a surety. This is a contract of a surety. Hence D does not have absolute liability. The intention of them was that the board would pay.

II) Exchequer Chamber

Reversed the decision of QB.

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III) House of Lords

Lord C: The conversation between P and D may be construed to mean that the liability was that of the board and if it failed to pay, D would be there as a back up. P could not be non suited

Lord Hatherley: D’s words were capable of another interpretation but there the evidence was sufficient enough to prove that there was personal liability before the jury and therefore, P should not be non suited

Also, P refused to work until D assured that he would pay-hence the intention as that P would sue D on non payment. Hence it IS a contract of indemnity. He had personal liability and not secondary.

(Use this if you want to differentiate between indemnity and guarantee.)

Name – Thomas Lakeman v. Mount Stephen

Year – 1874

Court – House of Lords

Topic –

Rules applied –

Facts-

A board of health in a town ordered to make connecting pipes, and under this order M, a contractor made connecting bridge.

The board asked the inhabitants to connect their house to the main pipes on their expense, otherwise board will do that on the expense of the inhabitants but the order was not followed by the inhabitants.

Surveyor of the board asked Mount Stephen, to construct these pipes but he refused to do so as no order has been received by him from the board.ss

Lakemen, Chairman of the Borad assured M by saying ‘M., go on and do the work, and I will see you paid’.

The board thereafter refused to pay the amount to the contractor. The jury decreed in favour of plaintiff while Queen’s Court decreed in

favour of defendant. The decision of the Queen’s court was reversed by the Exchequer

court.

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Plaintiff’s Contention-

That the defendant was the chairman of the board and was authorised to make such an assurance but in fact he was not authorised to do so.

That defendant would acquire a contract from the board to make it bound to compensate the contract but he failed to do so.

Defendant’s contention-

He didn’t promise as has been alleged by the plaintiff. Plaintiff did not do the work for the board. Plaintiff never indebted. Insisted that this was a promise to pay the debt of another, and, not

being in writing, was void under the Statute of Frauds.

Issue-

whether there was or was not evidence of an original liability on the part of the Defendant to pay the Plaintiff in the action for the work to be done

Rationale-

(Lord Carins)- Question falls to be determined really upon the consideration of the evidence of the Plaintiff in the action himself. It is true that another witness was called on behalf of the Plaintiff, but his evidence on this subject is quite immaterial, and we have the evidence of the Plaintiff only to deal with.

think there was ample and strong evidence to go to the jury that the go-by was entirely given to the question of an order of the local board, and that Mr. Lakeman stepped in and undertook himself, as a matter of primary liability, to pay for the work that would be done, and that any Judge who had to try this case would have miscarried, if upon this evidence he had held that there was no case to go to the jury.

(Lord Belborne) - There can be no suretyship unless there be a principal debtor, who of course may be constituted in the course of the transaction by matters ex post facto, and need not be so at the time, but until there is a principal debtor there can be no suretyship.

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The words so used, if that was the sense in which they were understood and intended by both parties, would have been in no degree less strong, for that purpose, than the words which were held to be a warranty of authority.

Result – Appeal Dismissed.

1. Punjab National Bank v ShriVikram Cotton Mills

Ranjit Singh-Agent of Vikram cotton Mills opened an account with PNB-executed 3 documents-Promissory note, a hypothecation and one letter assuring tatRanjit would remain solely responsible forall loss, damage with the bank.

On the same day, Ranjitsingh, the Director of the agents, executed a bond-called agreement of guarantee-agreeing to pay on demand all the money due under the “ultimate balance”. When the Mills closed the stocks-a balance of amount was still due. They wanted preference above the unsecured creditors.

Supreme Court:

Where the managing agent of a company guaranteed the payment of ultimate balancefound on the loan given by a bank to company-the liability does not arise until the balance has beendetermined/

Basically, in this case, they are trying to find out if the contract was an indemnity contract or a guarantee contract.

HC said is a contract of indemnity-because the company wasn’t a party to the contract-only between ranjit Singh and the Bank. And in the contract it never mentioned the company was the Principal Debot.

However, Supreme court said: the bond executed by Ranjitan his conduct-indicates that he agreed to guarantee the paymen of the debt due by the company. Hence, it was held the Bank, the Company and Ranjit Singh were parties to the agreemen-hence Ranjit Singh became a surety.

WHY did SC see this contract as a contract of guarantee?

The 2 contracts were signed together (the 3 security docs and the guarantee contract-implied contract of guarantee)

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Name – Punjab National Bank Ltd. vs. Shri Vikram Cotton Mills

Year – 1969

No. Of Judges – 2

Court – Supreme Court Of India

Rules Applied – Section 124, 126, Indian Contract Act, 1872.

Facts –

Shri Vikram Cotton Mills opened a cash-credit account with Punjab National Bank. To secure the repayment of the balance due, for bonds were executed by Ranjith Singh and the Managing agent of the Respondent ( Ranjith Singh and Sons Ltd. )

The Company closed its business in 1953 and bank disposed off the bond pledged and credited in the account of the company. The Bank claimed that an amount of Rs. 2,56,877/12/6 remained due at the foot of the account.

In order to safeguard the rights and interests of the Company and its unsecured creditors the Company had entered into an agreement with the lessee. The scheme was sanctioned by order of the High Court of Allahabad.

The Trial Court held that the suit was not maintainable against the Company without obtaining leave of the Company Judge, and also that the Court had no jurisdiction to adjudicate upon the merits of the Bank's claim and also released ranjith Singh and had not made any default.

High Court held that Ranjith Singh was only liable to pay the ultimate balance which due to the company and Bank's dues could be recovered from Ranjit Singh upon default in payment by the Company of the ultimate balance after scrutiny by the Board of Trustees.

High Court further held that the suit was premature as the amount to be paid by Rajith Singh has not been determined.

Appellant’s Contention –

Ranjit Singh guaranteed to the Bank, payment on demand of all monies which may at any time be due to the Bank from the Company on the general balance of that account with the Bank, that the

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guarantee was to be a continuing guarantee for the ultimate balance which shall remain due to the Bank on such cash-credit account.

