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R. Lilavati v. Bank Of Baroda
Factual and Procedural Background
The plaintiff bank granted credit facilities to defendants 1 to 3 in the name of their firm, defendant-1. These facilities included a demand loan of Rs. 12,000 and a cash credit hypothecation facility up to Rs. 25,000. After accounting for payments made, the plaintiff filed suit for Rs. 8,644.08. Defendant-4 stood surety for both loans. Defendants 1 to 3 did not contest the suit, while defendant-4 resisted, contending that her liability as surety was discharged because the plaintiff allowed the hypothecated properties to be lost and that she was not bound by acknowledgments signed only by defendants 1 to 3. The trial court rejected these contentions and decreed the suit against all defendants including defendant-4. Defendant-4 filed this revision against that judgment and decree.
Legal Issues Presented
- Whether the liability of defendant-4 as surety stood discharged due to loss of hypothecated properties allegedly allowed by the plaintiff creditor.
- Whether defendant-4 is bound by acknowledgments given by defendants 1 to 3 when she did not personally sign them.
- Whether the parties can contract out of the protections afforded to sureties under Section 141 of the Indian Contract Act.
- Whether the suit is barred by limitation as argued by defendant-4.
Arguments of the Parties
Defendant-4's Arguments
- Liability as surety discharged because the plaintiff creditor allowed the hypothecated properties to be lost.
- The acknowledgment given by defendants 1 to 3 to keep debts alive does not bind her as she did not sign it.
- The parties cannot contract out of the protections under Section 141 of the Indian Contract Act.
- The suit is barred by limitation as she was not party to the acknowledgments.
Plaintiff's Arguments (as presented by the Court)
- There is no evidence that the plaintiff creditor caused or consented to the loss of hypothecated security; mere loss does not discharge surety under Section 141.
- Defendant-4 expressly contracted out of the rights under Section 141 by agreeing in the surety bond to be treated as a principal debtor and waive protections available to sureties.
- Defendants 1 to 3 were constituted as agents of defendant-4 for giving consent and acknowledgments, binding her legally.
- The surety bond is a continuing guarantee, negating the limitation defense.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| The Karnataka Bank Ltd. v. Gajanan Shankararao Kulkarni, AIR 1977 Karnataka 14 | Clarification that passive negligence or inactivity by creditor in protecting collateral does not discharge surety under Section 141 unless creditor actively causes loss. | The Court relied on this precedent to reject defendant-4's contention that loss of hypothecated property discharged her liability. |
| Mahendrakumar Chandulal Ahmedabad v. Central Bank of India, AIR 1984 NOC 113 Gujarat | Interpretation of Section 151 of the Contract Act regarding minimum liability of bailee which cannot be contracted out. | The Court distinguished this case as involving a different chapter and held it inapplicable to the present facts concerning Section 141 and contractual waiver. |
| Dorothy Valentine Burnard v. William Douglas Lysnar | Principle that an agent's acts bind the principal in contractual matters. | The Court applied this principle to hold that defendant-4 is bound by acknowledgments given by defendants 1 to 3 as her agents. |
| Margaret Lalita Samuel Mrs v. Indo Commercial Bank Ltd., 1979 2 SCC 396 | Recognition of continuing guarantee negating limitation defense. | The Court followed this Supreme Court precedent to hold that limitation does not bar the suit as the surety bond is a continuing guarantee. |
Court's Reasoning and Analysis
The Court analyzed the liability of defendant-4 as surety in light of the Indian Contract Act provisions, particularly Sections 128 and 141. It observed that Section 141 entitles a surety to the benefit of securities held by the creditor but discharges the surety only if the creditor loses or parts with such security without consent. The Court found no evidence that the plaintiff creditor caused or consented to the loss of hypothecated property; mere passive loss does not discharge the surety. The Court relied on a prior Karnataka High Court Division Bench decision to reinforce this principle.
The Court further noted that Section 128 allows parties to contract out of certain liabilities and rights, and defendant-4 had expressly agreed in the surety bond to waive the protections under Section 141, agreeing to be treated as a principal debtor jointly with the principal. This contractual waiver was held valid and enforceable.
Regarding limitation and acknowledgments, the Court pointed out that defendant-4 empowered defendants 1 to 3 as her agents to give consent on her behalf. Hence, acknowledgments by defendants 1 to 3 bind her legally. Additionally, the surety bond was a continuing guarantee, which, under Supreme Court precedent, negates the limitation defense.
In sum, the Court found no merit in defendant-4's contentions and upheld the trial court's decree.
Holding and Implications
The revision filed by defendant-4 is dismissed.
The Court's decision confirms that a surety who contracts out of statutory protections under the Indian Contract Act cannot claim discharge on grounds of loss of security if the creditor was not responsible for such loss. It also affirms that acknowledgments by principal debtors bind a surety if the surety has empowered them as agents. The ruling upholds the enforceability of continuing guarantees against sureties and rejects limitation defenses in such contexts. No new precedent was established beyond the application of existing principles to the facts of this case.
Kulkarni, J.:—
This is a defendant No. 4's revision against the judgment and decree dated 15-7-1983 passed by the I Additional Small Causes Judge, Bangalore City, in S.C No. 137/82 decreeing the suit against all the defendants including defendant-4.
