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Keshavlal Harilal Setalvad Vs. Pratapsing Moholalbhai Sheth - Court Judgment

LegalCrystal Citation
Decided On
Case NumberFirst Appeal No. 218 of 1926
Reported inAIR1932Bom168; (1932)34BOMLR167
AppellantKeshavlal Harilal Setalvad
RespondentPratapsing Moholalbhai Sheth
DispositionAppeal allowed
indian contract act (ix of 1872), section 133, 141-principal and surety-variation in contract by principal- consent of surety not taken-discharge of surety-construction of statute.;section 133 of the indian contract act, 1872, contemplates a case in which the contract between the principal debtor and creditor is a continuing one, i.e., of the nature of a continuing guarantee as defined in section 129, and likely to result in a series of transactions, some taking place before and some after the variance of the contract; but it does not purport to make any change in the law in the case of variance made in a contract consisting of a single and indivisible transaction.;if there is a substantial alteration in a contract by the principal, without the consent of the surety, even if there be no.....nanavati, j.1. the plaintiffs sued to recover rs. 1,14,000 and odd on the strength of a mortgage-bond dated october 17, 1921, executed by defendant no. 1 and of a surety bond dated october 24, 1921, executed by defendants nos. 2 and 3. a decree was granted against defendant no. 1 as prayed and as regards the sureties the claim was allowed except for a sum of rs. 5,875 plus interest thereon. the original defendant no. 1 has not appealed, the appellants being the sureties, defendants nos. 2 and 8,2. the contention of the sureties in substance was that they were not liable because there had been a substantial variation in the original contract between the plaintiff's and defendant no. 1 without their consent, it was also pleaded that the sureties were discharged because time was given to the.....

Nanavati, J.

1. The plaintiffs sued to recover Rs. 1,14,000 and odd on the strength of a mortgage-bond dated October 17, 1921, executed by defendant No. 1 and of a surety bond dated October 24, 1921, executed by defendants Nos. 2 and 3. A decree was granted against defendant No. 1 as prayed and as regards the sureties the claim was allowed except for a sum of Rs. 5,875 plus interest thereon. The original defendant No. 1 has not appealed, the appellants being the sureties, defendants Nos. 2 and 8,

2. The contention of the sureties in substance was that they were not liable because there had been a substantial variation in the original contract between the plaintiff's and defendant No. 1 without their consent, It was also pleaded that the sureties were discharged because time was given to the principal debtor without their consent.

3. The learned Subordinate Judge held that the document evidencing the so-called new contract between the plaintiffs and defendant No. 1, Exhibit 93, could not be recognised or admitted in evidence, and that therefore there was no variation discharging the sureties. He, however, held that the sum of Rs. 5,875 paid to defendant No. 1 was in variation of the original contract and held the sureties discharged to that extent. He did not consider that there was any contract to give time and that the delay in filing a suit was merely due to forbearance which did not operate to discharge the sureties. He accordingly gave a decree as stated above.

4. The facts material to the present appeal may be briefly stated. Defendant No. 1, who is a pleader practising at Ahmedabad, was in involved circumstances and his four properties with which we are now concerned were mortgaged to different people. It seems that he was desirous of bringing the scattered mortgages into the hands of a single party. Defendants Nos. 2 and 3, the present appellants, are his brothers-in-law, that is, his wife's brothers, and were apparently desirous of helping him. The plaintiffs are the managers of the firm of Anandji Kalyanji, which is a sort of charitable trust of the Jain community. They were induced to enter into the contract dated October 17,1921, which is called a possessory deed of mortgage and is to the following effect The plaintiffs were to lend to defendant No. 1 the sum of Rs. 1,25,000 at the rate of nine per cent, per annum and that defendant No. 1 was to give as security a first mortgage on the four properties recited in that document, viz., a dwelling house, a Dehlun, a bungalow and certain vacant land at Vadaj. It was recited that each of these properties was mortgaged to certain persons for certain amounts totalling Rs. 1,01,500 as principal and some amount as interest. The mortgagor was to redeem these properties from the original mortgagees out of the moneys advanced to him by the plaintiffs and obtain propar reconveyances and hand over the same to the mortgagees along with all other necessary documents. The sum of Rs. 1,25,000 was not to be paid over to defendant No. 1. He was to be allowed to draw such sums as were required for the purpose of redeeming the properties from time to time and on redemption they were to form the security for the amount lent to him by the plaintiffs who were to be the first mortgagees of the properties. Any surplus out of Rs. 1,25,000, that remained in the hands of the mortgagees after all the properties were redeemed was to be paid in cash to defendant No. 1. On October 24, 1921, the present appellants, defendants Nos.'2 and 8, executed the deed of surety, Exhibit 36, which refers to the so-called mortgage deed dated October 17, just set out and states: ''Therefore, in case Krishnalal Narsilal above named does not pay the whole sum and interest due under the aforesaid document or in case the same are not realised from his properties, we shall jointly as well as singly pay the same in full and in case we fail to pay, etc.'

