1. This C.R.P. which came on for disposal before one of us in the first instance was refererd to a Bench in view of the importance of the point raised and the absence of any decision of this Court on the question involved.
2. The facts of the case have been set out sufficiently in the order of reference and we feel it not necessary to repeat them. Bereft of unessentials, the question raised for our consideration is whether a surety for a debt for which a minor made himself liable could be proceeded against on his contract of guarantee. The District Munsif has held in the affirmative, and it is the correctness of this position that has been canvassed before us in this petition.
3. The minor was of course not liable and the suit has been dismissed as against him. As regards the surety who is the petitioner before us, Section 128 of the Indian Contract Act enacts:
128. The liability of the surety is coextensive with that of the principal debtor, unless it as otherwise provided by the contract.
That the section refers to the quantum of a surety's obligation is beyond dispute. But the question to be considered by us is whether the obligation of a surety becomes a primary one when no liability was ever fastened on the principal debtor by reason of his minority at the time of the contract.
4. In this connection it is necessary to draw a distinction between a contract of indemnity on the one hand and a contract of guarantee or suretyship on the other. Section 124 of the Indian Contract Act defines a contract of indemnity thus.
Section 124. - 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.
5. The rights of a promisee in a contract of indemnity are set out in the section following:
Section 125. - 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 authorised 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 authorised him to compromise the suit.
6. In cases, therefore, where the contract is on its proper construction one of indemnity, there is no doubt that the non-liability of the principal debtor does not affect-the obligation undertaken by the indemnifier which is primary and in several' cases it was the possibility of this non-liability that was the occasion for this contract of. indemnity.
7. Every contract of guarantee, however, is not a contract of indemnity having this. effect. The nature of the obligation in this type of cases is set out in Section 126 as a contract to perform the promise, or discharge the liability of a third person in case of his default.' So then a 'default' of a third person is posited as the foundation for the liability of the guarantor or surety.
8. Turning now to the bond in suit Exhibit A-1 we are clearly of opinion that it embodies a contract of guarantee and not one of indemnity. The relevant, clause by which the petitioner undertook his liability runs:
It has been settled that if the 1st executant commits any default in paying the amount due for the respective instalments at the due time...the second executant in his capacity as surety...shall be liable for the entire amount payable.
9. The contract is tripartite - an indication that it is a guarantee rather than one of indemnity and there is no finding by the District Munsif that there has been any misrepresentation by the surety as regards the contractual capacity of the primary debtor. In these circumstances we are clearly of the opinion that the obligation undertaken was purely one as surety under Section 126 of the Contract Act.
10. The question that has next to be considered is, could there be a 'default' on. the part of the executant - the minor when under the law no legal obligation to pay was ever cast upon him.
11. The earliest reported decision of the Indian Courts on this point is Kashiba v. Sripat Narshiv I.L.R.(1894) 19 Bom. 697. One Lakshmibhai entered into a bond to secure payment to the plaintiff of Rs. 1000 and interest. At the time of the execution of the bond, she was a minor and her father joined in the bond. The material terms of the contract by the father were:
Should she (i.e., Lakshmibhai) fail to pay, I will pay the above-mentioned amount personally without pleading her excuse and take back this bond. If it is not so paid, you should get it paid off from my income.
12. The question was whether the father was liable on this guarantee in view of Lakshmibhai herself not being liable because of her minority. It was answered in the affirmative by Farran, J., who delivered the judgment of the Court stating 'By English Law it is clear that Shripat would be liable on such a contract' and in support of that conclusion the learned Judge referred to a passage in Chitty on 'Contracts' and other text-books and some decisions of the English Courts in which a similar view was indicated. The pasage extracted from Chitty ran:
But the rule that a party cannot be liable on a contract of guarantee unless the principal be also liable, is in some cases true in form or words rather than in substance. Thus, in the case of guarantee to answer for the price of goods, not necessaries, to be sold to an infant or other person incompetent to contract, there is no doubt that the party guaranteeing, though professedly contracting only in the character of a surety, would be responsible: for either he could not urge the incapacity of the supposed principal, or he might by construction of law be himself treated as the principal.
13. After referring to the distinction between the English and the Indian Law as regards contract by minors, that is, to their being voidable under the Infants Relief Act, 1874, whereas they were void under Section 11 of the Indian Contract Acts the learned Judge added:
The case is perhaps still more clear if the promise of the infant to repay the money is void. In that case, the contract of the so called surety is not a collateral, but a principal, contract. It is a conditional promise founded upon valuable consideration. It is like the case of a person, who to-appease the anger of a child, requests another to lend a guinea to the child to play with, and promises if the child loses or does not give back the coin, to make it good to the lender. The promise in such, circumstances is clearly that of a principal, and not of surety, and the situation is not altered by its being called a guarantee.
