Indian Contract Act – CHAPTER VI.
OF THE CONSEQUENCES OF BREACH OF CONTRACT
Section 73. Compensation for loss or damage caused by breach of contract
When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract – When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Explanation – In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.
a) A contracts to sell and deliver 50 mounds of saltpeter to B, at a certain price to be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of compensation, the sum, if any, by which the contract price falls short of the price for which B might have obtained 50 mounds of saltpeter of like quality at the time when the saltpeter ought to have been delivered.
b) A hires B’s ship to go to Bombay, and there take on board, on the first of January, a cargo which A is to provide and to bring it to Calcutta, the freight to be paid when earned. B’s ship does not go to Bombay, but A has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A avails himself of those opportunities, but is put to trouble and expense in doing so. A is entitled to receive compensation from B in respect of such trouble and expense.
c) A contracts to buy of B, at a stated price, 50 mounds of rice, no time being fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A, by way of compensation, he amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it.
d) A contracts to buy B’s ship for 60,000 rupees, but breaks his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise.
e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, does not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived if the boat had sailed according to the contract. After that date, and before the arrival of the cargo, the price of jute falls. The measure of the compensation payable to B by A is the difference between the price which B could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrived.
f) A contracts to repair B’s house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract.
g) A contracts to let his ship to B for a year, from the first of January, for a certain price. Freights rise, and, on the first of January, the hire obtainable for the ship is higher than the contract price. A breaks his promise. He must pay to B, by way of compensation, a sum equal to the difference between the contract price and the price for which B could hire a similar ship for a year on and from the first of January.
h) A contracts to supply B with a certain quantity of iron at a fixed price, being a higher price than that for which A could procure and deliver the iron. B wrongfully refuses to receive the iron. B must pay to A, by way of compensation, the difference between the contract price of the iron and the sum for which A could have obtained and delivered it.
i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to A’s mill informing B that his mill is stopped for want of the machine. B unreasonably delays the delivery of the machine, and A, in consequence, loses a profitable contract with the Government. A is entitled to receive from B, by way of compensation, the average amount of profit which would have been made by the working of the Mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract.
j) A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at 180 rupees a ton, telling C that he does so for the purpose of performing his contract with B. C fails to perform his contract with A, who cannot procure other iron, and B, in consequence, rescinds the contract. C must pay to A 20,000 rupees, being the profit which A would have made by the performance of his contract with B.
k) A contracts with B to make and deliver to B, by a fixed day, for a specified price, a certain piece of machinery. A does not deliver the piece of machinery at the time specified, and in consequence of this, B is obliged to procure another at a higher price than that which he was to have paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A but which had not been then communicated to A, and is compelled to make compensation for breach of that contract. A must pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation.
l) A, a builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that, before the first of January, it falls down and has to be re-built by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to make compensation to C for the breach of his contract. A must make compensation to B for the cost of rebuilding the house, for the rent lost, and for the compensation made to C.
m) A sells certain merchandise to B, warranting it to be of a particular quality, and B, in reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way of compensation. B is entitled to be reimbursed this sum by A.
n) A contracts to pay a sum of money to B on a day specified. A does not pay the money on that day; B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest up to ‘the day of payment
o) A contracts to deliver 50 mounds of saltpeter to B on the first of January, at a certain price. B afterwards, before the first of January, contracts to sell the saltpeter to C at a price higher than the market price of the first of January. A breaks his promise. In estimating the compensation payable by A to B, the market price of the first of January, and not the profit which would have arisen to B from the sale to C, is to be taken into account.
p) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B’s mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill.
q) A contracts to sell and deliver to B, on the first of January, certain cloth which B intends to manufacture into caps of a particular kind, for which there is no demand, except at that season. The cloth is not delivered till after the appointed time, and too late to be used that year in making caps. B is entitled to receive from A, by way of compensation, the difference between the contract price of the cloth and its market price at the time of delivery, but not the profits which he expected to obtain by making caps, nor the expenses which he has been put to in making preparation for the manufacture.
r) A, a ship-owner, Contracts with B to convey him from Calcutta to Sydney in A’s ship, sailing on the first of January, and B pays to A, by way of deposit, one-half of his passage-money. The ship does not sail on the first of January, and B, after being in consequence detained in Calcutta for some time and thereby put to some expense, proceeds to Sydney in another vessel, and, in consequence, arriving too late in Sydney, loses a sum of money. A is liable to repay to B his deposit with interest, and the expense to which he is put by his detention in Calcutta, and the excess, if any, of the passage-money paid for the second ship over that agreed upon for the first, but not the sum of money which B lost by arriving in Sydney too late
2007(2) AKAR (NOC) 190 (KER)= AIR 2007 Kerala 69 M.N.KRISHNAN,J.