5. In pursuance of these transactions three out of the four properties mentioned in the document were redeemed and the documents made over to the mortgagees. A sum of Rs. 91,000 had been drawn for the purpose of redeeming these properties and a sum of Rs. 125 was debited to this account for legal charges. Then on May 14,4922, an agreement appears to have been arrived at between the plaintiffs and defendant No. 1 which is embodied in Exhibit 93. The document is called a receipt and is to the following effect. The mortgagor Krishnalal stated that the fourth property mentioned in the original contract,viz., the land at Vadaj which was mortgaged to Jivanlal Chunilal for Rs. 16,500, was agreed to be sold to the said mortgagee Jivanlal Chunilal for the amount of the loan and interest thereon. Therefore, he was not to take any money from the plaintiffs for redeeming that mortgage, that he had caused the plaintiffs to pay Rs. 5,875 to one Kunjlal and that he had thus received a sum of Rs. 1,00,000 under the mortgage deed of October 17, 1921, and that that deed was to be treated as being one for the amount of Rs. 1,00,000 instead of the original amount stated therein. This document was signed by the principal debtor Krishnalal and attested by two persons, but the two sureties were not parties to it and do not appear to have been consulted, Entries relating to this change in the original transaction were made in the relevant accounts of the plaintiffs which are to be found in Exhibit 124. The entries contain a full recital of the change made in the transaction and credit back a sum of Rs. 25,000 to Krishnalal thus reducing the original debit of Rs. 1,25,000 to Rs. 1,00,000.

6. The term of the original mortgage being for one year, on September 22, 1922, the plaintiffs wrote to Krishnalal informing him that the period was about to expire and asking him to pay up the amount due in full settlement of the account. In reply defendant No. 1 wrote on October 16, 1922, Exhibit 43, claiming some relief in interest of the ground that he did not draw the whole of the money immediately on signing the contract. Then follows Exhibit 44 dated November 15, 1922, from Krishnalal to the plaintiffs in which he admits that it was agreed that interest on the full amount was to accrue from the date of the mortgage, viz., October 17, 1921. No suit was filed soon after the expiry of the term of one year, and it is claimed on behalf of the appellants that this letter Exhibit 44 shows that in consideration of defendant No. 1 giving up his contention as to the date from which interest was to run the plaintiffs agreed to give him time in which to pay up and that such agreement releases the sureties under Section 135 of the Indian Contract Act.

7. On September 21, 1923, the plaintiffs wrote to defendant No. 3 Naginlal informing him that they had advanced Rs. 1,00,000 to Krishnalal on his surety on the mortgage of the house, dehlun and 'some other immoveable properties', that a notice was sent to Krishnalal from whom a reply dated September 12, 1923, was received, a copy of which was enclosed and a reply was asked for from Naginlal containing an acknowledgment of liability. Before that a notice had been given on September 2, 1923, Exhibit 58, by the plaintiffs to Naginlal threatening a suit unless the money was paid up, A notice had also been given to him on January 13, 1923, Exhibit 59, claiming repayment. Finally, the present suit was filed on April 13, 1924, againat the principal debtor as well as the two sureties.

