Facts:
On February 27,1956 a Partnership firm entered into a contract of guarantee with the former Travancore Forward Bank Ltd. Both parties entered into an agreement to set up a cash credit account to the extent of Rs.1,00,000. This account was to remain in existence until closed by the bank and the goods pledged were secured by the bank. Furthermore, it was agreed by the respondents that upon any failure to repay the bank upon demand any dues owed to the bank, the bank could lawfully, without issuing any notice to the firm sell or dispose of all their securities either publicly through an auction or privately through a contract and apply the profits from the sale towards liquidating their debt.
Additionally, it was agreed that if any balance on the dues was remaining, the bank would be at liberty to utilise any amounts in the hands of the bank to the credit of the respondents towards repayment of the debt. A clause in the agreement further stipulated that the bank could, at any time, test the value of the goods pledged by the respondent by weighing them and the cost of such weighment was to be borne by the respondent. When the respondents failed to pay the amount due to the bank, the goods they pledged were sold with notice sent to the respondents and the proceeds from the sale were credited to the amount owed by the respondent.
The major contention in the case was that the stock that was pledged was initially valued around 99,991 INR but after verification, a shortage of 35,690 INR was found. The respondents were granted time to make up the deficit however, they failed to do so and the gross sum they owed to the bank after adjustment came to 40,933 INR. Following the respondent’s failure to pay, the bank filed a suit against the respondents and the appellant.
The appellant then contended that there had been a variation in the terms of the contract w.r.t the value of the limit from 1,00,000 to 50,000 to 1,00,000 between the principal debtor and creditor; the only evidence supporting this was certain entries in the pages of accounts of the Bank mentioning the “limit” as 50,000 INR. The appellant further contended that he was not aware of such a variation and thus, sought discharge under Section 133 of the Indian Contract Act. It was further contended by the appellant that by giving time to the respondents to make up the deficit, the bank absolved him of all liability. Finally, it was contended by the appellant that since a portion of the security was parted with without the consent of the surety, the liability of the appellant was discharged to the extent of the value of the security so lost.
Issue:
The main contentions which arise out of the given case are
- The maximum credit limit was cut to Rs. 50,000 and then raised to Rs. 100,000 without contacting the appellant, indicating that the contract conditions were changed without the surety’s (appellant’s) approval. Due to this variance in the terms of the contract, it was argued that the appellant was released from any liability under the contract of guarantee under Section 133 of the Indian Contract Act.
- It was contended second, for the appellant, that time was given to the respondents 2-6 to account for the deficit in the goods pledged worth Rs. 35,690 and such time granted him the right to be discharged under Section 135 of the Indian Contract Act.
- Lastly, it was contended that the deficit of Rs. 35,690 in goods was due to the negligence of the bank or other reasons that led to the bank facing this loss of securities which the bank was in possession of at the time when the contract of surety was undertaken. Because the creditor parted with or lost a portion of the security without the surety’s permission, Appellant’s liability was discharged to the amount of the value of the security so lost under s. 141 of the Act.
Rule:
The rules of law used in this case are,
- Section 133 states that any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. The issue of the variation made in the terms of the contract between the principal-debtor and the creditor in this case was dealt with under Section 133.
- Section 135 states that 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 sue the principal debtor, discharges the surety, unless the surety assents to such contract. With respect to the present case, Section 135 deals with the act of giving time to the borrowers to make up the quantity of items discovered to be short on weighment by the Bank.
- Section 140 states that 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 while Section 141 states that 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. In this scenario, Sections 140 and 141 address whether the creditor lost or parted with a portion of the security without the surety’s permission, and whether the surety is released to the extent of the value of the security lost.
Analysis:
It was pointed out that the maximum credit amount of Rs. 1,00,000 authorised in Ex. P-1 was decreased to Rs. 50,000 before being raised to Rs. 1,00,000 without consulting the appellant. Certain entries in the pages of accounts maintained by the Bank of the “limit” as Rs. 50,000 are the only evidence in support of this claim. It was further mentioned that the appellant had taken Rs. 5,000 out of the Rs. 10,000 he had deposited with the bank as security for advances to the firm. However, there is no documented agreement between respondent no. 1 Bank and respondent-firm about the reduction of the cash credit accommodation limit. When dealing with this contention of the appellant, the Court reinforced the High Court’s interpretation that the entries in the books of accounts could have been private instructions to the cashier to not allow cash advances greater than 50,000 INR. Such an instruction cannot be deemed to be legally binding on the other respondents. It was in this line concluded that the provisions of Section 133 of the Indian Contract Act could not be attracted in the present case.
