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Kurian Vs. the Alleppey C.C.M.S. Society - Court Judgment

LegalCrystal Citation
SubjectContract
CourtKerala High Court
Decided On
Case NumberSecond Appeal No. 220 of 1972
Judge
Reported inAIR1975Ker44
ActsContract Act, 1872 - Sections 126 and 135
AppellantKurian
RespondentThe Alleppey C.C.M.S. Society
Appellant Advocate T.M. Cherian, Adv.
Respondent Advocate C.K.V. Iyer, Adv.
DispositionAppeal allowed
Cases ReferredDorothy v. William
Excerpt:
.....ground that liability to pay has been exonerated in view of certain contact between plaintiff and principal debtor - even if arrangement regarding alteration of terms of contract was arrived at by principal debtor and creditor which was not previously authorized by surety yet surety will be bound if he ratifies and thereby assents to said arrangements - objection of appellant to execution of decree against him by respondent upheld - appeal allowed. - - it is a well recognised rule that a contract by a creditor to give time to the principal debtor discharges the surety. whether that was a good or a just principle originally, is a matter which it is far too late to think about now'.5. this principle has been reiterated in charles dudley robert ward v. however, in the well settled..........the bank and also for the correctness of the statements and returns furnished to the bank from time to time. the goods pledged were further declared and agreed to be not actually weighed or valued in order to verify th9 returns furnished by the debtor. when on one occasion the bank on actual weighment found some deficit in the quantity of goods, it granted some time for the principal debtor to make up the deficit. what the supreme court said is that the bank's act of giving such time to the principal debtor considered in the light of the above terms in the agreement were not tantamount to giving of time within the meaning of section 135 of the contract act so as could exonerate the surety, in this case, the respondent had filed the suit on the basis that money was duo from the.....
Judgment:

Chandrasekhara Menon, J.

1. The respondent, in this appeal, had instituted a suit for alleged balance due in the price of coir said to have been purchased by the 1st defendant, a firm. Defendants 2 to 5 were alleged to be partners of the firm. In the suit, the plaintiff (respondent herein) took out attachment before judgment of the goods belonging to the firm. The third defendant -- the present appellant -- got the attachment released by executing a surety bond, marked as Ex. P-1 in this proceedings, by which he made himself liable for payment of the amount that might be found due to the plaintiff from the 1st defendant and the second defendant (who was described in the said bond as the sole proprietor of the 1st defendant-firm), in the decree to be passed in the suit in case the said amount could not be realised from defendants 1 and 2. The suit bond was filed in court on 15-7-1957. On 20-9-1957, plaintiff and defendants 1 and 2 compromised the suit by filing a petition marked as Ex. B-4 in the proceedings. Defendants 3 to 5 were removed from the party array. In the compromise decree that was passed on the same date, i.e., 20-9-1957, it was provided that the plaint amount, costs and interest less Rs. 250 remitted by the second defendant was to be paid before 20-6-1958 (nine months from date of compromise), in default of which the plaintiff was entitled to realise the said amounts from the assets of the 1st defendant and also from the 2nd defendant. It was also provided therein that the third defendant's liability, as surety, was to subsist though strangely enough he was removed from the party array and was not made a party to the compromise.

2. When execution of this compromise decree was sought against the third defendant, he objected to the execution contending that he is exonerated from liability in view of the contract between the plaintiff and defendants 1 and 2 by which the principal debtor was given time for payment without the concurence of the surety. For this contention, the appellant-third defendant relied on Section 135 of the Indian Contract Act which is as follows:--

'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'.

The executing court upheld this objection; but on appeal by the decree-holder, the District Court overruled this plea and the decree-holder was allowed to proceed against the surety, third defendant, in accordance with Ex. P-1 surety bond. In the second appeal filed by the third defendant-surety, a learned Judge of this court referred the matter to a Division Bench in view of the importance of the question raised.

