M. Murugappa Mudaliar v. Muniswami Mudaly

The suit was brought on a promissory note executed by a deceased agent of the 1st defendant to the 3rd defendant. The latter endorsed it to the plaintiff. The 2nd defendant executed an agreement, Exhibit B, at the time of the endorsement of the note undertaking to be liable for the amount of the note. The suit was against all the three defendants on the note. In course of the suit plaintiff withdrew his claim against the 1st defendant. Thereupon a decree was passed against the other two defendants.

Mr. Krishnasawmi Aiyangar in his learned argument contended before us that as the principal debtor, the 1st defendant, has been exonerated, the other two defendants are also discharged from liability and that there should be no decree against them. He relied upon the language of Sect. 134 of the Indian Contract Act. We may say at once that we do not agree with the Lower Appellate Court that Sects. 134 and 139 of the Indian Contract Act do not apply to negotiable instruments. The general law regulating the relationship between principal and surety is contained in the Indian Contract Act, and would apply to all cases of contracts. Therefore we do not base our decision upon the view taken by the District Judge that the Indian Contract Act has no application to suits of this description. The real question is whether the release of the 1st defendant during the trial of the suit destroyed the right of the plaintiff to proceed against the defendants 2 and 3. There is no doubt that under the English Law the discharge of the principal debtor where there is a reservation to proceed against the sureties would not affect the right of suit against the sureties. That has been laid down by that eminent Judge Willis, J., in Bateson v. Gosling. He says after examining the earlier authorities “it must, therefore, now be taken to be settled that, where the principal has entered into a deed of arrangement containing a release subject to the reservation of the creditor's right of recourse against the surety the latter has no right to raise the objection. If, however, there is an absolute and unconditional release the remedy against the surety is gone, because the debt is extinguised. The reason that the surety cannot in such a case be sued is that it would be a fraud upon the rest of the creditors as is pointed out in Lewis v. Jones, where there is a note of Mr. Cresswell which has sometimes been erroneously attributed to Holroyd, J., in which the matter is very fully considered.” Two points have been raised with reference to this judgment. One is that there is no reservation in this case. We are unable to agree with the learned Vakil on this point, because where a suit is brought against three persons and it is withdrawn against one, there cannot be a more express reservation of the plaintiff's intention to prosecute his remedies against the other two. Therefore we must hold that there has been a reservation of the right to proceed against the two sureties. The other point is whether this principle of English law can be introduced into Sect. 134 of the Contract Act. The learned Vakil contended that there is nothing in the language of the Sect. 134 which would warrant the introduction of the principle of reservation enunciated in Bateson v. Gosling, The principle of applying English law to the provisions of the Indian Contract Act was considered by Sir Arnold White, C.J, in Natesa Aiyar v. Appavu Padayachi. The learned Chief Justice there says with reference to the question whether a deposit can be recovered back when the contract has fallen through. “I agree that the question must be determined with reference to the provisions of the Indian Contract Act and that if they are in conflict with the English Law as laid down in the English authorities we must follow the statute. I think, however, it may safely be premised that in a question such as this it was the intention of the legislature to depart from what was understood to be the English Law at the time the Indian Contract Act was passed.” Miller, J., uses similar language. Wallis, J., as he was then was, who differed from Sankaran Nair, J., is equally clear upon this question. Therefore in considering the Indian Contract Act we have to see what was the state of the law when the section was enacted. If we ascertain the state of the English Law and if we find that the Indian law does not in terms depart from the rule of the English Law according to the principle laid down by the learned Chief Justice, we would be justified in saying that the Indian law carries out the rule as enunciated by the eminent Judges in England. Applying that principle we must hold that the law which Wallis, J., regarded as well settled in England, just before the passing of the Contract Act must be taken to have been in the mind of the legislature in enacting Sect. 134 of the Indian Contract Act. Therefore we have come to the conclusion that there has been a reservation of right as against the sureties, and there is nothing in the terms of Sect. 134 of the Indian Contract Act, which is inconsistent with the rule of law as understood in England, we must hold that the remedy against the sureties is not affected. Moreover, on principle it seems to us that the same conclusion is deducible as was pointed out by Kelly, C.B, in Cragee v. Jones. The rule why a surety is held to be discharged from liability where there is a release of a principal debtor's is “if the creditor without the consent of the surety of his own act destroy the debt or derogate from the power which the law confers upon the surety to recover it against the debtor in case he shall have paid it to the creditor the surety is discharged”. Consequently so long as there is the possibility of the surety having a recourse to the principal debtor for payment or for contribution, the debt itself is not extinguished and the right to proceed against the surety is not affected. That must be taken to have been the principle which underlies the decision in Nathabhai v. Ranchhodlal Ramji, and Shaik Alli v. Mahomed, although no doubt in those cases the creditor gave up his remedy against the principal debtor because he could not be served.

Mr. Krishnaswami Aiyangar drew our attention to O. 9, R. 5, which gave a right of a suit against a person exonerated if the plaintiff is able to bring a suit within the time allowed by law. But that could not affect the principle which underlies the decision in the two Bombay cases. The mere giving up of a right in court against a principal debtor would not affect the right of the plaintiff to obtain a decree against persons against whom he reserved the right. Further the principle of English law is recognised in Sect. 39 of the Negotiable Instruments Act. It follows a fortiori that principle which reserves to the plaintiff the right to proceed against the surety while giving up his right against the principal debtor is applicable in the present case.

We do not agree with the Vakil of the respondent that this is a case of the Court exonerating the defendant and not the party himself exonerating him. The Court is not in any way interested in refusing to give a decree against one party and in insisting upon the plaintiff obtaining a decree against the other party. We must take it that there was an exoneration by the plaintiff himself of the principal debtor. We are of opinion that the decision of the Lower Court is right and we must dismiss the appeal. We make no order as to costs of the 1st defendant. As regards the other respondents there will be one set of costs.

S. S.Appeal dismissed.