Madras High Court
State Bank Of India vs Dharam Kumar And Anr. on 15 June, 1998
Equivalent citations: [2000]102COMPCAS166(MAD), (1998)IIMLJ774
Author: M. Karpagavinayagam
Bench: M. Karpagavinayagam
JUDGMENT M. Karpagavinayagam, J.
1. The appellant, the State Bank of India, Ambattur Industrial Estate, Madras, being the plaintiff, on being aggrieved over the judgment and decree passed by the lower appellate court setting aside the judgment and decree of the trial court in its favour, "has presented this second appeal.
2. The plaintiff filed a suit for recovery of a sum of Rs. 15,981.82 with interest at the rate of 12 per cent. per annum against the defendants.
3. The case of the plaintiff is as follows :
The plaintiff in the course of its business under the scheme of financial assistance to small business units, granted a loan of Rs. 8,000 to the first defendant on his request for carrying on business in rewinding of motors. As security for repayment of the loan, the first defendant executed a general agreement and an ancillary agreement dated August 17, 1978, hypothecating all the movable assets and agreeing for the prompt payment of the loan. The second defendant executed an agreement of guarantee dated August 17, 1978, for the due repayment of the loan granted to the first defendant. Since both the defendants failed to repay the loan in time in spite of the repeated demands and receipt of legal notice, the plaintiff-bank, the appellant herein filed the above suit.
The second defendant, the guarantor of the first respondent herein, filed a written statement, in which the averments are as follows : On August 17, 1978, when he was in his office, the first defendant came and brought certain printed forms and a typed agreement and N. J. stamp and requested him to sign as a guarantor, since he applied for a loan from the bank up to a limit of Rs. 8,000. Believing the words of the first defendant, the second defendant signed the blank forms to stand as a guarantor to the limit of Rs. 8,000. Since as per the suit, the suit sum exceeded the limit of Rs. 8,000, it is not binding on him and as such, there is a violation of the agreement. The confirmation of the balance was not intimated to him. Hence, the suit shall be dismissed with costs.
4. On framing necessary issues, the trial court examined PWs. 1 and 2 on behalf of the plaintiff and marked exhibits A-1 to A-11 and on the side of the defendants, the second defendant examined himself as DW-1.
5. On an elaborate consideration of the materials placed before it, the trial court decreed the suit as prayed for with costs.
Challenging the said decree, the second defendant alone filed an appeal before the learned District Judge, Chengalpattu. On hearing both the parties in the said appeal, the lower appellate court would hold that the second defendant is not liable to pay any amount except Rs. 8,000, since there is a variation between exhibit A-4 agreement and exhibit A-7 statement of account and thus, the second defendant is not liable to pay any amount exceeding the limit of Rs. 8,000 as mentioned in exhibit A-4 agreement. With this observation, the appeal was allowed modifying the decree and judgment of the trial court, to the effect that the liability of the second defendant is restricted to the extent of Rs. 8,000 only with pro-costs thereon. Hence, the present second appeal by the plaintiff, the appellant herein.
6. While this second appeal was admitted, the substantial question of law was formulated by this court in the following words :
Whether, in view of Clause 6 of the agreement of guarantee permitting the bank to enlarge or vary the credit to the borrower without the consent of the guarantor, Section 133 of the Contract Act will be a bar to the plaintiff-bank to claim any amount with interest over and above the amount mentioned in the agreement of guarantee and is not the guarantor estopped from contending that Section 133 is a bar in view of Clause 6 of the agreement entered into by him ?
7. While elaborating the above substantial question of law, Mr. Sukumar, counsel for the appellant, would vigorously contend that Section 133 of the Contract Act is not a bar in view of the agreement between the parties by which the second defendant agreed to waive his right under Section 133 of the Act. If the bank has a right to enlarge the credit without his further consent, there is no question of variation of the agreement, since the agreement itself contemplates payment of additional facility.
8. In short, the contention of counsel for the appellant is that the clauses mentioned in exhibit A-4 agreement dated August 17, 1978, would take away the rights as agreed by the second defendant as contemplated under Section 133 of the Act and that the clause cannot be said to be against public policy or against public interest and as such, the lower appellate court is wrong in concluding that the suit claim cannot exceed Rs. 8,000 for which the guarantor stood surety.
