Full Judgment Text
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PETITIONER:
RAJA BAHADUR DHANRAJ GIRJI
Vs.
RESPONDENT:
RAJA P. PARTHASARATHY RAYANIMVARU AND OTHERS.
DATE OF JUDGMENT:
04/09/1962
BENCH:
ACT:
Surety Bond-Executed in favour of Court--Compromise decree
in the proceeding, if effects a discharge-Equitable rule
Indian Contract Act, 1872 (9 of 1872), ss. 135, 126.
HEADNOTE:
Although s. 135 of the Indian Contract Act does not in terms
apply to a surety bond executed in favour of the court,
there can be no doubt that the equitable rule underlying
that section must apply to it. The reason for the said rule
which entitles the surety to a discharge is that he must be
able at any time either to require the creditor to call upon
the principal debtor to pay off his debt, or himself to pay
the debt and seek his remedy against the principal debtor.
The question as to whether the liability of the surety is
discharged by a compromise in the judicial proceeding in
which the surety bond is executed must depend on the terms
of the bond itself. If the terms indicate that the surety
undertook the liability on the basis that the dispute should
be
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decided on the merits by the court and not amicably settled,
the compromise will effect a discharge of the surety.
The Official Liquidators, The Travancore National & Quilon
Bank Ltd. v. The Official Assignee of Madras 1. L. R 1944
Mad. 708, Parvatibai v. Vinayak Balvant, 1. L. R. 1938 Bom.
794. Mahomedalli Ibrahimji v. Laxmibai, (1929) I.. L. R.
LIV Bom. II 8, Narsingh on v. Nirpat Singh, (1932) I. L.
R. XI Patna 590 and Muhammad Yusaf v. Ram GobindaOjha,
(1927) 1. L. R. LV Cal. 91, referred to.
But if the terms show that the parties and the surety
contemplated that there might be an amicable settlement as
well, anti the surety executed the bond knowing that he
might be liable under the compromise decree, there can be no
discharge and the surety will be liable under the compromise
decree.
Haji Ahmed v. Maruti Ramji, (1930) 1. L. R. LV Bom. 97.
Appunni Nair v. Isack Mackadan,(1919) 1. L. R. 43 Mad. 272
and Kanailal Mookerjee v. Kali Mohan Chatterjee, A. 1. R.
1957 Cal. 645, referred to.
Consequently, in the present case where the surety bond was
executed in favour of court and by it the sureties undertook
to pay certain amount of money on behalf of the respondent
if decreed by the court and the compromise decree between
the parties introduced complicated provisions enabling the e
appellant to take possession of the properties in adjustment
of rival claims, granted time, albeit to both the parties,
to discharge their obligations thereunder and included
matters extraneous to the judicial proceedings in which the
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surety bond was executed.
Held, that the sureties stood discharged by the compromise
decree.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: civil Appeals Nos. 243,
344 and 45 of 59.
Appeals from the judgment and order dated January 12, 195O
of the Madras High Court in A. A. O. Nos. 288 to 290 of
1946.
Alladi Kuppuswamy, S. B. Jathar and K. B. Choudhuri, for the
appellants,
A. V. Viswnatha Sastri,V. Vedantachari and T. Satyanarayona,
for respondent No. 2 (]in C. A. No. 345 of 59.)
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T.V. R. Tatachari, for respondents Nos. 3 to 6 (in C. A.
Nos. 343 and 344 of 59) and respondents Nos. 5 to 8 (in C.
A. No. 345 of 1959.)
1962. September 4. The Judgment of the Court was delivered
by
GAJENDRAGADKAR, J.-[ After disposing of Civil Appeals Nos.
343 and 344 of 1959, his Lordship proceeded as follows].
That takes us to Civil Appeal No. 345 of 1959 in which the
appellant wants liberty to proceed against the surety,
respondents Nos. 2 and 3. This claim has been rejected by
both the High Court. But the decision of the High Court
proceeds on the basis that the appellant was himself a
defaulter and so, he could not be permitted to enforce his
remedy against the sureties. Since on the question of
default, we have come to a contrary conclusion, it becomes
necessary to examine whether the appellant is entitled to
seek his remedy against the surety.
In determining this question, it is necessary first to
enquire into the nature and extent of the liability
undertaken by respondents Nos. 2 and 3 in executing the
surety bond. The surety bond was executed on the 29th Sept.