3. The learned counsel for the appellant strongly contended that when the plaintiff agreed to give nine months' time to the second defendant, the principal debtor for paying off the debt, that necessarily discharged the surety who has not concurred with this granting of time. It is a well recognised rule that a contract by a creditor to give time to the principal debtor discharges the surety. The principle underlying this rule is that the surety is entitled at any time to require the creditor to call upon the principal debtor to pay off the debt or himself pay off the debt and when he has paid it oft he is at once entitled to sue the principal debtor; and if the creditor has bound himself to give time to the principal debtor, the surety cannot do either the one or the other of these things until the time as given has elapsed. See Rouse v. Bradford Banking Co. ((1894) 2 Ch D 75) and Annadana Jadya Goundar v. Konammal, AIR 1933 Mad 309 (at page 312 the dictum in the aforementioned English case is quoted with approval).

4. We are in agreement with the contention of the learned counsel for the appellant that this rule applies squarely to this case. As early as 1795 in Rees v. Berrington ((1795) 2 Ves 540), Lord Loughborough, L. C. held that when a creditor gives time to the principal debtors, the surety is released from his obligation as his rights have been interfered with behind his back by granting time to the principal debtors. In Polak v. Everett ((1876) 1 QBD 669 at p. 673) Blackburn, J., said:

'It has been established for a very long time, beginning with Ress v. Berrington--(1795) 2 Ves 540--to the present day, without a single case going to the contrary, that on the principles of equity a surety is discharged when the creditor without his assent, given time to the principal debtor, because by so doing he deprives the surety of part of the right he would have had from the mere fact of entering into the suretyship, namely, to use the name of the creditor to sue the principal debtor, and if this right be suspended for a day or an hour, not injuring the surety to the value of one farthing, and even positively benefiting him, nevertheless, by the principles of equity, it is established that this discharges the surety altogether. The reason given for this, as stated in Samuell v. Howarth--(1817) 3 Mer 272 at p. 279--by Lord Eldon, is because the creditor, by so giving time to the principal, has put it out of the power of the surety to consider whether he will have recourse to his remedy against the principal or not, and because he in fact cannot have the same remedy against the principal as he would have had under the original contract. And he adds : 'The creditor has no right, it is against the faith of his contract, to give time to the principal, even though manifestly for the benefit of the surety, without consent of the surety'. The principle being, as I understand it, that as it is very undesirable that there should be any dispute or controversy about whether it is for his benefit or not, there shall be the broad principles, that if the creditor does intentionally violate any rights the surety had when he entered into the suretyship, even though the damage be nominal only, he shall forfeit the whole remedy. Whether that was a good or a just principle originally, is a matter which it is far too late to think about now'.

5. This principle has been reiterated in Charles Dudley Robert Ward v. National Bank of New Zealand ((1883) 8 AC 755 at p 763), Mahant Singh v. U BA YI 1939 AC 601 at p. 606 = (AIR 1939 PC 110 at pp. 113, 114) and Midland Counties Motor Finance Co. Ltd. v. Slade (1951-1 KB 346 at p. 352).

6. This rule has been given statutory recognition in Section 135 of the Indian Contract Act. Though having regard to the definition in Section 126 of the Indian Contract Act, Section 135 cannot in terms apply to a transaction where the surety bond is given to the court, there can be no doubt that the principles underlying these provisions can be applied. See Parvatibai v. Vinayak Balvant, AIR 1939 Bom 23; Narayan Ramachandra Bhagwat v. Markandya Tukaram, AIR 1959 Bom 516 and Pirthi Singh v. Ram Charan Aggarwal, AIR 1944 Lah 428.

7. The learned counsel for the appellant cited a large number of decisions of the Indian courts for the proposition that the surety is relieved if the creditor gives time to the principal debtor without his consent. However, in the well settled state of law in the matter, we do not consider it necessary to refer to all those decisions.

8. Learned counsel for the respondent invited our attention to the observations of the learned District Judge that as on the very day the compromise decree was passed reserving the decree-holder's right to proceed against the surety, defendants 3 to 5 were removed from the party array, it is suggestive that for the compromise as also for the striking of these defendants from the party array, third defendant was consenting party. We have no doubt that the inference made by the learned Judge is wrong. On the other hand, filing the compromise petition by plaintiff and defendants 1 and 2 alone, keeping out the surety, the, third defendant is indicative of the fact that the compromise was behind the back of the surety, without his knowledge or concurrence.