Rationle –

A contract of guarantee may be wholly written, may be wholly oral or may be partly written and partly oral.

The Bank, the Company and Ranjit Singh were parties to the agreement under which for the dues of the Company, Ranjit Singh became a surety.

By Clause 4 it is expressly stipulated that the bond secured "the ultimate balance" remaining due to the Bank. Therefore, unless and until the ultimate balance is determined no liability on Ranjit Singh to pay the amount arises, and it is common ground that the ultimate balance due is not determined.

Bank was under the terms of the bond executed by Ranjit Singh entitled to claim at any time the money due from the Company as well as Ranjit Singh under the promissory note and the bond. The suit could not, therefore, be said to be premature.

A binding obligation created under a composition under Section 391 of the Companies Act, 1956, between the Company and its creditors does not affect the liability of the surety unless the contract of suretyship otherwise provides.

The High Court should have stayed the suit and after "the ultimate balance" due by the Company was determined the Court should have proceeded to decree the claim according to the provisions of Clause 4 of the bond.

Result - The decree passed by the High Court is set aside and the suit be remanded to the Trial Court; to be disposed of in the light of the observations made in this judgment.

Ramchandra B. Loyalka v. Shapurji N. Bhownagree   (1940) 42 BOMLR 550(Section 124, 126 and 145 of Indian Contract Act, Difference between Indemnity and Guarantee)FACTS:The plaintiff (P) was a sub-broker employed by the defendant broker (D) on 50% commission. P introduced 6 constituents and became answerable to the broker for

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them. The constituents defaulted which resulted in loss of Rs.16000. P asked for amount due under his brokerage from D and agreed to make good Rs.16000[1]. D thereafter sued the constituents and compromised his claim as against some of them by receiving amounts much smaller than what was due from them and claimed the unrecovered amount. P sued to take accounts of the dealings between himself and D, and as to the compromises arrived at by D with some of the constituents, alleging D had settled the claims as against those constituents for lesser amounts without P’s (guarantor) consent. Therefore P was discharged from his obligation to pay the debts of those constituents.ISSUE: Whether contract of Guarantee or IndemnityCONTENTIONS:Plaintiff:1. P was a guarantor and D making a settlement without his (surety) had discharged

him.2. By the compromise made by D without P’s consent, with three of the constituents, his

remedies against those three parties are lost.Defendant:1. It was a contract of indemnity because there was no specific amount which the

plaintiff had stood surety for and the requirement that, there should be three parties for guarantee was absent. The deal was only between P & D.

2. The defendant was within his rights to negotiate and recover the best amounts he could and there was no allegation of any mala-fide or wrong-doing in arriving at these settlements with the defaulting customers.

HELD:Trial Court: Contract of guarantee, favoured PHigh Court (Bombay)BEAUMONT, CJ.1. (w.r.t 1st contention of D Trial court verdict) The contract fell within the terms of the

definition of indemnity under S. 124. The promisor is agreeing to save the promisee from loss occasioned by the conduct of the constituents introduced. A contract of guarantee involves three parties- the creditor, the surety and the principal debtor (S.126). There must be a contract, first of all, between the principal debtor and the creditor and between the surety and the creditor. But if those are the only contracts, the case is one of indemnity. In order to constitute a contract of guarantee there must be a third contract, by which the principal debtor expressly or impliedly requests the surety to act as surety. S.145 provides that in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. This is not possible unless the principal debtor is privy to the contract of surety-ship.

2. P was anyway liable to pay under the second agreement[2] by which he expressly agreed to be liable for the amounts mentioned in the document and hence D was entitled to the unrecovered amount.

KANIA, J.

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1. There must be a third contract by which the principal debtor agrees to satisfy the claim of the surety. If the surety satisfies the claim of the creditor without such contract, the action of the surety would be voluntary, and the debtor may repudiate all liability for the payment made by the surety, on the ground that he had never requested the surety to make any payment.

2. (w.r.t 2nd contention of P & D) D’s contention accepted. The second agreement completely defeats P’s claim. P’s rights, if any, come into existence only when he makes the payment and not before. Under the circumstances of the case consent(in law) is not consequential.

Name – National Highway Authority of India v. Ganga Enterprises and Anr.

Year – 2003

Court – Supreme Court Of India

No. Of Judges – 2

Rules Applied – Section 5, Indian Contract Act, 1872

Topic – Bank Guarantee

Facts –

The appellants called for a tender notice for collection of toll on a portion of the highway running through the Rajasthan.

Bid was called by the appellant and security was to be deposited in the form of Rs. 50 lakhs and it would become operative in case bidder withdraws his bid before the period of 120 days. It was to be deposited in the form of earnest money and was supposed to be forfeited in case of default of the bidder.

The bank guarantee was to be paid by the bank without demur on a written demand merely stating that one of those conditions has been fulfilled.

Responded filed their bid and when the bids were disclosed, it was found that the respondent had the highest bid.

Respondent then withdrew his bid before 120 days of the bid.

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Respondent filed a writ petition under article 226 in the High Court and High court decreed in favour of the respondent due to which the present appeal has been filed by the appellant.

High Court’s reasoning-

It holds that the offer was withdrawn before it was accepted and thus no completed contract had come into existence.

The fetter imposed by the clause to the contrary in the tender documents and the bank guarantee could not override the provisions of the Indian Contract Act.

Once it is held that there is no completed contract between the parties no further questions arises.

The petitioner was entitled to withdraw the bid because the prohibition against the withdrawal does not have the force of law and there was no consideration to bind him down to the condition.

Rationale-

By invoking the bank guarantee or enforcing a bid security, there is no statutory right, exercise of which was being fettered.

Withdrawal of an offer, before it is accepted, is a complete different aspect from the forfeiture of earnest/security money which has been given for a particular purpose.

Even though he may have a right to withdraw his offer, he has no right to claim that the earnest/security be returned to him. Such money is given and taken to insure that a contract comes into existence. In government contracts, such a term is always included in order to ensure that only a genuine party makes a bid.