14. On this reasoning, the learned Judge held that the surety and those claiming under him were liable to the promisee of the bond.
15. Kashiba v. Shripat Narshiv I.L.R.(1894) 19 Bom. 697, is the leading case on this topic and ail the later decisions in which a similar view has been taken have merely followed this case without any independent reasoning. As Farran, J., has relied on the law in England and the passage in Chitty on 'Contracts' and other text-books, it will be necessary to examine the position in relation to the decisions in England and to this we shall revert after referring to the later Indian decisions on the point.
16. The next case in order of date - this too a decision of the Bombay High Court - the one reported in Manju Mahadev v. Shivappa Manju I.L.R.(1918) 42 Bom. 444, appears to be on the other side of the line, The facts were that a sum of money was deposited by the trustees of a temple with the father of one Mahadev. There had been demands for the return of the money and a refusal. Long after the period of limitation for the recovery of this sum expired, there was another demand and one Boddu orally guaranteed to repay the amount in case Mahadev failed to pay. A suit was brought against the original depositee and the guarantor Boddu and the Subordinate Judge decreed the claim against both. This decree was brought up in appeal to the High Court and the question was debated whether the contract of guarantee was enforceable. The learned Judges Batchelor, Acting C.J., and Kemp, J., held that there was no consideration for the guarantee, since on that date the original debt, which was sought to be guaranteed, had become barred by limitation. They referred to Section 128. of the Indian Contract Act as regards the liability of a surety being co-extensive with that of the principal debtor and added that if the liability of the principal debtor was not enforceable in law, and therefore did not exist there could not be any liability under a contract of guarantee. It was, therefore, held that the representative of the guarantor could not be proceeded against. We shall only add that there was no reference in this decision to Kashiba v. Shripat Narshiv I.L.R.(1894) 19 Bom. 697.
17. In Chajju Singh v. The Crown I.L.R.(1921) Lah. 204, the Punjab High Court considered the liability of a person who had entered into a surety bond guaranteeing the appearance of an accused before a magistrate. The arrest itself was held to be illegal and hence the accused was not liable on his own bond. Martineau, J., held following the decision in Kashiba v. Shripat Narshiv I.L.R.(1894) 19 Bom. 697, that the liability of the surety was in effect that of a principal debtor and the fact that the bond executed by the accused was unenforceable did not affect this primary obligation. Except the reference to Kashiba v. Shripat Narshiv I.L.R.(1894) 19 Bom. 697, and an earlier ruling of the Punjab High Court which also followed Kashiba's case1 the decision in Chajju Singh v. The Crown I.L.R.(1921) Lah. 204, was not rested on any independent or additional reasoning.
18. Pestonji Manekji Mody v. Bai Meherbai (1928) 112 I.C. 740, was decided in 1928 its facts being nearly identical with those in Manju Mahadev v. Shivappa Manju I.L.R.(1918) 42 Bom. 444. The decision also was to a similar effect. The ground upon which the surety was held not liable was that: there was no consideration for the contract of guarantee.
19. Puranik, J., of the Nagpur High Court had to consider this question in Tikki Lal v. Komalchand I.L.R. 1940 Nag. 632. A surety had represented a minor to be of full age and on such re presentation had induced the plaintiff to part with money to the minor. The learned Judge treated the case as one not merely of a guarantee but where the surety had entered into a primary contract on which he was personally liable. He said:
The sureties were competent to contract though defendant I was not, and it is the sureties who represented to the plaintiffs that defendant I was competent to contract, and made them enter into this transaction, agreeing to compensate them if their (sureties') representations proved false or any defect was discovered in the contract thereafter. The sureties must under the terms of their contract compensate the plaintiffs. The suretyship contract is a collateral and almost an independent contract and can be enforced : Kashiba v. Shripat Narshiv I.L.R.(1894) 19 Bom. 697. It will, however, be seen from the passage extracted that the contract entered into by the defendant was a contract of indemnity within Section 124 of the Indian Contract Act not so much a contract of guarantee, as defined in Section 126. No other reported Indian decision has been brought to our notice.
20. In the seventh edition of Pollock and Mulla in the notes to Section 128 of the Contract, Act, the following passage from the judgment of Farran, J., in Kashiba v. Shripat Narshiv I.L.R.(1894) 19 Bom. 697, is extracted : (pages 446-447).
This section only explains the quantum of a surety's obligation when the terms of the contract do not limit it, as they often do. It does not follow, conversely, that a surety can never be liable when the principal debtor cannot be held liable. Thus a surety is not discharged from liability by the mere fact that the contract between the principal debtor and creditor was voidable at the option of the former, and was avoided by the former. And where the original agreement is void, as in the case of minor's contract in India, the surety is liable as a principal debtor; for in such a case the contract of the so-called surety is not a collateral, but a principal contract.
