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PETITIONER: STATE OF MADHYA PRADESH

       Vs.

RESPONDENT: KALURAM

DATE OF JUDGMENT: 05/09/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. WANCHOO, K.N. BACHAWAT, R.S.

CITATION:  1967 AIR 1105            1967 SCR  (1) 266  CITATOR INFO :  R          1968 SC1432  (7)  R          1980 SC1528  (13)  D          1992 SC1740  (23)

ACT: Indian  Contract  Act,  s.  141-Forest   contract-Contractor allowed to remove wood without making due  payment--Security for payment thus lost-Surety whether discharged.

HEADNOTE: At  an  auction  held  by  the  Divisional  Forest   Officer Hoshangabad  Division for sale of ’felled trees’, one J  was declared  the  highest bidder.  The amount of  the  bid  was payable in four installments.  According to the contract the Forest  Contract Rules were binding on the  contractor,  and the  contractor could be prevented from removing the  forest produce   in  case  he  made  default  in  payment  of   the instalments  due.  One K had stood surety for J  along  with another  surety.  J paid the first instalment due under  the contract  but  without making the  subsequent  payments  was allowed to remove the whole forest produce contracted to  be gold  from the contract area.  The State of  Madhya  Pradesh thereafter took proceedings to recover from K -as arrears of land  revenue the amount due from J. K commenced an  auction for  a  declaration that he was not liable to pay  the  dues recoverable from J and for an injunction against the  State. He contended that since the Forest Department had allowed  J to  remove the forest produce the security was lost  and  he stood  discharged.  The trial Court and-the High Court  both held in K’s favour.  The State of Madhya Pradesh appealed to this, Court by special leave. HELD : (i) The expression "security" in s. 141 of the Indian Contract  Act  is  not  used in any  technical  sense  :  it includes  all  rights  which the creditor  has  against  the property  at  the  date  of the  contract.   The  Surety  is entitled  on payment of the debt or performance of all  that he  is  liable  for  to the benefit of  the  rights  of  the creditor against the principal debtor which arise out of the transaction  which given rise to the right or liability:  be is  therefore on payment of the amount due by the  principal debtor entitled to be put in the same position in which the-

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creditor stood in relation to the principal debtor.  If  the creditor  has lost or parted with the security  without  the consent  of  the  surety,  the  latter  is  by  the  express provision  contained in s. 141, discharged to the extent  of the value of the security lost or parted with. [272 E-G] Wulff  and Billing v. Jay, L.R. (1872) 7 Q.B. 756,  referred to. (ii) The  Forest  Officer  parted with  the  forest  produce before   receiving  payment  of  the  amount  due   by   the contractor’  Thereby the charge in favour of the  State  was seriously  impaired  and  the statutory power  to  sell  the produce  for nonpayment of the amount remaining due  became, for  all practical purposes, ineffective.  Again, under  the terms  of the contract the Forest authorities had the  right to  prevent removal of the produce sold until the price  was paid : that right was also lost.  The right conferred by  s. 83 of the Forest Act and under the terms of the contract  to prevent  removal  and right to -sell the  produce  for  non- payment  of  the price, coupled with charge on  the  produce constituted the security of the State and that security  was lost  because the Forest Officers permitted removal  of  the produce by the contractor. [273 G-H] Accordingly  the surety stood discharged from  liability  to pay  the  amount undertaken by him under the  terms  of  the surety bond. 267

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 359 of 1964. Appeal  by special leave from the judgment and decree  dated September 29, 1961 of the Madhya Pradesh High Court in First Appeal No. 123 of 1958. B.   Sen J.P. Dube and I.N. Shroff, for the appellant B. C. Misra and S. S. Shukla, for the respondent. The Judgment of the Court was delivered by Shah,  J, This is an appeal with special leave  against  the decree passed by the High Court of Madhya Pradesh in  appeal No.  123  of 1958 confirming the decree  of  the  Additional District Judge, Hoshangabad, decreeing the plaintiff’s suit. The State of Madhya Pradesh has appealed to this Court. At an auction held on July 20, 1954 by the Divisional Forest Officer, Hoshangabad Division, for sale of "felled trees" in Coupe No. 66 Dhekna, Range Seoni, one Jagatram was  declared the  highest bidder and the trees were sold to him  for  Rs. 12,100.   The  amount  of  the  bid  was  payable  in   four instalments  of Rs. 3,025 each: the first instalment  to  be paid  immediately  on acceptance of the bid, the  second  on December  1,  1954, the third on February 1,  1955  and  the fourth  on  May 1, 1955.  Jagatram executed  a  contract  in favour  of  the  Governor of Madhya Pradesh  in  which  were incorporated  the  terms and conditions of  the  sale.   The following are the material terms of the contract:               "2. The quantity of the said forest produce to               be  sold  under  this contract  shall  be  the               quantity  which  may  exist  at  the  time  of               executing  this  indenture or  may  come  into               existence thereafter in the contract area  all               of  which  forest contractor  by  collect  and               remove   from  it  in  accordance   with   the               conditions herein contained during the  period               from the date the forest contractor  furnishes               the necessary coupe boundary certificate after               inspection  of the contract area to  the  30th