The existence and non-existence of an underlying contract become irrelevant when the invocation is in terms of the bank guarantee.

The bid security was given to meet specific contingency i.e. withdrawal of the offer within 120 days. The contingency having arisen, Appellants are entitled to forfeit.

Result – The appeal is allowed.

Appellants: National Highway Authority of India Vs.Respondent: Ganga Enterprises and Anr.

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Facts:

The Appellant invited bids for collection of toll on a highway running through Rajasthan.

The last date of submission of bid was 31st July, 1997. It was also provided that toll

plazas would get completed by the authority and handed over to the selected

enterprise.

There were two types of securities to be furnished, one being a bid security in an

amount of Rs. 50 lakhs. The other was a performance security by way of a bank

guarantee of Rs. 2 Crores. The purpose of the bid security was to ensure that the bidder

did not withdraw his bid during the period of bid validit y and/or that after acceptance

the performance security is furnished and the Agreement is signed .

The bid validity period was 120 days. In terms of this tender document the respondent

gave his bid or offer. The offer/bid was in terms of the tender and thus it was also in two

parts. The first part being an offer that the bid would not be withdrawn during the bid

validity period and/or that on acceptance the performance security would be furnished

and the Agreement signed.

As earnest money/security for performance the respondent along with his bid furnished

a bank guarantee in a sum of Rs. 50 Lakhs as bid security. The bank guarantee furnished

was a "on demand guarantee" which specifically provided that the bank guarantee

could be enforced "on demand" if the bidder withdraws his bid during the period of bid

validity or if the bidder having been notified of the acceptance of his bids, fails to furnish

the performance security or fails to sign the Agreement. The amount of the Bank

Guarantee was to be paid by the bank without demur on a written demand merely

stating that one of these conditions had been fulfilled.

The 120 days would have come to an end of 28th November, 1997. In August the

technical bids were opened. In September the financial bids were opened, wherein it

was found that the Respondent was the highest bidder.

However, on 20th November, 1997 the Respondent withdrew his bid i.e. he withdrew

his bid before the expiry of 120 days.

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On 21st November, 1997, the Appellants accepted the offer of the Respondent.

However, as the Respondent had withdrawn his bid the performance guarantee was not

furnished and the Agreement was not entered into.

The Appellants thus encashed the bank guarantee for Rs. 50 lakhs.

The Respondent then filed a Writ Petition in the High Court for refund of the amount.

The High Court held that the offer was withdrawn before it was accepted and thus no

completed contract had come into existence. The High Court also held that in law it is

always open to a party to withdraw its offer before its acceptance. Therefore, the High

Court held that in the circumstances the invocation and encashment of the bank

guarantee is illegal and void and is liable to be set aside.

The appellants have filed this appeal against the order of the High Court.

Arguments/Held:

The defendants restated their arguments as they raised them before the High Court,

Basically , they maintained that before their offer was accepted, they had every right to

withdraw the same.

The appellants however, contended that allowing parties to withdraw their bids before

the due date would defeat the very purpose of awarding contracts through a process of

tendering which would be jeopardized.

Supreme Court held that no doubt the defendants had every right to withdraw their

offer but since a Bank guarantee was an independent contract between the bank and

the beneficiary , the latter had every right to encash the amount undertaken by the Bank

in the guarantee. The bank guarantee also stands enforced because the bid was

withdrawn within the 120 days. Therefore it could not be said that the invocation of

bank guarantee was against the terms of the bank guarantee.The earnest money

security was given and taken to ensure that a contract comes into existence. The Indian

contract Act merely provides that a person can withdraw his offer before its acceptance.

But withdrawal of an offer, before it is accepted, is a completely different aspect from

forfeiture of earnest/security money which has been given for a particular purpose. A

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person may have a right to withdraw his offer but if he has made his offer on a condition

that some earnest money will be forfeited for not entering into contract or if some act is

not performed, then even though he may have a right to withdraw his offer, he has no

right to claim that the earnest/security be returned to him. It was held that forfeiture of

such earnest/security, in no way, affects any statutory right under the Indian Contract

Act.

Greer v Kettle: Facts: An agreement was made whereby Austin Friars ( A) were to be given a

loan from Mercantile Marines(MC). A was to provide MC collaterals by way of shares of Iron Industrial Company to make the transaction a secured one. The Parent Trust company (P) agreed to guarantee the secured debt , thereby becoming the surety.

However A defaults and it turns out that the shares given as collaterals

were invalid. MC seeks payment from P. P claims that they never guaranteed an unsecured debt , but MC argued that P was liable and thus should be estopped from going back on their agreement.

Issue: 1. Is the surety liable? Judgement: The shares being given as collaterals was one of the pre-requisites for

the defendant (P) to become a surety. They didn’t become guarantors for any unsecured loan , thus there is no question of imposing liability for which they never consented to.

The plaintiff (MC) argued that the defendants was privy to the fact that

these shares were given as security as it had been stated in the recital, thus they cannot claim ignorance regarding the invalidity of the shares. However , it was the plaintiff who was privy to the details in the

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recital , the plaintiff never sought to verify the security but accepted them , thus they are the ones not the defendants who are bound by the recital.

Conclusion: A surety can insert pre-conditions to his liability as guarantor when he

enters into a contract. Charan Singh v Ms. Security Finance Pvt. Ltd. and Others

Decree holder-Security Finance ltd (DH) had obtained decree for recovery of some amongst Charan Singh and 2 other (A and B). A and B were principal debtors and C was the surety. A died and B paid 10K. The DH was the balance amount. He sues Charan Singh.Charan Singh says since DH had entered into a compromise with the Principal debtor-without the consent of the surety-his liability is discharged/

Issue:

After a decree has been passed against the PD and the Surety-and the DH enters into a settlement with the PD and agreed to accept some less amount from the PD-does this discharge the surety?

Contentions:

Look into Section 133-139. As soon as a composition has been made by the DH with the PD-the liability of the surety is discharged. HOWEVER COURT SAYS THIS DOES NOT APPLY TO DECREE PASSED BY THE COURT.