(B)Contract Act(9 1872) Ss.73,70- Agreement to sell vehicle – Misrepresentation of model of vehicle or breach of Contract – Factum of non – disclosure of real model to plaintiff entitles plaintiff to get away from contract – Plaintiff entitled for return of advance amount paid by him-However, plaintiff having taken possession of vehicle, used it as taxi for 36 days – Even if there is breach of contract committed by defendant in form of misrepresentation plaintiff cannot be unjustly enriched-Amount of Rs.100/- per day directed- be given to defendant for plaintiffs possession and user of jeep.
2007(3) AIR Kar R 278 D.V.SHYLENDRA KUMAR,J.
Contract Act (o of 1872) S.73-Compensation towards idle labour-Contractor could not execute work on instructions from respondent – Electricity Board-Agreement not imposing liability on Board to pay for idle labour – Notwithstanding said agreement Assistant Executive Engineer of Board awarded fabulous sum towards compensation which goes beyond contract value of work itself – Held, improper – Reason being, Contractor cannot be assumed to have incurred so much of expenditure for employing work force-Reduction of said amount by Board without notice to Contractor cannot be found fault with – No relief can be granted against unilateral action taken by Board, be it in violation of principles of natural justice.(Paras 3,7,9)
Section 74. Compensation for breach of contract where penalty stipulated for-
[When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Explanation.- A stipulation for increased interest from the date of default may be a stipulation by way of penalty.]
Exception.- When any person enters into any bail-bond, recogni- zance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 1*[Central Government] or of any State Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation.- A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.
a) A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceeding Rs. 1,000, as the Court considers reasonable.
b) A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B Rs. 5,000. A practice as a surgeon in Calcutta. B is entitled to such compensation, not exceeding Rs. 5,000, as the Court considers reasonable.
c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.
d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent at the end of six months, with a stipulation that, in case of default, interest shall be payable at the rate of 75 per cent from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable.
e) A, who owes money to B a money-lender, undertakes to repay him by delivering to him 10 mounds of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 mounds. This is a stipulation by way of penalty, and B is only entitled to reasonable compensation in case of breach.
f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly installments, with a stipulation that” in default of payment of any installment, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms.
g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly installments of Rs. 40, with a stipulation that, in default of payment of any installment, the whole shall become due. This is a stipulation by way of penalty.
2007(3) AIR Kar R 528 R.GURURAJAN AND C.R.KUMARASWAMY,JJ.
Contract Act(9 of 1872) S.71, 74 – Evidence Act (1 of 1872) S,45-Suit for refund of advance purchase price and damages-Claim based on agreement to sell and receipt of defendant with regard to receipt of advance purchase price-Signature of defendant on agreement identified by plaintiff-Court noticing signature of defendant accepted agreement and receipt-Non-examination of hand writing expert-Does not render said documents, inadmissible-Plea raised by defendants alleging forgery-Not tenable, in view of fact that defendant despite being a practicing lawyer had not taken any action for forgery against plaintiff.(para13)
2007(2) AIR Kar R 493(Supreme Court) S.B.SINHA & MARKANDEY KATJU,JJ
(B)Contract Act(9 of 1872) S.74-Auction sale – Forfeiture of earnest money Is permissible only when there is concluded contract and not prior thereto(Paras 30,32)
2007(3) AIR Kar R 99 D.V.SHYLENDRA KUMAR,J.
(D)Karnataka Excise Act (21 of 1966) S.71 Karnataka Excise (Lease of Rights of Retail Vend of Liquor)Rules (1969) R 18(2)Contract Act(9 of 1872) S.74-Forfeiture of bid deposit-Phrase loss sustained by the State Government – Computation of – State will have to take into account amount that it has received by way of forfeiture under Rule 18(1) such other amount which it has received pursuant to re-auction – Demand in so far as it seeks to exclude amount which was deposited by highest bidder and which has been forfeited by Government cannot be sustained Provisions of S.74 of Contract Act would be a guiding factor for purpose of computation of such losses.(Paras68,72,73)
2007(3) AKAR (NOC) 313 (P & H) =AIR 2007 PUNJAB & HARYANA 58 HEMANT GUPTHA,J.
(B)Contract Act(9 of 1872) Ss.74,70- Unjust Enrichment-What amounts to Govt. Contract – Forfeiture of earnest money of highest bidder for not fulfilling terms and conditions of contract consequent to issue of letter of intent – Not unjust enrichment – In cases of breach of contract, consequences has to follow from each of defaulting tenderers.
