Semester-2

Module-1 Specific contracts.

Indemnity
 Indemnity always starts with ‘loss’. Without loss there is no question of
indemnity….first thing to be ascertained us that there is loss.
 Then we ask the indemnifier to compensate the indemnity holder
(2 parties- indemnifier and indemnity holder (he has the claim to a damage against the
indemnifier when a loss has happened))
 Section 124- indemnity.
 A says to B I will compensate you if any damage happens to you due to my act…
here, A is indemnifier and B is indemnity holder… a third person can be potentially
involved….if A says that I will compensate B even for the actions of C (genesis of
insurance contracts)

 Section 125- rights of indemnity holder. (narrow)

 Common law- plain and simple view of indemnity--- you suffer a loss you will be
reimbursed… but you had to show the loss
 Case Law guarantee trust accident society, Liverpool mortgage insurance company
(LGTAS LMIC), 1914
Facts- there wa tis company- Sans and Welson company… they issued debentures
(that is they took some loans).. on August 30th they issued a debenture worth 100
pounds... this company entered into a contract with LGTAS an insurance company…
lgtas said that if you default on the principal amount then we will re-imburse you for
that… lgtas entered into another contract with lmic – an reinsurance contract with
lmic in case of any default on part of lgtas—lmic says that whatever is the debenture
amount that lgtas has to pay, lmic will pay 2/11th of it… there is a default on the part
of sans and Wilson… liability falls on lgtas… but lgtas goes intot liquidation.. it sells
some assets and pays some amount… amount remaining to be paid- 4988 pounds…
lgtas says we will pay you if you show ownership certificate… lgtas launches a claim
against lmic… but lmic says that we will pay you 2/11th of the amount that you will
actually pay… that will actually be the loss suffered by you… that is the money that
has actually passed out of your pocket… so we will pay you 2/11th of that amount not
the entire liability.
Court said that it will stick to the hard and fast definition of indemnity… payment
only for loss.
Appeal goes to chancery division… says that yes there is this hard and fast definition..
but we need to revisit it.. the loss here is imminent… lgtas has no money to pay for
it. .then what is the use of this remedy of indemnity when you can’t even use it bcz of
a technicality.. it becomes useless…we need to make indemnity more equitable… the
court says that even when you can’t show loss but loss is imminent.. it is
ascertained… then also indemnity holder can be asked to pay… here indemnifier is
not ‘reimbursing’ from loss but rather he is ‘saving’ from loss.. the indemnity
becomes a weapon in the hands of the indemnity holder… chancery division gave this
equitable understanding of indemnity.
[Sir’s dictation] In law, the indemnity holder must pay upon the original contract and
suffer some loss or damage to make a claim. But if the danger is imminent, equity will
grant specific performance of the contract of indemnity without waiting for the
indemnity holder to pay off the creditor. Otherwise he would be unable to pay and sue
on the contract of indemnity at the same time. To indemnify does not merely mean to
reimburse in respect of the money paid but to save from loss in respect of the liability
against which the indemnity has been given. If the payment is held to be a condition
precedent to the recovery, the contract may be of little value to the person to be
indemnified who may be unable to meet the claim in the first instance.

Indian context--
Does Section 125 read with 124 include this equitable understanding of indemnity?
Language of the law does not appear to include so…
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri AIR 1942 Bombay 32
Facts- respondent had given a plot of land on lease to the appellant… appellant would
enjoy the land and undertake some construction activities with the material on his
own cost…appellant bought the materials but did not pay for them… and also while
in possession of the land he had some other legal duties to pay the ground rent+taxes
to the Bombay municipal corporation…but he didn’t adhere to these
responsibilities… the claimants went to the respondent… but he didn’t have the
means to repay… he relied on the indemnity clause… appellant argues that you must
first be demnified (damaged) in order to be indemnified… the question here is that
whether the liability has commenced here or not? Meaning, the respondent has not yet
suffered a loss, so if he has not yet incurred a loss how can he be indemnified?
Appellant said that sec 125 has been deliberately written in a narrow way and we
should stick with it.
Court said that the preamble of the contract act says that it is a ‘amending and
consolidating legislation’... meaning that thew provisions of the act do not present an
exhaustive core... every aspect of every circumstance is not covered in the act…
sometime literal interpretation goes against the actual intention of the statute... in such
situations we need to interpret in a way which upholds the good intention of the
statute instead of the literal sense… this is what Justice Chawla has done here… if we
go by the literal meaning it will go against the aim of indemnity… if the loss to the
indemnity holder is imminent then we will not wait for the loss to occur… indemnity
is not just a tool for recompense for the happened loss but also a way to save from the
imminent loss.
*Indian courts have taken the equitable principle of remedy in their jurisdiction*

Exceptions to the equitable principle--:

Case Lala Shanti Swaroop v Munshi Singh AIR 1967 SC 1315

Facts- Say there is a piece of land sold by the seller to the buyer… but the seller had a
mortgage on the land… and the notice of this mortgagee was given to the buyer as
well as the mortgagee (creditor)… the cost was the calculated as 16K… seller said
that don’t pay us 16K give us 2.5K and the remaining 13.5K to the mortgagee around
the year 1920… buyer does not pay the mortgagee… claim was presented to the
seller… disputes continued… In 1937 a order was passed by a special civil judge…
he directed the seller to pay the amount equal to 26K (including taxes)… another
order was passed which said that the buyer and seller would be half half… in 1943 it
was finally decided that the seller would pay the entire amount… he paid (also had to
transfer some land to the mortgagee) and presented a claim of indemnity against the
buyer… buyer said that there is a limitation period in which you had to file a suit… in
the specific relief act there was no specific article for indemnity… so it would fall
under article 113 if there is no specific article… 113 says that the limitation period is
3 years from when the loss was suffered.. so when did this loss occurred and the 3 yrs
started?… the actual loss or the imminent loss?? According to the Gajanan rule, the
loss occurring year would be 1920 as the loss became imminent… but from 1920-43
many things had happened… in 1943 the final amount was decided… before that it
was not possible as the dispute was going on.
Court said that Gajanan Moreshwar guides us on indemnity but it does not
completely wipe out the actual common law rule (indemnified when demnified).. it
gives a solution to a specific problem but doesn’t supplant the actual common law
notion… here the common law principle would be used which is more beneficial to
the indemnity holder
[in these cases, the courts have been seen to favour the indemnity holder more as he is
the one who suffers loss…the rule which favours the indemnity holder is mostly used]
[Sir’s notes] The SC relied on the observations of the King’s Bench in the case of
Collinge v Heywood 1839 9AEB 633 where it was held by the court that the plaintiff
was not demnified till he had paid the bill delivered by his attorney. Accordingly, the
SC concluded that the damage occurred to the plaintiffs not on 1937 when the final
mortgage decree was passed in favour of the mortgagees but in 1943 when the
collector directed the execution by the plaintiffs of a self-liquidating mortgage of the
proportion of property of which they were the owners. Therefore, time runs under
Article 83 of the Limitation Act from 1943 when the plaintiffs were compelled to
execute the self-liquidating mortgage for the purpose of satisfying the claim of the
mortgagees.

Case Abdul Hussain Shaikh Gulamali Jambawalla v Bombay Metal Syndicate AIR
1972 Bombay 252
Facts- P sold some goods to D and asked the D to deposit the sales tax to authorities...
the amount was approx. 3100 … D didn’t deposit… P had to deposit at the direction
of the tax authorities… 3100+378 as penalties—approx. 3500 was deposited by the P
which had to deposited by the D… Feb 1963 order came from the tax authorities…
payment was made in somewhat between April to July 1963… suit was brought by
the P against the D on April 13th 1966… D argued that the limitation period should
start from Feb 1963 as the liability became absolute/imminent then (Gajanan rule).
Bombay HC said no.. when it comes to the calculation of the limitation period we
follow the main common law rule… the Gajanan rule is just an addition to the
common law rule which is applied in certain cases… the main rule is still the common
law rule… it depends on the circumstances of the case as to which approach to
apply… although the courts have shown a tendency to favour the indemnity holder.
*re-iteration of the Lala Shanti Swarup case*

Case Jet Airways (India) Ltd. v Sahara Airlines Ltd. 2011 SUPP BCR 709
Observations support the ruling of Gajanan Moreshwar
Facts- some taxes were not paid by Sahara… claim was presented to Jet Lite (a
subsidiary)… Sahara was asked to indemnify… Sahara said that this should go under
Sec 73 and 74 and Sahara shouldn’t be asked to pay until and unless Jet actually paid
the tax authorities (actual loss happened)… Courts applied equitable principle of
indemnity and followed Gajanan rule saying that the liability became absolute and
loss became imminent.

Case Reliance Industries Ltd. v Balasore Alloys Ltd 2014 22 BOM CR 15

Bombay HC further affirmed the ruling of Jet Airways here.
Case HPCL (indemnity holder) v M3nergy Berhat (indemnifier)
2 partial awards came – one in Jan 2014 and another in Sept 2014
Clause in the awards (Article 22.3)—each party shall be solely liable for any loss or
damage or liability of whatsoever nature when such loss damage or liability is caused
by such party’s negligence or willful misconduct and in such event such party shall
indemnify the other party against all claims in respect of any loss or damage so
arising. In no event shall any party be liable to any other party for loss of profits or
business or special, indirect or consequential damages.

What happens when the indemnifier furnished an additional security to the indemnity
holder?
Case Srinivas Gupta v Hindustan Commercial Bank 1967 37 COMPCAS 434 SC
Facts- a bank furnished a loan to a company callee Tailong Brothers… the appellant
was an employee of the company… Tailong brothers furnished a security to the
bank… appellant had the duty to verify the quality of the security… security was tins
of ghee… if the security is of not sufficient quality so that the bank can compensate
its losses then the appellant would compensate the loss to the bank… so appellant is
the indemnifier and the bank the indemnity holder… appellant arranged for some
additional security… one was tins of ghee whereas additionally he also arranged some
mortgage on a property owned by Tailong brothers… certain portions of the tins of
ghee were rotten… bank puts acclaim against the appellant… appellant says that we
have arranged some additional security... pursue that option.
Court says no… until and unless the indemnity holder has chosen a particular option,
the indemnifier cannot dictate the terms of the indemnity… if the bank chose to
liquidate the mortgages then it’s fine… but the court has given this choice to the
indemnity holder whether he wants to pursue that additional option or not.
Court’s observations [Sir’s notes]- the liability under the contract of indemnity
contained in clause 13 of the agreement was to make good the loss to be caused to the
bank in the present circumstances. The mere fact that the 2 mortgage deeds were
executed for the entire amount due on April 1st 1947 does not amount to the payment
of money due to the bank. All that the transaction amounted to was that in place of the
tins of ghee, the 2 mortgages were given as security. The responsibility of the
appellant under clause 13 was to make good the loss to the bank and the mere
execution of the mortgage deeds does not make good the loss which can only be made
good after the money secured by the mortgages has been realized.

Implied Indemnity
There is no express clause of indemnity in the original contract… the task of the
indemnity holder becomes more difficult.