“when the creditor sues on the contract and obtains a decree against the PD and the surety-this is a liability under the decree and not one udner the original contract-the liability of the surety does not cease to exist. It is not co existensive with that of the PD-hence he can’t be discharged.

Hence, none of the sections between S133 and S139 are applicable to decrees passed by court

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Charan Singh v M/s Security Finance (S.133)

Delhi HC

Facts:

The decree holder M/s Security Finance had obtain a decree against Bhiku Ram , Attar Singh (who died) and their surety , Mr Charan Singh. Bhiku Ram entered into a compromise with the creditor/decree holder whereby he agreed to pay Rs. 10,000 and the rest balance would be recovered from Charan Singh.

Charan Singh objected to this ,saying that collusion between judgement debtor and decree holder without the consent of the surety amounts to his discharge as per S.133.

Issue

Is the appellant discharged because of the material alteration without his knowledge as per S.133?

Judgement

After a decree has been obtained by the creditor , the nature of the principal debtor and security undergoes a change , they become co-judgement debtors. The provisions of the Contract Act (in particular from S. 133-139) won’t apply once a decree has been passed. The Co-judgement debtors are

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jointly and severally liable , thus any act of collusion between one and the decree holder will not discharge the other co-judgement debtor.

Mahatma Gandhi Sahakra Sakkare Karkhane v National Heavy Engineering Co-Operative Limited and Another

Supreme Court of India In an unconditional bank guarantee, there is no condition subject to which the bank will pay. Since unconditional bank guarantees are very important for commerce, courts don't generally interfere in such cases. Respondent says that

1. It is a conditional guarantee2. There is fraud - appellant should have told the bank.

HC agrees with respondent.SC says no fraud because there is no relation between the contract and the contract of guarantee, and so the respondent saying that the appellant hasn't told the bank of the breach is not applicable.SC also said that it is clearly an unconditional bank guarantee because of the clauses.

Syndicate Bank v. Channaveerappa Beleri & Co , 2006

Supreme Court

Facts:

The Bank (plaintiff) extended credit facilities by way of overdraft and provided Gadag Forge Fits company a loan. The respondents (defendants) , who were the directors of the company stood as guarantors for the amount. The company defaults and the respondents were asked to pay , accordingly a case was filed against them. The respondents argue that the suit has been

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barred by limitation , because the limitation period runs from the date when the loan was made.

Issue:

When does a suit in case of a guarantee contract become time barred?

Judgement:

The contention that the period of limitation runs as soon as the principal debtor becomes indebted has been negated many times. It runs from the time when the balance is constituted and demand is made. The Guarantee Contract mentions that there shall be payment on demand , thus a demand is a condition precedent for the liability of the guarantor. Time will start running when the contract is broken ( A. 55) or when the right to sue accrues ( A.113) , that is when the demand is made and it is refused by the surety.

This is a case of continuing guarantee with a live account.

The time period started to run from the moment the refusal was made. Thus the suit is not time barred.

Conclusion:

Limitation period for a debtor starts when the debt is incurred , and for surety when the demand for payment is made.

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1. RadhaKanta Pal v Union of India

Rajnikant (A) executed a bond in favour of the Bank in consideration of the Bank emplyong Nishi. Nishi was found to be guilty of mismanaging a certain amount of money. Hence, Bank wanted to enforce the bond and get the money. A’s heir, filed a suit against the bank claiming the security back as A had been discharged of his liability as the Bank had continue to employ N even after finding out the mismanagemen without notice to him.

P’s MAIN Contention is that since the bank continued the employ N even after finding out the mismanagement without notice-S139-crediot does any act inconsistent with rights of the surety-

D’s Main contention is that N is responsible for the shortage in cash-bank is entitled to deduct that out of the secutiry deposit.

Judgment:

S139 cannot be maintained. In order to attract that section: there must be an act inconsistent with the right of the surety etcetc and ALSO the impairment of the eventual remedy of the sturety against the debtors-because of that act.

Nothing shows that the P’s eventual remedy against nishi had been impaired. P infact was suing even Nishi-which goes against his contention that his remedy against N is impaired.

Also, the bank can’t dismiss its employee merely on suspicion-they reported it and did an investigation. When N was found responsible after this-they bank intimated the P.

Radha Kanta Pal v Union Bank Of India

Facts:

An uncle guarantees the conduct of his nephew for his appointment as Cashier to the Union Bank and places promissory notes as security. The nephew defaults repeatedly in his conduct , thus the bank seeks to encash the promissory notes.

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The surety claims that he only guaranteed the fidelity of the cashier and not for his infidelity , thus when he first defaulted the bank should have informed him , but as they failed to do so and continued to employ him , as per S. 139 the surety is discharged.

Issue

Has the surety been discharged as per s. 139?

Judgement

To attract S.139 not only must the creditor do some act inconsistent to the right of the surety , the surety must also be impaired from seeking remedy from the debtor. The second qualification is missing because there is no evidence of impairment of such remedy. Ironically the nephew has also been made a party to the suit by the surety , thus it shows that his legal remedies are intact. Thus the surety is NOT discharged of his liability.

Jay Bharat Credit v. CSTFacts:

The appellants had a business of hire-purchase. They engaged in purchasing of vehicles and then giving them on hire with the hirer paying an initial amount and then paying the rest, which includes the price of the vehicle and hire charges, in instalments. After the payment of the last instalment, the hirer is given an option to transfer the ownership of the vehicle in his/her name on the payment of a nominal charge.

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The sales tax authorities maintained that the amount paid in instalments was a part of the sale price and as such came under the ambit of taxation under the provisions of the Bengal Finance (Sales Tax) Act, 1941 as extended to the Union territory of Delhi.

The case was decided in the favour of sales tax authorities by the HC.

Issue:

Whether the respondents (Sales tax authorities) were justified in holding that hire-purchase transactions entered into by the appellants (Jay Credit & Investments Co.) were liable to imposition of sales tax on the consolidated proceeds?

