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Carr Lazarus Phillips and ors. Vs. Alfred Ernest Mitchell and ors. - Court Judgment

LegalCrystal Citation
Subject Property
CourtKolkata
Decided On
Reported inAIR1930Cal17
AppellantCarr Lazarus Phillips and ors.
RespondentAlfred Ernest Mitchell and ors.
Cases ReferredHobson v. Bass
Excerpt:
- .....creet. amount guaranteed. - rupees six lakhs.(sd.) a.m. arathoon. amount guaranteed - rupees six lakhs.2. stephen died on 14th may 1927 and the present plaintiffs are the executors and trustees under his will. on 12th october 1927, the plaintiffs as such executors demanded from galstaun immediate payment of the said sum of rupees forty lakhs and of the interest due thereon. galstaun having failed to pay, the plaintiffs gave notice on 15th october 1927 to each of the present appellants of the fact of their having made the said demand on galstaun. thereafter on 8th june 1928, the plaintiffs demanded payment from each of the present appellants of the sum of rupees six lakhs due under and by virtue of the said instrument of guarantee. the present appellants having failed to pay, the.....
Judgment:

C.C. Ghose, J.

1. In my opinion this appeal should be allowed and I will state my reasons. The facts involved in this appeal, shortly stated, are as follows : One J.C. Galstaun, who is-the owner of very considerable house and landed properties in and outside Calcutta, was in financial difficulties in the early part of 1927. There were several decrees against Galstaun and ho was unable to satisfy the same. He applied to one Arrathoon Stephen for a loan of Rs. 40,00,000 to enable him' to pay off the amounts of the said decrees as well as certain other liabilities. Stephen borrowed from the Imperial Bank of India a sum of Rs. 40,00,000 for the accommodation of Galstaun and the latter on receipt of the amount executed n mortgage on 14th February 1927 in favour of Stephen for the purpose of securing the loan of Rs. 40,00,000 undertaking to pay interest at the rate of six per cent per annum by equal monthly instalments with quarterly rests until payment. Stephen it appears, agreed to obtain the said loan of Rs. 40,00,000 from the Imperial Bank of India at the request of the appellants and the latter guaranteed to Stephen the payment by the said J.C. Galstaun, of the said sum of Rs. 40,00,000 to the limit of their aggregate liability to the extent of Rs. 18,00,000 and' of their individual liability of Rs. 6,00,000. It was also agreed between Stephen and the appellants that should the common liability be less than the said maximum aggregate sum of Rs. 18,00,000, the share due from each one of them in respect thereof should be in strict proportion to the individual liability of each of the appellants as referred to above. The guarantee was as follows:

To Arrathoon Stephen,

2, Camac Street,

Calcutta.

In consideration of your having at our request agreed to obtain a loan of Rupees forty lakhs Soaring interest at six per -cent par annum from the Imperial Bank of India for the sole benefit of Jahan Garapiet Galstaun for the purpose of satisfying certain decrees and paying certain pressing debts such sum of Rupees forty lakhs to bear interest at the rate aforesaid and the repayment thereof to be secured by a mortgage to be executed by the said John Carapiet Galstaun in your favour of the properties included in the mortgages hold by Framroz Edulji Dinshaw and a second mortgage of the properties included in the mortgage executed by the said John Carapiet Galstaun in favour of the Prudential Assurance Co. Ltd. We, the undersigned Care Lazarus Phillips of No. 33, Alipore Park Road, Alipore, Arathoon Mackertoom Arathoon of No. 3, Rawdon Street, in Calcutta, and Arathoon Theodre Creet of Ghusick Colliery in the District of Raneegunge, hereby guarantee to you the payment by the said John Carapiet Galstaun of the said sum of Rupees forty lakhs to the limit of our aggregate and individual liability hereinafter proscribed.

This guarantee shall be a continuing guarantee, but our aggregate liability thereunder shall not under any circumstances exceed the sum of Rupees eighteen lakhs and the liability of each of us individually in respect of the said sum shall not exceed the sum of Rupees six lakhs, being the sum placed opposite our respective signatures at the foot hereof and should the common liability be loss than the said maximum aggregate sum, the share duo from each one of us in respect thereof shall be in strict proportion to his individual liability hereunder and not otherwise.

Within the aforesaid limit of liability this guarantee shall extend to and be applicable to the whole debt that shall ultimately be duo to you from the said John Carapiet Galstaun in respect of such advance as aforesaid and not merely to so much thereof as shall be co-extensive with our aforesaid maximum liability hereunder.