1935. Clause 5 of the surety bond which is relevant
provides that the sureties covenant that if the order of the
High Court in C. M. A. No. 362/1929 be reversed or varied by
the Privy Council and as a result of the said variation or
reversal respondent No. 1 becomes liable to pay by way of
restitution any amount to the said appellant in the Privy
Council, the sureties would pay whatever sum may become
payable by the said respondent and that if they failed
therein, then any sum payable shall be realised in the man-
ner specified in the said clause. This bond was executed in
the favour of the court.
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The appellant contends that as a result of the decision of
the Privy Council, the matter was remitted to the trial
Court for ascertaining the amount due to the appellant and
it was during the pendency of the appeals which were pending
in the Madras High Court against the decision of the trial
Court on the applications made by the respective parties in
the remanded proceedings that the compromise decree was
passed between the appellant and respondent No. 1 and so
whatever is claimable by the appellant by virtue of the said
compromise decree must attract the operative portion of
clause 5 of the surety bond. On the other hand, Mr. Sastri
for the surety agrees that the surety bond must be strictly
construed and it is only if the amount claimed by appellant
from respondent No. 1 can be said to be the result of the
reversal or variation by the Privy Council of the orders
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under appeal before it that the surety bond can be proceeded
against. Mr. Sastri urges that when disputes were pending
between the appellant and respondent No. 1 before the Madras
High Court, the parties compromised the disputes and the
compromise decree which followed acts as a discharge of the
liability of the sureties. In support of this argument,
reliance is placed on the equitable principles underlying
section 135 of the Indian Contract Act. Mr. Kuppuswamy
contests this position and urges that s. 135 is inapplicable
to a surety bond executed in favour of a court and he argues
that appellants remedy against the surety is not affected by
the fact that the dispute between the appellant and
respondent No. 1 was amicably settled and terminated in a
compromise decree.
This controversy raises the question as to whether s. 135 of
the Indian Contract Act or principles underlying it apply to
surety bonds executed in favour of the court. Section 135
provides that a contract between the creditor and the
principal debtor, by which the creditor makes
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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. There can thus be no doubt
that a contract of suretyship to which s. 135 applies would
be unenforceable if the debt in question is compromised
between the debtor and the creditor without the assent of
the surety. But this provision in terms cannot apply to a
surety who has executed a bond in favour of the court,
because such a contract of guarantee of suretyship does not
fall within the scope of s. 126 of the Contract Act. A
contract of guarantee under the said section postulates the
existence of the surety, the principal debtor and the
creditor, and this requirement is not satisfied the case of
a bond executed in favour of the court. Such a bond is
given to the court and not to the creditor and it is in the
discretion of the court to enforce the bond or not.
Therefore, there cannot be any doubt that in terms, the
provisions of s. 135 cannot apply to a court bond.
It is also clear that the equitable principles underlying
the provisions of s. 135 apply to such a bond. If, for
instance, the decree-holder gives time to the judgment-
debtor and promises not to seek his remedy against him
during that period, there is no reason why the extension of
time granted by the creditor to the debtor should not
discharge the surety even where the surety bond is executed
in favour of the court. The reason for the equitable rule
which entitles the surety to a discharge in such
circumstances is that the surety should be able at any time
to require the creditor to call upon the principal debtor to
pay off his debt or himself pay off the debt and seek his
remedy against the principal debtor. If the creditor has
bound himself not to claim the debt from his principal
debtor, that materially affects the right
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of the surety and so, whenever time it; granted to the
debtor by the creditor without the consent of the surety,
the surety can claim discharge. This equitable principle
would apply as much to a surety bond to which s. 126. of the
Contract Act applies as to a surety bond executed in favour
of the court. Therefore, we see no justification for the
argument that even the equitable principles underlying the
provisions of s. 135 of the contract Act should not apply to
surety bonds executed in favour of the court.
In determining the question as to whether liability under
such a ’surety bond is discharged by reason of the fact that
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a compromise decree had been passed in the judicial
proceedings in which the surety bond came to be executed, it
will always be necessary to examine the terms of the bond
itself. Did the surety contemplate when he executed the
bond that the dispute pending between the debtor and the
creditor may be compromised, or did be contemplate that the
dispute would, and must be settled by the court and not
compromised by the parties? If the terms of the bond
indicate that the surety undertook the liability on the
basis that the dispute would be decided on the merits by the
court in invitium and would not be amicably settled, then
the compromise of the dispute would discharge the liability
of the surety (vide The Official Liquidators, The Travancore
National & Quilon Bank Ltd. v. The Official Assignee of
Madras,(1) Parvatibai v. Vinayak Balvant (2); Mahomedalli
Ibrahimji v. Laxmibai, (3); Narsingh Mahton v. Nirpat Singh
(4) and Muhammad Yusaf v. Ram Gobinda Ojha. (5) If, on the
other hand, from the terms of the bond it appears that it
was within the contemplation of the parties including the
surety
(1) I.L.R, 944 Mad. 708.