75. Party rightfully rescinding contract entitled to compensation
A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract.
A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two nights In every week during the next two months, and B engages to pay her 100 rupees for each night’s performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfillment of the contract.
2007(5)AIR Kar R 113 (Supreme Court)(From AIR 2005 Bombay 385)
S.B.SINHA & P.K.BALASUBRAMANYAM,JJ.
(D)Contract Act(9 of 1872) Ss.124,126- Indemnity or Bank Guarantee – Document indemnifying party against losses, claims, damages etc. which may be suffered by it – And not using usual words found in Ban k Guarantees like unequivocal condition; unconditional and absolute – Is a contract of Indemnity – Contractor indemnifying Co-operative Society against loss, damages etc. which may be suffered by it-And not using usual words found in Bank Guarantees like unequivocal condition; unconditional and absolute – Is a contract of indemnity-Contractor indemnifying Co-operative Society against loss. Damages etc.- Claim made by assured on termination of contract need not be honored by bank without proof of loss. AIR 2005 Bom.385,Reversed.(para 18)
Sale of Goods
Chapter VII Sections 76-123-[Sale of Goods] Rep. by the Indian Sale of Goods Act 1930 (3 of 1930), s. 65.
OF INDEMNITY AND GUARANTEE
124. “Contract of indemnity” defined
A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ” contract of indemnity”.
A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
2007(5)AIR Kar R 113(Supreme Court)(From AIR 2005 Bombay 385)
S.B.SINHA & P.K.BALASUBRAMANYAM,JJ.
(D)Contract Act(9 of 1872) Ss.124,126- Indemnity or Bank Guarantee – Document indemnifying party against losses, claims, damages etc. which may be suffered by it – And not using usual words found in Ban k Guarantees like €œunequivocal condition€?; unconditional and absolute – Is a contract of Indemnity – Contractor indemnifying Co-operative Society against loss, damages etc. which may be suffered by it – And not using usual words found in Bank Guarantees like unequivocal condition; unconditional and absolute – Is a contract of indemnity – Contractor indemnifying Co-operative Society against loss. Damages etc. – Claim made by assured on termination of contract need not be honored by bank without proof of loss. AIR 2005 Bom.385,Reversed.(para 18)
125. Rights of indemnity holder when sued.
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-
1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies
2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;
3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.
126. “Contract of guarantee”, “surety”, principal debtor” and “creditor”
A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor “, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
2007(1) AIR Kar R 513 V JAGANNATHAN,J.
Contract Act(9 of 1872) S.126-Invocation of bank guarantee – Injunction-Expression €œwithout questioning the right of the principal to make such demand or the propriety or legality of the demand€? used in bank guarantee – Clearly indicates that the bank was bound to pay the amount under the two bank guarantees without a question being asked-Bank guarantee is an unconditional guarantee-No injunction can be granted (Paras6,11,12)
2006(2) AIR Kar. R 633,Disting 2- Contract Act(9 of 1872) S.126
Invocation of bank guarantee – Injunction against – Contract for supply, erection and commissioning of Wind Energy Generators(WEG)-Clause of performance bank guarantee required that appellant should obtain certificate from certified agency that WEGs have not generated power as per authenticated power-curve of each machine before lodging claim for invocation of bank guarantee – Clause also requiring fulfillment of availability of machines as stated in supply order – Bank guarantee in question is a conditional performance bank guarantee – Same were not satisfied, appellant had no right to invoke bank guarantee-Order restraining appellant from invoking bank guarantees-proper.
2007(1) AKAR (NOC) 18 (CAL.) = AIR 2006 Calcutta 301
KALYAN JYOTI SENGUPTA,J.
(D)Contract Act (9 of 1872) S.126-Civil P.C. (5 of 1908) O.39 R 4- Bank guarantee-Invocation of-Injunction order Vacation of-Contract for supply of goods-Plaintiff as suppliers discharged their obligations and delivered goods to defendant No.1 – There was no complaint from defendant No.1-Bank Guarantees had been furnished by plaintiffs through their Bankers /defendant No.3 – Despite repeated request defendant No.1 failed to cancel bank guarantees given by plaintiffs and therefore interim injunction was granted restraining defendant No.3 from invocation of bank guarantee – There had been no lawful invocation of bank guarantee at any time by any of beneficiaries before making present application – By subsequent event plaintiff was able to make out very strong prima facie case of element of fraud in connection with invocation of bank guarantee-Interim injunction cannot be therefore vacated.