21. It will thus be seen that the entire case-law in regard to surety's liability in such circumstances is founded on the exposition in Kashiba's case I.L.R.(1894) 19 Bom. 697, which in its turn was based on the passage in Chitty on 'Contracts' and other text-books and a few decisions referred to in them.
22. It thus becomes necessary to examine these decisions and consider how far they could be treated as authorities for the broad proposition laid down by Farran, J. The decisions were referred to by the learned Judge. In Harris v. Huntbach (1757) 1 Burrow 373 : 97 E.R. 355, the defendant had given a memorandum whereby he had acknowledged receipt, of a sum of money 'on behalf of EE' an infant and promised to be accountable for such sum on demand; it was held that the memorandum was evidence to support a count for money lent to the defendant. Duncomb v. Tickridge Aleyne, page 94, the other decision referred to by Farran, J. is treated in the text-books as authority for the position that where an infant is placed at school by a parent or guardian it is implied that credit is given to the parent and not to the infant. These two cases therefore proceed on the basis that credit was given to the adult guarantor and not to the infant and are no authority for the position that where credit is given to the infant, on the mistaken footing that he would be liable a guarantor assumes an obligation as a principal debtor.
23. It will now be convenient to refer to the later decisions in England wherein this point has come up for consideration. As all these have been critically reviewed at length recently by Oliver, J., in Coutts & Co. v. Brown-Lecky L.R. (1947) 1 K.B. 104, we consider it sufficient to extract some relevant passages from this judgment. The case before Oliver, J. related to a claim against two defendants who had guaranteed a loan by way of overdraft granted by the plaintiff-bank to an infant who was impleaded as the first defendant to the action. The fact of the infancy was known to all the parties. Oliver J., held after an examination of the earlier decisions that the guarantors were not liable. The learned Judge observed:
The clear-cut question of law arises : can the guarantor of an infant's overdraft with a bank be made liable to pay the bank?...Apart from authority, it would certainly seem strange if a contract to make good the debt, default or miscarriage of another - which is the classic definition of a guarantee - could be binding where, by statute (in this case the Infants Relief Act, 1874) the loan guaranteed is, in terms, made absolutely void. Looking at the matter broadly, how, in those circumstances, can the omission by an infant to pay what is made void by statute be described as either a debt, a default or a miscarriage? There is no debt here, for the Act of 1874 says so; there is no default, for the infant is entitled to omit to pay; and there is no miscarriage for the same reason...Mr. Ashe Lincoln for the guarantors relied on the Scottish case, Swan v. Bank of Scotland 10 Bligh 627 : (1836) 6 E.R. 231 decided in the House of Lords. The overdraft there was guaranteed by joint guarantors and arose out of transactions which were both illegal, that is to say punishable, and expressly made void by statute. Held that no debt had been incurred and therefore that the parties were not liable upon the bond. That seems to me, as it stands, to be clear authority for the proposition put forward for the guarantors, namely, but the guarantors in this case cannot be successfully sued in respect of this alleged debt which is no debt at all. It was argued for the Bank that later cases had established an exception, into which the present case falls. Examples cited were Yorkshire Railway Wagon Co. v. Maclure (1881) L.R. 19 Ch.D. 478, a decision of Kay, J. and Garrard v. James L.R. (1925) Ch. 616, a decision of Lawrence, J. Those cases and others cited all concerned guarantees by the directors of companies of loans to their companies which it was ultra vires the companies to accept. In a number of the cases the directors were held liable notwithstanding that the companies could not be sued because the loans were ultra vires. I note in passing that in Garrard v. James L.R. (1925) Ch. 616 , Lawrence, J. appears to distinguish Swan v. Bank of Scotland (1836) 10 Bligh 627 : 6 L.R. 231 on the ground that in that case what was done amounted to a breach of the law as well as being void, and. suggests that that was the reason for the decision. I find it difficult to follow that, because it seems to me, Lord Brougham expressly says that that is not the reason for his decision; the real reason was that the statute had made the transaction void...My attention was also drawn by counsel for the bank to the fairly recent case of Wauthier v. Wilson (1911) 27 T.L.R. 512. That at first sight, appeared to be an authority on the very facts before me, and directly contrary to the sense in which I am giving judgment...Pickford, J., goes on : 'My difficulty is this. As I understand the case cited to me of the Yorkshire Railway Wagon Co. v. Maclure (1881) L.R. 19 Ch.D. 478, Kay, J., there expressly decided that there may be a. transaction purporting to be a debt, which is void, and yet a guarantee given of that so-called debt may be valid'...He goes on then to give judgment on that footing against the guarantor...That decision went to appeal (1912) 28 T.L.R. 239, and to my mind it is plain that the Court of Appeal supported Pickford, J.'s decision on entirely different grounds, and did not agree with the grounds for his decision. The Court of Appeal held that the action was a common-law action on a promissory note, and that any one executing a promissory note was liable on it at common law and could only escape liability on the arising of some equity which made it inequitable for him to pay. The Court held that, on the plain facts, before them, the father had executed not a guarantee but an indemnity, and was personally liable without any question of a guarantee arising. I think it fairly plain that the court would not have supported Pickford, J.'s decision had the contract in question turned out to be in reality a contract of guarantee and not one of indemnity. I think that the definition given by Pothier and quoted in de Cloyar's 'Law of Guarantees and of Principal and Surety', 3rd edn., published as long ago as 1897, puts the matter in that text-book, (at page 210) It is stated:.As the obligation of sureties is according to our definition an obligation necessary to that of a principal debtor, it follows that it is of the essence of the obligation that there should be a valid obligation of a principal debtor; consequently, if the principal is not obliged, neither is the surety as there can be no accessory without a principal obligation..In my opinion, the guarantors to a Bank of an infant's loan, where all the parties know the facts, cannot be sued.