9. The learned counsel for the respondent contended that in the instant case, there is no giving of time for payment to principal debtor because giving of time pre-supposes a fixation of time in the original contract itself. In this connection, he invited our attention to the following passage in Amrit Lal v. State Bank of Travancore (AIR 1968 SC 1432 at p. 1436):

'What really constitutes giving of time is the extension of the period at which, by the contract between them, the principal debtor was originally obliged to pay the creditor by substituting a new and valid contract between the creditor and the principal debtor to which the surety does not assent.'

In that case in an agreement between a creditor Bank and principal debtor it had been provided that the latter should be responsible for the quality and quantity of goods pledged with the Bank and also for the correctness of the statements and returns furnished to the Bank from time to time. The goods pledged were further declared and agreed to be not actually weighed or valued in order to verify th9 returns furnished by the debtor. When on one occasion the Bank on actual weighment found some deficit in the quantity of goods, it granted some time for the principal debtor to make up the deficit. What the Supreme Court said is that the Bank's act of giving such time to the principal debtor considered in the light of the above terms in the agreement were not tantamount to giving of time within the meaning of Section 135 of the Contract Act so as could exonerate the surety, In this case, the respondent had filed the suit on the basis that money was duo from the defendants. Allowing the concerned defendants to pay the decretal money within nine months certainly would amount to giving of time within the principle underlying Section 135 of the Indian Contract Act. The passage relied on by the learned counsel for the respondents in the Supreme Court decision has to be understood in the context it was made.

10. The learned counsel for the respondent urged that this is a case where the liability of the surety is not co-extensive with that of the principal debtor and the rule embodied in Section 135 of the Indian Contract Act could have no application in such a case. He pointed out that the surety's liability arises only if the decree-holder is not able to realise the decretal amount from the assets of the first defendant and from the second defendant. We are unable to appreciate this argument. We may only refer, in this connection, to Section 126 of the Indian Contract Act which defines the terms 'contract of guarantee', 'surety' etc. Section 126 reads:

'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.'

11. The respondent's counsel also brought our attention to the following observations of Rankin, C. J, in Jai Bai v. Joharmull, AIR 1932 Cal 858 at pp. 862, 863:

'I would say upon this case that if it is to be contended that the surety is discharged from his bond in any case where there is a consent decree providing for postponed payment or payment by instalments, then that is a proposition to which as at present advised, I am not prepared to assent.'

Entitled as it is to great weight coming from Rankin, C. J. we would quote in this connection what was stated about this observation in a subsequent Division Bench decision of the Calcutta High Court itself. In Kanailal Mookerjee v. Kali Mohan. AIR 1957 Cal 645, S. R. Das Gupta, J., speaking for the Bench said:

'It should be noted, as Rankin. C. J., himself observed, that the case before their Lordships did not raise that exact question. These observations it must be admitted, are in the nature of obiter dictum. Apart from that what Rankin, C. J. observed was that if it is to be contended that the surety is discharged from bond in any case where there is a consent decree providing for postponed payment or payment by instalments then his Lordship was not prepared to assent to such a proposition. In other words, according to his Lordship there cannot be such a broad and general proposition, namely, that whenever there is a consent decree providing for postponed payment or payment by instalments, then the surety is discharged. It seems to me that what the learned Chief Justice meant was that this question will have to be decided in each case on its own facts, and it cannot be laid down in general terms covering all cases that where there is a consent decree providing for postponed payment or payment by instalments, then the surety is discharged. It may, perhaps be possible to conceive of a case where although there is a consent decree providing for postponed payment the same does not conflict with the terms of the bond in question.'

12. We are in agreement with thisview. Rankin. C. J. in the case was onlyconsidering the question whether a decreepassed on consent would release thesurety. We are not certainly resting ourdecision on the ground that the liabilityof the surety is extinguished merely because the decree happened to be a consent decree.

13. We have also been referred to the decision in Dorothy v. William (AIR 1929 PC 273) and Hariprashad v Chandrojirao, AIR 1962 Madh Pra 69. They are only to the effect that even if the arrangement regarding alteration of terms of contract was arrived at by the principal debtor and the creditor which was not previously authorised by the surety, yet the surety will be bound if he ratifies and thereby assents to what had been done.

14. In view of what is stated above, the appeal has to be allowed and the objections of the appellant to the execution of the decree against him by the respondent upheld. We accordingly allow the appeal, set aside the decree of the lower appellate court and restore that of the executing court with costs throughout.


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