Case Barclays v Sheffield Corporation 1905 AC 392

Facts- Barclays bank had some shares of the 2 persons.. these 2 had taken loan from
them- Timbrell and Honeywill (T & H)… t and h had deposited these shares as
security... the shares were of Sheffield Corp… when the bank was holding the share it
was the owner so that it can get the dividends and via the dividends the loan could
have been put off… so in the records of Sheffield Corp the owner was shown as the
bank till the time the loan was pending… when the loan obligations were met the
bank re-transferred the shares back to t and h and made a request to Sheffield corp to
update its records in 1893… in 1899 t died and it was discovered the while the shares
were with the bank t had impersonated h and was benefitting from both the person’s
shares… H presented a claim to Sheffield Corp… the Corp settles the claims and then
returns to the bank and said that while the shares were in your possession this
impersonation took place so you pay us back… company said that we incurred loss
due to your lack of due diligence… you should have found out and intimated us.. .the
bank said that there was no indemnity clause and forget about the clause there was no
agreement between us.
Court says that the indemnity was implied and the agreement was not required … the
nature of the communication between the bank and Sheffield corp… the indemnifier
made a request to the indemnity holder (transferring shares back to t and h ) and the
indemnity holder suffered loss because of acting on that request.. it was a sort of trust
relation where the company acted on trusting the bank… this nature of the
communication (request by the indemnifier to the indemnity holder) created an
implied indemnity between the bank and the company.

[absent- Zoya’s notes] Observations- citing with approval, the case of dugdale v.
lovering, the house of lords speaking to lord davey held that where a person invested
with statutory or common law duty of ministerial character is called upon to exercise
that duty on the request, demand or direction of another and without any default on
his own part acts in a manner which is apparently legal but not manifestly tortious.
However in fact illegal, there is implied by law a contract for the requester to
indemnify the requestee. It makes no difference if the requester is unaware of the
invalidity of his actions and could not have discovered it with reasonable diligence.

India has also accepted this implied indemnity rule and the case is lala shanti swaroop
v. Munshi singh
Art 83 of schedule 5 of limitation act read with 115 and 116
Privy council decision (judicial committee decision)-

Musammat Izzal un- nissa begum v. Kunwar Pratap Singh 36 IA 203

Observations- if the purchaser covenants with the seller to pay the encumbrances
(mortgages) of the property, there is nothing more than a contract of indemnity.

Observation of 1938 allahabad Hc decision- Tilak Ram v. Surat Singh ILR 1938
Allahabad 500
The purchaser's covenant to relieve the vendor of liability under mortgage of the
concerned property is an implied indemnity in favour of the vendor.

Insurance and Indemnity

Sec 124
Even if the loss arises out of 3rd person, the indemnity can be claimed

Equity indemnity (gajanand), Risk based (actual demnification)

Happening of event, causation of loss. Loss should be caused by event

Life insurance
Are you able to calculate it? Is t on the loss occurring basis
Frayed insurance(damage to goods etc)- loss occurring basis

United India Insurance Company v. Kantika Colour Lab and ors (2010) 6 SCC 449
[till here]
 Facts- some printer machine + processor films were to be taken from Mumbai to
Haridwar… they suffered some damage when they were being carried due to the
mishandling by the staff of the transporter… so they were liable but the insurance
company also had to pay bcz the agreement was to pay upto 55 lacs in case if damage
happened during transit.. but he insurance company had to do 3 rounds of survey… in
preliminary survey, it was found that the printer machine suffered damage and not the
processor and that damage was repairable… second survey by Mr. Vinod Sharma…
he had to assess loss under Section 64 UM Act… then a joint inspection by Mr.
Sharma and a 3rd party surveyor Mr. Amit Bose of Satyam Equipment Services.. they
found that the damage was repairable… they calculated the cost as 5,76,700 approx…
dispute arose… matter went to NCDRC… they ordered an almost full insurance
amount around 53 lacs + 10% interest to be paid jointly and severely by the insurer
and the carrier… matter goes to the SC… respondents submitted that the event for
which we were ensured had happened
Sc said that only the event happening is not sufficient... you have to see the nature of
the insurance agreement… here 55 lacs was not the assured amount… it was the cap
amount… 2 things you have to show for insurance:
1. Show that the event for which you were ensured happened
2. The resulting damage that happened.
SC said that your insurance is not equity insurance, i.e., assured sum insurance (for eg
life insurance)… your insurance can extend upto 55 lacs not assured sum of 55 lacs…
your amount would be decided on the resulting damage/loss.
Observations of the SC [Sir’s notes]- in the absence of proved damage affecting the
performance of the machine, it is difficult to assume that the film processor was also
damaged. Though contracts of insurance are generally in the nature of contracts of
indemnity, except in cases of life insurance, personal accident insurance, etc. all other
contracts of insurance entitle the assured for the reimbursement of actual loss that is
proved. The happening of the event does not by itself entitle the assured to the claim
of the amount stipulated in the policy. It is only upon the prove of actual loss, that the
assured can claim reimbursement of the loss to the extent it is established, not
exceeding the amount stipulated in the contract.

Contracts of Guarantee
 Guarantee starts with a debt… or a performance that is due
 It is a secondary liability… the primary liability being the principle debt.
 Say if A lends a loan of 100 to B… then one possibility is that B furnishes a security
to A, and/or, he appoints a surety as C… here the principle debt is between A and B…
B is principle debtor, A is the creditor and C is the surety… This is a contract of
guarantee.
 2 things-:
i) The liability of the surety in this contract is secondary
ii) This is a tripartite contract (whereas indemnity was a bipartite contract)… all A, B
and C are privy to the contract for it to be a contract of guarantee.

 According to Halsbury’s Laws of England, guarantee is an accessory contract by

which the promisor (surety) undertakes to be answerable to the promise for debt,
default or miscarriage of another person whose primary liability to the promise must
exist or be contemplated.
‘primary liability to the promise must exist or be contemplated’ means that it is an
 executory contract… even a situation in which the principle debt will arise at a later
stage, but is certain that it will arise at some point, is also covered in this definition of
a contract of guarantee.
Lord Diplock observed in Moschi v Lep Air Services 1973 AC 331 that the words
debt, default or miscarriage signifies failure to perform existing or future obligations
arising from either contractual promises or obligations resulting from bailment, tort or
unsatisfied judgements.

 The nature of liability of a surety in a contract of guarantee is secondary, collateral,

ancillary and subsidiary to the liability of the principle debtor, i.e., there is no need to
perform obligation by the surety if the debtor has performed his promise or
discharged his obligation.

 Guarantee is of 3 types-

(1) Conditional- guarantee is provided subject to certain conditions… surety may

agree to become the surety only if the debtor furnishes some security to the
creditor first
(2) Fidelity- when the surety assures the good and honest conduct of the principle
debtor.
(3) Performance bond / Bank Guarantee- absolute guarantee… on demand you
have to pay first… any disputes could be dealt with later in a lawsuit… but on
demand you have to pay first.

 Fidelity Guarantee--:
Case Radha Kant Pal v United Bank of India (UBI) AIR 1965 Calcutta 217
 Facts- RKP’s nephew, Nishi Kant Pal, had been employed with UBI as cashier…
when he was joining, UBI asked for a fidelity guarantee from rkp for any loss caused
by nkp… for this rkp gave 2 promissory notes to ubi with a total of 10000… during
the employment nkp was found guilty of misappropriation of cash… total liability
was 8800… ubi wanted to enforce this promissory note… but rkp dies… suit
continued by his son Rajnikant and wanted to get an injunction against ubi… his
ground was Section 139 (when creditor acts in a manner which is inconsistent with
the rights of the surety with the principle debtor… eg. The creditor deliberately
allowed the debt to rise up when he should have acted in another manner)… Rajnikant
said that the bank knew about the wrongful act and deliberately didn’t do anything
about it and allowed the debt to rise up… Rajnikant cited the case of Cooperative
Commission Shop Ltd Chak Jhumra v Udham Singh AIR 1944 Lahore 424.
Calcutta HC negated this contention and said that these 2 cases are different as one,
the period of the wrongful act was just 3 months here as compared to 3 years in that
case, and 2, bank did carry out an internal enquiry which was not done in that case;
the enquiry report takes time, so the bank did act in the expected manner.
Calcutta HC says that fidelity guarantee is not a guarantee against the risk of infidelity
but rather against the fact of infidelity… meaning that when it is ascertained that
infidelity exists, it is then that the creditor should move against the surety… which is
what the bank did here.
[Sir’s notes] The omission to disclose previous misconduct of employee will entitle
the surety to avoid the guarantee, i.e., if the employer discovers that the employee has
been dishonest but continues to employ him without telling the surety, the surety will
not be liable for any subsequent dishonesty by the employee. (subsequent dishonesty
 here signifies that the creditor has been given the chance to ascertain the full facts…
when he has ascertained the full facts he has to notify about the dishonesty… but till
that time he is given the time to ascertain dishonesty… hence this relief is applied
prospectively not retrospectively)

Performance bond--:
 Contract in strictissima juris- liability is absolute and payable on demand
 Invoked usually in intl. transactions… usually to protect the buyers assuming that
they are in an inferior position.
 On demand, a letter of credit is issued by the buyer’s bank to the seller’s bank and the
seller’s bank has to transfer the relief immediately to the buyer’s bank (it is a bank to
bank transaction)… later on the seller may bring a suit… but initially he has to pay it
on demand.

Case Edwards Owen Engineering Ltd v Barclays Bank Intl. Ltd 1978 1 All ER 976
Facts- seller and buyer transacting in goods… seller gave the goods but buyer refused
to pay saying that he had some problems with the quality of goods… the seller also
had some issue with the letter of intent… buyer invoked the bank guarantee… seller
asked for an injunction… issue was whether this bank guarantee can be injuncted
until the issues about the quality of product and letter of credit are resolved.
Court said no it cannot be injuncted until there is some grave fraud… the disputes can
be looked into later … but the preliminary liability needs to be met... pay the bank
guarantee .. .we’ll look into the disputes later.
Performance bond plays an imp role in intl trade. If the seller defaults in making
delivery the buyer can operate the bond. He does not have to go to far away countries
to sue for damages. He can get damages at once which are due to him
for breach of contract. The bond, on notice of default, enables the buyer to have his
money in hand to meet his claim for damages for the seller’s non-performance. If he
receives too much that can be rectified later. The duty of the court is to ensure that the
performance bond is honored.

RD Harbottle (Mercantile) Ltd. v. National Westminster Bank ltd. (1977) 2 All ER

862
RD was selling 2 commodities, one to each two Egyptian companies. He was
represented by National Westminster bank. The 2 companies- national bank of egypt
and bank of alexandria. To the 1st company, supply of horse stick beans. To the other
it is consignment of coal. Consignment supplied to each one of them. The buyer
companies are not satisfied with the quality. So they wish to invoke a bank guarantee.
National Westminster bank provided the bank guarantee. RD filed a writ application
for injunction against the national westminster bank as they have not ascertained
whether there is an actual quality issue.