8. The ground must first be cleared by considering the question as to the admissibility in evidence of the document Exhibit 93, the so called receipt. The learned Subordinate Judge has held that it is not admissible in evidence without registration and that it does not operate to effect any change in the mortgage deed of October 17, 1921. Now, on a true construction of the document it is clearly not a receipt but it is an agreement between the two parties for making a certain change in the contract entered into by them on October 17, 1921, that change being that instead of four properties to be given as security, they (the mortgagees) were to be content with three properties and that instead of advancing Rs. 1,25,000 they were to advance only Rs. 1,00,000. The original contract of October 17, 1921, is itself hardly a regular deed of mortgage, because at that date the mortgagor had really no interest to mortgage anything except the equity of redemption inthose properties, which equity was apparently not very valuable. It was a contract between the parties by which the plaintiffs were to provide funds for redeeming the properties from the original mortgagees and the borrower was then to mort- gage those properties to the plaintiffs. I see no reason why an agreement to make a certain change in an earlier contract of this sort between the parties should not be admissible in evidence without registration. Moreover, the contention of the appellants was that Exhibit 93 was given in evidence not for the purpose of affecting any property but for a collateral purpose, viz., to show that some substituted contract had been arrived at between the parties on May 14, 1922. For such collateral purpose it is permissible to receive the document in evidence, as was held in the following cases: Saraswatamma v. Paddayya I.L.R. (1922) Mad. 349 Varatha Pillai v. Jeevarathammal (1919) L.R. 46 IndAp 285 : 22 Bom L.R. 144 Vyravan Chetti v. Subrammanian Chetti and Hanmant v. Shankar I.L.R. (1907) Bom. 303 : 9 Bom. L.R. 523 I think that this argument is correct. But in any event there can be no doubt that the entry in the plaintiffs' accounts, Exhibit 124, which is a clear admission of the plaintiffs of such change in the original transaction is admissible in evidence and serves the purpose of the appellants irrespective of the admissibility of Exhibit 93. Even apart from that admission, the plaint itself, paragraph 6, shows that the transaction actually carried out between the plaintiffs mortgagees and defendant No. 1, the mortgagor, was not the same as was entered into between them on October 17, 1921. It is clear from the plaint that instead of advancing Rs. 1,25,000, only the sum of Rs. 1,00,000 had been advanced, and that instead of giving the security of four properties mentioned in the original document only three properties had been redeemed and given as security. I hold, therefore, that on May 14,1922, the mortgagor and mortgagees agreed to make a change in the terms of the original contract between them, and that Exhibit 93 is admissible in evidence to prove this fact.

9. It is, therefore, now necessary to consider what is the effect of this change as regards the liability of the present appellants. They contend that this change is a material one, and as it was made without their consent, they are entirely absolved from their liability under the surety bond. The view taken by the lower Court was that a mortgage does not cease to be enforceable merelybecause a part of the consideration has not been paid. The learned Judge observes: ' There is no reason why it should not be enforced to the extent of the amount of consideration actually paid, and especially where the amount paid forms a substantial part of the whole.' For this proposition ha relies on the cases of Munshi Bajrangi Sahai v. Udit Narain Singh (1906) 10 C.W.N. 932 Rashik Lal v. Ram Narain I.L.R. (1912) All. 273 : 9 A.L.J. 198 Abdur Rahman v. Krishna Mal (1911) 11 I.C. 868 Bhagabai v. Narayan : (1907)9BOMLR950 , and Srinivasaswami Aiyanyar v. Athmaram Aiyar I.L.R. (1908) Mad. 281 All these are cases in which the mortgagor tried to get out of his liability to the mortgagee on the ground that part of the consideration was not paid. The question of the position of a surety who had undertaken that the mortgagor should fulfil his part of the contract has not been considered and that is the question with which we are now concerned. The learned Subordinate Judge thinks that there is no reason why the sureties should not be liable within the scope of the surety bond as regards the amount paid for carrying out the terms of the mortgage. But he has overlooked the point that in the present case the terms of the original contract-it is a misnomer to call it a mortgage bond-have been substantially varied without the consent of the sureties. It is not merely that the sum advanced has fallen short of the amount agreed to be advanced. Instead of the mortgagor being enabled to redeem four properties he has been enabled to redeem only three of them. It is conceivable that the sureties were induced to undertake their burden out of sentimental considerations for the preservation of a particular piece of property in the family. It is possible to imagine circumstances in which a surety who would be willing to undertake a burden for the sake of preserving the entire property of his relative might not desire to undertakethe same burden for the sake of preserving only a portion of it. When a contract is varied in a substantial particular, it is not for the Court to say that the surety who undertook the burden of the original contract must or ought to have undertaken the burden of the contract as subsequently varied. The sole judge of the question is the surety himself, In this particular case it does not appear at first sight that the alteration was unreasonable or prejudicial to the debtor or his sureties, but all the facts bearing on that question are not before the Court, and it is impossible for the Court to come to any considered opinion on the question whether the burden on the sureties was increased or diminished by the change. None of the issues covered the question of the intrinisic value of the Vadaj property and its likelihood of increasing or descreasing in value and no evidence was adduced on that point. It is conceivable that the land at Vadaj was so placed that it was cap- able of increasing considerably in value. Its proximity to Mr. Gandhi's Ashram, for example, might in some circumstances invest it with a special desirability in the eyes of some people and make it specially valuable to them. It is, therefore, impossible for the Court to place itself in the position of the sureties and decide that the new contract arrived at between the mortgagor and the mortgagees was such as the sureties ought to have assented to. The whole point is that when a new contract is substituted for the old one it is the surety alone who is to judge whether he should undertake the burden in respect of the new contract or not. No doubt the Court will not accept fanciful objections or trivial changes as justifying the surety in refusing to carry out his obligations. But there can be no doubt that in the present case the change is one of substance.