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             day of June, 1955               3.    The forest contractor shall commence his               work  of  collecting  and  removing  the  said               forest   produce   within  one   month   after               furnishing the necessary certificate mentioned               in clause 2 above               5.    The said forest produce shall be removed               by  the  forest contractor from  the  contract               area by the routes specified in the  following               table  and  shall  be  presented  by  him  for               examination  at  one or other  of  the  depots               specified in that table:-                              (Table Omitted)               6.    The  Forest contractor shall be  subject               to  the Forest Contract Rules as amended  from               time to time               up C. I.166-4               268               and  the Rules shall be deemed to be  part  of               this contract in so far as they are applicable               thereto : .........."               Jagatram  paid the first instalment due  under               the contract on July 28, 1954, and  subscribed               his  signature to the terms of  the  contract.               Nathuram  and Kaluram stood sureties  for  him               and executed the following bond:               "Whereas  the Governor in order to secure  the               due  performance  of conditions of  the  above               contract  demanded  security from  the  forest               contractor, I               (1)   Nathuram  son of- Kashiram  resident  of               Chaterkheda               (2)   Kaluram  son of Jhandusingh resident  of               PipaliyaKalan,  by occupation  Agriculturists,               surety  on  behalf of the  forest  contractor,               undertake  to discharge the liability  of  the               forest   contractor  in  case  of   any   act,               omission,  negligence or default on the  part;               of the forest contractor for any sum which may               become payable by the forest contractor to the               Governor  by  or under the conditions  of  the               above contract.               I also agree that any sum which may be payable               by me to the Governor under the terms of  this               bond  shall be recoverable in the same  manner               as an arrear of land revenue." Jagatram removed almost the entire quantity of trees sold to him,   but  since  he  did  not  pay  the  remaining   three instalments  of the price, the State of Madhya Pradesh  took proceedings  to  recover  from Kaluram  the  amount  due  by Jagatram as arrears of land revenue. Kaluram then commenced an action against the State of Madhya Pradesh for a declaration that he was not liable to pay  the arrears of forest dues recoverable from Jagatram and for  an injunction  restraining  the State from  realising  or  from continuing  the  recovery proceedings with regard  to  those forest  dues from him.  The principal ground in  support  of the  claim  was  that the forest authorities  gave  time  to Jagatram  and omitted to take steps which their duty to  the surety  required them to take i.e., prompt seizure and  sale of the trees after the second instalment had fallen due, and since  on that account his eventual remedy against  Jagatram was impaired, he Kaluram stood discharged from liability  as surety. The Trial Court held that the forest officers were negligent