You have not been able to establish any exceptional condition that warrants the
injunction. It was an absolute and unqualified bank guarantee

Observations- mere contractual disputes are the long way away from fraud. It is only
in exceptional cases that the courts will interfere with the machinery of irrevocable
obligations undertaken by the banks. They are the lifeblood of international commerce
(bank guarantee). Though such obligations are regarded as collateral to underline
rights and obligations between the buyer and the seller, except in clear cut cases of
fraud of which banks have noticed, courts will leave the merchants to settle their
disputes. Courts are not concerned with the difficulty of enforcement experienced by
the merchants as such a risk is inherent in the transaction.

Banque Saudi Fransi v. Lear Siegler Services (2005) EWHC 2395 (Comm)
Fransi was the bank. LSI is a company in Delaware which manufacturers jets.
Subsidiary of LSI(UNC)enters into contract with Ministry Of Defence Affairs
(MODA). As a part of service contract, there is a guarantee to the ministry of defence
affairs (MODA) by BSF. BSF obtained a counter indemnity from UNC (subrogation).
Once UNC fails to pay, the parent company will step in. There is some dispute
between MODA and UNC. MODA makes a claim to BSF. LSI files injunction
application against BSF. there is some contractual dispute going on, after that only the
payment will be processed.
Court relies on the principle of RD case
Payment under bank guarantee has to be absolute and has to be provided. It is a rule
It has to be a case of grave fraud or special inequity (concrete evidence should be
submitted)- pre trial discovery.

Cases in which the exceptions were recognised (grave fraud or special inequity cases)
Mahonia v. JPMC and ors. (2003) LLoyd’s Republic 911
Ex turpi causa exception. fraud)

Pre trial assessment recognised in-

Swain v Hilllman (2001) 1 All ER 91
Three rivers district council v. Bank of England (2003) 2 AC 1

Why is the surety giving the guarantee? What is the consideration for the surety?
Section 127- Any benefit that the principle debtor is getting from the creditor is
enough consideration for the surety… to say, the surety is considered as a well wisher
of the debtor who just wants good for the debtor… so any benefit to the debtor is
enough consideration for the surety.
For this consideration to the surety to hold, the surety/guarantee should arise
contemporaneously to the principle debt… if the surety joins the contract later after
the principle debt arose, then we cannot say that the surety has had his consideration
of the well-being of the principle debtor… another situation could be that A gave a
loan to B only on the condition that B gives a surety to A… then even if C did not at
the time know about this arrangement, the consideration to him is considered valid as
the contract is conditioned on C being the surety… if the 2 events (principle debt
between A and B & the guarantee between A and C should not be isolated events…
there must be some connection/nexus between the 2 events… then it is considered as
valid consideration to C… as Section 2(d) says that consideration must move at the
request of the other… so C must have entered the contract wishing the ‘good’ for B…
and in the 2nd situation when C initially did not know about the principle debt but that
debt arose on the condition of C being the surety- (here the consideration didn’t move
at C’s request, then how is it valid consideration?)- that’s why we have made a
separate provision for this as 127… otherwise we would have left it on 2(d)… but 127
allows that also, even if there is a connection between the 2 events, we would
consider it to be valid consideration to C)
[Purely if we go by the principles of contract law, there is no valid consideration
here... we can’t think of any good reason as to why the surety is giving the
guarantee… but this is such a popular commercial route that the law is desperately
trying to somehow validate its existence]

Case Gulam Hussain Khan v Faiyaz Ali Khan

Facts- a person named Madar Baksh wanted to take a dargah area on a lease… 3 year
lease deed was executed for an amount of 8286 with a monthly interest of 230 Rs.
Between Madar Baksh and the dargah Committee (1st contract)… 2nd contract
happened on a subsequent between Gulam Hussain Khan and the dargah committee
where Gulam agrees to be liable to the dargah committee for the default of Madar
Baksh for an amount of 2762 (meaning this is the cap on Gulam’s liability)… Baksh
defaults and 3387 was the liability… the committee files a suit against Gulam to
recover 2762… Gulam argues that before the HC that he did not have consideration in
this contract of lease deed according to 2(d)… he pleaded that these 2 were isolated
events (debt and guarantee)… HC favours the committee… goes in appeal to Oudh
HC… It refutes these conditions
Court says that 2(d) does not hold… the very fact that we have 127 then it can be
considered that the makers of the law thought that there was a need for a specific rule
to govern such a situation…so it will not fall under the general provision of 2(d)… the
language of 127 uses the word ‘done’ means that the guarantee may not necessarily
arise contemporaneously… it may arise in the past … the only condition being that
there must be a nexus between the 2 events… and the court said that there was a
nexus as a resolution was passed by the dargah committee on 15 Nov 1928 which said
that Madar Baksh would be given this land on the condition that he furnishes a
surety… so the surety furnished by Gulam is not an isolated event to the principle
debt but rather it is connected to the event of principle debt.
[Court’s Observation- Sir’s notes]- The court upon perusal of illustration C concluded
that anything done or any promise made for the benefit of the principle debtor must be
contemporaneous to the surety’s contract of guarantee. However, past benefit will be
valid consideration where the subsequent surety agreement is pursuant to the previous
agreement between the principle debtor and the creditor. Principle adopted from Privy
Council decision Kali Charan v Abdul Rehman.

Case Ram Narayan Singh v Hari Singh

Facts- RNS transferred a loan of 7500 to Hari Singh Sikh (different person from the
one in the case name)... on 18 Dec 1953 the entry was executed, evidencing the
principle debt… repayable amount was 9058… on a later date, Lt. Col. Hari Singh
(the one in the case name) took the responsibility of the repayment as is being claimed
by the appellant… he claims that LCHS has signed on the account book and agreed to
repay… RNS argued that the surety can come on a later date and still the guarantee
can be valid; the use of the word ‘done’ has a very wide ambit… The HC found out
an evidence that the principle debt had already been settled… so RNS was trying to
fraudulently claim more money from the surety when the liability had already
ended… since the primary liability had ended then the question of consideration for
the surety became redundant… still the court gave an obiter
The interpretation of the term ‘done’ is unnecessarily wide… regards this
interpretation of 127 as unnatural… if there is no link between the 2 events then there
is no consideration and illustration c prevails… consideration will be presumed to
exist when there is a nexus between the 2 events.
The obiter- The Rajasthan HC concluded from illustration C to Section 127 that
anything done or any promise made for the benefit of the principle debtor by the
creditor must be contemporaneous to the surety’s contract of guarantee in order to
constitute a valid consideration for guarantee. A contract of guarantee executed
afterwards without any consideration is void. Allowing past benefit to the principle
debtor as a good consideration for surety gives an unnatural meaning to the word
done. However as held by the privy council in Kali Charan v Abdul Rehman, past
benefit will be a valid consideration where the subsequent surety agreement is
pursuant to the previous agreement between the principle debtor and the creditor.

The extent of the surety’s liability to pay--:

Section 128- surety’s liability is coextensive to the liability of the principle debtor
( = principle debtor’s liability)… unless something else is provided in the contract
(they can put a cap on the surety’s liability)
[Sir’s note on 128] The Bombay HC observed in Manju Mahadev Shetty v
Shivappam Manju Shetty AIR 1918 Bombay 197 that the word ‘co-extensive’ is an
adjective for the word extent and relates to the quantum of the principle debt. Section
128 only explains the quantum of the surety’s obligation when the terms of the
contract do not limit it. Liability means liability enforceable under law (should be
legal in nature). A surety is therefore liable not only for the principle amount but also
for the interest due under the contract unless the promise under the contract of
guarantee is for the payment of the principle sum only.

Say the principle debtor has furnished some additional security apart from the
surety… the creditor moves towards the option of surety to settle the debt… surety
says that he has this other option, pursue that… but the courts have clarified that the
surety cannot dictate rights of the creditor… the choice rests with the creditor.

Case Bank of Bihar v Damodar Prasad AIR 1969 SC 297

Facts- BoB lent a sum of money to Mr. DP… this amount was guaranteed by Mr.
Paras Nath Sinha… Dp defaulted… BOB filed a suit against PNS to settle the debt…
PNS says that the nature of liability of the principle debtor is primary whereas
surety’s liability is secondary… so BOB must file a suit against the principle debtor
first… if he is unable to pay then move against the surety.
SC says no… the choice to file a suit against whichever party (principle debtor or
surety) rests with the creditor… whatever way he wants to pursue he can… an
equitable principle also followed in common law.
[Sir’s notes] The SC approved the judgement of the Bombay HC in Lachhman
Joharimal v Babu Khandu & Tukaram Khandoji 1869 6 Bombay HCR 241where the
court held that is not bound to exhaust his remedy against the principle debtor before
suing the surety. When a decree is obtained against a surety, it may be enforced in the
same manner as a decree for any other debt.
Accordingly, the SC held that the very object of guarantee is defeated if the creditor is
asked to postpone his remedies against the surety. This security under the guarantee
will become useless if the creditor’s rights against the surety can be so easily cut
down.

Case State Bank of India v Indexport Register AIR 1992 SC 1740

Facts- SBI advanced as loan of 1 lakh to Indexport and Ramkishan was the
guarantor… additional security in the form of a mortgage on a shop of Indexport was
also available… IR defaulted… SBI moved for debt settlement… the court issued a
composite decree ( an order against both IR and RK) giving SBI the right to claim
their money from both the options (the mortgage and the surety)… RK filed an
application and said that in a composite decree, creditor should move against the
principle debtor first (i.e., claim the debt from the security first) relying on a previous
case of Union Bank Of India v Manku Narayana (1987 SC decision) in which the SC
had said that in a composite decree we will follow the order of primary-secondary
liability.
When this matter went in appeal to the SC, it said that this approach is wrong and
overturned its previous decision… they said we will not make any special exception
for a composite decree… the choice still rests with the creditor no matter whether it’s
a composite decree or otherwise.
[Sir’s notes] The SC observed that in the present case the composite decree does not
postpone the execution against the surety. The decree is simultaneous and it is jointly
and severely against all the defendants including the surety. It is the right of the
decree holder to proceed with it in a way he likes. The court cited a paragraph from
Pollock and Mulla where it was noted that the creditor is bound to exhaust his remedy
against the principle debtor before suing the surety and the suit may be maintained
against the surety though the principle debtor has not been sued.
In 2009, the SC decision of Industrial Investment Bank of India v Biswanath
Jhunjhunwala 2009 9 SCC 478 reiterated this principle.
Observations- The liability of the surety and principle debtor is co-extensive and not
in alternative. The creditor or decree holder has the right to proceed against either for
recovery of dues or realization of the decretal amount.