24. It is to our mind clear that the law laid down in Section 128 of the Indian Contract Act enacts the same rule. In the absence of special circumstances, like fraudulent representation or in the absence of other features from which a Court could infer the contract to be one of indemnity, as denned in Section 124 of the Indian Contract Act, the liability of the surety is only ancillary and can rest only on a valid obligation on the part of the party whose debt or obligation is guaranteed.
25. Kashibai's case (1894) L.R. 19 Bom. 697, is not when properly understood against this view as on the facts the obligation undertaken by the father appears to be one of indemnity rather than of guarantee.
26. We are strengthened in this view of the law by the opinion expressed by a Full Bench of this Court in a decision reported in Subramania Chettiar v. Narayanaswami Gounder (1950) 2 M.L.J. 74. The case related to the extent of the liability of a non-agriculturist surety when the principal has been scaled down under the provisions of the Madras Agriculturists Relief Act in favour of an agriculturist principal debtor. The Full Bench, overruling an earlier decision of this Court in Subramania Chettiar v. Batcha Rowther : AIR1942Mad145 , held that the surety's liability was co-extensive with that of the principal and as such a surety could not be liable for a larger amount than the principal debtor. Panchapakesa Ayyar, J., who delivered the opinion of die Full Bench stated:
Section 128 of the Indian Contract Act says that the liability of the surety is co-extensive-with that of the principal debtor unless it is otherwise provided by the contract. It is a settled principle of law that the surety's liability is only accessory and secondary. That can only mean that his liability is no less or no more than that of the principal debtor.
27. The learned Judge referred with approval to the following observations of Niyogi, J., in Babu Rao v. Babu Manaklal I.L.R. (1939) Nag. 175.
When the creditor seeks to enforce the debt against the surety, the latter is legitimately entitled to ask, 'is the principal debtor himself liable?' If not, he has committed no default, and you cannot compel me to discharge an obligation which has no existence....
28. It is interesting to notice how the decision of Oliver, J., in Coutts & Co. v. Brown-Lecky L.R. (1947) 1 K.B. 104, has been dealt with in the 21st edn. (1955) of Chitty on 'Contracts' (paragraph 812, on page 447). The general principle is set out in paragraph 812 which is in the same terms as in the earlier editions.
The general nature of a contract of guarantee is sufficiently simple. It is a collateral engagement, either by way of personal liability or by a charge on property or by both, to answer for the debt, default, or miscarriage of another as distinguished from an original and direct engagement for the party's own act. It is therefore of the essence of this contract that there should be someone liable as principal.
29. Then follows paragraph 813 which reproduces the passage extracted by Farran, J., in Kashiba's case (1894) L.R. 19 Bom. 697, which we have already quoted. At the end of this paragraph the present editors add:
In the main, however, the general rule stated above (in para. 812) holds good, and it is likely that in the absence of special circumstances, the guarantor in such a case would not be held liable;
and the decisions in Swan v. Bank of Scotland (1836) 10 Bligh N.S. 627 : 6 E.R. 231, and Coutts & Co. v. Brown-Lecky L.R. (1947) 1 K.B. 104, are referred to as authorities for this addition. Thus, it would be clear that the present editors of Chitty on 'Contracts' recognise that in the case of contracts of guarantee as distinguished from contracts of indemnity the sine qua non of the liability of the surety is the existence of the liability of the principal debtor.
30. The decree of the Court below is set aside and the suit dismissed against the 2nd defendant. In the circumstances, however, there will be no order as to costs.