Charles A. Turner, Kt., C.J.
1. The farm of the Abkari revenue in the Dindigal Taluk for a term of three years from Fasli 1282--Fasli 1284 (July 1872--July 1875) was offered for sale by public auction.
2. It is a condition of such sales that the bidder whose bid is accepted shall within a time specified furnish security to the amount of two monthly instalments payable in respect of the farm, and that if he fails to do so, the farm shall be again put up to auction, and if the price realized be less than the price bid by the defaulter at the first sale, that the defaulter shall be responsible for the difference.
3. At the sale Mahalingam Pillai was declared the highest bidder, and his bid was accepted subject to his furnishing the required security. He failed to do so, and a second sale was held at which he was again declared the purchaser, but at a bid less than his bid at the original sale by Rs. 4,875, and he consequently became indebted to the Government in that sum. He again found some difficulty in furnishing the security. Eventually he deposited with the Collector a Government promissory note for Rs. 1,216, and it was arranged that he should find a responsible surety in the sum of Rs. 2,568, the balance of Rs. 3,784, the security required for the due performance of the conditions of the lease. In pursuance of this arrangement, the respondent, a sub-renter, was accepted as surety and executed jointly with Mahalingam Pillai the bond on which this suit has been brought.
4. The bond recited the arrangement made respecting the security, but made no mention of the debt which had been incurred by Mahalingam Pillai in consequence of the resale. On the termination of the lease Mahalingam Pillai was indebted to the Government in the sum of Rs. 639-13-6 in respect of arrears of rent. The appellant claimed to recover that sum with interest from the respondent. Among other defences it was pleaded that the Revenue authorities had not; informed the respondent that Mahalingam Pillai had become a defaulter on the occasion of the first sale, and that this silence on the, part of the Revenue authorities rendered the contract of suretyship inoperative.
5. In support of this plea reliance was placed on the 143rd section1 of the Indian Contract Act, 1872. The Munsif held that the provisions of the Contract Act did not apply, as the contract had been made before that Act came into operation. He, however, considered whether the rule which had been declared in English cases was applicable and held on the authority of Hamilton v. Watson 12 C. & F. 109 that the circumstance that Mahalingam Pillai had at the previous sale failed to furnish security was not a circumstance which the Revenue authorities were bound to disclose.
6. On appeal the defence was again set up in somewhat different terms : it was pleaded that Mahalingam Pillai was a defaulter at the date the contract was made, and that this was a material fact and was not disclosed.
7. It appeared from a letter of the Collector to the Board of Revenue that on the date on which the contract of suretyship had been made Mahalingam Pillai had not discharged the debt of Rs. 4,875 incurred by him on the resale.
8. The Judge observing that the provision of the Contract Act on which the respondent relied was but a reproduction of the English law held that the fact that Mahalingam had not discharged the debt of Rs. 4,875 was a material fact, that it was incumbent on the Revenue authorities to disclose it, and that by their omission to do so the contract was void.
9. It is not necessary that we should determine in this case whether the Indian Contract Act embodies the rule of English law or goes beyond it in the obligation it imposes on a person who seeks to obtain a guarantee from a surety, for the contract of suretyship was made by the respondent before the Act came into force, nor is it necessary for us to pronounce what is the construction to be placed on the term 'material circumstances' in Section 143 of the Contract Act, but we may point out that to justify the application of the rule enacted by the section, it must be proved not only that there was silence as to a material circumstance but that the guarantee was obtained by means of such silence.
10. Although the Judge has held that the appellant kept silence as to a material circumstance, he has not found that the guarantee was obtained by means of the appellant's keeping silence : if the Section were applicable, the judgment of the Lower Appellate Court would be defective by reason of the omission of a finding on this point.
11. We proceed then to consider the validity of the defence set up by the respondent on the principles of the law of contract which were accepted before the Contract Act came into force.
12. Any contract is vitiated by fraud; and fraud in a legal sense includes deceit occasioned however innocently by silence, where to use the language of the Contract Act 'it is the duty of the person keeping silence to speak,'' or where 'his silence is in itself equivalent to speech,' but ordinarily 'mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud '; a dealer in goods is not bound to disclose to a purchaser defects in his goods of which he may be aware; a purchaser of an estate is not bound to inform the seller of any special advantages appertaining to the estate of which he alone may be cognizant. On the other hand, where a relation of trust and confidence exists between the parties to a contract each, is bound to inform the other of any circumstance of which he may be a ware, which would deter the other from entering into the contract.
