Indemnity - Pullock and Mullah PDF

User Name: Sanjay Kataria
Date and Time: 17 August 2020 13:58:00 IST

Job Number: 123374147
Documents (23)
1. [s 124] “Contract of indemnity” defined.—

Client/Matter: -None-
2. [s 125] Rights of indemnity-holder when sued.—
3. [s 126] “Contract of guarantee,” “surety,” “principal-debtor” and “creditor”.—
4. [s 127] Consideration for guarantee.—
5. [s 128] Surety’s liability.—
6. [s 129] “Continuing guarantee”.—
7. [s 130] Revocation of continuing guarantee.—
8. [s 131] Revocation of continuing guarantee by surety’s death.—
9. [s 132] Liability of two persons, primarily liable, not affected by arrangement between them that one shall be
surety on other’s default.—
10. [s 133] Discharge of surety by variance in terms of contract.—
11. [s 134] Discharge of surety by release or discharge of principal debtor.—
12. [s 135] Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal-
debtor.—
13. [s 136] Surety not discharged when agreement made with third person to give time to principal-debtor.—
14. [s 137] Creditor’s forbearance to sue does not discharge surety.—
15. [s 138] Release of one co-surety does not discharge others.—
16. [s 139] Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.—
17. [s 140] Rights of surety on payment or performance.—
| About LexisNexis | Privacy Policy | Terms & Conditions | Copyright © 2020 LexisNexis
Sanjay Kataria
18. [s 141] Surety’s right to benefit of creditor’s securities.—
19. [s 143] Guarantee obtained by concealment, invalid.—
20. [s 144] Guarantee on contract that creditor shall not act on it until co-surety joins.—
21. [s 145] Implied promise to indemnify surety.—
22. [s 146] Co-sureties liable to contribute equally.—
23. [s 147] Liability of co-sureties bound in different sums.—
| About LexisNexis | Privacy Policy | Terms & Conditions | Copyright © 2020 LexisNexis
Sanjay Kataria
[s 124] “Contract of indemnity” defined.—
Pollock & Mulla: The Indian Contract and Specific Relief Acts, 16th ed
Pollock & Mulla: The Indian Contract and Specific Relief Acts, 16th ed > Pollock & Mulla: The Indian
Contract and Specific Relief Acts, 16th ed > Volume 2 > The Indian Contract Act, 1872 > Chapter VIII Of
Indemnity and Guarantee
The Indian Contract Act, 1872
CHAPTER VIII Of Indemnity and Guarantee
A contract by which one party promises to save the other from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person, is called a “contract of indemnity.”
Illustration
A contracts to indemnify B against the consequences of any proceedings which C may take against B in
respect of a certain sum of 200 rupees. This is a contract of indemnity.
[s 124.1] Introduction
The section defines a contract of indemnity as one under which the promisee promises to save the other
from loss caused to him by the promisor’s conduct, or from the action of a third person.
[s 124.2] Indemnity
The term “indemnity” is used in law in many senses. In the widest sense, it means recompense for any
loss or liability which a person has incurred, such duty arising from an agreement or otherwise. The
obligation to indemnify may arise out of a contract of indemnity—express or implied—or from an
obligation resulting from the relation of the parties, if there is a state of circumstances to which the law
attaches a legal or equitable duty to indemnify or by statute.1 Contracts of indemnity may also be of
Sanjay Kataria
Page 2 of 22
various types. In the wider sense, such contracts may include all contracts of insurance, and also of
guarantee. In the narrow sense, it may be limited to contracts to save the promisee from loss caused by
the claims of persons (promisor himself or third parties), and thus exclude contracts of marine insurance,
and of insurance against liability to third parties. The term “indemnity” is normally used to denote a
contract by which the promisor undertakes an original and independent obligation to indemnify, as
distinct from a collateral contract in the nature of a guarantee by which the promisor undertakes to
answer for the default of another person who is to be primarily liable to the promisee.2
A contract of indemnity as per section 124 is one under which one party promises to save the other from
loss caused to him by the conduct of the promisor or any other person. An agreement to compensate loss
due to change of law is not covered by this section since such loss is neither due to the conduct of the
promisor nor due to any third party.3 Likewise, indemnity as applicable to marine insurance is not one as
contemplated by the Contract Act, as the loss covered by the contract is not caused to the assured by the
conduct of the insurer or conduct of any other person.4
[s 124.2.1] Nature of Contract of Indemnity
A contract of indemnity and/or guarantee is an independent contract, separate from the main contract.
