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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 922 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.) 923 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. 924 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                             925 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 926 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 .                             927 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. 928 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                             929 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. 930