9. None appeared for the first defendant, the second respondent herein. However, Mr. S. Raghavan, counsel appearing for the first respondent/ second defendant, would strenuously contend as follows :
The judgment of the lower appellate court is correct and unassailable. It is held in Muthiah Mudaliar v. Somasundaram. Mudaliar [19741 TLNJ 282, as pointed out by the lower appellate court, even if there is the slightest variation in the terms of a guarantee, the responsibility of the guarantor would be discharged. In the instant case, there is a variation of contract between exhibit A-4 agreement and exhibit A-7 statement of account. Of course, the clauses of exhibit A-4 agreement provide that notwithstanding anything contained in Section 133 of the Contract Act or in any other provision of law, the guarantor(s) would not claim to be discharged to any extent because of the bank varying any of the terms and conditions. These clauses cannot have any statutory force, as these being the provisions contained in the agreement cannot override the statutory provisions of Section 133 of the Contract Act. Therefore, the second defendant, the first respondent herein is not liable to pay any amount except Rs. 8,000 and not the suit sum which exceeds the limit.
Counsel for both the parties would cite several authorities, which I shall deal with later.
10. Even though, initially the second defendant, the guarantor, came forward with a plea that the first defendant obtained his signature in his office in blank forms, both the courts below, on the basis of the evidence of the field officer of the bank, held that the second defendant signed in the filled up agreement exhibit A-4. This aspect of the finding, admittedly, has not been challenged before this court. The only contention urged by counsel for the second defendant, the first respondent herein is that he is not liable to pay any amount exceeding the limit of Rs. 8,000 as mentioned in exhibit A-4 agreement, as there is a variation, by virtue of section 133 of the Contract Act.
11. Therefore, the point for determination in this case is, whether the provisions of Section 133 of the Indian Contract Act are subject to a contract to the contrary between the parties to the contract.
12. According to the plaintiff, it is entitled to recover the suit sum inclusive of interest at the rate of 12 per cent. per annum from the first defendant as the borrower and the second defendant as the guarantor and both of them are jointly and severally liable for the repayment of the suit sum. Admittedly, the suit notice was sent to both the defendants. Despite receipt of the notice claiming the suit amount, the second defendant did not choose to reply.
13. Section 133 of the Indian Contract Act provides thus :
"Discharge of surety by variance in terms of contract.--Any variance made without the surety's consent in the terms of the contract between the principal (debtor) and the creditor, discharges the surety as to transactions subsequent to the variance."
The principle of the law of the discharge of sureties by virtue of this section, is that the surety cannot be held bound to do something for which he has not contracted or consented.
14. Let us now look at the relevant clauses in the agreement exhibit A-4 entered into between the plaintiff and the second defendant :
"(6) The bank shall be at liberty and without the consent or knowledge of the guarantor(s) at any time or from time to time to grant to the borrower or any person liable for him any time or indulgence and to determine enlarge or vary the bank's credit to take or not to take and if taken to vary exchange or take other security or release or part with any securities held or to be held by the bank for or on account of the said cash credit account or any part thereof or to renew any bill, note or other negotiable instrument and to compound or make any other arrangement with or any person so liable with or for the borrower/without releasing or discharging and/or in any manner affecting the guarantor(s) liability under the guarantee.
(10) That notwithstanding anything contained in Section 133 of the Contract Act or in any other provision of law the guarantor(s) will not claim to be discharged to any extent because of the bank varying any of the terms and conditions, whether contained in the general agreement and supplemental general agreement if any and/or any ancillary agreement(s) or any other agreement or letter or not and on which the facility by way of the said cash credit account has been made to the borrower and for this purpose and in particular any excess drawings over and above the sanctioned limit of the said cash credit account allowed by the bank at or without the specific request of the borrower shall not discharge the guarantor(s) from his/her/their liability."
This agreement exhibit A-4 is dated August 17, 1978. On this date only the loan was granted by the plaintiff to the first defendant. By virtue of the wordings contained in Clause (10), the second defendant has waived his right under Section 133 of the Act from claiming to be discharged because of the bank varying any other terms and conditions contained in the original agreement. It is also to be noticed that Clause (6) would make it clear that the bank shall be at liberty and even without the consent of the guarantor(s) to vary the bank's credit at any time to grant to the borrower and to enlarge or vary the bank's credit. Therefore, the second defendant had expressly agreed to vary the terms of the original contract.
15. The question that arises for consideration in this context is, whether, in law, it is permissible to enter into a contract giving up the right available to the surety under Section 133 of the Act.