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in  allowing  the contractor Jagatram to  remove  the  trees sold,  and  on that account the security of the  surety  was impaired,  and  the surety stood discharged  for  the  whole amount  recoverable from the contractor.  The High Court  of Madhya Pradesh confirmed the  decree of the Trial Court. 269 By  virtue  of  cl.  6 of the terms  of  the  contract,  the relevant Forest Contract Rules were to be treated as part of the contract between Jagatram and the State.  By r. 2 it was provided  that  all contracts whereby the  Government  sells forest produce to a purchaser shall be subject to the rules, insofar as they are applicable, and that those rules’  shall be deemed to be binding on every forest contractor not  only as rules made under the Forest Act, but also as  conditions’ of  his forest contract.  By r. 6 the forest  contractor  is required to carry with him an "accessory licence"  entitling him  and  his  servants  and agents  to  go  upon  the  land specified  in the contract and to do all acts necessary  for the proper extraction of the forest produce purchased  under the contract.  Rule 8 provides:               "Where the consideration payable to Government               under   a  forest  contract  is   payable   in               instalments and the Divisional Forest  Officer               at  any  time before the  last  instalment  is               paid,  considers that the value of the  forest               produce removed by the contractor exceeds  the               amount  of the instalments already  paid,  the               Divisional  Forest  Officer may  stop  further               removal  until  the contractor has  paid  such               further  sum  as  may,  in  his  opinion,   be               sufficient to cover such excess:               Provided that, if in the opinion of any Forest               Officer not below the rank of a Range Officer,               it  is necessary to take immediate  action  to               prevent  a  breach of this rule,  such  Forest               Officer-               (i)   may  by notice in writing serve  on  the               contractor  or his agent, if any, stating  the               grounds   for  the  direction,   require   the               contractor  or  his  agent  to  stop   further               removal   of  the  forest  produce  from   the               contract area; and By r. 12 a forest contractor is prohibited from removing any forest  produce  from  the  contract  area,  unless  it   is accompanied  by a pass in the prescribed form signed by  the contractor  or  his authorized agent.  By r. 13  the  forest contractor is required to remove forest produce only by  the route or routes specified by rules under the Act, or by  his forest  contract, and to take all forest produce removed  by him to such depots or places as may be similarly prescribed, for  check  and examination.  Rule 16  requires  the  forest contractor  to  keep  accounts of  the  quantity  of  forest produce removed by him from the contract area, and that such accounts  shall  be open to inspection at any  time  by  the Divisional Forest Officer or by any forest subordinate  duly authorized  in  that  behalf.  Rule 29(1)  provides  that  a forest  contract may be, terminated by the Office  empowered to execute it on behalf of the Government, if the Forest 270 contractor makes default in the payment of the consideration for his contract or of any instalment thereof, or commits  a breach  of any of the other conditions of his contract.   By sub-r.  (2)  of r. 29 it is provided that  such  termination shall  be  notified to the forest contractor  by  a  written notice  and thereupon all the contractor’s rights under  the

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contract  including all accessory licences shall  cease  and all the forest produce remaining within the contract area or at  the  depots  specified  under r.  13  shall  become  the absolute  property of Government.  Rule 33(1) provides  that all   forest  produce  removed  from  a  contract  area   in accordance with the rules and duly checked and passed at the depots  established  under r. 13 shall be  at  the  absolute disposal  of the forest contractor.  By cl. (2) of r. 33  it is provided that the forest contractor may assign any forest produce  not  so removed, but such assignment shall  not  be valid  unless  it  is made with  the  previous  sanction  in writing of the forest officer who executed the contract. It  is also necessary to refer to ss. 82 & 83 of the  Indian Forest  Act  16 of 1927.  By s. 82 it is provided  that  all money  payable to the Government under the Act or under  any rule  made under the Act, or on account of the price of  any forest produce, or of expenses incurred in the execution  of the  Act in. respect of such produce, may, if not paid  when due,  be recovered as if it were an arrear of  land-revenue. Section 83 provides:               "(1) When any such money is payable for or  in               respect  of  any  forest-produce,  the  amount               thereof  shall be deemed to be a first  charge               on such produce, and such produce may be taken               possession  of by a Forest-officer until  such               amount has been paid.               (2)   If such amount is not paid when due, the               Forest Officer may sell such produce by public               auction, and the proceeds of the sale shall be               applied first in discharging such amount.               (3)........................" Beside  the  contractual right which is conferred  upon  the State  by r. 8 to stop removal of goods in  value  exceeding the  amount  already  paid  by  the  contractor,  where  the consideration  is  payable in instalments  the  statute  has imposed  a charge upon the goods sold, inter alia,  for  the price thereof, and has authorised the Forest Officer to take possession  of the goods until such amount is paid.  If  the amount is not paid when due, the Forest Officer may sell the produce  by  public  auction.   The  State  Government   has therefore  under the terms of the contract and by virtue  of the  statute,  even  though the property in  the  goods  has passed  to the contractor, the right to stop removal of  the goods  and  take possession thereof till the amount  due  is paid and to sell the goods if the amount is not 271 paid  when  due; the State has also the  power  to  prohibit removal,  of the goods when the value of the forest  produce removed by the contractor exceeds the amount of  instalments already  paid,  to  check  and examine  the  goods,  and  to terminate the contract in case of default in payment of  the amount due and to take possession of the goods either in the contract area or in the depots of the contractor. The  contract between Jagatram and the State was in  respect of "felled trees" and the area and denomination of the coupe were  set  out.   The trees agreed to be  sold  being  in  a deliverable  state, by virtue of s. 20 of the Sale of  Goods Act, the property in the goods sold passed on the production of  the  "coupe  boundary certificate".   It  is  true  that because  of the diverse covenants contained in the  contract and  the  provisions of the Rules which formed part  of  the contract,   certain  restrictions  were  imposed  upon   the contractor.   Rule  8 authorised the forest  authorities  to stop  removal  of the -foods sold if it was found  that  the contractor  had removed goods of value exceeding the  amount