2007(1) AKAR (NOC) 132 (DEL)= AIR 2007 Delhi 16
(B) Contract Act (9 of 1872) S.126-Bank Guarantee – Invocation of – Award of contract-Bank guarantee furnished by petitioner-Contractor to respondent-it was irrevocable Bank guarantee – Liability to honour same was unconditional, unequivocal – It was specifically mentioned therein that any notice issued to Bank to make payment would be binding on it notwithstanding differences arising between parties – Pendency of dispute by invocation of arbitration agreement-would be therefore no ground to prevent encashment of Bank guarantee-More so when no case of irretrievable injustice or fraud made out.
2007(5)AIR Kar R 113(Supreme Court)(From AIR 2005 Bombay 385)
S.B.SINHA & P.K.BALASUBRAMANYAM,JJ.
(B)Contract Act (9 of 1872) S.126-Bank Guarantee – Construction of -Surrounding circumstances – Court will not take recourse to surrounding circumstances unless an ambiguity exists.
AIR 1965 SC 1856, AIR 1966 SC 902,Disting;2006 AIR SCW 4235,Rel.on(paras17,22,26)
(C)Contract Act (9 of 1872) S.126-Guarantee Contra t -Bank Guarantee – Is a separate transaction – Must be construed on its own terms – Case law discussed
(1997) 9 SCC 179, 1999 AIR SCW 3747,2000 AIR SCW 3639,1997 AIR SCW 2415,2006 AIR SCW 721 Rel.on 2003 AIR SCW 1225,Disting(para27)
2007(5)AIR Kar R 461(Supreme Court)(From Karnataka)
TARUN CHATTERJEE AND B SUDERSHAN REDDY,JJ.
(A)Contract Act(9 of 1872)S.126-Interim injunction-Bank guarantee – Agreement to raise capacity of Sugar plant-Bank guarantee given by seller providing that guarantor had undertaken to pay to purchaser specified amount without demur – Sole discretion conferred on purchaser as to whether amounts became recoverable from seller or whether he had committed breach of agreement – Right of purchaser to recover amount from guarantor not affected on ground of dispute raised by seller as to his liability-Held that, it was unconditional guarantee – No injunction against invoking it on ground of dispute between parties or breach of terms of agreement, can be granted.
(B)Contract Act (9 of 1872) S.126-Bank Guarantee-Mere fact that bank guarantee refers to principal agreement without referring to any specific clause in preamble of deed of guarantee-Does not make guarantee furnished by bank to be conditional one .(para29)
2007(2) AKAR(NOC) 174 (DEL.)= AIR 2007 Delhi 75
Dr.MUKUNDAKAM SHARMA & Ms.HIMA KOHLI,JJ.
(A) Civil P.C.(5 of 1908) O.39 r 1,2-Contract Act(9 of 1872) S.126-Enforcement of Bank guarantee-Injunction-To be issued only in exceptional cases like fraud or irretrievable injustice.
(B)Civil P.C.(5 of 1908) O39 r 1,2-Contract Act(9 or 1872) Ss.126,17,18-Enforcement of Bank guarantee Injunction-Bank guarantee is independent contract between Bank and beneficiary-Not even a whisper in the entire plaint to the effect that Bank had knowledge of the fraud in respect of primary contract awarded by Development Authority in favour of tenderer-Part of tender documents reveals that tenderer had knowledge about existence of nallah on project side – There was no fraud at all on part of Development Authority while entering primary contract with tenderer herein-Even otherwise, there is no fraud either alleged or proved in respect of Bank guarantee-Bank guarantees furnished are unconditional and irrevocable in nature and Bank is under an obligation to pay on demand-Injunction restraining encashment of bank guarantees cannot be granted.
127. Consideration for guarantee
Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s promise.
b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise.
c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.
128. Surety’s liability
The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.
2007(1) AIR Kar R 267 D.V.SHYLENDRA KUMAR,J.
( C )Contract Act(9 of 1872),S.128-Suretys liability – Banker who issues Bank guarantee is in position of surety – Not open for surety Banker to question liability or otherwise of principal debtor or justification for principal debtor to have incurred liability-Bank not caring to honour guarantee for six months – Such a conduct on part of commercial organization, deprecated(Paras58,59,61)
2007(5) AKAR (NOC) 636 (GAU) = AIR 2007 Gauhati 113
Contract Act(o of 1872) S.128-Possession of mortgaged property of Guarantor – Cannot be taken by Financial Corporation without notice to guarantor – Corporation also cannot issue public notice for auction/sale of mortgaged property without notice to guarantor-reason being, liability of guarantor is secondary and arises only when borrower fails to make repayment-Guarantor is bound by his own separate agreement to which principal borrower does not join-Difference between surety and guarantor, stated.