You shall be at liberty without discharging us from liability hereunder to grant time or other indulgences to the said Carapiet Galstaun' and to accept payment from him in cash or by moans of negotiable intruments or otherwise.

Dated at Calcutta this ninth day of February one thousand nine hundred and twenty seven.

Signature of Sureties.

(Sd.) C.L. Philips. Amount guaranteed. - Rupees six lakhs.

(Sd.) A.T. Creet. Amount guaranteed. - Rupees six lakhs.

(Sd.) A.M. Arathoon. Amount guaranteed - Rupees six lakhs.

2. Stephen died on 14th May 1927 and the present plaintiffs are the executors and trustees under his will. On 12th October 1927, the plaintiffs as such executors demanded from Galstaun immediate payment of the said sum of Rupees forty lakhs and of the interest due thereon. Galstaun having failed to pay, the plaintiffs gave notice on 15th October 1927 to each of the present appellants of the fact of their having made the said demand on Galstaun. Thereafter on 8th June 1928, the plaintiffs demanded payment from each of the present appellants of the sum of Rupees six lakhs due under and by virtue of the said instrument of guarantee. The present appellants having failed to pay, the plaintiffs instituted the present suit.

3. The defendants filed three separate written statements; but the main contention on their behalf was that upon a true construction of the said instrument of guarantee it should be held that each of the defendants was liable to the plaintiffs for such sum only as might ultimately be due from Galstaun after realisation of the securities mentioned in the mortgage by Galstaun in favour of Stephen, such liability of each of the defendants in no event to exceed the sum of rupees six lakhs, and that the realization of the securities mentioned in the mortgage executed by Galstaun in favour of Stephen was a condition precedent to the arising of any obligation or liability under the instrument of guarantee. There was another contention raised at the hearing before Buckland, J. being the second issue, but Mr. Pugh, who appeared for the appellants before us, did not press the same.

4. Buckland, J. held that the defendants were not entitled to say that they Were only liable for the deficiency after the properties mortgaged by Galstaun in favour of Stephen had been brought to sale and that upon the construction of the said instrument of guarantee all that Was necessary for the plaintiffs to establish to enforce liability against the defendants was that there had been default by Galstaun in payment of mortgage debt. It is against this judgment that the present appeal has been brought.

5. It appears that along with their written statements, the defendants filed a suit in this Court being Suit No. 2285 of 1928 against the plaintiffs and the said Galstaun : see p. 29 of the paper book in which they contended that the defendants in. the said suit other than Galstaun (i.e. the present plaintiffs) were bound to realise the securities under the mortgage by Galstaun in favour of - Stephen and to apply the proceeds in satisfaction of their claims to the extent of the liability mentioned in the said instrument of guarantee and further in. the alternative that the plaintiffs were bound to hold as trustees and on behalf of the present appellants any surplus. The said suit, we are informed, is still pending in this. Court. It may be stated in passing that the present plaintiffs filed a suit in this Court being Suit No. 664 of 1929 on 8th April 1929 against Galstaun on the mortgage dated 14th February 1927.

6. A guarantee, like every other contract, must be construed reasonably; it must be construed by the words used, but also with regard to the surrounding circumstances see Lloyds v. Harper [1880] 16 Ch. D. 290. In other words, in construing a guarantee you must look at, and are entitled to have given in evidence, all the surrounding circumstances so as to know what the parties meant : Per Pollock, C.B. in Hoad v. Grace [1861] 7 H. & N. . In this case, no oral evidence was adduced by the appellants before Buckland, J.; and we are therefore left to gather the intention of the parties from the words used with the aid of such light on the surrounding circumstances as is afforded by the documents printed in the paper book. Now, as will be seen from the instrument of guarantee, the appellants requested Stephen to find the money from the Imperial Bank of India for the benefit of Galstaun and their idea was that Stephen was to be secured by a mortgage by Galstaun in his favour of certain immovable properties belonging to Galstaun. The instrument of guarantee is dated 9th February 1927 and it appears that the mortgage by Galstaun in favour of Stephen was not executed till 14th February 1927. Galstaun undertook to pay to Stephen on demand the said sum of rupees forty lakhs. According to the, plaintiffs, demand was made on Galstaun and Galstaun failed to pay, and that, thereupon the plaintiffs' cause of action against the defendants arose.