(2) I.L.R. 1938 Bom. 794.
(3) (1929) I.L.R. LIV Bom. 118.
(4) (1932) I.I.R. XI Patna 590.
(5) (1927) I.L.R. LV Cal. 91 .
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that the dispute may be amicably settled and the surety
executed the bond knowing that his liability may arise even
under the compromise decree, then the passing of the
compromise decree will not entitle him to claim discharge
vide Haji Ahmed v. Maruti Ramji; (6) Appunni Nair v. Isack
Mackadan, (7) and Kanailal Mookerjee v. Kali Mohan
Chatterjee (3). The question would thus always be one of
construing the surety bond in order to decide whether a
compromise decree discharges the surety or not.
Turning to the bond passed by respondents Nos. 2 and 3 in
the present case, it is impossible to, hold that it was
within the contemplation of the sureties when they executed
the bond that the parties would amicably settle their
dispute in the manner they have done. At the time when the
surety bond was executed, the dispute pending between the
parties was the money dispute the decision of which would
have ended in an order directing one party to pay another a
certain specified amount. The compromise decree has
introduced complicated provisions for the satisfaction of
the appellants claim against respondent No. 1. Under the
compromise decree, the appellant would have been entitled to
take possession of the properties in suit and in that
process, rival claims of both the parties would have been
adjusted. We are satisfied that the material terms in
clause 5 of the surety bond could not be said to be
attracted when the parties chose to settle their dispute in
accordance with the terms of the compromise agreement.
Besides, it is clear that the compromise agreement gave time
to respondent No. 1 and the decree was, therefore, not
’executable immediately after it was passed. In substance,
by the decree, time was granted though it is true that time
was granted to both the parties to discharge their
respective obligations under
(6) (1930) I.L R. LV Bom 97.
(7) (1919) I.L.R. 43 Mad. 272.
(8) A.I.R. 1957 Cal 645.
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the compromise. That is another reason why we think the
liability of respondents No. 2 and 3 under the surety bond
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is discharged as a result of the Compromise decree.
There is yet another consideration which is relevant in
dealing with this point. It is common ground that amongst
the disputes which were settled between the parties was
included the claim made by respondent No. 1 for damages on
account of the fact that the appellant had created occupancy
rights in favour of strangers in respect of the properties
which were in his possession as a mortgagee. This claim is
plainly outside the proceedings contemplated and permitted
by the order passed by the Privy Council, and yet this
dispute has been settled by the compromise decree which
means that a matter which was strictly not germane to the
judicial proceedings in which the surety bond was executed
has been introduced by the parties in their final
settlement. Therefore, we are satisfied that though the
appellant succeeds in showing that he was not a defaulter,
he cannot seek his remedy against the surety, respondents
Nos. 2 and 3.
An attempt was made by Mr. Kuppuswamy to suggest that
respondents Nos. 2 and 3 should not have been allowed to
raise ibis point before the High Court, because no such
point bad been taken by them in the trial Court. We do not
think there is any substance in this argument. It is true
that respondents No. 2 and 3 did not take any such
contention in the trial Court, but that may be because
parties had then concentrated on the issue as to who was the
defaulter. But when the appeals were argued before the High
Court, this point was specifically urged by respondent No. 2
and it has been considered by the High Court. No doubt Mr.
Kuppuswamy ingeniously suggested that this was not a pure
question of law and so, the High Court
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should not have allowed it to be raised for the first time
in appeal. The argument is that if the point had been
raised in the Court of first instance, the appellant would
have shown that respondents Nos. 2 and 3 bad consented to
the compromise agreement between the appellant and
respondent No-. 1. This is clearly an afterthought. If the
appellant’s case was that respondents Nos. 2 and 3 were not
discharged by the compromise decree because they were
consenting parties to the compromise agreement, they should
have stated so before the High Court and the High Court
would then have either called for a finding on that issue or
would have refused permission to respondents Nos. 2 and 3 to
raise that point.
The result is, Civil Appeal No. 345 of 1959 fails and is
dismissed with costs,
Appeal dismissed.
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