Raja Bahadur Dhanraj Girji Vs. Raja P.
Parthasarathy Rayanimvaru & Ors  INSC 250 (4 September 1962)
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.
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 there under and included matters extraneous to the judicial
proceedings in which the surety bond was executed.
Held, that the sureties stood discharged by
the compromise decree.
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 manner 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 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
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
In determining the question as to whether
liability under such a 'surety bond is discharged by reason of the fact that 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 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.