2. The plaintiff granted credit facility to defendants-1 to 3 in the name of their firm - defendant-1. The first transaction was the demand loan of Rs. 12,000/- and the other was cash credit hypothecation facility to the limit of Rs. 25,000/-. Ultimately after giving deduction to the amounts paid, the suit was filed by the plaintiff Bank for Rs. 8,644-08. Defendant-4 had stood surety for both the loans.
3. Defendants-1 to 3 did not contest the suit. It is only defendant-4 that resisted the suit. She raised a contention that as the plaintiff creditor allowed the hypothecated properties to be lost, her liability as a surety stood discharged. The second contention urged is that the acknowledgment given by defendants-1 to 3 in order to keep their debts alive does not bind her as she has not signed the acknowledgment.
4. The trial Court negatived all the contentions of defendant-4 and decreed the suit.
5. The material portion of condition No. 4 found in the surety bond reads as:—
“Moreover, though as between the principal debtor and me/us I am/we are sureties only. I/we agree that as between yourselves and me/us, I am/we are principal debtor (s) jointly with him and accordingly I/we shall not be entitled to any of the rights conferred on sureties by Sections 133, 134, 135, 139 and 141 of the Indian Contract Act.”
6. The learned Counsel Shri Raghavan submitted that there was nothing in Section 141 of the Contract Act to show that the parties could absolve themselves from the operation of Section 141. Section 141 of the Contract Act reads as:—
“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.”
There is nothing to show that the plaintiff creditor had any part to play in the loss of the hypothecated security as such. This Court in a Division Bench decision reported in The Karnataka Bank Ltd. v. Gajanan Shankararao Kulkarni . AIR 1977 Karnataka 14. has held as:—
“The sureties could not appeal to the provisions of Section 141 which in the facts and circumstances of the case was not attracted. A mere passive inactivity or passive negligence on the part of the creditor by failing to realise the debt from the collateral security is not sufficient in itself, to discharge the surety for the reason that the surety can himself avoid consequences of such passivity by himself paying the debt and becoming subrogated to the rights of the creditor. In the absence of a contract to the contrary, the creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive. Thus tested, the inaction on the part of the creditor-Bank would not, of itself, mitigate sureties liability.”
Therefore, in view of this dictum laid down and also in view of the fact that the evidence does not disclose that the creditor had anything to do with the loss of the hypothecated properties, the argument of the learned Counsel Shri Raghavan that the liability of the surety defendant-4 stood discharged on account of this, merits to be rejected.
7. The learned Counsel Shri Raghavan then submitted that there was nothing in Section 141 of the Contract Act to indicate that the parties could contract out of the liability envisaged by Section 141. But Section 128 of the Contract Act reads as:—
“The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.”
The Contract Act has created rights and liabilities. But the parties have got a right to contract out of the rights and liabilities mentioned in the contract. That is envisaged by Section 128 of the Indian Contract Act. Therefore merely because we do not find words ‘notwithstanding anything contained to the contrary’ etc., in Section 141, it does not follow that the parties cannot contract out of the rights and liabilities laid down in Section 141 of the Contract Act. In this case defendant-4 has agreed that she will not claim the benefit given to her under Section 141 of the Indian Contract Act. She herself is a party to that surety bond. Therefore it is not open to her now to contend that the said clause is either bad at law or is not enforceable.
8. The Learned Counsel Shri Raghavan relied on Mahendrakumar Chandulal Ahmedabad v. Central Bank of India, Ahmedabad . AIR 1984 NOC 113 Gujarat.. It interprets Section 151 of the Contract Act. What the Gujarat High Court held was that the bailee cannot contract out of the minimum liability imposed under Section 151. Section 151 is to be found in Chapter IX. While Section 141 is to be found in Chapter VIII. The liabilities of the rights created under Chapter VIII are entirely different from the rights and liabilities in Chapter X of the Contract Act. There is nothing in Chapter IX to indicate that the parties could contract out of the legal rights and liabilities. Therefore the said Gujarat ruling has no application to the facts of the present case. Therefore in view of the said undertaking given by the surety it is not open to her to contend that the said contract between her and the plaintiff is invalid and unenforceable. Therefore even though the property might have been lost still she is liable in law in view of the said contract entered between her and the plaintiff Bank. The trial court also has come to the same conclusion on this point.
9. So far as the question of limitation is concerned, the Learned Counsel Shri Raghavan argued that the acknowledgment given by the judgment debtors defendants-1 to 3 would not save limitation so far as she was concerned. Normally it is so. But para 4 of the surety bond executed by her reads as:—
“And for all the purposes of this claim the Principal is empowered to give consent on my/our behalf and any consent given by the Principal shall be deemed to have been given by me/us and shall bind me/us in all respects as if the same had been expressly given by me/us in writing.”
By this she has constituted defendants-1 to 3 as her agents. Therefore when she has specifically empowered defendants-1 to 3 to give consent, any consent given by defendants-1 to 3 would be binding on her. This is also the principle laid down in Dorothy Valentine Burnard v. William Douglas Lysnar.3 Therefore though she might not have been personally a party to the acknowledgment she on account of constituting defendants-1 to 3 as her agents, will be bound in law by the acknowledgment given by defendants-1 to 3.
10. Further the surety bond says that it is a continuing guarantee. If it is a continuing guarantee, the question of limitation urged now by defendant-4 will not crop up at all. This is the view taken by the Supreme Court in Margaret Lalita Samuel Mrs v. Indo Commercial Bank Ltd. . 1979 2 SCC 396 Therefore the decree passed by the Court below does not suffer from any illegality.
11. Thus, in the result, the revision is dismissed.
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