That the appellant corporation acted under section 29 of the State Financial Corporations Act did not mean that
the contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession
and sell the assets for recovery of dues under the main contract. “The mortgage may have come to an
end, but the contract of indemnity which was an independent contract, did not. The right to claim for the
balance arose, under the contract of indemnity, only when the sale proceeds were found to be
insufficient.”5
The courts in India have taken the position that an indemnity holder is entitled to sue the indemnifier
even before incurring any actual damage or loss and that an indemnity is not necessarily invoked after
payment.6 An indemnified party can call upon the indemnifier to make the payment once the liability has
accrued. The concept of accrual of loss or liability and the attendant obligation to indemnify can be
contractually agreed upon between the parties.
The Law Commission of India had recommended that the definition of “contract of indemnity” in this
section be expanded to include cases of loss caused by events which may or may not depend upon the
conduct of any person; and also, to provide clearly that the promise may be implied.7
[s 124.2.2] Indemnity and Absolute Obligations
Sanjay Kataria
Page 3 of 22
In an indemnity, the possibility of risk of any loss happening is only contingent as against the
indemnifier.8 It is a matter of construction whether the obligation in the contract is an absolute obligation,
or one of indemnity. Where the promisor incurs an absolute obligation, he can sue for its enforcement,
without the occurrence of actual loss.9
Where the defendants agreed in the deed of ijara10 to payoff mortgages executed by the plaintiffs, the term
was held as a contract to pay off the mortgages, and not a contract of indemnity.11 So also, where a part of
the purchase money was left with the vendee for paying the vendor’s creditors, there was no contract of
indemnity, and the vendor could sue the vendee on the latter’s default, without actual loss.12
However, where a vendor transfers a property to a vendee, with a direction to the vendee to pay off a
third person, a contract of indemnity may be implied.13 An agreement between a seller and the purchaser,
whereby the consideration for the sale was to be paid by the purchaser to a creditor of the vendor, was a
contract of indemnity;14 so was a clause in a registered sale deed that “if upon the objection of anyone any
damage or loss accrues to the vendor, the vendor will be liable”.15
[s 124.2.3] Indemnity and Damages
The right to indemnity given by the original contract should always be distinguished from the right to
damages arising from breach thereof.16 While the right of indemnity is given by the original contract, the
right to damages arises in consequence of breach of that contract. These two rights are confounded and
the reason for the confusion is that when the contract is broken, indemnity is often found to coincide
with the measure of damages.17 Thus, where a mother agreed with a film company that her minor
daughter would work for the company, failing which the mother and daughter would compensate the
company for the loss suffered by it, it was not a contract of indemnity; the money was in lieu of damages
for breach, and not indemnity.18 The question whether in general law, demurrage is based on indemnity or
is a stand-alone and independent provision was brought up in Ultratech Cement Ltd. v Sunfield Resources Pty.