7. A guarantee is a contract to indemnify upon a contingency : Exp. Gardom [1808] 15 Ves. 286 and Sampson v. Burton [1820] 2 Br. Bing. 89 and the whole point in this case is what was the contingency which the parties had in their minds when the instrument of guarantee was executed. It is no doubt true that Galstaun undertook to repay the said sum of Rupees forty lakhs on demand; but it could not have been the intention of the parties that immediately on the execution of the mortgage, demand would be made on Galstaun and that on Galstaun's failure to pay, the defendants would be forthwith called upon to meet their liabilities under the instrument of guarantee. There would be no sense in an arrangement like this. The defendants executed the instrument of guarantee relying on the fact that the repayment of forty lakhs to Stephen was to be secured by a mortgage of certain immovable properties which was to be executed by Galstaun in favour of Stephen. Was that mortgage to count for nothing? In these circumstances, I entertain no doubt whatsoever that the intention of the parties was that the security specified in the mortgage which was to be executed by Galstaun should be realized first and in the event of a deficiency, the defendants were to be called upon to meet their liabilities as specified in the said instrument of guarantee.

8. I lay very considerable stress on the word 'ultimately' used in Clause 3 of the letter of guarantee. I am aware that this clause was inserted by the lawyers because of the apprehension felt by them that Galstaun might be adjudged a bankrupt and in that event, for the purpose of securing in an effective manner the right of the creditor to retain certain dividends in bankruptcy. If the amount for which the surety is liable is less than the total debt owing to the creditor by the debtor, it is always necessary in bankruptcy to consider whether the surety is bound for the whole of that debt with a limitation of his liability or whether he is only bound for a part of it equal to the amount for which he is liable. If the former is the case, he has no right in bankruptcy to-a dividend till the creditor has received twenty shillings in the pound on the whole. If the latter, he is relieved to the extent of the proportion of the dividend attributable to that part of the debt which he has guaranteed, just as if the amount he has guaranteed were a separate distinct debt from the rest of the creditors' claim. It is usual, for instance, in guarantees taken by banks to insert a clause providing that the bank may prove for its own benefit and that the guarantee is to stand security for the ultimate balance. This principle is exemplified in a long series of cases referred to in Ellis v. Emmanuel [1876] 1 Ex. D. 157 : see. 15 Halsbury 481. To put it in plain words, the question which has arisen in bankruptcy is whether the guarantor means:

I will be liable for Rs. 100 of the amount which A.B. shallowe you

or

I will be liable for the amount which A.B. shall owe you subject to this limitation, that I shall not be called upon to pay more than Rs. 100.

9. Each case must depend upon its own facts and in deciding the point in issue in this case, it is not necessary in my opinion to go into a discussion about the rules which prevail in bankruptcy and to attribute a peculiar meaning to the word, 'ultimately.' I think on the whole, when the parties said that the guarantee should extend to and be applicable to the whole debt that should ultimately be due to Stephen from Galstaun, they clearly had not in their minds the peculiar rules in bankruptcy, but that their intention was that, the securities mentioned in the mortgage by Galstaun in favour of Stephen should be realized first and that the guarantee given by the present appellants should only come into play in the event of a deficiency. The surety may, no doubt, be sued in the first instance and it may be said that the surety if he pays the creditor is not without his rights. The right of surety to the benefit of the security held by the creditor is derived from the obligation of the principal debtor to indemnify his surety Young v. Raynell [1852] 9 Hare 809. But a surety is not entitled to the securities which the creditor holds until he pays the entirety of the debt : Re : Howe, Exp. Brett [1871] 6 Ch. 838, Gedye v. Matson [1858] 25 Beav. 310. In other words not until the sureties in the present case have paid off the entirety of the mortgage debt due to Stephen, would they be-entitled to the securities which Stephen held i.e., even if the sureties paid off a sum of Rs. 18 lakhs, they would not be entitled to the said securities until the balance of 40 lakhs was realized. The sureties would, in such a case be without any security whatsoever during the interval. Could they have intended that such circumstances should intervene? I answer no In this case you have the further fact that a suit to enforce the mortgage in favour of Stephen has already been instituted; it was instituted before the present suit came on for trial and one may not unreasonably conclude that the intention of the parties was as I have attempted to state. In my view the present suit is premature and that this appeal should be allowed. The appeal will be allowed with costs and the suit should) stand dismissed with costs.

Page, J.

10. I have arrived at the same conclusion, but only after much consideration, for, in my opinion, the construction of this guarantee is not free from difficulty.