Contentions:

The counsel for the appellant contended that sales tax can not be levied on the full amount paid by the hirer which would include the hire charges, but the sale consideration on which tax can be imposed will only be the price of the vehicle at the time when the hirer exercises the option to purchase the same as per the amendment made to the Bengal Finance (Sales Tax) Act, 1941.

According to the counsel, the definition of sale under the Sale of Goods Act would not include a hire-purchase agreement.

The counsel also contended that there was a violation of Article 14 of the constitution as hire purchase transactions had not been included under the ambit of taxation in the whole country, but only in Delhi.

Decision:

The court referred to the definition of the word ‘sale’ under Bengal Finance (Sales Tax) Act, 1941 before and after the date of amendment and under Delhi Sales Tax Act, 1975.

The contention regarding violation of article 14 was rejected on the ground that the definition of sale in the Central Sales Tax Act included hire purchase agreements and as such applied to the whole of India.

The court pointed out that the amendment of the Act on 1st October, 1959 has, in effect, not altered the position from what existed prior to that date and even after the amendment the principle laid down by this Court in the first case of Instalment Supply Co. would continue to hold good. In that case, the court had observed that the term ‘hire and purchase’ was often used to describe the contracts which were in reality agreements to purchase chattels by instalments subject to a condition that the property in them is not to pass until all instalments have been paid. It recognised the difference between two types of agreements -first where, as in the case of a hire-purchase contract, the hirer is not obliged to buy the goods at the end of the contract, whereas in the latter type of contract there is an obligation on the hirer to buy. It held that in cases where the property changes ownership, tax could be levied.

The court held that the definition of sale under section 2(g) of the act includes both terms ‘transfer of property in goods’ and transfer of goods on ‘hire purchase’ and therefore the latter is liable to be taxed as well.

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Sections 2(g)-definition of sale- and section 2(h)-definition of sale price- read together also leads to the same conclusion that hire-purchase charges are included in the sale price and as such come under the ambit of taxation.

The appeal was dismissed.

Aziz Ahmad v Sher Ali and Others The question which has been referred to this Bench is"Whether a surety is discharged when the creditor allows the execution of his decree against the 'principal debtor to be barred by limitation."When a debt is time barred, what happens to the debt? It still exists, although there isn't any legal remedy. Difference between a time barred debt and a debt that the government waives (farmers' debts, for example) is that in the first case, the debt still exists, but in the second case, the government erases the debt, debtor isn't liable to pay. Section 25 (3) - debt is there. Hence the liability as a principal debtor remains, but he cannot be sued because of the law of Limitation. So he has no remedy, but the right persists. Now why would you promise to pay before Limitation? If you need to transact with the same creditor again, and you don't pay, he cannot sue, but he need not give you another loan. In case of a time barred debt, it has to be in writing. Only in that case can it be enforced in the absence of consideration.Section 60: Where the debtor has omitted to intimate…When you don't tell him what debt you're paying for, the creditor can appropriate it to any old debt, even if it is time-barred. So even though creditor cannot sue, debt still exists. Inn this case, surety said that since the debt is time barred, I should be absolved. He used section 134 to say that the omission was the creditor not suing before Limitation. But this omission doesn't discharge the debtor, so the debt still exists, so surety is still liable. Also, the creditor always has the option to sue either the debtor or the surety or both of them together, so even if the principal debtor cannot be sued because of Limitation, the surety can be sued. So the surety cannot escape his liability. But there is a limitation period within which you can sue the surety, but it will be different from that of the debtor. But why does the period of limitation not lapse at the same time for both the principal debtor and the surety? Because the liability of the surety is secondary in nature and so the creditor can decide when to recover from the surety. Section 137: merely because the creditor doesn't sue the principal debtor doesn't absolve the surety of his liability, unless agreed otherwise in the guarantee. In case of the debtor, he becomes liable to pay when the debt becomes due, the surety's liability begins when the creditor seeks the repayment of the debt from him.  

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Aziz Ahmad v. Sher Ali

Allahabad High Court

Facts: ( not mention , only an issue of law has been raised before the court)

Issue:

If the creditor allows the execution of his decree against the principal debtors to be barred by the law of limitation , is the surety discharged?

Judgement

It is erroneous to hold the view that the surety is discharged when a creditor allows his remedy against the principal debtor to become barred by time. The expiry of the period of limitation only bars the right , it does not extinguish the right. A barred debt is still a live debt , and can be a good foundation for a written promise .s. 137 states that mere forbearance on part of the creditor does not discharge the surety.

The surety has argued that he will lose the right to seek remedy under s. 140 and s.145 as the rights of the creditor cannot be enforced. However the surety can guard against such contingency by including a term in the contract whereby as soon as the guaranteed debt becomes due , the surety will be invested with all the rights creditor has against the debtor after making the payment.

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A creditor has no duty to the surety to pursue his legal remedy against the principal debtor and his failure to take action will not discharge the surety.

1. M.S.Anirudhan v Thomco's Bank Limited

A-was the surety for an O/D allowed by the bank to S. A blank form of guarantee was given by the bank to S, who got A to fill it up, saying ht will be gurantee 25K. When S brought the letter-to the bank, the bank refused to accept the guarantee an said they will give only 20K amount. S then made alteration by himself and corrected it to the 20K. Later, bank sued the Debtor and the surety-saying they wanted their money bank.

A is contending-since the document was altered without his consent-he was discharged.

This case talks of concepts such as material alteration, agency etc.

WHAT IS MATERIAL ALTERATION?

One which completely changes the nature of the contract-change in the obligation-can’t be done unilaterally because it goes against the concept of consent. If the alteration was material-then he is discharged from the liability.

Kapur:

S was acting on behalf of the A since it was handed over to him to hand it over to the bank. Since S was acting as an agent of the A, and the change was made with the consent-it was binding on him-the change.

Sarkar (Dissenting):

The altered document is not binding-he accepted another contract-the acceptance is not valid now. There was a reduction in the amount-the bank REFUSED the original contract (25K)- meaning they did not accept the OFFER of contract of 25K and hence there was no contract.