Case Union Bank of India v Satyawati Tondon 2010 8 SCC 110

Facts- Appellant had given a loan to respondent 2 and the amount was guaranteed by
respondent 1 (ST)… R2 defaulted… notice was sent to both R1 and R2 under Section
13(2) SARFAESI Act for the settlement amount of 18 lacs… R2 said she would give
50K… proceedings were initiated in District Court under Section 14 read with 13(4)
… R1 filed an application for a restraint order in the HC and asked the HC that
proceedings should be initiated under the principle debtor first.
The SC said that the HC committed a serious error in ignoring so many SC
precedents… the rule remains the same even under the SARFAESI Act that the
choice rests with the creditor to proceed according to his wish
[Sir’s notes] The liability of the surety is co-extensive with that of the principle debtor
and the surety becomes liable to pay the entire debt. The liability of the surety is
therefore immediate and cannot be deferred until the creditor exhausts his remedies
against the principle debtor. The surety does not have any right to dictate to the
creditor his terms by asking to pursue the remedy firstly against the principle debtor
and to defer the proceedings against him.
In 2012, the SC judgement of Ramkishan & Ors. v State of UP 2012 11 SCC 511
reiterated this principle.
Facts- loan was taken by one Ganga Prasad from UBI… surety Chunni Lal… both
couldn’t repay and died… liability fell on surety’s son Ramkishan… he said that
Ganga Prasad had left many properties … they should be used before proceeding
against me…. The District Magistrate rejects the application… surety moves in the
HC… that also dismissed… he went to the SC and the SC reiterated the principle of
Satyawati.

Case Sundar Singh v HP State Cooperative Bank Ltd & Ors. Manu/HP/0715/2021
 Facts- Respondent 1 had advanced a loan of Rs 5 lac 55 K to R4 and petitioner was
the surety (father of R4)… the monthly installment was 8K500… default in the
payment and R1 resorted to arbitration proceedings… P said that 1 L 58K had already
been deposited as margin money so that can be used for now and the rest can be paid
later… arbitrator passed the order and said that the amount of liability is much more
(7 L) on top of which he had to pay 15% interest and the directed the employer of the
petitioner that from the petitioner’s salary 10K needs to be deducted every month…
now the surety said that the principle debtor should be proceeded against before
him… the court referred to all the cases listed above (from Damodar Das to latest)
and said that the surety can’t dictate the rights to the creditor
[This case displays the entire march of the law in this area]

Case State Bank of India v Navneet Mishra & Ors. 2018 4 CJLJ 30
This case gives an example where this position of law was drafted as a clause in a
contract.
Clause- ‘That my/our liability under this guarantee is coextensive with that of the
borrower as if we were the principle debtors of the bank and the amount due under
this agreement will be recoverable from me or us without any recourse to the
borrower and it shall not be obligatory on the bank to call upon the borrower to pay
the amount first or take any action against the borrower before enforcing the
guarantee against me or us nor shall it be necessary for the bank to join the borrower
in any suit against me or us. I or we further agree that the guarantee given thereunder
is irrevocable and enforceable not withstanding any dispute or suit that may be
pending between the bank and the borrower’.
This clause totally exempts the principle debtor from any liability… the surety cannot
say that you first move against the principle debtor before proceeding against me.

Case Kiran Gupta v State Bank of India & Ors. AIR 2021 Delhi 24
Facts- surety is the petitioner… R1 is the creditor and R4 is the PD… R4 defaulted in
the repayment of the loan… proceedings initiated for insolvency and bankruptcy
against the PD… simultaneously, R1 moved against R4 and PD under the SARFAESI
Act… petitioner challenged this 2nd proceeding I the Delhi HC… he said that the 1st
process needs to complete first before any proceeding is brought in SARFAESI
The court said that just bcz a proceeding is happening under IPC, it does not prevent
the creditor to move against the PD and surety under SARFAESI… Section 128 is
wide enough to include a proceeding under both the IPC and SARFAESI.

[Darshika’s notes from here]

##### Kiran Gupta v. State Bank of India and ors. AIR (2021) DELHI 24 - Pt- surety
- R1- creditor
- R4- PD.

- R4- taken loan from SBI and default- liquidation proceedings under IBC- before NCLT
Delhi.

- R1- proceeded against the Pt and the R4 under SARFAECI (parallel proceedigs)- secured
debt- under 13(2)- notice sent
- under 13(4) read with 14- get the enforcement order after filing an application in the district
court

- Pt anticipated this danger and files a writ petition in Delhi HC- proceedings under sarfaeci
act to be quashed as there are proceedings already going on under IBC. - prioritise IBC- I'll
pay the remaining after IBC is completed (as surety is not involved with IBC, but with
SARFAECI)

- jahan surety nahi hai, vo quash kardo, pehle PD pay krde, assets will come down, jab kam
paisa bachega dene ko, tab main karunga pay. subject to res judicata, initiation ho skta hai ek
saath do courts me, par agar kisi ek me bhi settle hogya, to vo use kr skte doosre me.

- court- whatever happens under sarfaeci is unaffected from IBC, sarfaeci is against both, to
already PD ki liability IBC me hatt skti hai.

- PD is not directly involved but added as a party so respondent.

- general rule still remains the same, ibc me chal bhi rhi ho, tab bhi dictate nhi kr skta creditor
ko surety.

- section 23- contract cannot violate a law- you cannot waive away your right- contract
cannot override the law.

**Feb 1**:

S. 128- **Discharge to PD by application of law- impact on liability of surety**

If the Principal debtor gets discharge by application of law, like farm loan waiver, what
happens to the liability of the surety?

Farm loan waiver- Govt. takes burden

- Creditor gives loan to surety

- Loan waived through law passed by the State government

- PD is discharged- effect on liability for surety??

- Surety's liability is *co-extensive* to that of PD, so if PD gets a benefit, does benefit go to

the surety?

##### Aypunni Mani v. Devassy Kochouseph and Anr. AIR (1966) Kerala 203 - R1- surety
(DK)
- R2- PD
- Appellant- loan to PD

- R2- defaults and Appellant obtains decree agaisnt R1 and R2 and either should pay - Court
gives decree, has to be executed

-
##### Maharashtra State Liquidity Board v. Official State Liquidator Ernakulam AIR 1982
SC 1497

- There was a company called Cochin Malleables -

## Section 129:

129. ‘Continuing guarantee’.—A guarantee which extends to a series of transactions, is called

a ‘continuing guarantee’. —A guarantee which extends to a series of transactions, is called a
‘continuing guarantee’."

Illustrations

[(a)](https://indiankanoon.org/doc/144533/) A, in consideration that B will employ C in

collecting the rents of B’s zamindari, promises B to be responsible, to the amount of 5,000
rupees, for the due collection and payment by C of those rents. This is a continuing
guarantee. (a) A, in consideration that B will employ C in collecting the rents of B’s
zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection
and payment by C of those rents. This is a continuing guarantee."

[(b)](https://indiankanoon.org/doc/256165/) A guarantees payment to B, a tea-dealer, to the

amount of £ 100, for any tea he may from time to time supply to C. B supplies C with tea of
above the value of £ 100, and C pays B for it. Afterwards, B supplies C with tea of the value
of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is
accordingly liable to B to the extent of £ 100.

[(c)](https://indiankanoon.org/doc/1553911/) A guarantees payment to B of the price of five

sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to
C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The
guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the
price of the four sacks.

- finer nuances of guarantee

**Continuing guarantee** : guarantee which extends to a series of *transacations*(ambiguity

as this word has not been defined).

- difficult when a surety wants to pull out of a contract/ revokes (revocation operates to the
series of subsequent transaction- eg. before the 6th transaction happens, surety revokes.
therefore, revocation cannot opreate restrospectively but prospectively.)

Possibility 1 -

- contract for one year and after every year it automatically renews- each one year is one
transaction.

Possibility 2-

- contract for 5 years- parties- will execute the contract in 5 yearly trenches- there is a surety
in this contract- after 2 tranches surety wants to opt out. if this is a case of CG- fur future
transactions- not liable.
- If not a case of CG- a normal contract of 5 years

##### Kapurthala estate v. Sheo Shankar AIR 1942 OUDH 325

- it depends how we construe the word transactions.

- KE is the creditor- has a property given it on a lease (theka)- to Mr. Anandi Ben- for a fairly
long period of time but the rent is to be paid annually.

- Surety- SS, upto rs. 2,472- cap on his liability

- AB passes away in 1936

- 1937- is replaced by his widow- Bam Chandra- unable to pay the rents-

- KE files a suit against BC- she couldn't pay- SS sends a notice of revocation when KE
approaches them.

- SS: whatever period in the entire lease remains, I will not pay. but til this point I will pay-
he has to prove that it is a contract of continuing guarantee.

- Contention before the HC- each of the payments constitutes 1 transaction

- He relies on illustration A- Collection of zamindari rent- according to the illustration, each

part which has been broken down is a transaction.

- annual payment of rent within one contract- becomes one transacation.

- Applying principles of revocation in CG- the df can opt out of the contract as a surety.

- **court**: Sometimes we can break down a contract into definite engagements but those
definite engagements do not become the transactions- but the transaction is the bigger
contract.

- For Eg. the lease is of 5 year, after 5 years it renews and everything gets updated. Therefore,
after the first 5 years, ONE transaction is complete. If the parties have split up thse 5 years
into monthly payments for their convenience.- Surety cannot claim that the transacition has
been completed after a year just because of monthly installments.

- first contention was regarding 128- *primary liablity stood discharged* by application of
**213(1)(b) of Up tenancy Act**- these transactions were not iheritable, upon the death of
AB, BC was already discharged as the liability was not discharged by BC- court negated
saying that at the point when the contract was dispute- **Oudh rent Act** was the local law
and not the UP Tenancy Act.

- Second contention- intention of the parties was that one lease was to be considered as one
transaction.

Court relied on 2 cases:

##### Laxman v. Gorakhjee (1920) Nagpur HC ##### Hasan Ali v. Waliullah (1930)
Allahabd HC
**Observations of Allahabad HC**:

Whether or not a transaction is a continuing guarantee is to be gathered from the terms of the
instrument. It is mainly a question of construction. The document should be interpreted as a
whole and is not to be confined merely to the operative part. If there is any ambiguity, it is
permissible to press into consideration the nature and character of business, the relative
position of he parties and surrounding circumstances. In this case, a lease was granted for a
period of 5 years. The stipulation for the several payments were definite engagements
constituting one transaction. The guarantee was given for the due fulfilment of these
engagements stipulated in the lease during the whole term of its continuance. It was held not
to be a continuing guarantee.

Applying the above principle, the court concluded that the current transaction has simply
being broken down into multiple engagements which do not qualify as transactions under
section 129. Therefore, the liability of the surety cannot be revoked for subsequent payments
of the rent under the lease.

- whatever the surety has committed for the lease, he has to pay.

- if the contract is worded as such each engagement looks like a contract- it can be treated as
so too.

- Service contracts have auto renewal clauses. eg. MSA(master service agreement) and
SOW(statement of work)

- Even the amendments made to the MSA are renewable.

