1. This is an appeal by the plaintiffs from the judgment and decree of the Additional District Judge. Indore. dismissing their suit as against the surety defendant No. 2 and decreeing it only against the principal debtor defendant No. 1. The questions for decision are whether in the special circumstances fee dealings between the principal debtor and the plaintiffs between February and July, 1955, can be described as the grant of time or composition coming under Section 135 or the acceptance of additional security which by implication discharging the original surety, or amount to acts calculated to prejudice the interests of the surety in the manner set out in Section 139 of the Contract Act.
2. The following facts of the case are practically common ground and though there are one or two obscurities in matters of detail they have not been raised in the pleadings of either party as justifying its respective case.
3. The plaintiffs are the trustees in charge of certain properties for the benefit of Princess Usha Devi who has since the filing of the suit become the Ruler of Indore. The trustees own a stretch of grass land in two villages outside Indore about the identity of which there is no controversy Jhatalomal Ahuja a businessman at Indore took lease of the grass of that land for a total consideration of Rs. 19,500 in the season of 1955 This was to be paid in three instalments of Rs 6,500 each, on the 15th of the three months February, March and April. In one or two papers 15th January has been mentioned as the due date for the first instalment: but this is incorrect according to both the parties.
On the agreement being signed (p. 51 on 18-9-1954 by Ahuja there was a demand for security and accordingly the defendant No. J Rai Sahib Bhagwandas to which he became the surety and agreed to pay the instalments in case the principal debtor Ahuja failed. He also made himself expressly liable personally for any amount outstanding against Ahujs on account of this lease. It may be noted even here, that the suit was against Ahuja as the principal debtor and Tiwari as the surety, though it is stated by the plaintiffs and in a measure admitted by both the defendants that Tiwari was a partner in this venture, according to the latter with certain reservations. Besides his liability as a partner he made himself liable as a surety and has been sued in that capacity. The plaintiffs have therefore not been allowed to raise as an additional ground Tiwari's liability as a partner irrespective of whether or not he has been discharged as a surety.
4. When the first instalment fell due in February. Ahuja paid only a sum of Rs. 3,000. The plaintiffs naturally called upon him to pay up the balance and while this was going on already the second instalment fell due on the 15th March, which was also not paid. On the 16th March the plaintiffs cautioned Ahuja that unless he paid within a day or two actually the evening of 18th is mentioned, they would be obliged to take legal steps for the recovery of the dues Meanwhile Tiwari had quarrelled with Ahuja and claiming to be partner had been taking certain steps in the regular civil Courts. He also wrote to the plaintiffs stating that the principal debtor Ahuja had become unreliable and that he as the surety was anxious that the plaintiffs should take strong measures against Ahuja.
Tiwari went on repeating this obviously anxious that he should not be called upon to make good the shortage in accordance with his security bond. In June both Ahuja and Tiwari were noticed to pav up these amounts and as they failed the suit was filed in July As it was, credit has been given to a total of Rs. 7,000 in particular two payments of Rs. 3000 and 1,500 certainly cash payments made by Ahuja. There are other smaller amounts credited which may or may not be the price of grass sold up by the plaintiffs in circumstances which have not been investigated because neither party wanted it shall, however make a mention of this in connection with the second ground on which the defendant No. 2 claims that he had been discharged, namely, the acceptance of additional security.
5. From the very beginning, even after accepting Tiwari's security bond the plaintiffs had been asking the principal debtor Ahnja to furnish additional security; in other words, they felt that besides Tiwari's security some more cover was necessary Nothing particular seems to have come out of it till in February when the plaintiffs were oressing for the payment of the instalment and Ahuja was trying to evade; then the latter made a statement that some grass had been stacked by him in the Lalbagh Palace lands and offered that it might be taken as 'additional security'. The plaintiffs, however, would not think of it unless the grass so slacked was worth about Rs. 20,000 We do not know whether such a quantity was stacked at an or whether the grass that was stacked had been taken away by Ahuja or his nominees or had been seized by the plaintiffs. sold and the sale-proceeds applied towards the liquidation of the claim.
6. There is certainly no doubt whatsoever that independently of other considerations the surety can call upon the plaintiff to give an account of ail realisations towards the debt made from the principal debtor and claim a credit in that regard. If any of the grass belonging to Ahuja had been sold by the plaintiffs certainly the defendant No. 2 as well as Ahuja himself would be entitled to a reduction pro tanto of fee claim made. The real point to note is that neither of the defendants has alleged that the grass had been sold by the plaintiffs and the proceeds appropriated by them m wanted as adjustment on that account. It is therefore not possible at this stage to direct an inquiry in this regard. Actually, however it does appear that some of the credits already given by the plaintiffs are en account of some of the grass the plaintiffs did succeed in selling. Nothing more need therefore be said about the seizing of the grass if any by the plaintiffs. However, the so-called the 'additional security' will be examined in the light of Sections 136 and 139 to see If it really justifies the discharge of the surety in the manner it had been done by the trial Court.