11. If, as the appellants urge, the parties intended that the guarantee should only attach to the balance of the debt (if any) outstanding after the mortgaged properties had been sold, 1 agree with Buckland, J., that one would expect to find such an intention expressed in. precise and unambiguous terms. That, however, has not been done. On the other hand, if it had been intended that the guarantors should forthwith become liable upon the failure of Galstaun to repay the loan it was unnecessary to make any reference to the mortgage in the guarantee, as the mortgage would be an independent collateral security upon the enforcement of which the liability of the guarantors in no way depended. Indeed, if the construction for which the respondents contend is correct it would follow that the day after the mortgage had been executed, Stephen would have been entitled to demand repayment from Galstaun, and upon his default to claim immediate payment of the loan from the guarantors.

12. Thus the substance of the transaction would be that the guarantors would be responsible for the loan to the extent of 18 lacs without any security to which they could have immediate recourse, while Stephen would be responsible for 22 lacs only the repayment of which was secured by the mortgage; for, although the guarantors upon honoring the guarantee would obtain as against Galstaun a co-extensive charge upon the mortgaged properties nevertheless, until the whole of the indebtedness of Galstaun to Stephen in respect of the loan had been satisfied the guarantors would be precluded from enforcing the charge which had accrued to them upon the properties that had been mortgaged Gedye v. Matson [1858] 25 Beav. 310.

13. That the guarantee would create such a situation, in my opinion, was neither intended nor contemplated. Indeed, the intention of the parties to the transaction becomes manifest from a perusal of the terms of the guarantee and the mortgage.

14. It appears that Stephen had been persuaded at the instance of the appellants to advance 40 lacs at 6 per cent interest to Galstaun, the repayment thereof to be secured by a mortgage to be executed by Galstaun in favour of Stephen of the properties referred to in the guarantee. Stephen, however, would seem to have been uncertain whether the mortgaged properties would prove to be sufficient to cover the loan, and it was to meet that possible contingency that the appellant contended within the limits specified in the guarantee to become responsible for making good the balance of the debt outstanding after realization of the mortgaged properties.

15. It was provided that the guarantee should be a continuing one, and, it was obviously contemplated that from time to time certain of the mortgaged properties might be sold, and that Galstaun himself might repay instalments of the loan. It was for the repayment of the whole debt outstanding after giving credit for the sums so realized that it was intended that the guarantors should make themselves responsible and under Clause (3) in the event of Galstaun becoming insolvent the guarantors would not be able to obtain any dividend out of Galstaun's estate in respect of any payment they had made until the whole of the indebtedness of Galstaun to Stephen had been satisfied Hobson v. Bass [1871] 6 Ch. 792. That such was the intention of the parties to this transaction is not, I think open to doubt but the question is whether, having regard to its true construction, effect was given to such intention in the form of guarantee that was signed. In my opinion it was. The fact that it was made part of the consideration for the guarantee that the repayment of the loan should be secured by the mortgage supports the view that we take of this instrument, and unless and until Galstaun executed the mortgage the guarantee would not become operative. But how is that consistent with the construction for which the respondents contend, namely, that on Galstaun's default in repaying the loan on demand the guarantors automatically became liable under the guarantee without reference to, and independent of, any rights that Stephen might have acquired under the mortgage or any other collateral security? And the construction which we are disposed to put upon this guarantee is further borne out by the language in which Clause 3 is couched. To what debt was the guarantee to extend?

The whole debt that shall ultimately be due to you from the said John Carapiet Galstaun in respect of such advance as aforesaid.

16. What was 'such advance as aforesaid?' The advance the repayment of which was to be secured by the mortgage. What is the meaning of 'the whole debt that shall ultimately be due?' Surely, the balance of the advance that hall remain unpaid after giving credit for any sums repaid by Galstaun and the proceeds of the sale of the mortgaged properties by which the repayment was to be secured. What other meaning can be attributed to these words? I cannot persuade myself that the phrase 'the whole debt that shall ultimately be due' is an apt expression merely to denote the whole debt of 40 lacs with interest.

17. Construing the terms of this guarantee as a whole I am of opinion that liability under the guarantee does not attach until the respondents have pursued their remedies under the mortgage, and it is proved that the proceeds of the sale of the mortgaged properties are insufficient to satisfy Galstaun's outstanding indebt-ness to Stephen in respect of the loan.

18. For these reasons, I agree that the appeal should be allowed and the suit dismissed with costs.


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