Hidayatullah:

He says since the A agreed to guarantee 25K and 20K is included in that, he is liable. Also, principal of estoppel. The bank BELIEVED that S had authority (due the conduct of A by handing over documents to him).

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Name – H.B. Basavraj v.Canara Bank

Year – 2009

Court – Supreme Court Of India

No. Of judges – 2

Rules Applied – Section 129, 130, Indian Contract Act

Topic – Guarantee

Facts-

LST was a trust to publish Kannada daily ‘Samyukta patrika’. They entered into an agreement to transfer the publishing, printing and machineries rights to KKP.

Some interested people filed suit for the removal of the trustees. While suit was pending, KKP entered into an agreement to transfer all its rights, liabilities and interests to JKNP.

Meanwhile, two loans transactions were made between Basavraj, JKNP and the respondent bank and a collateral security was provided to the bank in form of a hypothecation agreement.

Subsequently, JKNP became a public became a public limited company and an appeal was filed by the bank for the recovery of the loan.

Meanwhile, JNKP was appointed as the receiver of the property while the suit was pending. Thereafter, District Judge was appointed as a receiver by the Court.

LST act was passed by the Govt. Of Karnataka in order to take over the trust seeing the pending litigation and same was approved by the High Court in a decision. The trust properties came to be vested in the Administrator appointed by the Government.

High Court held appellants liable for the payment of the loan due which the present appeal has arisen.

Appellant’s Contention –

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Basavaraj did not have the chance to verify the documents he had signed at the time of his entering into an agreement to become a surety.

The machinery hypothecated to the bank on account of the agreement between JKNP and the Bank as security for repayment of the loan was not identifiable specifically on account of lack of evidence.

Issues –

Who should be liable to pay the loan amounts? Whether the deceased surety and his Legal Representatives are liable

to repay the disputed loan amount? Whether the Lokashikshana trust alone is responsible to repay the

disputed loan amount being the beneficiary of the same? Whether the LST having benefited from the loan transaction disputed

herein can be estopped from denying its liability?

Rationale –

There was absolutely no evidence to show that the bank had in fact exercised its dominant power to force the surety into entering the contract that he ultimately did. In the absence of any conclusive evidence to point to the entering of dates at a later stage, we cannot find any difficulty in rejecting the aforesaid contentions of the appellants.

It was not open to a party to revoke a guarantee when he had agreed to it being a continuing one and thus would be bound by the terms and conditions of the agreement executed at the time of entering into the guarantee.

In the absence of a specific written document by Basavaraj revoking the guarantee, the guarantee stands and the legal representatives of the deceased are liable to repay the loan.

There was no record to show that there were withdrawals from the loan account of JKNP from which it could be inferred that the Bank had permitted the receivers to withdraw money.

The administrator appointed by the Government had indeed secured a loan towards the facilitation of running of the publications but had not created any new charge on the property.

The High Court failed to consider that LST was liable to repay the loan on the principle of Section 70 of the Contract Act inasmuch as it was LST who had been benefited from the loan, which JKNP had secured.

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The principle of estoppel is, however, only applicable in cases where the other party has changed his position relying upon the representation thereby made.

It might be said that the action of the trust falls under the third category whereby it ratified all actions taken by others and benefiting from the same.

Result - The appeal is allowed and the judgment of the High Court is set aside and that of trial court is restored.

Guarantee (Subrogation)

13. Craythorne v. Swinbourne(33 ER 482)

Facts:

In order to raise a loan for S, the defendant arranged for the execution of a bond

whereby S, the principle and the plaintiff, as surety, were jointly and severally bound the

moneylenders.

Following a conversation between the lenders and the defendant, a second bond was

executed to the effect that the lenders did not trust the security of S and the plaintiff,

but if the defendant would become security to them in case of default of S and the

plaintiff, they would advance the money.

The money was advanced and the second bond was recited. It also stated the condition

that the second bond would be void in case S, or the plaintiff, or either of them, repaid

the lenders.

The plaintiff repaid the lenders in full since S died, insolvent.

He further claimed contribution from the defendant as co-surety. (defendant claimed

he was collateral security)

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Held: The defendant was not a co-surety with the plaintiff and, therefore, not liable to

contribute.

Issues:

1. Whether parol evidence of the defendant’s conversation with the lenders should be

admitted.

2. Whether the defendant was a co-surety or a collateral security.

Arguments:

Sir Samuel Romilly for the plaintiff: (have been adapted into the ICA in the form of S.140, 141)

He argues on the basis of natural justice and equity. He says that the contribution results

from the maxim that equality is equity; and that the surety will be entitled to every remedy that

the creditor has against the principle debtor, to enforce every security and all means of

payment; to stand in place of the creditor, not only by medium of contract, but also by means

of securities entered into without the knowledge of the surety and to avail himself of all those

securities against the debtor. Further, the right of the surety also stands on a principle of

natural justice: that one surety is entitled to contribution from another. It is possible that the

creditor, because of his partiality towards one surety sues only the co-surety. In such a case, the

court gives the creditor’s right (ie, resorting to either for the whole or each for his proportion)

to the co-surety and enables him to enforce it. Natural justice requires that the surety having

become security with others shall not have the whole lot thrown on him by the choice of the

creditor.

He also argues that the evidence produced to prove that the defendant was a surety only

in case of default of payment by the plaintiff, cannot be received as it consists of declaration to

which the plaintiff was no party and were made in his absence. Moreover, the intention was

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that the bond should be void by the payment at any day by the defendant or the other two.

Though the bonds treat them all as principles, the fact is admitted that S, was the only principle

and the other two were securities.

Thus, on established principles, one surety has a right to call on the other to contribute

equally with himself, or to compel the creditor, the instant the day was past and the bonds

were absolute, to enforce both bonds against both, and not one only.

Judgement:

The judge says that if the defendant had proposed to the bank that he become co-

surety then the matter would end, but since he proposed to the back to pay them only

in case of default of the others, he had by contract, withdrawn himself from the reach of

the principle, and the plaintiff cannot complain as the transaction was without his

knowledge and the defendant bound himself only to the extent he thought proper.