16. As stated earlier, Section 133 of the Act itself would indicate that any variance would entitle the surety to claim for discharge provided there is no consent in the terms of the contract by the surety regarding the variation. However, it would be better to go deep into the matter, in view of the contingency by which it has been urged that the consent in the agreement would not be considered to be valid consent as contemplated under Section 133 of the Act.
17. Chapter VIII of the Indian Contract Act deals with the indemnity and guarantee consisting of Sections 124 to 147. Among these sections, Section 128 deals with the surety's liability. Sections 132 to 136 deal with the liability of the sureties and discharge of their liabilities. Section 139 deals with the discharge of surety by creditor's act or omission impairing surety's eventual remedy. Sections 140 and 141 deal with the rights of surety on payment or performance and surety's right to benefit of creditor's securities, respectively. Sections 142 to 144 deal with the guarantee.
18. Thus, the reading of the relevant sections in Chapter VIII of the Act would reveal that all these provisions contained in the said Chapter are closely linked together and one is connected with another. In other words, all these provisions relating to the guarantor and the principal debtor have to be read together and not in isolation.
19. Section 128 of the Act specifically provides that the liability of the guarantor is coextensive with that of the principal debtor, unless it is otherwise provided by the contract. In other provisions of Chapter VIII relating to the rights of the guarantors, the words "unless it is otherwise provided by the contract" as contained in Section 128 are not found. Therefore, the conjoint reading of Sections 153 and 128 of the Act would make it clear that the liability of the guarantor is subject to the terms of the contract as may be arrived at between the parties. In other words, it is manifestly clear that these sections themselves would allow a guarantor to give up his right available to him under Section 133 and other sections of the Act.
20. In the case of a contract of guarantee, the consideration is advancing of loan to a principal debtor. The object of the agreement is to secure the debt of the creditor. Therefore, neither the consideration nor the object of the agreement is unlawful. Both are also not forbidden by law.
21. It is the settled legal position of law that a legal right can be given up provided such giving up of a legal right under any contract is not forbidden by law. As per Section 23 of the Act, if the consideration or object of an agreement is said to be unlawful, then the said agreement is void.
22. In the instant case, it is not the case of the second defendant that the said agreement is hit by Section 23 of the Act. Section 133 of the Act as referred to above, makes it clear that any variance made in the contract between the principal debtor and the creditor discharges the guarantor as to transactions subsequent to the variance, only when there is no consent from him.
23. This consent of the guarantor can be obtained at the time when the agreement is made between the principal debtor and the creditor to which the guarantor gives the guarantee, for making any variance or alteration in the agreement to be made or not to claim any right or benefit under Chapter VIII of the Act. In other words, in the guarantee bond itself, the guarantor can agree to waive his rights available to him under the various provisions contained in Chapter VIII of the Act.
24. The rights conferred on the guarantor under Chapter VIII are not inalienable rights, nor have those rights anything to do with public policy as such. It is not the case of the second defendant that the aforesaid consent in the guarantee bond had been obtained by the creditor from him either fraudulently or that the said recital giving the consent can be considered to be immoral or opposed to public policy.
25. Counsel for the first respondent has cited three authorities in support of his contention. The first decision is Muthiah Mudaliar v. Somasundaram Mudaliar [1974] TLNJ 282. In fact, this decision was referred to in the judgment of the lower appellate court to hold in favour of the second defendant. In my view, the said decision will not come to the rescue of the second defendant.
26. In the said decision, it is held as follows :
"It is also well established that the slightest variation in the terms of a guarantee unless agreed to would discharge eo instanti the responsibility of the guarantor from being liable under the engagement."
This observation would clearly reveal that any slightest variation would discharge the guarantor unless agreed to for the same. In the instant case, as it is stated earlier, the consent for variation was specifically given in Clauses (6) and (10) of the agreement exhibit A-4.
27. The second decision is Union of India, Ministry of Food and Agriculture (Department of Food) v. Pearl Hosiery Mills, . The relevant observation is as follows (page 285):
"Moreover, I am of the opinion that the provisions of Section 133 of the Indian Contract Act are not subject to a contract to the contrary between the parties to the contract. This section is in unqualified terms. It was not necessary to put in the words 'notwithstanding any contract to the contrary' in this section, because wherever the Legislature wanted that the terms of the contract between the parties should take precedence over the provisions of any section, the words 'in the absence of any contract to the contrary', or 'in the absence of any special contract have been inserted in that particular section as has been done in Sections 152 and 163 of this Act."