Secondly, When the number of products actually in store was compared to the weekly statement dated April 18, 1957, it was discovered that there was a shortfall of goods worth Rs. 35,690. The Bank demanded that respondents 2 to 6 make up the difference right away. The respondent firm stated on April 23, 1957 that the deficit will be made up within one month. According to the Bank, respondents 2 to 6 were given one month to make up the quantity of goods deficit. With respect to these facts the Court ruled that the act of giving time to the borrowers could not be considered a “promise to give time” under Section 135 of the Indian Contract Act. The Court placed reliance on a clause in the agreement between the bank and respondents that stipulated that the borrowers would be liable for the quantity and quality of the goods pledged and for the correctness of statements and returns furnished to the bank. The reasoning employed was that the act of the Bank in giving time for repayment was not tantamount to the giving of time to a principal debtor for payment of the money within the meaning of Section 135 of the Indian Contract Act.
On behalf of the appellant, it was stated that when the number of products actually in store was compared to the weekly statement dated April 18, 1957, a shortage of items worth Rs. 35,690 was discovered. The stock was evaluated at Rs. 99,991 and the respondent Bank’s Agent testified that “he did not know how the shortage developed” and that “there was a potential of defendants 1 to 5 taking away the items.” When dealing with this contention, wherein a portion of security lost by the creditor or parted with without the consent of the surety, the Court relied on the statement of an Agent of the bank who claimed that he did not know how the shortage occurred and that it was possible that the respondents had taken away the goods. The Court further placed reliance on Sections 140 and 141 of the Indian Contract Act as well as the case of the State of Madhya Pradesh v Kaluram[1] and concluded that the shortage of goods was brought about by the negligence of the Bank or for some other reason and to the extent of the shortage, there must be deemed to be a loss of the securities which the Bank had at the time when the contract was entered into. In light of this interpretation, the Court applied the principle enshrined in Section 141 of the Indian Contract Act and held the appellant liable only for 5,243 INR.
Conclusion:
The decision that the Bank’s act of allowing the principal debtor time to make up the quantity of goods pledged does not amount to allowing the principal debtor time to make payment of the money within the meaning of section 135 closely follows the decision in a case where it was decided that whereby an arrangement between the principal judgement-debtor and the decree-holder, the time for debt was extended by the former, it was held that its effect upon discharge of surety depended upon the discretion of the court.[2] Although promise to give time is against the faith of the contract, and it is one of the duties of the creditor towards the surety not to allow the principal debtor more time for payment[3]; taking in account the facts of this case it can be contended that allowing the principal debtor time to make up the quantity of goods pledged is not the same as giving the debtor more time for payment.
The decision that the surety is entitled, under section 140 of the Contract Act, to be treated in the same way as a creditor in relation to the principal debtor upon payment of the money due and under Section 141 of the Act, the surety has a right to the creditor’s securities at the time he became surety. In another example, when the buyer took the items, the security was lost, and the surety was released to the extent that the value of the security was lost. The court further noted that the fact that the security was lost due to inaction rather than positive action was irrelevant.[4] With respect to the facts of the case in question the difference between the English law and the principle of the section, was explained by the Supreme Court stating that Section 141 has limited the surety’s right to the securities held by the creditors at the date of his becoming surety and has modified the English rule that the surety is entitled to the securities given to the creditors both before and after the contract of guarantee. However, Section 141 incorporates the rule of English law relating to a surety’s discharge from liability when the creditor part with or loses the security held by him, subject to adjustment. Based on this principle the surety’s liability was discharged to the value of the security lost under Section 141 as was done in another case where the High Court held the Defendant to be utterly negligent in dealing with the pledged goods and discharged the surety’s liability on account of conduct of the parties, the pledge of goods and the subsequent contract of guarantee.[5]
[1] State of MP v Kaluram, AIR 1967 SC 1105.
[2] Wandoor Jupiter Chits (P) Ltd v K.P. Mathew, AIR 1980 Ker 190.
[3] Samuel v Howarth, 3 Mer 272,279.
[4] Id. at 1.
[5] State Bank of Saurashtra vs. Chitranjan Rangnath Raja and Anr., 1980 SCR (3) 195.
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