7. The sheet anchor of the case of the surety is that the mere grant of time has bad the effect of discharging him. To some extent this has impressed the trial Court which has made this one of the grounds for dismissing the suit as against the surety. The actual facts as shown by correspondence are the following. Besides a letter in January, warning the principal debtor that the instalment was falling due. we have the letter of the creditors, dated 18th February, pointing out that the instalment was overdue and demanding the payment. Five days later on the 23rd we have another letter acknowledging receipt of Rs. 3,000 and calling upon the principal debtor to remit the balance before the end of the month.
Somewhere during this interval the surety wrote a letter which seems to have greatly impressed the trial Court. Alt that he says in this letter is that Jhatolomal Ahuja was becoming unreliable and was playing tricks upon his partner, namely, the surety himself, He, in his own interest was taking action; but he was equally anxious that the creditor should realise the dues directly from Ahuja by sale of the birs (grasslands) without giving any time to him.
'If he fails to deposit by the 28th because the time has already been granted, you may take necessary action against him for fee realisation.'
8. No doubt by this letter the surety was showing his anxiety to have a line of escape in case the worst happened, namely, a final default by Ahuja and sm occasion for enforcement of the security. Anyway. Ahuja. did not pay up by the end of February either. On the 10th March the surety was again writing to the trustees staring that he had gathered that they were giving Ahuja some more time and that they should take more effective action against the principal debtor. Now for the first time the surety also indicates the lines on which he intended to resist any claim made on him:
'As Shri ... was granted extension for the payment of the balance of fee contract money without my consent and although under the law I am automatically discharged from a liability still withou t prejudice to my rights I would request you to kindly confirm this fact so that 1 may be able to move in the mailer accordingly.'
Meanwhile the principal debtor had been given time till the 18th March. However, the default continuing, the trustees were thinking of legal action Most of fee correspondence between the creditors and the principal debtor had been communicated to fee surety as in fact he himself desired H. Some three months later both of them were noticed and as no payment had been made ultimately the suit was filed, the principal debtor Ahuja not seriously contesting while the surety resisted on the lines he had alreadv made in his correspondence which has been summarized above.
9. The two grounds (themselves interconnected) on which fee surety claims feat he has been discharged are, firstly, feat time had been given to the principal debtor for the payment of the instalments, and secondly, additional security had been accepted. A perusal of the trial Court's judgment, ia particular paragraph 15 regarding the enlargement of time and paragraph 16 regarding the additional security shows feat Court had accepted both of them as equivalent to new contracts and not merely as a case of forbearance in the one instance and of mere additional security in the other without disturbing the original security. As these seem to be very wide statements of the law it would be convenient briefly to notice the general principles and then to apply them to fee facts of fee instant case in fee light of reported case law.
We have Section 135 of the Contract Act setting out the circumstances in which a contract between fee creditor and fee principal debtor discharges the surety unless the last is privy to that contract. Such a contract might provide for one of three things, namely, a composition with the principal debtor or a promise to give time or more not to sue. The essential condition is that whatever the creditor offers or agrees to do should be a contract that is one with a quid pro quo or consideration from the principal debtor. It it is a mere forbearance to take action then of course there is no effect on the surety. As if to bring but this feature Section 137 of the same Act expressly provides that a mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not discharge the surety unless of course there is an express provision to that effect in the surety bond, which is not the case here.
10. Then we have Section 139 which we can describe as a general provision covering eases which may not come within the letter of Section 135. Any act which is prejudicial to the rights of the surety or any omission on the part of the creditor to take such steps as he is bound to take in the interest of the surety or steps taken by the creditor leading to difficulties for the surety himself in time to enforce his right (if occasion arises) against fee principal debtor,--all this would lead to the discharge of the surety. Tn fact in Section 139 we have what might be called an equitable provision. The creditor should not either by collusion or by a bargain with the principal debtor do anything which would shift the burden on to the surety.