28. When a similar question has been considered by the Division Bench of the Karnataka in the decision in T. Raju Setty v. Bank of Baroda, , it considered the above Punjab judgment in Union of India, Ministry of Food and Agriculture (Department of Food) v. Pearl Hosiery Mills, and observed that the said judgment did not deal with a case in which the point for consideration has been raised in this case. The relevant observation is as follows (page 189) :
"It appears that the word 'not' found in the third sentence in the above extracted portion is a clerical or printing mistake as the word 'not' does not fit in with the view expressed therein. Pearl Hosiery Mills' case, , was a case in which without the consent of the surety variations were made in the terms of the original contract. Therefore, in view of Section 133 of the Act it was held that surety stood discharged (see para. 34 of the judgment). Therefore, it was not a case in which the point in question was considered."
No doubt it is true that the single judge of the Punjab High Court observed that the words "in the absence of any special contract" as contained in Sections 152 and 163 of the Contract Act are not available in Section 133 of the Indian Contract Act. In my view, it is not necessary for the Legislature to provide the words "in the absence of any special contract" in Section 133 of the Act because the section itself speaks of the consent of the surety regarding the variance in terms of the contract. It is specifically mentioned in Section 133 as "without the surety's consent". Therefore, the said judgment would not help in any way.
29. The third decision is Indian Bank v. S. Krishnaswamy, . This decision also would not be of any use, since the facts of the said case are entirely different from the case on hand. That is a case where the bank entered into a fresh arrangement with the principal debtor by which all outstanding accounts were adjusted and converted into a term loan for Rs. 35,00,000. To this arrangement, the guarantors were not parties and they did not have the knowledge about the same. Therefore, the sureties were discharged from their liabilities. It is also observed in the said case that unless the sureties had expressly bound themselves for variation, they are liable to be discharged. As indicated earlier, in the instant case, it is consented by the guarantor for variation in the relevant clauses of exhibit A-4 agreement. Therefore, none of the decisions cited by counsel for the first respondent would come to his rescue.
30. On the other hand, some of the decisions rendered by the Division Bench of this court would clearly give the answer for the question posed in this case.
31. The first decision is A.R. Krishnaswami Aiyar v. Travancore National Bank [1940] 10 Comp Cas 162 ; AIR 1940 Mad 437. The relevant observation is this (headnote of AIR) :
"Although a composition bond between the principal debtor and the creditor extinguishes the debt to the principal debtor it does not absolve the sureties from their liability under surety bond, where the surety had expressly contracted to remain liable notwithstanding the discharge of the principal, and therefore, the discharge of the principal cannot be said to be implied discharge of the surety."
32. In the recent judgment in O. S. Appeal No. 276 of 1997, dated January 29, 1998, the Division Bench of this court in which I am one of the judges, would hold as follows :
"As can be seen from Clause 9 extracted above, defendant No. 2 specifically agreed that he shall not be entitled to any of the rights conferred on sureties by Sections 133, 134, 135, 139 and 141 of the Contract Act. It is not disputed that this letter of guarantee was executed by defendant No. 2. In the light of this specific clause contained in the letter of guarantee, excluding the application of Section 135 of the Contract Act, defendant No. 2 cannot now turn round and say that he has got the right under Section 135 of the Contract Act."
A similar view has been expressed in Citibank (N.A.) v. Juggilal Kamlapat Jute Mills Co. Ltd., , R. Lilavati v. Bank of Baroda, and T. Raju Setty v. Bank of Baroda .
33. Thus, it is always open to the guarantor to give up his rights available under Chapter VIII of the Act by giving consent as contemplated under Section 133 of the Act, even at the time of executing the surety bond, provided the contract is not hit by Section 23 of the Act.
34. In view of what is stated above, my conclusion is this :
"The right conferred on the guarantor under Section 133 of the Act could be waived by specific agreement in the deed of guarantee. Such an agreement would amount to consent within the meaning of the abovesaid section of the Act."
In the light of the above decisions and conclusion, I am of the view that the decree and judgment as modified by the lower appellate court have to be set aside and the decree and judgment passed by the trial court have to be restored and confirmed.
35. In the result, the second appeal is allowed. The decree and judgment of the lower appellate court are set aside and the decree and judgment of the trial court are restored and confirmed. There is an order of costs throughout.