10. The argument of the learned Counsel for the respondents was that the case is covered by Section 133 of the Indian Contract Act, Section 133 reads as follows :-

Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

11. Now this section clearly contemplates a case in which the contract between the principal debtor and the creditor is acontinuing one and likely to result in a series of transactions, some taking place before and some after the variance of the contract, It does not seem to me to be applicable to the present contract which does not consist of a series of transactions. The mortgagees were to lend a total sum of Rs. 1,25,000 and as security for it were to receive four properties of the mortgagor in first mortgage after they had been freed from prior encumbrances. It is not like a contract guaranteeing the honesty of an employee over a period of time where the conduct of the person guaranteed might be honest for a few months and thereafter become dishonest. In short Section 133 contemplates a contract of guarantee of the sort that is defined as a continuing guarantee in Section 129. Here the guarantee was merely as regards one single point, viz., that if the mortgagees fail to realise their money from the principal debtor or his mortgaged property, the sureties would be responsible, and the consideration for that was that the mortgagees were to advance a sum of Rs. 1,25,000 and thus put the mortgagor in funds for the redemption of four properties. This the mortgagees failed to do. They advanced sufficient money only for the redemption of three of the properties. It is true that this was done at the request of the principal debtor, but as the sureties were not consulted it cannot be said that they agreed to the variance. Here there could be no question of certain transactions being prior to the variance and certain other transactions being subsequent thereto. The only fact that can be definitely stated about it is that the contract on the fulfilment of which the sureties' liability could arise was not carried out,

12. There does not appear to be any section of the Indian Contract Act which exactly covers the present case. Section 141 was also relied on by the learned Counsel for the respondents. It is merely to the effect that if the creditor without the consent of the surety parts with any part of the security the surety is discharged to the extent of the value of the security. It is argued that what the creditor did in the present case was merely to part with the security of the fourth property intended to be mortgaged. That, however, does not seem to be the correct way of describing what happened. It is not the case that after advancing Rs. 1,25,000 and after getting the first mortgage of all the four properties, the creditor out of kindness of heart allowed the debtor to dispose of the fourth property for his own benefit. In such a case it might have been reasonably urged that the sureties were discharged only to the extent of the value of the property so relinquished. In the present case the full sum was not advanced and the properties intended to be redeemed were not redeemed but the creditor and the debtor agreed among themselves that the original contract was to be modified by permitting the creditor to advance Rs. 5,000 less and the debtor to sell off one of the properties to another person. This agreement between them is not one that can be brought under the terms of Section 141 of the Indian Contract Act so as to hold the sureties responsible for the reduced amount. Moreover, there is no evidence to show that the reduction in the amount advanced was no more than the value of the property relinquished.