**feb 2**:
- in CG, aspect of revocation also becomes very important.
- At some point, the surety may want to opt out from the transaction - How to revoke- S. 130
and 131 (***not very important for exams*)

## Section 130

By sending a notice of revocation to the creditor, upon sending this notice- discharged fromt
he liabity of the surety for future transactions

even after sending the notice of revocation, trasnsaction constinues, however beyond
revocation- surety is NOT liable

**Illustration**:

- taken the example of a bill of exchange- one person owes some money to the other person

- to whom the money is owed- draws the bill of exchange- creditor(drawer) raises this BoE
against the PD(drawee)- eventually the PD has to pay the amount back- eg. if I am giving the
check, I must have that sum of money in my bank account

Ill. (a)- drawn against the debtor for an amount of rs. 5000- percursor to subsequent bills of
exchange- during these 12 months- multiple BoEs will be drawn- total amount- 5000
when the preliminary discussion is taking place- the contract does not materialise at that point
of time-

if it is a case of one whole transaction which we are executing in various tranched- each
tranch is not a transaction

- *standing offer-* - may or MAY not TRANSLATE into CONTRACTS 5000 ko 100-100
krke denge 1 saal ke liye

- each of these smaller BoEs will be one transaction

- initial understanding between a drawer and a drawee does not represent a contract liability
of surety arises in respect of that BoE-

after 2 months- liabity of PDis 2000- surety sends a notice of revocation- liability of surety-
2000 ab ke liye

remaining 3000- surety's liability has stopped

one transaction - each BoE raised within a period of 12 months - not an indefinite series

- NOT a contract as such- multiple contracts will arise- after each BoE is raised against the
PD

- 12 months - 5000 (not a contract)- each BoE- each transaction IS a contract - the first so-
called contract is just paving the way for multiple contracts

Common law rule from the case of:

##### Offord v. Davis (1862) 12 CBNS 748

**Note**: The promise by itself creates no obligation for the surety. It is in fact conditioned
to be binding if the creditor acts upon it either to the benefit of the Principal debtor or to the
detriment of himself. But until the condition has been at least fulfilled in part, the surety has
the power if revoking it. Each discount is considered a separate transaction creating a liabilty
for the surety till it is repaid and after repayment leaving the promise to have the same
operation that it had before the discount was made and no more.

## Section 131:

talks about another way of revocation

- on the day of the death of surety- the surety is discharged of his liabilities as to FUTURE
transactions

- this rule is subject to a contract of the contrary - The contract could provide otherwise

- even regardless of the death- the surety's estate will be liable till the entire period of this
continuing guarantee

- Upon death- provide a notice of this death to the creditor- falls upon the legal heirs
**English law:**

##### Beckett and Co. v. Addyman (1882) 9 QBD 783

**Indian law**:
##### Durga Priya Chowdhury v. Durga Pada Roy AIR (1928) CALCUTTA 204

## Section 132-
***NOT important for exams***

A and B have taken a loan from C

- internally between ourselves we agreed that B is going to be the PD and A (I am) is going to
be the surety- so please exhaust your remedies against B first and then you come to me.

- S. 132- this does not create any order of liabilities because this was just an internal
discussion- even if we assume that it is a valid contract- not possible- as they are JOINTLY
and severally liable to C- it is C's decision-

- A pays the rs. 100 C asked, A can go to B and claim rs. 50- but an internal discussion does
not give any right to dictate the creditor

- liability of the surety might be secondary

- No ***privity***- no contract of guarantee -

Surety also has some grounds of discharge even though it looks that his liability touches the
skies- fidelity was one ground but there are other quite detailed grounds for that too.

**Feb 4.**
**Under what situations can the surety claim discharge from the liability?**

## Section 133

Effect of variance in the primary liability- exists between the PD and the Creditor

If change in the underlying contract and the surety has not consented to that change, then
surety's liability discharged, as acc. to section 126- all three parties must be privy to the
contract.

128- surety's liability is co extensive to that of the PD in respect of something that he has
*guaranteed*, not the changed contract. eg. cash to online, nature of liability changed-
*Illustration. a*- fidelity guarantee, amount changed.

1. no longer tripartite 2. no longer satisfy 128

3. 127?

(a) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards, B and C
contract, without A's consent, that B's salary shall be raised, and that he shall become liable
for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank
loses a sum of money. A is discharged from his suretyship by the variance made without his
consent, and is not liable to make good this loss.

**Note:**

The surety like any other party cannot be bound to something for which he has not
contracted. If the original parties have expressly agreed to vary the terms of the original
contract, it has gone and unless the surty has assented to the new terms, there is nothing to
which he can be bound, as the final obligation of the principal debtor will be somthing
different from the obligation which the guaranteed. He is discharged forthwith on the contract
being altered without his consent. Even under section *128*, the liability only extends to the
liability on the contract guaranteed and not on something for which he has not contracted.

- Is it any kind of change which happens in the primary contract?

- What is the liability is reduced (ISN't IT BETTER???) or increased? - Is the nature of
change is important?

Addressed in **common law** for the first time *landmark*

##### Holme v. Brunskill (1878) 3QBD 495

- tenant(PD) and landlord (Pf)

- lease

- Pf had sheep herd, he had to ensure that the sheep were grazing in the adjacent land

- Performance guarantee in respect of this grazing- tenant ko- Df(surety)- if not done. Df will
pay

- Pf and PD made a change to the contract where they reduce the area for grazing - lesser
liability on the PD, and thus on surety too.
- default on the performance of the tenant
- Pf files a suit- claiming the amount assured

- Old contract se variance and assent not taken- therefore, no longer a party to the contract of
guarantee

- court also qualifies this proposition that any and every kind of variance will not ensure a
discharge to the surety

- only in case of material variance- either *substantial* or *prejudicial*- if this is prima facie
established then the court can go into the matter- not a matter of right, however court can
consider the question and in its discretion can give the surety a discharge.

- None of the tests are being satisfied- surety will continue to be liable.

**India**-

- if compared with the ill. of section 133- it suggest *any kind of change*
- 133 considers any kind of change to be a variance- flavour of the above judgement- we have
to do some analysis.

-
**Observation of Lord Justice Cotton**:

"If there is any agreement between the PD and the creditor, the surety ought to be consulted.
Unless the alteration is prima facie *not* *unsubstantial* (substantial) or *prejudicial* to the
surety, the court will not inquire into the effect of alteration on the rights of the surety."

This position has also been accepted by the Indian courts in the case of:

##### S. Perumal reddiar v. bank of Baroda (1981) Madras HC

##### M.S. Anirudhan v. Thomco's bank Ltd. AIR (1973) SC 746

- Mr. Sankaran given loan under iverdraft scheme with th eaccount he was holding under the
TB

- Anirudhan- guarantee provided- liability cap- 25k

- separate arrangement between the PD and the creditor- lowered the cap of the liability of the
surety to Rs. 20k

- Appelant's (surety) consent not taken

- When there was a default- app. claims that there has been a revision of this contract without
his consent.

- s. 133- materiality of variation

- if unsubstantial or non prejudicial

- common law position accepted- HC

- SC- Whether the surety will get a discharge- 2:1

- minority judge- strictly go by the language of 133- which does not say anything about the
nature of the change- discharge to be allowed

- Majority opinion- separate but concurrent

**Justice J.L. Kapoor**: the facts are slightly different we don't need to go into the aspect of
variation as the PD was acting as an agent of the surety. How? letter of guarantee given by
the surety- so possession of LoG was with the PD- shows a level of entrustment from the
surety to the PD- PD had the *implied* authority to go ahead and make changes- a *material
fact*

quote a principle from halsbury's laws of England

where the promisor (app) had entrusted this log to the PD, then whatever the debtor does with
the promisee(creditor) we will treat that as a decision of the surety only- agent acting on
behalf of the party- though it was not with his consent, yet entrusted with the Letter of
Guarantee to the PD.

**Halsbury's Law of England**:

"Even if the alteration to a contract is made by a stranger without the knowledge of the
promisee, the promisor is discharged if the contract is in the possession of the promisee or his
agent. But if the contract is altered by a stranger when the contract was in the custody of the
promisor or his agent, then the promisor shall not be discharged. Accordingly, if a guarantor
entrust a Letter of guarantee to the principal debtor and the PD makes an alteration without
the assent of the surety, the surety is liable because it is due to the act of the surety that the
letter of guarantee remains with the PD. What the principal debtor did will estop the surety
from pleading want of authority."

nexus to be built with the surety or the principal debtor, normally the creditor possesses the
LoG and ofcourse, the surety too.

The other POV from **J. Hidayatullah**- agrees but some additional points to consider

applies test of materiality under Holme v. Brunskill and uses *contra proferentem*(the
language of the contract must be strictly construed)- 1862 from the observations of **Lord
Westbury** in the case of ***Blest v. Brown (1862)***

if not a material change- none of the parties are discharged from the liability if contra
proferentem is applied-

Scope of the contract is not ventured outside

J. Hidayatullah- change is bringing down the liability of the surety

when it comes to materiality, we have to see whether there is a change in the nature or
character of a document- there has been no change in it-

As far as executing the contract is concerned- no real difference- therefore, surety still liable-
this case gives more legitimacy to Holme v. Brunskill- thumbrule- *whether it is changing
the nature or character of the transaction*- object and purpose of the indian contract act
which is an amending and consolidated act- equitable relief.

##### Narendar Pal Agrawal v. Saraswat Corporate bank Ltd. (2019) 2RCR (Civil) 151-
bombay HC decision

- R1- creditor- advanced loan to R2- transaction guaranteed by the Petitioner in this case-
who is the director of some company- pledged securities like his bombay bungalow and other
assets.

- Petitioner- surety

- his position was to be taken up by some other director of the company and he had
communicated this to the creditor.

- R1- suit before the civil court- asking surety to pay.

- agreed between ourselves and the creditor- the guarantee was replaced by a fresh contract-
sec. 62 of the ICA- *novation*- old contract substituted by new contract- discharged from his
obligation under the old contract.

- Court- not be governed by s. 62 as it is not a case of novation as the petitioner has failed to
prove that his place will be taken up by some other director- the Pt continues to be the surety.

- identity of the surety has not changed, court- your obligation continues- not a case of
wholesale replacement of one contract by another

- S. 133- what entitles a surety to be discharged- prove variance and secondly, *you have not
waived off your right to claim variance.*

- the pt waived off his right to claim discharge on account of variance- there was such a
clasuse in the contract, therefore he cannot claim the effect of variance.

waiver clause: "I/ we - (undertaking given by the surety) waive in favour all of my/our rights
against you or the principal so far as maybe necessary to give effect to any of the provisions
of this guarantee. And I/we agree that I/we shall not be entitled to claim the benefit of any
legal consequences of any variation of any contract entered into by the principal with you the
liability in respect of which is guaranteed by me/us."

SC has said in - ***Sitaram Gupta v. Punjab National bank(2008)*** - these waiver clauses
are permissible provided they do not oppose public policy.

**Court**:

1. not a novation as earlier obligations still continue in the new contract with some
alterations, therefore NO change in surety's liability.