11. Courts have dealt with different aspects of this problem in a number of rulings. For example in Subramania Aiyar v. Shaw Wallace & Co.. Madras. AIR 1920 Mad 259. It was pointed oul with reference to the general Section 139 that-
'A surety who seeks to be relieved of the obligation imposed upon him as surety and to be absolved from liability must not only show that the creditor has. by his acts or conduct. either prevented the debtor from doing the things which he undertook to do. or has connived at the debtor's omission to do those things, or has enabled him to do something which he ought not to have done, he must also show that the creditor has done some act inconsistent with the rights of the surety, or omitted to do any act which his duty towards the surety required him to do within the meaning of Section 139.'
The ground there being additional security it was also pointed out-
'The taking of additional security from the surety does not amount to giving time to the debtor and will not absolve the surety.'
Whereas in this case the emphasis was upon the general provision, in Seth Pratapsingh T. Keshavlal Harilal, AIR 1935 PC 21, it was held that before a surety could be discharged the original contract must have been altered without his consent. It is not every granting of time or of accepting the additional security which will discharge the surety but only such of them as come under Section 134 by being elements in a new contract between the creditor and the principal debtor to which the surety is not a party:--
'The surety, like any other contracting party, cannot be held bound to something for which he has not contracted. If the original parties have expressly agreed to vary the terms of the original contract no further question arises. The original contract has gone, and unless the suretv has assented to the new terms, there is nothing to which he can be bound for the final obligation of the principal debtor will be something different from the obligation which discharged forthwith on the contract being altered without his consent, for. the parties have made it impossible for the guaranteed performance to take place.'
12. The same is the trend of the Bombay ruling reported in Parvatibai v. Vinayak Balvant, AIR 1939 Bom 23. The special feature of that case was that it was a surety bond in a Court and the High Court held that the principles of Sections 135 and 139 were applicable. The same topic has been touched upon in the Lahore ruling reported in Pirthi Singh v. Ram Charan. AIR 1944 Lah 428. There the creditor gave the principal debtor time to pay and spread out his debt in a number of instalments. On those facts the Court held that a new contract had been created behind the back of the surety who was accordingly discharged : in other words, being entitled to a lump payment forthwith. the creditor instead of insisting upon if was provided in the original contract, granted the instalments for the first time in variation of the original terms. Here is a typical instance where the granting of lime by providing for instalments was not merely a ca.se of forbearance but one of a new contract.
13. A different position was found on the facts in the Allahabad case reported in Mt. Radha Kunwar v Ram Narain. AIR 1952 All 587. There time had been granted; but the Court found it was not a new contract but merely forbearance to sue:
'The idea underlying Section 135 is that where the creditor does something behind the back of the surety and does if to his prejudice, by advancing facilities to principal debtor, 'which are likely to harm the surety' the surely is no more to be bound by his undertaking Where the creditor agrees not to continue execution proceedings against the principal debtor for the time being to allow him opportunity to raise money to discharge the debt, it is only an act of forbearance within the meaning of Section 137 and not an instance of giving lime under a contract within the meaning of Section 135 and does not discharge the surety' (underlining (here in ' ') mine).
14. Thus tbe mere fact thai time has been granted or that additional security has been accepted does not decide the question of fee surety's discharge either' way. because there may be cases in which these happen without being parts of a contract, in which event there is no question of discharge. They might also be parts of a contract with a quid pro quo gained by the creditor in which case of course they become a contract which, un(SIC) assented to by a surety, will lead to his discharge. Which of the alternative positions prevails would depend upon the facts and circumstances of each case. In the instant case, for example, the trial Court has thought that these two elements were parts of a contract. Possibly the trial Court also felt that in terms of equity the acceptance of the additional surety harmed the interests of the original surety defendant No. 2 and accordingly led to his discharge.
15. We are not inclined to agree with this interpretation of the circumstances and accordingly the matter calls for a discussion. We have the correspondence in full between the principal debtor Ahuja and the trustees in course of which some time was given to enable him to make arrangements for the money. Actually the time allowed was very little: but that is not the main point, because it is conceivable that even the grant of one day can become a new contract in view of the attendant circumstances. What is to the point is that there was no consideration gained by the trustees by thus granting time to the principal debtor to make arrangements for the money; all that had happened was the principal debtor having produced part of his first instalment was evading and the trustees told him definitely that if he did not pay up by a particular date (18th of March) they would not wait any more.
It is not as if that in return for thus waiting the principal debtor was going to do something for the creditors It was just a case of forbearance comparable to the set of facts already referred to in one of the reported cases. No doubt all this time the surety was felling the trustees that the principal debtor had become a cheat and should be firmly dealt with. Certainly if by this forbearance the plaintiff's had enabled collusively the principal debtor to secrete properties or to do acts prejudicial to the surety there would be a case for consideration under Section 139. But that is not alleged or proved. So it is a case of orbearance which does not attract Section 135. It was similar to the giving of time in the case reported in Tejumal v. Secretary of State. AIR 1933 Sind 311, in which it has been described as being gratuitous.