13. It appears to me that the attempt of the respondents to show that what happened in the present case is covered by the terms of any section of the Indian Contract Act has not succeeded. We must, therefore, look to the general principles of the law of contract in the present case. It is true, as pointed out by the learned Counsel for the respondents, that the Court must interpret the Act itself where it applies and that the natural meaning of the words of the statute should be followed uninfluenced by the previous state of the law: see Ramdas Vithaldas Durbar v.S. Amerchand & Co. (1916) L.R. 43 IndAp 164 : 18 Bom. L.R. 670 Mohori Bibee v. Dhurmodas Ghose and Norendra Naik Sircar v. Kamalbasini Dasi I.L.R. (1896) Cal. 563 But where the Act does not cover the case with which the Court has to deal, then the Court is bound to follow the principles of the common law. It has been laid down in more than one case that the Indian Contract Act is not exhaustive : see Jagjiwandas v. King, Hamilton & Co. : (1931)33BOMLR709 Irrawaddy Flotilla Company v. Bugwandass (1891) L.R. 18 I.A, 121 Jwaladutt Pillani v. Bansilal Motilal I.L.R. (1929) Bom. 414 : 31 Bom. L.R. 687 and Scott & Hodgson v. Keshavlal : AIR1930Bom529 ,

14. Now there can be no doubt that on the accepted principles of the law on this point a variation of the kind that has taken place in the contract now before the Court discharges the sureties. In Smith v. Wood (1929) I Ch. D. 14 it was held that the release of one property out of several affected the right of the other depositors, whose property might be taken towards the satisfaction of the debt, and that therefore the release of that property had brought about a substantial alteration in the contract. It was held that the properties of such of the plaintiffs as had not consented to the alteration were released from liability. It is not necessary to give the facts of this case at length but the principle that where there has been a material variation the surety is discharged from his liability clearly applies. It was observed by Lord Hanworth M.R. (p. 23) :-

it may be that they (the other persons) are very little affected, but it was for them to judge and for them to decide whether they would allow the alteration, and it is not for a Court or a jury to determine the materiality of the alteration. The result of the alteration was not really large in this case, but the contributing person is to be the sole judge of whether or not he will con-gent to remain liable notwithstanding the alteration.

15. He also quoted an extract from the judgment of Cotton L.J. in the case of Holme v. Brunskill (1877) 3 Q.B.D. 495 which is worth repeating (p. 505):-

The true rule In my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in oases where it is without inquiry evident that the alteration is unsubstantial, or that itcannot be otherwise than beneficial to the surety, the surety may not be dis-charged yet, that ifits is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.

16. This is the latest ease on the point and it is in consonance with a long series of decisions enforcing, in varying circumstances, the same principle, viz., Johnson v. Gandy (1855) 4 W.R. 22 Bonser v. Cox (1844) 13 L.J. Ch. 260 Whitcher v. Ball (1826) 5 B. & C. 269 Polak v. Everett (1870) 1 Q.B.D. 669 Bonar v. Macdonald (1850) 3 H.L.C. 226 Calvert v. The London Dock Company (1838) 2 Keen's Rep. 638 and Holme v. BrunsKill (1877) 3 Q.B.D. 495 A reference to these cases is sufficient to show that if there is a substantial alteration, even if there be no actual prejudice to the surety which can be shown to exist, the surety will be discharged because the Court or the jury will not go into the question whether there has been any actual prejudice or not. The surety is to be the judge as to whether he will continue to remain liable on the new contract or not. In Polah v. Everett the surety was aware of the new arrangement between the creditor and the debtor, still it was held that the variation discharged him. ' You cannot keep the surety bound and transact his affairs without consulting him.' It is interesting to note that the cases cited have been referred to in the commentary under a 133 in Pollock and Mulla. It is clear that they are not regarded by the learned commentators as having been overruled or set aside in any manner by Section]33. In fact two of the cases form illustrations (a) and (e) to that section. The applicability of Section 133 to illustration (e) is not very evident. The illustration refers to a contract which is one and indivisible while the section refers to a contract which consists of a series of transactions extending over a period of time. This, however, is by the way. The fact remains that Section 183 provides only for a particular case of variance,viz., where the contract of guarantee contemplates a series of transactions extending over a period of time, and that it did not purport to make any change in the law in the case of variance made in the case of a contract consisting of a single transaction, as may be inferred from the fact that illustration (e) which is taken from the case of Bonser v. Cox has been appended to it. It follows, therefore, that the appellants in the present case must be held to have been discharged from their surety bond in view of the alteration made in the original contract; by the plaintiffs and defendant No. 1 on May 14, 1922.