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of  instalments  already  paid.  Again  the  contractor  was required to take the goods to the depots and to get the same checked and examined.  But on that ground it cannot be  said that  the contractor did not become the owner of  the  goods when  the "coupe boundary certificate" was produced.  The  " coupe boundary certificate" is not on the record, and we are unable  to hold that any goods were removed or permitted  to be  removed  without the production of  the  coupe  boundary certificate.  That is not the case of the State and we  will not  be justified in so assuming.  The terms of rr. 29 &  33 also  abundantly support the view that on the production  of the "coupe boundary certificate" the contractor becomes  the owner of the goods.  Under cl. (2) of r. 29 when a  contract is  terminated for reasons mentioned in cl. (1)  all  forest produce remaining within the contract area or at the  depots specified  under r. 13 becomes the absolute property of  the Government.  it  is  implicit  in the  rule  that  till  the eventuality contemplated by r. 29(1), property in the forest produce  is in the contractor.  The terms of r. 33(2)  which authorize the forest contractor to assign any forest produce also support that inference.  The right to assign the forest produce not removed from the contract area predicates  title to  the forest produce.  The argument of the State that  the property  in  the  goods  had  not  passed  to  the   forest contractor  till they were removed, and on that account  the statutory  charge  under  s. 83 of the Forest  Act  did  not attach  to the goods sold, has therefore no force.  As  soon as  the  contract was entered into and  the  coupe  boundary certificate was produced and we assume in this case that  it was  so  produced,  the  property in  the  goods  passed  to Jagatram.   But  for the contract price there  was  a  first charge  on  such produce in favour of the  State  of  Madhya Pradesh  under s. 83(1).  The Divisional Forest Officer  had authority to stop removal of those goods until 272 the amount of instalments payable by the contractor was paid and even to sell the goods for recovery of the amount  which had  fallen  due.  The forest  authorities  however  allowed Jagatram to remove the goods sold before the instalments due on December 1, 1954 and thereafter were paid. Kaluram  by  executing  the surety bond  had  undertaken  to discharge  the liability arising out of any  act,  omission, negligence or default of the forest contractor.  The  surety Kaluram contends that because the State lost or parted  with the  security he stood discharged.  By s. 140 of the  Indian Contract Act, 1872, 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; and by s. 141 it is provided :               "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 consent of the surety, parts with such               security,  the  surety is  discharged  to  the               extent of the value of the security." The  State had as already observed, a first charge over  the goods: the State was also entitled to prevent the goods from being  removed without payment of the amount of  instalments due.  The expression "security" in s. 141 is not used in any technical  sense: it includes all rights which the  creditor