129. “Continuing guarantee”
A guarantee which extends to a series of transactions is called a “continuing guarantee”.
a) A, in consideration that B will employ C in collecting the rent of B’s zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee.
b) A guarantees payment to B, a tea-dealer, to the amount of pound 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of pound 100, and C pays B for it. Afterwards B supplies C with tea to the value of pound 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of pound 100.
c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does riot pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.
2007(3)AKAR (NOC) 344 (KER)= AIR 2007 Kerala 131 V.K.BALI,C.J. & S.SIRI JAGAN,J.
(A) Limitation Act (36 of 1963) S.55-Contract Act (9 of 1872) S.129 – Kerala Revenue Recovery Act (1 of 1810),S 69(2)-Enforcement of personal guarantee between creditor and guarantor – Limitation – Applicability to revenue recovery proceedings-Clause to guarantee entitling creditor/Financial Corpn.to act as if guarantor was principal debtor – Guarantee shall also remain in force till borrower pays full loan amount on demand – Personal guarantee executed – Limitation begins to run from refusal on part of guarantor to fulfill demand – Since revenue recovery notice itself is demand made on guarantor question of limitation does not arise.
130. Revocation of continuing guarantee
A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
a) A, in consideration of B’s discounting, at A’s request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees, on default of C.
b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonors the bill at maturity. A is liable upon his guarantee.
131. Revocation of continuing guarantee by surety’s death
The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.
132. Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on other’s default
Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence.
A and B make a joint and several promissory note to C. A makes it, infact, as surety for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note.
133. Discharge of surety by variance in terms of contract
Any variance, made without the surety’s consent, in the terms of the contract between the principal 1[debtor] and the creditor, discharges the surety as to transactions subsequent to the variance.
a) A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards B and C contract, without A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his surety ship by the variance made without his consent, and is not liable to make good this loss.
b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect, of a duty not affected by the later Act.
c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for B’s duly accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary. A is not liable for subsequent misconduct of B.
d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payments shall be applied to the then existing debts between B and C. A is not liable on his guarantee for any goods supplied after: this new arrangement.
e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st January. A is discharged from his liability, as the contract has been varied, inasmuch as C might sue B for the money before the 1st of March.
134. Discharge of surety by release or discharge of principal debtor
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.
a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C, and A is discharged from his surety ship.
b) A contracts with B to grow a crop of indigo an A’s land and to deliver it to B at a fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation of A’s land and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.
c) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is discharged from his surety ship.
135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal debtor
A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.
136. Surety not discharged when agreement made with third person to give time to principal debtor.
Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged.
C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to give time to B. A is not discharged.
137. Creditor’s forbearance to sue does not discharge surety
Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.
B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his surety ship.
138. Release of one co-surety does not discharge others
Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties1.
139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy
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.
a) B contracts to build a ship for C for a given sum, to be paid by installments as the work reaches certain stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A, prepays to B the last two installments. A is discharged by this prepayment.
b) C lends money to B on the security of a joint and several promissory note made in C’s favour by B, and by A as surety for B, together with a bill of sale of B’s furniture, which gives power to C to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing to his misconduct and willful negligence, only a small price is realized. A is discharged from liability on the note.
c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part that he will, at least once a month, see M make up the cash. B omits to see this done as promised, and M embezzles. A is not liable to B on his guarantee.
140. Rights of surety on payment or performance.
Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
141. Surety’s right to benefit of creditor’s securities
A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety ship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.
b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge of A, withdraws the execution. A is discharged
c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged.
142. Guarantee obtained by misrepresentation invalid.
Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.
143. Guarantee obtained by concealment invalid
Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
a) A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.
144. Guarantee on contract that creditor shall not act on it until co-surety joins
Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.
145. Implied promise to indemnify surety
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.
a) B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt.
b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from A, and, on A’s refusal to pay, sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover from B the amount of the bill, but not the sum paid for costs, as there was no real ground for defending the action.
c) A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2,000 rupees, but obtains from A payment of the sum of 2,000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.
146. Co-sureties liable to contribute equally.
Where two or more persons are CO-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.
a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, la and C are liable, as between them selves, to pay 1,000 rupees each.
b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the extent of one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees.
147. Liability of co-sureties bound in different sums
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.
a) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 30,000 rupees. A, B and C are liable to pay 10,000 rupees.
b) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupees each
c) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of 70,000 rupees. A, B and C have to pay each the full penalty of his bond.