2. Court accepts that there has been a variance to which the surety was not privy however the
surety has waived his own rights and there was no evidence of the waiver being opposed to
public policy.

two cases distinguished by this case:

##### Seth Pratap Singh Moholal Bhai v. Keshavlal Harilal Sethalwad AIR (1935) Privy
council 21

##### Satish Chandra Jain v. National Small industries corporation lts. AIR (2003) SC 623

in both the cases, there were wholesale changes- new surety introduced

Sitaram Gupta had approved these two old cases-

1. ***Hodges v. Delhi and London Bank Ltd. (1900) - 27 IA 168***

2. ***Indian Bank Madras v. S. KrishnaSwamy AIR (1990) MADRAS 115***

**Note on the Narendar case:**

The facts of this case are materially different from the cases cited by the Petitioner. In the
current case, there is no alteration or substitution of the original contract as between the
creditor an the PD. The original finance made by the creditor to the PD was simply continued
by a document of renewal of the contract and the guarantee of the surety accordingly
continued.

As held by the SC in ==Sitaram Gupta v. PNB (2008) 5 SCC 711===, the surety cannot
claim the benefit of sectionn130 or any other provision of the contract act by reason of waiver
of such benefit while entering into the agreement of guarantee with the creditor. As a general
rule, any person can enter into a binding contract to waive the benefit conferred upon him by
any act of Parliament unless it can be shown that such agreement or waiver is contrary to
public policy.

In the current case, the petitioner as a surety had clearly given his consent waiving his rights
under the relevant provisions of the contract act in respect of such renewal or variance.

-----
**feb 8.**
## Section 134:

134. Discharge of surety by release or discharge of principal debtor.—The surety is

discharged by any contract between the creditor and the principal debtor, by which the
principal debtor is released, or by any act or omission of the creditor, the legal consequence
of which is the discharge of the principal debtor.

Illustrations

(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and

afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to
them his property in consideration of their releasing him from their demands. Here B is
released from his debt by the contract with C, and A is discharged from his suretyship.

(b) A contracts with B to grow a crop of indigo on A's land and to deliver it to B at a fixed
rate, and C guarantees A's performance of this contract. B diverts a stream of water which is
necessary for the irrigation of A's land and thereby prevents him from raising the indigo(*Act
of the creditor which makes it impossible for the performance of the primary liability*). C is
no longer liable on his guarantee.

(c) A contracts with B for a fixed price to build a house for B within a stipulated time, B
supplying the necessary timber. C guarantees A's performance of the contract. B omits to
supply the timber. C is discharged from his suretyship.

139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.—
If the creditor does any act which is inconsistent with the rights of the surety, or omits to do
any act which his duty to the surety requires him to do, and the eventual remedy of the surety
himself against the principal debtor is thereby impaired, the surety is discharged.

- broadly covered in 134

The creditor has entered into a contract with PD but does not 1. act
2. contract

##### Mahant Singh v. U. Ba Yi AIR (1939) PC 10

- creditor was the contractor- entered into a contract with some trustees- commissioned the
contractor to carry on some repair work in a pagoda(buddhist worshipping place)

- to secure this amount, guarantee provided by the surety- default.

- creditor files suit against the trustees.
- while the suit is pending, all trustees die (BERRYYYY SUSSSSSSSS) - substitution of
trustees with their legal heirs.
- court- not heritable obligation- so you find new trustees

- order 1, rule X of the old CPC, now it is under order 6, rule XVII (amendment of the
plaint)- this will not come under this- not th ecorrect way of proceeding, ideally come uner
orer XXIII, rule 1 (old CPC) if you want to institute new parties in the picture- subject to the
discretion of the court

- court- time period to file amendment application has expired- limitation period - creditor
files a suit against the surety

- the primary liability is discharged kyunki trustees ko nhi dena ab paisa, to through your act,
under 134 you gave a discharge to the surety.

- The creditor appealed in HC under PC (pre independence case)

- What is the nature of discharge? *expiry of limitation period*
- HC's reasoning- discharge under 134
- PC- 134 does not contemplate this kind of discharge as it is not a discharge *per se*.

- expiration of limitation period hai to fir *remedy is gone, but right is not gone*.

- there is a bar in obtaining the remedy, just due to some procedural grounds- remedy cannot
be claimed. therefore, read with *137*- it is just a forbearance

***Section137.*** Creditor’s forbearance to sue does not discharge surety.—Mere

forbearance on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him does not, in the absence of any provision in the guarantee to the contrary,
discharge the surety.

Illustration

B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year
after the debt has become payable. A is not discharged from his suretyship.

- the contract must be enforceable in law then only secondary liability can be derived. - you
should be able to approach a court and obtain a remedy.
- agar ab enforceable nhi hai, how can you make me liable? ***section- 2(h)***-
- COURT: enforceablity in sec. 2(h) is only *substantial enforceability*, procedurally you
cannot enforce, but substantially you can, 2(h) is still satisfied, therefore, *still remains a
contract, so 137 will take over*

- if complying with the requirements of sec. 10, sec. 25

*pro-creditor* judgement
134 nhi lg rha kyunki 137 is superceding, 2(h) is not a bar- creditor ko paisa mil rha hai

--

Reservation of rights against the surtey- assuming that there is a discharge of the PD- the
right sof the creditor against the surety are reserved.

- right of subrogation is not infected????? sala beemari hai kya - pro creditor clause

**NOTE**: "If a creditor agrees to discharge the PD, it would be the breach of the agreement
for the creditor to pursue his remedy against the surety because the surety would then enforce
his remedy against the PD and thus the creditor's agreement to discharge would be rendered
inoperative. But if the agreement to discharge contains a reservation of rights against the
surety, the agreeemtn cannot operate as an absolute release for the obvious reason that the
creditor's remedies against the surety are preserved and the surety's right of recourse against
him is not extinguished."

GIVEN in ***Annadann Jadaya Goundar v. Konammal AIR (1933) MADRAS 309***-

Madras HC decision.

**Feb. 9**

## Section 135-

135. Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor.—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.

ground for discharge- composition w/o surety's knowledge

- if there is a composition between the creditor and the PD- composition is kind of a
settlement- doesn't mean you can go to the surety (126, 128, 133 hit the contract- 137
represents an exception)

- out of court settlement- payment will be for a lower amount or go for a compromised decree
from the court- parties receive a judicial stamp- drop the terms of compromise and present it
for the court's approval

- the second ground is *agreement to give additional time* to the PD to pay the debt. Why is
this a ground? Surety pay krdega, fir vo aaega pd ke paas right of subrogation lene, PD bol
dega ki mere pe to time hai abhi, surety ka paisa fass gya

- if surety if alien to these changes- 135 is discharge to surety

- *Agreement not to sue*- effectively doing away with the primary liability- secondary
liability will also disappear- we cannot make this a contract of guarantee.

- Forbearance has no bearing on the liability of the surety? then why not covered under
137- ??? in those cases, there is no agreement(contract unless it is not satisfying 2(h)) when
there is a limitation period being lapsed. here, they agreed- so primary liability is affected.

- remedy cannot be exercised anymore.

- creditor- 6 more months- then take surety's consent.
- force majeure- performance is not an issue, contract is an issue.

**Underlying rationale of sec. 135**

Observations of SC in ***Bharat Nidhi v. Bhagwan Das Mehra (1967) Supreme Court***

"It is the clearest and most evident equity not to carry on any transaction wihtout the privity
of him (surety) who must necessarily have a concern in any transaction with the principal
debtor. You cannot keep him bound and transact his affairs without consulting him. It's effect
is to alter prejudicially his position by tying the creditor's hands from receiving payment and
the guarantor from suing the principal debtor. One more reason is that it would be a fraud on
the principal debtor if the creditor, after making such an arrangement is able to sue the surety
because the surety could then claim from the principal debtor in breach of the agreement to
give time."

##### Amritlal Govardhan Lalan v. State bank of Travancore and Ors. AIR (1968) SC 1432

- R3,4,5,6- taken loan of rs. 1L from Travancore Forward bank ltd. later renamed as SBT -
App.- surety

- in addition tot he guarantee furnished by the app. some goods were also pledged by the
creditor.

- default of rs. 73,000.

- after all security and all, 40, 000 bacha h

- bank finds there is a shortfall in the secutiry given which is of 35, 000- this amount could
not be utilized due to quality issues of the goods- otherwise would have been 5000- bank
sends a notice- to fulfil deficit in the value of the quality of the goods.

- App.- this amounts to discharge as the creditor has given time to the PD without consulting
the surety.

- yes, it does however there was a clause in the contract.

- **Clause**: "The borrowers shall be responsible for the value, quantity and th equality of
the goods pledged. The borrowers further declare and agree that the goods pledged with the
bank have not been actually weighed or valued. In order to verify the quantity or quality of
the goods, the bank is at liberty to weigh or value the goods by an authorised officer. If on the
weighment and valuation, goods pledged are found to be less than the weight or value shown
by the borrowes, the borrower undertakes to make up the deficit on demand."
- this clause changes everything- creditor has followed a process which has already been
agreed by all the 3 parties- not ventured beyond the contract.

**Observation of the court:**

Giving time to the borrowers to make up the quantity of security does not amount to giving
time under section 135. What really constitutes giving of time is the extension of the period at
which, the principal debtor was obliged to pay the creditor, by substituting a new and valid
contract between the PD and the creditor to which the surety does not consent.

**Feb. 14**

## Section 137:

Sec. 134, 135 and 137 are related.

PD has taken a loan from the creditor, and has furnished a security to the creditor. Also made
sure the presence of a surety. If there is a default, after the surety has settled it, who is entitled
to the security?

Sec. 139 has to be read with Sec. 141.

Principle behind Sec. 139: It is the substance of Sec. 139 that it is the duty of the person who
has secured the guarantee to do every act necessary for the protection of the rights of the
surety. For example, where the liability of the surety guaranteeing payment by a judgement
deter of the decretal amount by instalments was expressly made dependant on the execution
of the decree by the decree holder. On the occurrence of a single default, the decree holder
owed a duty under the terms of the guarantee to seek execution according to his terms. Also,
if the creditor takes any security from the principal debtor, it is his duty to see that the
security remains enforceable against the principal debtor. If any formalities are required by
law in connection with that security, it is his duty to see that such formalities are observed.
The creditor is not required to do anything more than this.

Sec. 140: Gives statutory rights to recognition of subrogation (policy justification)

“Upon the payment and performance of the principal debt, surety gets credited with all the
rights the creditor had against the principal debtor. Surety steps in to the shoes of the
creditor.”

Creditor had rights with respect to a certain security, and the securities are still there in his
possession. As soon as the primary liability has been discharged, and the creditor has played
his part, the rights of the creditor (the securities), surety will be entitled to the securities.

Parties don’t need to build a clause to signify the transfer of creditor’s rights to the surety as
subrogation. It is the norm and very much implied. What you can do is initiate a specific
performance action but even THAT should not be required

NOTE: According to the Halsbury’s Laws of England, a surety is entitled to every remedy
which the creditor has against the principal debtor to enforce the security and all means of
payment to stand in the place of the creditor not only through the medium of contract but
even by means of securities entered into without the knowledge of the surety having a right to
have those securities transferred to him though there was no stipulation for that and to avail
himself of all those securities against the debtor. This right of surety stands not upon a
contract but upon a principle of natural justice.

