INDEMNITY AND GUARANTEE

GajananMoreshwarParelkar 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.
DS 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.

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
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 companys assets for payment of ICCs 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

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]

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 companys
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,
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.

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 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 doesnt 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 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 referees judgement and accepts the contention of LEP.
According to the court, the referees 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 doesnt, 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:

Ds 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.

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: Ds 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-

10

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 Queens Court decreed in
favour of defendant.
The decision of the Queens court was reversed by the Exchequer
court.

Plaintiffs 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.

Defendants contention

He didnt 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-

11

(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.
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 PNBexecuted 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 bondcalled 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:

12

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 wasnt 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 conductindicates 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)

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

13

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.

Appellants 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
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.

14

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
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 Ps
(guarantor) consent. Therefore P was discharged from his obligation to pay the debts of
those constituents.
ISSUE: Whether contract of Guarantee or Indemnity
CONTENTIONS:
Plaintiff:
1.

P was a guarantor and D making a settlement without his (surety) had

discharged him.

15

2.

By the compromise made by D without Ps 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 P
High Court (Bombay)
BEAUMONT, CJ.
(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.
1.

KANIA, J.
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.

16

2.

(w.r.t 2nd contention of P & D) Ds contention accepted. The second agreement

completely defeats Ps claim. Ps 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.
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 Courts reasoning-

17

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
Vs.
Respondent: Ganga Enterprises and Anr.

Facts:

18

Authority

of

India

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

19

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.

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

20

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

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 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.

21

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 didnt 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 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

22

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

Charan Singh v M/s Security Finance

Delhi HC

Facts:

23

(S.133)

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) wont apply once a
decree has been passed. The Co-judgement debtors are 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

24

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 guarantee
1 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

25

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 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:

26

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

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. As 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.
Ps 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 suretyDs 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 Ps 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 cant 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.

27

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.

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.

28

Jay Bharat Credit v. CST

Facts:
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.
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 hirepurchase 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:

29

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.
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

30

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.

31

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.

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.

32

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.

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-cant 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):

33

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).

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.

34

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.

Appellants Contention

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.

35

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.
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

36

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)

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

Issues:
1. Whether parol evidence of the defendants 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

37

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 creditors 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 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.

38

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 Romillys 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:StateofMadhyaPradesh
Vs.
Respondent: Kaluram

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

39

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 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

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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 creditors 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.

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

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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 suretys 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

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

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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
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

43

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
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

44

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.

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