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had  against the property at the date of the contract.   The surety is entitled on payment of the debt or performance  of all  that he is liable for, to the benefit of the rights  of the creditor against the principal debtor which arise out of the transaction which gives rise to the right or  liability: he  is  therefore  on  payment of  the  amount  due  by  the principal debtor entitled to be put in the same position  in which  the  creditor  stood in  relation  to  the  principal debtor.   If  the creditor has lost or has parted  with  the security  without the consent of the surety, the latter  is, by the express provision contained in s. 141, discharged  to the extent of the value of the security lost or parted with. The  State had a charge over the goods sold as well  as  the right   to  remain  in  possession  tilt  payment   of   the instalments.   When the goods were removed by Jagatram  that security  was  lost and to the extent of the  value  of  the security  lost the surety stood discharged.  In the  present case the State has not produced the accounts furnished under r.  16 by the contractor relating to the quantity  of  goods removed by Jagatram.  We must in the circumstances hold that the  entire quantity contracted to be sold to  Jagatram  had been  removed,  and  the surety is, because  the  State  has parted with the security                             273 which  it held, discharged from liability to pay the  amount payable under the terms of the contract.               In  Wulff and Billing v. Jay,(1)  Hannen,  J.,               stated the law thus:               "..........  I take it to be established  that               the defendant became surety upon the faith  of               there being some real and substantial security               pledged,  as  well as his own credit,  to  the               plaintiff; and he was entitled, therefore,  to               the  benefit  of  that  real  and  substantial               security  in the event of his being called  on               to  fulfill his duty as a surety, and  to  pay               the  debt for which he had so become-  surety.               He  will,  however,  be  discharged  from  his               liability as surety if the creditors have  put               it  out  of their power to hand  over  to  the               surety  the means of recouping himself by  the               security   given  by  the   principal.    That               doctrine  is  very clearly  expressed  in  the               notes in Rees v. Barrington-2 White &  Tudor’s               L.C.,  4th  Edn. at p. 1002-’As a  surety,  on               payment  of the debt, is entitled to  all  the               securities  of  the creditor,  whether  he  is               aware  of their existence or not, even  though               they   were  given  after  the   contract   of               suretyship,  if the creditor who has  had,  or                             ought to have had, them in his full po ssession               or  power, loses them or permits them  to  get               into the possession of the debtor, or does not               make  them effectual by giving proper  notice,               the surety to the extent of such security will               be  discharged.  A surety, moreover,  will  be               released if the creditor, by reason of what he               has  done’. cannot, on payment by the  surety,               give  him the securities in exactly  the  same               condition  as  they  formerly  stood  in   his               hands.’ " Subject  to certain variations, which are not  material  for the  matter  under discussion, s. 141 of  the  Contract  Act incorporates  the  rule  of  English  law  relating  to  the

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discharge from liability of a surety when the creditor parts with or loses the security held by him. The  Forest Officers of the State of Madhya  Pradesh  parted with the goods before receiving payment of the amount due by the  contractor Jagatram.  Thereby the charge in  favour  of the State was seriously impaired and the statutory power  to sell  the goods for non-payment of the amount remaining  due became,  for  all practical  purposes,  ineffective.   Again under  the terms of the contract the Forest authorities  had the  right to prevent removal of goods sold until the  price was paid: that right was also lost.  The right conferred  by s. 83 of the Forest Act and under the terms of the  contract to  prevent removal and right to sell goods for  non-payment of  the  price,  coupled  with  the  charge  on  the   goods constituted the security of the State, and that security was lost  because the Forest Officers permitted removal  of  the goods by the contractor. (1)  L.R. (1872) 7 Q.B. 756. 274 It  was  urged  however on behalf of  the  State  that  mere inaction  on  the part of the forest  authorities  does  not amount  to parting with the security.  But the terms of  the statute  do  not apply only to cases in  which  by  positive action  on the part of the creditor the security  is  parted with.   Even  if the security is lost by the  creditor,  the surety is discharged.  In any event the facts in the present case make it abundantly clear that it was on account of  the conduct  of  the forest authorities that  the  security  was lost,.  The goods sold were under the control of the  Forest Officers,  when  they were in the coupe and even  when  they were  in  the depot of the contractor.  The goods  could  be removed on the production of a pass from the coupe, and even after the goods were removed, unless they were examined  and checked they were not at the disposal of the contractor.  It is  not  pleaded by the State that the trees sold  were  not checked  and  examined  at  the  depot  of  the  contractor. Knowing  that the goods were removed without payment of  the instalments, if the Forest authorities checked and  examined the  goods  and took no action for recovery  of  the  amount payable,  and  did  not  enforce the  charge,  it  would  be difficult to say that there was mere inaction on the part of the forest authorities. We therefore agree with the High Court that the surety Kalu- ram  stood  discharged  from liability  to  pay  the  amount undertaken by him under the terms of the surety bond because the  forest  authorities of the State had  parted  with  the security which they possessed for recovery of the amount due from the contractor. The appeal fails and is dismissed with costs. G.C.                                   Appeal dismissed. 275