According to Mulla, the surety’s right to the creditor’s securities arises because it is
inequitable for a creditor to not avail himself of the securities for the guaranteed debt and
throw the whole liability on the surety. The word ‘invested’ dispenses with the requirement
of assignment of rights by the creditor. Subrogation is therefore, automatic.

Chunduri Panakala Rao v. Atmuri Venkata Sarvesan AIR 1936 Madras 342 Two persons: D1
and D2. Taken a loan from the bank.

1. 1)  Had pledged some properties to the bank

2. 2)  D2 has taken a separate loan from the bank, in this contract, there is a surety P.

D2 defaults in Contract (2), P pays. P can go to the bank to claim securities given by P to the
bank even though the contract was different. The principal debtor and creditor were a
common one. P is “invested with” the rights of the bank. It is an overarching principle over
the head of the concept of privity. P’s right is very broad and sweeping. This right is
equitable. The right of the BANK becomes secondary to P’s right.

Between these two contracts, there was a joint undertaking given from D1 and D2, until and
unless all their liabilities are settles, they are not going to alienate their property. Unclear if
this had an actual bearing on the judgement. Would the courts still have given the same
judgement?

## Section 139

139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.—
If the creditor does any act which is inconsistent with the rights of the surety, or omits to do
any act which his duty to the surety requires him to do, and the eventual remedy of the surety
himself against the principal debtor is thereby impaired, the surety is discharged.

Illustrations

(a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work
reaches certain stages. A becomes surety to C for B‟s due performance of the contract. C,
without the knowledge of A, prepays to B the last two instalments. A is discharged by this
prepayment.

(b) C lends money to B on the security of a joint and several promissory note made in C‟s
favour by B, and by A as surety for B, together with a bill of sale of B‟s furniture, which
gives power to C to sell the furniture, and apply the proceeds in discharge of the note.
Subsequently, C sells the furniture, but, owing to his misconduct and wilful negligence, only
a small price is realized. A is discharged from liability on the note.

(c) A puts M as apprentice to B, and gives a guarantee to B for M‟s fidelity. B promises on
his part that he will, at least once a month, see M make up the cash. B omits to see this done
as promised, and M embezzles. A is not liable to B on his guarantee.
- broader premise- 141 gives a specific example of the same- in respect of a debt, guarantee
and security has been furnished- loan amount 2000 ka, security- 10 bags of wheat worth rs.
1000 given by PD- possession of goods is with the creditor- thief comes and steals the 10
bags of wheat- 1000 rs. worth of secutiry lose- creditor lost due to negligence- ab agar default
hua to PD will say to the surety ke jaakr 1000 rs. vale bag utha lao. This is the fault of the
creditor, why shall surety suffer after discharging, therefore, deduct that 1000 rs.

- Act/ omission of the creditor impairs the rights/remedies(subrogation) of the surety against
the principal debtor- then discharge of surety is allowed.

- We don't allow the creditor to benefit from his own wrong, as all parties must ebnefit
equally from the contract, otherwise unequitable.

- Radhakantapal case- creditor should have initiated the inquiry earlier. -

- 140 and 141 are also read together -

--

- if other than natural wear and tear, kuchh gadbad hua hai- anything apart from natural
depreciation attributed to the act or omission to the creditor

---
**Underlying principle of sec. 139**:

It is the substance of section 139 that it is the duty of the person who has secured the
guarantee to do every act necessary for the protection of the rights of the surety, for e.g.,
where the liability of the surety guaranteeing payment by a judgement debtor(someone who
has to pay under the judgement) of the decretal amount (amt. sanctioned under the decree) by
installments was expressly made dependent on the execution of the decree by the decree
holder on the ocurrence of a single default, the decree holder owed a duty under the terms of
the guarantee to seek execution according to its terms. Also, if the creditor takes any security
from the principal debtor, it is his duty to see that the security remains enforceable against the
principal debtor. If any formalities are required by law in connection with that security, it is
his duty to see that such formalities are observed. The creditor is not required to do anything
more than this.

----

## Section 140- subrogation

140. Where a guaranteed debt has become due, or default of the principal debtor to perform a
guaranteed duty has taken place, the surety, upon payment or performance of all that he is
liable for, is *invested with all the rights* which the creditor had against the principal debtor.

- useful when some additional security has been pledged- creditor after getting money has no
use for those securities- surety gets those rights.

- surety is the first choice and the PD can now NOT alienate those securities to another
person, will have to consult the surety first. Surety will now have the *first right of
rejection*.
Once the surety has paid for the PD or performed his obligation, the surety becomes
==invested== with all the rights of the creditor against the PD the moment this is done.

What is the significance of the term *'invested'* with?

- This is a matter of right you are having, no need an additional clause under a contract now.
It is a better practice to have a clause rather than claiming it as a *matter of right*.

**Underlying principle of sec. 140**:

According to Halsbury's laws of England, a surety is entitles to every remedy, which the
creditor has against the principal debtor to enforce the security and all means of payment to
stand in the place of a creditor, not only through the medium of contract, but evem by means
of securities entered into without the knowledge of the surety, having a right to have those
==securities transfer to him though there was no stipulation for that==, and to avail himself
of all those securities against the debtor. This right of surety stands not upon a contract but
upon a *principle of natural justice*.

According to Mulla, the surety's right to the creditor's securities arises because it is
inequitable for a creditor to not avail himself of the securities for the guaranteed amount and
throw the whole liability on the surety. The word 'invested' dispenses with the requirement of
assignment of rights by the creditor. *Subrogation is therefore automatic*.

Q. What kind of situation is this talking about- 'securities transfer to him though there was no
stipulation for that'?

the securities are not part of the current contract per se.

##### Chunduri Panakala Rao v. Atmuri Venkata Sarvesam AIR (1936) MADRAS 342 -
Madras HC

- Df1 and Df2- taken loan from a bank- 1st contract.- secured loan, pledged joint family
properties with the bank.

- In a separate contract, Df2 took another loan from the same bank, Pf was the surety in the
2nd contract- isme hogya default.

- Pf pays to the Df, now the Pf goes to the Df2 who says that the Pf can use the properties had
pledged under the 1st contract.

- Surety says that he has the rights of the 1st contract but still not privy to the 1st contract. -
140 is silent on this position,

- Common law- it is possible that at that point he had no knowledge of the securities, as the
link between the 2 contracts is the creditor and for subrogation, a nexus must exist.

applies not only in respect of securities provided under current contract and also other
contract where there is no stipulation to the guarantee.

- Court- 140 doesn't place any restriction on which contract it should be- equitable right still
given to the *surety OVER the creditor*.
- there is a deeming fiction of law that the surety will be considered on par with the creditor

**Learning from the case**: Surety is invested with the rights of the creditor which also
extend to other contracts.

HYPOTHETICAL: Surety in the first contract, then the second contract and then the creditor.

**Observations:**

"It is a settled law that a surety who has paid the debt of his principal is subrogated to all the
remedies and rights which the creditor has not only against the principal but against the
others and to all the securities and rights of action generally which the creditor had in respect
of the debt. It is immaterial that when the surety entered into the obligation, he was unaware
of the existence of the said rights and securities. Though the transaction where the Pf became
surety was with respect to Df2, still so far as the bank is concerned, it must be deemed to be a
joint transaction between Df1 and Df2. The Pf, therefore, became subrogated to the right of
action against Df1 and Df2."

**Distinction between sections 140 and 141**:

When a surety has paid all the debts he was liable for, he is under section 140 entitled to
demand all the securities held by the creditor at the time of the payment whether they had
been simultaneously received with the loan or not. Section 141 signifies that the surety
cannot complain if the creditor loses or parts with the security obtained by him after the
contract of surety was entered into. Section 141 does not enable the creditor to withhold from
the surety any security actually held by him at the time when the debt is paid to detract him
from the rights of the creditor under section 140. Section 140 applies when the surety has
paid off the guaranteed liability, when he would be subrogated to the position of a creditor
and entitled in his own right to enforce the securities available to the creditor.

Section 141 on the other hand, is designed to protect the surety against the creditor's act of
losing or without the surety's consent, parting with the securities.

## Section 141:

141. Surety’s right to benefit of creditor’s securities.—A surety is entitled to the benefit of
every security which the creditor has against the principal debtor at the time when the
contract of suretyship is entered into, whether the surety knows of the existence of such
security or not; and if the creditor loses, or, without the consent of the surety, parts with such
security, the surety is discharged to the extent of the value of the security.

Illustrations

(a) C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further
security for the 2,000 rupees by a mortgage of B‟s furniture. C cancels the mortgage. B
becomes

insolvent and C sues A on his guarantee. A is discharged from liability to the amount of the
value of the furniture.
(b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that
advance from A. C afterwards takes B‟s goods in execution under the decree, and then,
without the knowledge of A, withdraws the execution. A is discharged.

(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B.
Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up
the further security. A is not discharged.

- To enforce his right of subrogation under 140, the surety will have the rights over the
secuirty first.

- 141 is a more specific example for section 139.

- Slight departure from the English rule.
- only relates to those securities which are existing at the time when the guarantee is there?

- furnished to the creditor after the security deed is executed- aisa bhi ho skta hai tab - under
141, rights of surety cannot extend to such future securities- *ENGLISH RULE is very wide
though- says theat surety can have rights even on those securities- incidentally, this widens
the ambit of subrogation.*

TILL 140- AND DIFFERENCES BETWEEN 140 AND 141 -**MIDTERM**

[Darshika’s notes till here]

Continuing Guarantee
Section 129-131--
129- what is continuing guarantee
130-131- revocation of continuing guarantee

129- it. Has to be a guarantee and it exceeds to a series of transactions.

Illustration A-

Case Aypunni Mani v Devassy Koehouseph & Anr.

Facts- appellant obtained a judgement decree against R2 (principle debtor) in the trial
court… while the decree is in execution an act was passed- Kerala Act 1 of 1958…
R2 filed an objection that he ahs been given an exception under this particular act (a
loan waiver)… R1 (surety) also filed an objection that he also had a claim under this
act… whatever was being given to R2 should also be extended to me… District court
gave a favourable ruling to them… in appeal, the principle debtor said that even if we
extend a relief under the act to the principle debtor, a claim against the surety must
still be there
HC said that no… a decree can be altered in certain cases… being altered by the
passing of an act is one such situation… and we cannot allow the exemption to not be
given to the surety as that would defeat the purpose of the act… the act must have
intended to exempt the debtors from liability and by denying that to the surety it
would go against the intention of the statute makers.