13. It is in virtue of a special rule suggested by the necessity of the cases that in contracts of insurance on ships or lives the assured is bound to inform the insurer of all circumstances within his knowledge which might affect the willingness of the insurer to undertake the risk.
14. It may be that the effect of the provisions of the Contract Act is to impose a similar obligation on a person who seeks to obtain a guarantee from a surety; on that point we desire to avoid pronouncing an opinion : but independently of the Act we hold that the contract of suretyship did not, in respect of the obligation of disclosure, differ from other contracts.
15. The question as to the nature and extent of the disclosures, which a person accepting a guarantee is bound to make, has been much discussed in the English Courts. The decision in Stone v. Compton 5 Bing. 142 illustrates the rule enacted in Section 1422 of the Contract Act that a guarantee is vitiated by the misrepresentation of a material part of the transaction.
16. In the North British Insurance Company v. Lloyd 10 Ex. 523 the distinction between contracts of insurance and contracts of guarantee is noticed. In Hamilton v. Watson 12 C. & F. 109 it was held that a guarantee was not vitiated by the omission to disclose circumstances not forming a material part of the transaction, but which if disclosed might have deterred the surety from contracting. On the other hand it was held in Lee v. Jones 14 C.B.N.S. 386 : 17 C.B.N.S. 507 that when the person taking the guarantee describes to the proposed sureties the transaction proposed to be guaranteed, that description amounts to a representation that there is nothing in the transaction that might not naturally be expected to take place between the parties to a transaction such as that described, and that if a representation to this effect is made to the proposed surety by one who knows that there is something not naturally to be expected to take place between the parties to the transaction, and that this is unknown to the party to whom the representation is made, and that if it were known to him he would not enter into the contract of suretyship, this is evidence of fraudulent representation on his part. Pidcock v. Bishop 3 B. & C. 605 and Railton v. Matthews 10 C. & F. 934 are also authorities for the proposition that silence, amounting to a fraudulent misrepresentation of circumstances, which would affect the willingness of the proposed surety to contract, invalidates the contract. Lee v. Jones and Pidcock v. Bishop it may be observed appear to have suggested the illustrations to Section 143 of the Contract Act.
17. The fact which it is alleged was undisclosed by the appellant was a fact, which if it had been known to the respondent might have induced him to refrain from giving the guarantee, though this is by no means certain : but it was not a material part of the transaction in respect of which the guarantee was given. The guarantee did not cover the debt which had been contracted by reason of the resale, it was confined to the due performance of the terms of the lease, nor did the omission to mention the debt on any ground amount to a fraudulent misrepresentation.
18. Assuming the Contract Act has had the effect of imposing a larger obligation on a party taking a guarantee than would be recognized in English law, we hold that it is an obligation of an arbitrary character which we are not bound to enforce by any consideration of equity or good conscience, and that it would on the contrary be unjust to enforce it in this case when at the time the contract was made the party sought to be affected by it could not have known the duty was incumbent on him.
19. The other objections urged in appeal in the District Court do not admis of argument. There is nothing to show that the contract between the appellant and Mahalingam was in any respect varied, the Revenue authoritiet in the exercise of their powers were at liberty to enter and carry on the farm.
20. We shall, therefore, simply reverse the decree of the lower Appellate Court and restore that of the Court of First Instance with costs.
21. The late Mahalingam Pillaihada contract with Government for the Abkari farm of Dindigal. He fell into arrears and a sum of Rs. 4,875 was found due which he was unable to pay. The Sub-Collector refused to continue the contract with him unless he should provide security for the due performance of his contract for the future.