17. In view of the above finding it is not necessary to consider at length the effect of the alleged extension of time, It will be sufficient to say that the view of the learned Subordinate Judge is correct, viz., that there was no agreement to give time but that there was merely forbearance on the part of the mortgagees to take action which did not discharge the sureties.

18. It was sought to be argued for the appellants that the mortgagees had failed to realise the rent on the rent-note, Exhibit 37, and that it was their duty to recover those amounts. It was argued that the failure to realise the rents according to the rent-note increased the liability of the sureties to that exent, and therefore they are discharged to the extent of the damage suffered by the negligence. I do not think there is anything in this argument The rent-note was merely for the amount of interest on the amount of the loan and had no relation to the actual rental value of the property. Defendant No. 1 did pay Us. 10,000 towards interest after one year and that sum was more than sufficient to cover the year's interest. After the expiry of the second year the suit was filed within a few months and it does not seem to me that any plea, of negligence can be made out.

19. In support of the view that the transaction between the plaintiffs and defendant No. 1 was single and indivisible and not to be viewed as a series of transactions, it may be pointed out that defendant No. 1 would not have been entitled to redeem the mortgage from the plaintiffs piecemeal. The mortgage was one single transaction and a single sum was to be lent to redeem the four properties. The whole of the sum was debited to defendant No. 1 immediately on completion of the contract and taken to his credit in a deposit account. The interest on the whole sum was also to run from the same date. All these circumstances clearly show that the contract in suit did not consist of a series of transactions to be entered into between the parties from time to time but contemplated a single and indivisible transaction.

20. The result is that the decree against the appellants, original defendants Nos. 2 and 3, must be set aside and the appeal allowed with costs in both Courts.

Baker, J.

1. I agree. The material point in this case lies within a small compass. The facts have been fully set out by my learned brother, and it is not necessary to repeat them. So far as the question of registration is concerned, as we are not dealing with the effect of the subsequent novatio on the land at Vadaj, which originally formed part of the contract with the plaintiffs and was subsequently removed from the operation of the mortgage, I do not think it is necessary to consider whether that document required registration. In any case, it is clear that the sale of the fourth property, namely, the land, to the prior mortgagee, rendered it impossible that it should form part of the transaction with the plaintiffs. The result of this sale is to convert a mortgage of four properties for Rs. 1,25,000 into a mortgage of three properties for Rs. 1,00,000, and there is thus a variation both in the amount advanced or to be advanced and in the properties which formed the security for the advance. The sureties were sureties for the original contract, and were not consulted as to the variation. Consequently, under all the authorities which have been set forth in the judgment of my learned brother, and which I need not repeat, they are discharged.

2. The learned Counsel for the respondents has referred to s.133 of the Indian Contract Act, but that section appears to refer rather to a continuing contract such as one of guarantee, vide the illustrations (a), (b), (c) and (d) to the section. The question of transactions subsequent to the variation does not seem to arise in the present case. The contract between the plaintiffs and the original defendant No. 1 is one and indivisible, as is clear from the fact that if it had been carried out in its 'original form, the mortgagor defendant No. 1 could not have redeemed any one of the four properties without redeeming the others, and therefore, there can, in my opinion, be no question of any transactions subsequent to the variation. On the authorities, we are not concerned with the question of whether the burden on the sureties is or is not increased, and, as a result, the sureties, who did not assent to this variation and are not shown to have been aware of it, must be discharged. Consequently, the appeal must be allowed with costs, the decree against the appellants as sureties being set aside.

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