If liquidation proceedings are ongoing (the creditor is being repaid under supervision)
… now if the creditor moves against the surety at the same time, then can the
liquidation supervisor ask for a restraining order against the surety from paying? (as
then, after paying, the creditor would move against the principle debtor)
Case Maharashtra State Electricity Board v Official Liquidator, Ernakulum
Contract bw Cochin Maleables and Mahrashtra State Electricity. Board… Cochin had
a guarantee in case of default in Canara Bank… Canara Bank further secures this
guarantee against Cochin Maleables as a security in the form of some fixed deposits
and some Zinc Inbots… default happened… amount was paid as bank guarantee…
when Canara Bankl went to Cochin, they were in liquidation… the liquidation
supervisor moved against Canara as giving Cnara that amount would adversely affect
the principle debtor.
The SC had to decide whether this repayment by the principled debtor amounted to
discharge? Then it would be covered under 134… the court said no…
Principle also adopted in Ansal. v Tehri Hydro Development Corporation
SC’s observations- affirming the decision MSEB v Official Liquidator, Ernakulum,
the SC observed that it is a settled law that the bank guarantee is an independent and
distinct contract between the bank and the beneficiary and is not qualified by the
underlying transaction and the validity of the contract between the principle debtor
and the creditor. Unless fraud or special inequity exists, the creditor cannot be
restrained from encashing the bank guarantee. The object is to inculcate respect for
the free flow of commerce and trade and faith in the commercial banking transactions
unhedged by pending disputes between the creditor and principle debtor. The
irrevocable commitment given by the bank must be honoured. The trading operation
would not be jettisoned and faith of the people in the efficacy of the banking
transactions cannot be eroded or brought to disbelief.

Section 133

Narendar Pal Agarwal v Saraswat Cooperative Bank Ltd. & Ors. 2019 2 RCR (Civil)
151 [Bombay HC decision]
Facts- R1 had given a loan to R2 and the petitioner was the surety… as surety, the P
had pledged multiple things to the creditor (like a bungalow he had, etc) in case of a
default by R2… P was the director of a company… the directors of that company
decided that the P will be relieved of the liabilities and some other directors will take
his place and that this had been communicated to the creditor… fresh agreement
drawn up b/w R1 and R2 but the P was still kept as surety… there’s a default by R2…
R1 filed a suit against P… P contended that this is a case of novation (substitution of
one contract by the other- Section 62)… his earlier obligation had been substituted by
another contract… court rejected this.
It said that novation means substitution… replacement of one contract by another
contract… here the contract was replaced… but his obligation was still there under
the new contract also… the contention regarding that would this be a case of variance
under Section 133 as a new contract was drawn up without the consent of the surety…
Court rebutted this by saying that the P was unable to prove that the 2nd contract
relived him of liability… secondly, the court rebutted P’s second argument that his
right to claim discharge under a statute cannot be taken away… the court said that
said that the P waived off his right to claim any discharge because of variance bcz
there was such a clause in the contract… and such a clause is allowed and not unheard
 of, the only requirement being that it is not against public policy… and the court
regarded it as being within the domains of public policy.
Clause- I/We waive in favour all of my or our rights against you or the principle
debtor so far as may be necessary to give effect to any of the provisions of this
guarantee. And I or we agree that I or we shall not be entitled to claim the benefit of
any legal consequences of any variation of any contract entered into by the principle
with you, the liability in respect of which is guaranteed by me or us.

Note making resumes after the difference between 140 and 141--:

Underlying principle of 141--:

Case Craythorne v. Swinburne
[Sir’s notes] A surety, on the payment of debt, is entitled to all the securities of the creditor
whether he is aware of its existence or not even though given after the contract of suretyship.
If the creditor who has them or ought to have them in full possession or power, uses them or
permits them to getting to the position of the debtor or does not make them effectual by
giving proper notice, the surety to the extent of such surety will be discharged. A surety
moreover will be released if the creditor by reason of what he has done cannot on payment by
the surety give him the securities in exactly the same condition as they formerly stood in his
own hands.
Section 141 embodies this rule of equity in English Law relating to discharge from liability as
a surety when the creditor parts with or loses the security held by him. However, the Section
limits the surety’s right to the securities held by the creditor at the date of his becoming
surety and has modified the English rule under which the surety is entitled to securities given
to the creditor both before and after the contract of guarantee. (In India, surety’s right extends
only to those securities which existed on the date of entering the contract of guarantee…
whereas in English law even those securities that came under the domain of creditor after
entering the contract, the surety has a right over those also.)

Case State Bank of Saurashtra v. Chitaranjan Rangnath Raja AIR 1980 SC 1528.
Facts- SBS advanced a loan to 76,368 to Mr. Hari Lal and Chitaranjan was the surety… in
addition of the suretyship, Hari all also pledged some securities in the form of 500 tins of
groundnut oil to be kept in the godown of the bank… the godown keeper did not attend to his
duties and hence the tins got damaged… so when default occurred, bank couldn’t use the tins
and went against the surety… the surety asked for discharge to the extent of damage caused
to the tins… the District Court said that the pledge and the guarantee were 2 different
contracts… what happens in a pledge cannot be allotted to the contract of guarantee… HC
reversed this decision and applied 141 to give surety the discharge… the SC said that it does
not matter whether the securities was under a different kind of contract… all that matters is
whether they were covering the same debt, 141 will apply.
Court’s observations [Sir’s notes] It is an inescapable conclusion that the principle debtor
offered 2 securities- one, the pledge of the goods and the other, the personal guarantee of the
surety. Section 141 will undoubtedly be attracted as it comprehends a situation where the
debtor has offered more than one security one of which is the personal guarantee of the
surety. Even if the surety of the personal guarantee id not aware of any other security offered
by the principle debtor, yet once the right of the surety against the principle debtor is
impaired by any action or inaction, which implies negligence appearing from lack of
supervision undertaken in. the contract the surety would be discharged under the combined
operation of Sections 139 and 141. In any event, if the creditor loses or without the consent of
the surety parts with a security, the surety is discharged to the extent of the security lost as
provided under Section 141. The negligence of the creditor cannot be allowed to the
detriment of the surety. The creditor must remain accountable for his negligent acts. The
guarantee is generally intended to cover proper performance of a contract and not a bank’s
utter disregard for its responsibilities and the failure to exercise the care of a prudent man
which one would expect in management of one’s own affairs.

[Syllabus of guarantee is done… Sections 142-147 also deal with guarantee but they are not
that important]

Bailment
 Section 148- Bailor transfers goods to bailee for some purpose… the possession of the
goods is transferred… once the purpose has been accomplished, the goods have to be
returned to the bailor (there is a duty to return) or dispose them off as per the
instructions of the bailor.
 Bailor is the owner and bailee is the possessor.
 Bailment does not arise out of an express contract… it doesn’t arise from discussions
between the 2 parties… it can arise just out of a spark of a moment… and it arises just
via a simple exchange of possession… bailment is the most unlaw like contract.
 [Sir’s notes on bailment] A bailment is a delivery of a thing entrusted for a special
object or purpose upon a contract to conform to a object or purpose of the
entrustment. A bailment is usually the delivery of personal chattels on trust with a
contract that the trust shall be executed and the chattels redelivered in their original or
altered form as soon as the time or use for, on condition on which they were bailed
shall have elapsed or being performed.

From where did the concept of bailment arise?

In England in late 1600s or 1700s, a new type of situation arose bcz of which a judge thought
of giving this situation the shape of a contract… he came up with a new type of contract
called bailment.

 Bailment can be of 2 types-

i) For valuable consideration/reward- this can be further divided into 2 types
(1) Security for loan given to bailor
(2) For hire to bailor- further 4 types
(a) Hiring for use
(b) For labour/work on goods
(c) Custody
(d) For carriage

ii) For gratuitous consideration- no pecuniary element in this contract… further 3

types
(1) Bailee simply keeps
(2) Bailee does something for bailor
(3) Goods loaned by bailor for use by bailee

[one class left…Kairav’s notes]

Sale and bailment

Case State of Maharshtra v. Brittania Biscuits Company Ltd. (1995) 2 SUPP.SCC 72

Facts- Brittania charges a 20% refundable add on price which was refundable if the goods
were returned by the customers… if the tins in which the biscuits were kept were not retunred
then that 20% was kept by Brittania which was kept in the account books separately… they
wrote that 20% as compensation in its record books… so they were trying to ring the element
of bailment into this… but the sales tax officer when analysing their account books, recorded
this 20% as sales… so as ther amount of sales goes up the sales tax would also go up…
Brittania objected to this as this was not sale but compensation… SC said that this bailment
with an element of sale.. .it said that if the tins were returned then it was bailment and if the
tins were not returnede then it was sale… in 148, bailment requires either compulsorily
retuning the goods or disposing them on the direction of the bailor… the control over the fate
of the goods is with the bailor… but here the actual control is with the customers (the so
called bailee by Brittania)… they are the ones who will decide whether to return the tins or
keep them for their own use… so in essence, it is not bailment as th afte of the goods is not in
the hands of the bailor.
Observations [Sir’s notes]- The SC held that the current transaction is a composite transaction
which may or may not translate to the sale of tins. The customer has an option to return the
tins which may or may not be exercised. This option is absent in bailments where the return is
mandatory. Therefore, the amount written off on the non-return of the tins must be treated as
a part of sale price and shall be subject to sakes tax, rather than an amount payable by the
customer for breach of contract of bailment.

Case United Breweries v. State of Andhra Pradesh

Facts- UB is the assesee… they were selling beer bottles to dealers… the dealers had to pay a
security deposit of 40 paise per bottle which was refundable on the return of the bottle.. the
message to the dealers was that they should encourage the customers to return the bottles
after use… when the dealers were not able to secure the return of the bottle, the 40 apise
remained with UB which UB had to show the sales authorities from where they were getting
this… similar to above case, they showed it as compensation… the officer again assessed it
as the sale price… the question again arose whether it was sale or bailment.
This time the SC said that Section 19 of the Sales of Goods Act, 1930 says that if there is an
intent to sell the goods on part of the seller, then we will regard it as sale… here there was no
such intent to sell the goods… UB intended to secure a return of the bottles… even though
the return was not mandatory, but the court said that that is not relevant… what is relevant is
that there was an intent to secure the bottles back instead of selling them… so we will not
regard it as a sale.
Observations [Sir’s notes]- The SC referred to another case of 1989, Raj Steel v. State of
Andhra Pradesh and observed: that the question whether the transfer of possession of
containers with the product sold amounts to bailment or sale has to be determined by
ascertaining the true nature and character of the transaction. It depends on the intention of the
parties and an overall view of the dealings and transactions between the parties must be
taken. The SC was of the view that the principle of Section 24 of Sale of Goods Act or any
analogous principle cannot be applied to a case like this as neither the beer nor the bottles
were sent to the customers by UB for approval or on sale or return basis. Section 24 is subject
to Section 19 which provides that property in specific or ascertained goods is passed to the
buyer only at such time as the parties to the contract intent it to be passed. The facts of this
case reveal that UB did not intend to sell the bottles or plates to the customers. On the
contrary, the customers (dealers) were advised to the sell the beer in bottles to the consumers
and collect a deposit of 40 paise per bottle so that the bottles can be brought back from the
consumers and returned to UB. Th entire idea was to use the bottles over and over again so
that the business costs of UB could be kept at a low level and the consumption of beer would
increase.