22. Accordingly on the 24th August 1872 the first defendant joined Mahalingam in the execution of the document marked A, whereby the first defendant made himself responsible for the due performance of Mahalingam's contract for the three Faslis (1282, 1283, and 1284). The Sub-Collector, who represented the Government, omitted to inform the first defendant when he was about to contract this liability, that Mahalingam Pillai was already indebted to the Government. Afterwards Mahalingam Pillai died without paying instalment for June 1875; and the first defendant having failed to make good the balance, this suit was brought against the first defendant, and against the second defendant, the widow of Mahalingam, deceased. The suit has been dismissed as against the second defendant, and no question remains for determination as regards her. The first defendant pleaded amongst other things that his contract of guarantee was void by reason of the Sub-Collector having failed to inform him that Mahalingam Pillai was already indebted to the Government. The first defendant relied on Section 143 of the Indian Contract Act. The District Munsif observed that the Indian Contract Act was not in force on the 24th August 1872 when the contract in question was made, and relying on the case of Hamilton v. Watson 12 C. & F. 109 he decreed that the first defendant should pay the balance found due, Rs. 639-13-6, with costs and further interest. Against that decree the first defendant appealed, and the Subordinate Judge, observing that, although the Contract Act was not in force when the contract was made, yet the law was the same before the passing of that Act, reversed the decree of the District Munsif and dismissed the suit with costs.
23. The present appeal against that decree has been preferred on behalf of the Government on the ground that by the law in force at the time of the contract it was neither void nor voidable, but was a good and binding contract.
24. The Indian Contract Act came into operation on the 1st of September 1872, and it is not disputed that the contract of the 24th August 1872 must be governed by the law in force before the Act. At that time the Courts were bound by Regulation II of 1802, in the absence of any specific rule, to decide -according to justice, equity, and good conscience; and in matters of contract, when they were not thought to be in conflict with these principles, the rules of English Law were freely applied. The point for determination in this case is whether the contract, upon which the suit was brought, is void by reason of the Sub-Collector having failed to communicate the fact that Mahalingam Pillai was already indebted to the Government. No Indian case in point has been brought to our notice. But the District Munsif has referred to the case of Hamilton v. Wdtson 12 C. & F.109 whichwas decided in the House of Lords. In that case the--defendant as surety had joined one Biles in a bond in favour of the plaintiff's Banking Company for 750 to enable them to open a credit for that amount in favour of Elles. The Bank did not inform the defendant when he was about to join-in the bond that Elles already owed them 800. The sum placed to the credit of Elles was applied by him in payment of that debt, and when Elles died insolvent, the defendant was held liable. Upon appeal to the House of Lords it was held that the defendant having asked no questions the Banking Company were not bound to conrtnunicate to the defendant the antecedent debt due by Elles, the existence of that debt not rendering the position of the surety different from that which he might naturally expect.
25. In the case of Lee v. Jones 17 C.B.N.S. 507 it was held that there was evidence of fraudulent misrepresentation, and misrepresentation was also found in the case of Stone v. Compton 5 Bing. 142. But in the present case it is not pretended that there was any intentional fraud oh the part of the Sub-Collector. On the other hand, the case of Railton v. Matthews 10 C. & F. 534 shows that it is not necessary in such a case to show that there had been wilful or intentional fraud.
26. In the case of Lee v. Jones Mr. Justice Blackburn is reported to have said, 'I think that it must in every case depend upon the nature of the transaction whether the fact not disclosed is such that it is impliedly represented not to exist.'
27. Now in the case before us no representation was made as to the state of the account between Mahalingam and the Government. The Sub-Collector, who represented the Government, was silent on the subject, and the question is, whether in the circumstances he was bound to disclose it. Now the defendant in this case, was a sub-renter under Mahalingam Pillai. He got some pecuniary advantage for himself by becoming surety for Mahalingam, as shown by his own admissions; and he was probably fully aware of Mahalingam's previous debt. But, if he was not aware of that, the Sub-Collector's refusal to continue the contract without further security was sufficient to suggest to him the necessity for inquiry. Looking at all the cirucumstances of this case I cannot say that Mahalingam's previous indebtedness to the Government was a state of facts which could not have been expected from the stoppage of the contract until surety was procured. It was rather a state of facts which, if the defendant did not know, he had every reason to expect. It was, therefore, the duty of the defendant, if he was not already aware of it, to have questioned the Sub-Collector as to the state of Mahalingam's accounts; and in the absence of such questions the Sub-Collector was not bound to make any statement on the subject.
28. For these reasons I am of opinion that the decree of the Subordinate Judge should be reversed with costs and that of the District Munsif restored.
1 Guarantee obtained by concealment invalid.
[Section 143: Any guarantee, which the creditor has obtained by means of keeping silence as to a material circumstance, is invalid.]
2 Guarantee obtained by misrepresentation invalid.
[Section 142 : 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, s invalid.]