If therefore, a party exempts himself from the liability or the extent of the liability by a

special condition mentioned in the contract, he has, in effect, contracted so as to not be

liable in any degree. Thus, the intention of the party is to be bound as surety for the

surety and not co-surety with him.

Basically, the judge does not accept Romilly’s argument as he says that the co-surety

will be liable, unless by some contract, he exempts himself from liability. In this case, the

last line of the second bond made the defendant a collateral security. Here, equity does

not apply, and thus, the defendant is exempted from liability.

The Bill is dismissed.

Appellants:StateofMadhyaPradeshVs.Respondent: Kaluram

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Facts:

One Jagat Ram was given the contract for collection and sale of felled trees in a certain forest by the govt of MP. For this, Jagat Ram was to pay a sum of Rs 12,100 in four instalments out of which he paid the first instalment of Rs 3025 and the balance was to be paid on given dates and payment of the same was guaranteed by Kaluram.

Jagat Ram defaulted in payment of the balance instalments though he was allowed to continue removal of the felled trees by the forest authorities who had extended time of payment without any intimation to Kaluram.

The statement government lodged a claim against Kaluram for payment but he refused to pay on the ground that the forest authorities gave time to Jagat Ram and omitted to take steps which their duty to the surety required them to take i.e., prompt seizure and sale of the trees after the second instalment had fallen due, and since on that account his eventual remedy against Jagat Ram was impaired, he Kaluram stood discharged from liability as surety.

Arguments/ Held:

The Trial Court held that the forest officers were negligent in allowing the contractor Jagat Ram to remove the trees sold, and on that account the security of the surety was impaired, and the surety stood discharged for the whole amount recoverable from the contractor.

The High Court of Madhya Pradesh confirmed the decree of the Trial Court. Under Section .141 the term “security” includes all the rights which the creditor had

against the property at the date of the contract . The surety is entitled on payment of the debt or performance of all that he is liable for, to the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or liability: he is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor. If the creditor has lost or has parted with the security without the consent of the surety, the latter is, by the express provision contained in s. 141, discharged to the extent of the value of the security lost or parted with.

The state had a charge over the goods sold as well as the right to remain in possession till payment of the instalments. When the goods were removed by Jagat Ram that security was lost to the extent of the value of the security lost the surety stood discharged.

The SC held that the Forest Officers of the State of MP parted with the goods before receiving the payment of the amount due to them. Thereby, the charge in favour of the

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State was seriously impaired and the statutory power to sell the goods for the non-payment of the amount remaining due became, for all practical purposes ineffective.

The State further contended that “mere inaction on the part of the Forest Authorities does not amount to parting with the security”. The court held that the terms of the statute do not apply only to cases in which by positive action on the part of the creditor the security is parted with. Even if the security is lost by the creditor, the surety is discharged. In any event the facts in the present case make it abundantly clear that it was on account of the conduct of the forest authorities that the security was lost. The goods sold were under the control of the Forest officers when they were in the coupe and even when they were in the depot of the contractor.

Appeal Dismissed

Mahant Singh v U Ba Yi

Issues:

1. Whether the surety is discharged from his liability to the principal debtor vide s 134 provided that the operation of Or 23 Rule 1 has extinguished the creditor’s remedies against the principal debtor.

Rule:

1. S 134 ICA: The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.

2. S 139 ICA: If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged

3. S 2(g): An agreement not enforceable by law is said to be void.

4. S 2(j): A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

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Analysis:

1. The surety contends that he is discharged from his liabilities towards the creditor as:

a. Due to the omission on part of the creditor to take the permission of the Court before withdrawing or abandoning a part of his claim in a suit pursuant to Or 23 Rule 1 of CPC, the creditor has lost the right to sue the debtor (i.e. has created a situation the legal consequence of which is the discharge of the principal debtor). Thus by the operation of s 134, the surety claims discharge.

b. Due to the operation of Or 23 Rule 1 of the CPC, the contract b/w the principal debtor and the creditor has become unenforceable (as the creditor cannot enforce his rights through the courts) and hence void vide s 2(j) of ICA. This has absolutely released the debtor and consequently the surety,

2. The High Court of Rangoon denies the surety’s contentions on both grounds.

a. On the first ground the Court held that the only consequence of the operation of Or 23 rule 1 was to prevent the creditor from suing the principal debtor. It was evident that by continuing his suit against the surety, the creditor had reserved his rights against the surety.

b. On the second ground, the Court held that the words ‘unenforceable by law’ have to be read as ‘unenforceable by substantive law’ and cannot be read to accommodate procedural aspects of law. Thus a contract which ceases to be enforceable due to some procedural law is not void as per s 2(j) of the ICA.

3. In effect, the claim of the creditor against the surety was allowed.

Significance of the Case: The case distinguishes between s 134 and s 139 of the ICA. Accordingly, s 134 discharges the surety when the creditor and the debtor enter into a contract without the assent of the surety or the creditor commits an act or omission the legal consequence of which is discharge of the debtor. S 139 applies when a subsequent act of the creditor impairs the remedy of the surety against the debtor for ex when the creditor loses the securities furnished by the debtor for securing the debt.