'A mere gratuitous agreement '(that is an agreement made by a creditor without consideration)' by a creditor to give time to the principal debtor will not discharge the surety, and that in order to have such effect, and agreement to give time to the principal debtor must amount to a contract, that is, there must be consideration therefor.'
16. The position in the case reported in Jagjivandas v. King Hamilton & Co.. AIR 1931 Bom 337. which has been relied upon by the defendant No. 2--respondent--is substantially different. No doubt that judgment states:--
'Giving time to the principal debtor does prejudice the rights of the surety by preventing him from paying off the creditor and then enforcing the creditor's original rights against the principal debtors.'
But immediately before this sentence the judgment finds:--
'The effect of material alteration in the contract between the creditor and the principal debtor without reference to the surety is to discharge the surety.'
In that particular case it was found on the facts that the granting of time was part of a new contract so that Section 135 did apply.
17. An extreme case of giving time and not filing the suit against the principal debtor till the recovery was barred limitation was yet held not to operate as a discharge of the surety is. Mahanth Singh v. U Ba Yi, AIR 1939 PC 110, because by doing so the creditor was not getting any consideration and accordingly it was not a contract In the instant case, however, it is really not necessary to go so far.
18. In the more recent ruling reported in Sankaranarayana Iyer v. Kottayam Bank Ltd., AIR 1950 Trav. Co. 66, it was again held:--
'It is not simply neglecting to sue the principal which would have any effect upon the surety's liability but there must be a positive agreement with the principal that the creditor win postpone the suing of him or enforcing other remedies to a subsequent period before a surety can claim bis discharge.' In the Madhya Pradesh ruling reported in Veerchand v. Kashibai. 1962 MPLJ 895, it was held:-- 'In order that a surety may be discharged what is required is not a unilateral act unsupported by any consideration of the creditor in giving time to the principal debtor, but a contract between the creditor and the principal debtor. A contract being an agreement enforceable by law has to be supported by some kind of consideration. . . . Therefore, mere settlement of rent account and offer to pay the same within a week does not constitute a contract unless the creditor receives some consideration for it and is consequently bound by it.'
19. Coming to the position of additional security there is on the one hand some obscurity about the facts; by agreeing to accept the additional security the trustees had not m any manner intended to reduce or to give up the original security. In fact from the very beginning the trustees had been asking the principal debtor to bring some more security in addition to what was contained in the bond executed by defendant No. 2 Whether it was necessary or not is not the question before us. As it was no additional security was filed till sometime in February-March when being pressed for the instalment Ahuja wrote that he had stacked some grass on the grounds of the Lalbagh Palace and that might be treated as additional security. The trustees in their turn would not say anything to this unless the principal debtor was prepared to store grass worth Rs. 20,000.
We do not know whether grass worth that sum had been stored; but we do know that some grass had been stored. There is also anindication that some grass at least had beenseized and had been ultimately sold by thetrustees. The defendants themselves did notwant that in this suit any account should betaken of the sums the plaintiffs might haveappropriated by sale of the grass and creditgiven for it. It does appear that some of thecredits are on account of the grass; but thewhole thing is uncertain and could not beinvestigated in the trial Court and cannot beinvestigated here for the very simple reasonthat neither partv wanted it.
But the real question raised by the defendant No. 2 is not as to the value of the grass as might have been appropriated by the creditor but the assertion that the creditors had accepted the grass as additional security and that this acceptance of additional security has the effect of discharging his security. It is altogether difficult to agree, because at no stage was there any idea either on the request of the principal debtor or on the initiative of the creditors themselves that the additional security if any should have any effect on the original contract or the contract of security given by the defendant No. 2. It was just a possible additional cover which, if it had materialised would have been for the benefit of the surety himself and not to his detriment.
20. Finally, the evidence does not show any act of collusion between the creditor and the principal debtor nor any device on the part of the former to enable the principal debtor to put properties beyond the reach of the surety in case the latter paid up and sued him.
21. Thus the two features on account of which the trial Court has discharged the surety do not attract either Section 135 or 139 of the Contract Act Accordingly they do not have the effect of discharging the surety. The result is that the appeal is allowed and the decree made by the trial court is modified by inclusion of defendant No 2, respondent, and shall now be a decree against both the defendants the principal debtor defendant No. 1 and the surety defendant No 2 The surety defendant No. 2 shall pay the entire costs of this appeal to the plaintiff-appellants along with pleader's fee according to rules.