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
1. 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 be 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.
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…
2. 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--:

3. 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.. buyer 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.

4. Case→ Abdul Hussain Shaikh Gulamali Jambawalla v Bombay Metal Syndicate AIR 1972
Bombay 252
Facts- P sols some goods to D and sked 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*

5. 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.

6. 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?
7. 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- 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.

8. Case→ Barclays v Sheffield Corporation

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 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 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 the company acting on the 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.
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)-

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

Observations- if the purchaser covenants with the seller to pay the encumbrances 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

10. 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--:

11. 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
12. 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.

13. 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.

14. 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.

15. 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 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]

1. Gulam Hussain Khan v Faiyaz Ali Khan

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.
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.
2. Ram Narayan Singh v Hari Singh
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.
3. Kali Charan v Abdul Rehman
privy council -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)

4. Manju Mahadev Shetty v Shivappam Manju Shetty

Bombay HC observed 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.

5. Bank of Bihar v Damodar Prasad AIR 1969 SC 297

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.
The SC approved the judgement of the Bombay HC in Lachhman Joharimal v Babu Khandu & Tukaram
Khandoji where 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.

6. State Bank of India v Indexport Register AIR 1992 SC 1740

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.
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.
 7. Industrial Investment Bank of India v Biswanath Jhunjhunwala 2009 9 SCC 478
In 2009, the SC decision 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.

8. Union Bank of India v Satyawati Tondon 2010 8 SCC 110

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
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.
9. Ramkishan & Ors. v State of UP 2012 11 SCC 511 reiterated this principle.
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.

10. Sundar Singh v HP State Cooperative Bank Ltd & Ors. Manu/HP/0715/2021
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]

11. 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.

12. Case→ Kiran Gupta v State Bank of India & Ors. AIR 2021 Delhi 24
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.
 - understand the nature of the guarantee of the party.
- What is the nature of liability?
- When does he become liable?
- When can he be discharged?
- Section 128- what is the quantum of his liability?
- the nature of the liability of the surety is co extensive to that of the principal debtor.
- like parallel elastic cords- increase the length of one, other one decreases.
- Can surety say that I will only pay the principal and not the interest?
- the same will be reflected on the liability of the surety as the principal interest.
- if there is a cap on the liability(fixed liability) provided in the contract, then just the amount
has to be paid.
- it can be equal (Principal debt + interest) or lower (cap)
- surety pays only when the debtor can't
-----
SURETY’S LIABILITY: Section 128: The liability of the surety is co-extensive with that of the principal
debtor unless it is otherwise provided by the contract.
As the liability of the Principal debtor increases so does the liability of the surety. If the surety has to limit his
liability, he has to make it expressly clear in the contract. If he is not interested in paying additional amounts,
he will make it expressly clear. Unless he does that, the court will hold him liable for any amount that the
principal debtor has to pay.

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?

13. 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
14. Maharashtra State Liquidity Board v. Official State Liquidator Ernakulam
- 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 teadealer, 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

1. 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 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 till 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:

2. Laxman v. Gorakhjee (1920) Nagpur HC

3. 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.
• 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 front he liability of the surety for
future transactions
even after sending the notice of revocation, transaction continues, 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 precursor 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 100100 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 liability of PD is 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:

4. 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 liability 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:

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

Indian law:

6. Durga Priya Chowdhury v. Durga Pada Roy AIR (1928) CALCUTTA 204

Section 132

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.

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 onefourth 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 surety 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
something 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

7. 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:

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

9. M.S. Anirudhan v. Thomco's bank Ltd. AIR (1973) SC 746
• Mr. Sankaran given loan under overdraft scheme with the account 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
• Appellant’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 nonprejudicial
• 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 entrusts 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.

10. 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 –

11. Sitaram Gupta v. Punjab National bank(2008) –

these waiver clauses are permissible provided they do not oppose public policy.

Court:

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

12. Seth Pratap Singh Moholal Bhai v. Keshavlal Harilal Sethalwad AIR (1935) Privy council 21
13. 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

14. Hodges v. Delhi and London Bank Ltd. (1900) 27 IA 168

15. 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.

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
▪ act
▪ contract
16. 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

Section 137.

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
Procreditor 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."

17. GIVEN in Annadann Jadaya Goundar v. Konammal AIR (1933) MADRAS 309 Madras HC decision.

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

18. 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 without 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."

19. 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 to the 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 security 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 borrows, 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.

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.

20. Chunduri Panakala Rao v. Atmuri Venkata Sarvesan AIR 1936 Madras 342

Two persons: D1 and D2. Taken a loan from the bank.

1) Had pledged some properties to the bank

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.

21. Chunduri Panakala Rao v. Atmuri Venkata Sarvesam AIR (1936) MADRAS 342
• 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 that surety can have rights
even on those securities incidentally, this widens the ambit of subrogation.