Amrit Lal Goverdhan Lalan v. State Bank of Travancore & Ors

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In February 1956, respondents 3 to 6, as partners of respondent 2 firmentered into an agreement with a Bank undertaking to open in the Bank a cash credit account to the extent of Rs. 100,000 to be secured by goods to be pledged with the Bank. Clause 9 of the agreement provided that the borrowers shall be responsible for the quantity and quality of goods pledged. The appellant executed a letter of guarantee in favor of the Bank guaranteeing the liability of the borrowers in respect of the account up to a limit Rs. 100,000. Under cl. 5 of the letter of guarantee, the appellant agreed that the Bank may enforce and recover upon the guarantee the full amount guaranteed notwithstanding any other security the Bank may hold. The weekly statement dated 15th March 1957 showed that the stock pledged was valued at about Rs. 99,991 but when the quantity of the goods actually in stock was verified with the weekly statement dated 18th April 1957, shortage of goods to the value of Rs. 35,690 was found. It was admitted on behalf of the Bank that. it was not known how the shortage occurred and that respondents 2 to 6 must have taken away the goods. Respondents 2 to 6 were granted one month's time to make up the deficit, and in spite of the time being extended, the deficit was never made up. In May 1958, after adjusting the money realized on the sale of the goods pledged and other adjustments, a sum of Rs. 40,933.58 was found due to the Bank from respondents 2 to 6. The Bank filed a suit against them and the appellant, and the suit was decreed. The decree was confirmed by the High Court. In appeal to this Court, it was contended that : (1) Certain entries in the account books of the Bank showedthat the maximum limit of credit was reduced to Rs. 50,000 and again raised to Rs. 100,000 without consulting the appellant, that therefore there was a variation in the terms of the contract without the surety's (appellant's) consent and, under s. 133 of the Indian Contract Act the liability of the appellant was discharged; (2) Under s. 135 of the Act, the conduct of the Bank in giving time to respondents 2 to 6 to make up the deficit in the quantity of goods absolved the appellant of all liability; and (3) under s. 141 of the Act, since a portion of the security was parted with or lost by the creditor without surety's consent, the liability of the appellant was discharged to the extent of the value of the security so lost.

Judgment of the SC

1. The entries in the books of account were mere internal instructions not legally binding on therespondents, and in view of the formal record in the original agreement and letter of guarantee, there could notleave been a variation in the terms without a proper written agreement, Therefore, there was no variance in theterms of the contract between the creditor and the principal debtor and the provisions of s. 133 of the Act werenot attracted

2. What really constitutes a promise to give time within the meaning of s. 135 of the Act is the extension ofthe period at which, the principal debtor was by the original contract obliged to pay the creditor, bysubstituting a new -and valid contract between them, or, whenever the taking of a new security from theprincipal debtor operates as giving time. Therefore, the act of the Bank in giving time to the principal debtorto make up the

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quantity of goods pledged is not tantamount to giving of time to the principal debtor formaking payment of the money, within the meaning of the section.

3. Under s. 140 of the Contract Act the suretyis, on payment of the amount due by the principal debtor, entitled to be put in the same position in which thecreditor stood in relation to the principal debtor. Under s. 141 of the Act the surety has a right to the securitiesheld by the creditor at the date when he became surety. The word 'security' is not used in any technical senseand includes all rights which the creditor has against the property at the date of the contract. Therefore, if thecreditor has lost or parted with the security without the consent of the surety, the latter is by the expressprovision contained in s. 141, discharged to the extent of the value of the security lost or parted with. In the present case, the shortage of goods of the value of Rs. 35,690 was brought about bythe negligence of the Bank and to that extent there must be deemed to be a loss by the Bank of the securitywhich the Bank had at the time when the contract of surety was entered into; and there is nothing in cl. 5 ofthe letter of guarantee to indicate that the appellant was no, entitled to invoke the provisions of s.141. The words 'any other security' in the clause meant any security other than the pledge of goods mentionedin the primary agreement. Therefore the principle of the section applies and the surety was discharged of hisliability to the Bank to the extent of Rs. 35.690

State Bank of Saurashtra v Chitranjan Rangnath Raja

The appellant bank allowed a cash credit facility limited to Rs. 75,000/- to the principal debtor Harilal Parmananddas Adatia on his pledging 5,000 tins of groundnut oil under the lock and key of the Bank and on personal guarantee of the surety, respondent No. 2. Thereafter the principal debtor enjoyed the cash credit facility by borrowing various amounts. By the end of February 1959 the principal debtor owed Rs. 76,368.04 P in this account to the Bank. Principal debtor died in November 1959. The Bank wrote to the surety calling upon him to pay the outstanding balance of Rs. 70,879/- in cash credit account of principal debtor as in the circumstances mentioned in the letter the balance was required to be recovered from the surety. Some correspondence ensued thereafter between the Bank and

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the surety and ultimately the Bank filed the suit for recovery of Rs. 76,368.04 against defendant 1, the legal representative of principal debtor and defendant 2, the surety. The trial court round that there was negligence on the part of the Bank with regard to the safe custody of the pledged oil tins but as the contract of guarantee entered into by the surety with the Bank was independent of the pledge of goods given by the principal debtor, the surety is not discharged from his liability under the guarantee. So observing the trial court decreed the suit. The surety paid the entire amount demanded and appealed to the High Court. The High Court held that the pledge of the goods and the guarantee of the surety constituted one composite transaction. The High Court further held that the Bank was utterly negligent and had not exercised such care as a prudent man would in the circumstances of the case which resulted in the loss of security, namely, pledged oil tins and, therefore, in view of combined operation of sections 139 and 141 of the

Judgment of SC:

1. In order to attract section 141 of the Contract Act, it must be shown that the creditor had taken more than one security from the principal debtor at the time when the contract of guarantee was entered into and irrespective of the fact whether the surety knew of such other security offered by the principal debtor, if the creditor loses or without the consent of the surety parts with the other security the surety would be discharged to the extent of the value of the security.

2. In the instant case as found by the High Court and not controverted, the principal debtor had offered two securities (i) the pledge of goods and (ii) personal guarantee of the surety. The surety himself agreed to give personal guarantee of the specific understanding and with the full knowledge of the Bank that the principal debtor was offering another security, namely, pledge of goods.

3. The surety in good faith contracted to offer personal guarantee on the clear understanding that the principal debtor has offered security by way of pledge of goods and the goods were to be in the custody of the creditor Bank. On this conclusion, 141 of the Act will be indubitably attracted. Section 141 comprehends a situation where the debtor has offered more than one security one of which is the personal guarantee of the surety. Even if the surety of personal guarantee is not aware of any other security offered by the principal debtor yet once the right of the surety against the principal debtor is impaired by any action or inaction, which implies negligence appearing from lack of supervision undertaken in the contract, the surety would be discharged under the combined operation of sections 139 and 141 of the Act. In any event, if the creditor loses or without the consent of the surety parts with the security, the surety is discharged to the extent of the security lost as provided by s. 141.