Ltd.19 It was held that it cannot be considered as indemnity since “the detailed provisions as to the
calculation of lay time and of demurrage contained in clause 10 clearly show that demurrage is an
independent liability, for if the liability was only a transferred liability of demurrage arising under the
Contract of Affreightment, all these provisions would be otiose”
[s 124.2.4] Indemnity and Guarantee
While a guarantee is a tripartite contract between three persons: the principal-debtor, creditor and the
surety, a contract of indemnity is bilateral.20 Where the only contracts are between the principal-debtor
and the creditor, and the creditor and the surety, but no contract between the principal-debtor and the
surety, the case is one of indemnity.21 In a contract of indemnity, there is no privity of contract between
Sanjay Kataria
Page 4 of 22
the surety and the debtor,22 and the surety (in this context the indemnifier), cannot compel the principal-
debtor (in this context the person in respect of whose conduct the indemnity is given) to pay.23 In order
to constitute a contract of guarantee there must be a third contract, by which the principal-debtor,
expressly or impliedly, requests the surety to act as surety. Unlike a contract of guarantee, under a contract
of indemnity, there is no direct right of action on the original contract to the person whose conduct has
caused loss. The indemnity-holder can only sue in the name of the promisee.24 The rights conferred on a
surety under section 141 have not been conferred expressly on an indemnifier.25
Mere use of the words “indemnify” and “indemnified” are not sufficient to conclude that the document in
question is a contract of indemnity, if on a composite reading of the document, it is found to be a
contract of guarantee.26
Where a surety’s contract with the creditor creates not collateral, but original liability, it is a contract of
indemnity.27 Where a decree-holder transferred the decree and X executed a security bond in favour of
the transferee, undertaking to indemnify him for loss due to the acquisition of the rights under the decree,
and the judgment-debtor was not party to the arrangement, the deed was not a guarantee, but an
indemnity bond.28 Similarly, where X agreed to reimburse an employer to the extent of a stated amount
for the loss caused to the employer by the conduct of a certain bill collector, and the document was signed
by X but not the bill collector, the contract was not one of guarantee, but one of indemnity, even though
X described himself as a surety in the document.29 An agreement by the employees of a bank to see the
repayment of irregular loan granted by them within a month, or to repay the amount themselves, was a
valid contract of indemnity.30 An agreement between a broker and a sub-broker by which the latter agreed
to save the former from any loss which he would suffer by reason of his effecting transactions at the
request of the sub-broker for the constituents introduced by the sub-broker, the constituents being
unascertained at the time, and knowing nothing of the guarantee, was a contract of indemnity, and not
one of guarantee.31
In State Bank of India v Mula Sahakari Sakhar Karkhana Ltd,32 a contractor gave what was termed a
guarantee concerning a contract for installation for a paper plant. Upon disputes, the paper plant invoked
the guarantee. The bank refused payment stating that the contract was one for indemnity, and it was not
liable until the factory proved loss or damage. It was held, interpreting the document based on terms
mentioned therein, that the contract was one of indemnity, and the bank was not liable to pay, because
the bank’s promise to pay was not unconditional or unqualified, nor did the bank agree to pay without
delay or demur, and the bank had expressly promised to “indemnify the [plant] against all losses, claims,
damages, actions and costs which may be suffered by it”.
[s 124.2.5] Indemnity and Insurance
When used in the wider sense, contracts of indemnity would include contracts of insurance. Except in the
case of contracts of life insurance, personal accident and sickness or contracts of contingency insurance,
all other contracts of insurance entitle the assured for the reimbursement of actual loss that is proved to
Sanjay Kataria
Page 5 of 22
have been suffered by him, the happening of the event against which insurance cover has been taken does
not by itself entitle the assured to claim the amount stipulated in the policy. It is only upon proof of the
actual loss, that the assured can claim reimbursement of the loss to the extent it is established, not
exceeding the amount stipulated in the contract of insurance which stipulates the outer limit of the
insurance company’s liability.33
Unlike contracts of insurance, a contract of indemnity is not one uberrimae fidei.34 In the case of insurance,
there is a legal and not merely an equitable right on the part of the assured to claim under the policy as
soon as the event insured against (i.e. the liability to meet the claim of a third person) has arisen, and it is
immaterial that he has not discharged the liability to the third party.35 It is, of course, a matter of
construction whether an insurance policy is a mere insurance against loss or is a contingency policy. The
first principle of an insurance policy saying, “the company shall indemnify against...” is that the company
will pay if the insured has been found liable or has sustained loss which is proved. However, when the
policy is a mere contingency policy, the insurer has to pay on the happening of specified contingency, and
the payment represents either loss or a possibility of loss which that event entails.36 Indemnity, applicable
in Marine Insurance is not an indemnity as contemplated under the Indian Contract Act, as the loss in such
a contract is covered by the contract itself and such loss is not caused to the assured by the conduct of the
insurer nor by the conduct of any other person.37
[s 124.2.6] Implied Contract of Indemnity
A right to indemnify may arise from contract—express or implied. Where a vendor transfers a property to
a vendee, with a direction to the vendee to pay off a third person, a contract of indemnity may be
implied.38 A purchaser buying properties subject to charge impliedly undertakes to indemnify the owner
against encumbrance.39 However, in the absence of an express contract of indemnity, a supplier of news
was not liable to the editor of a newspaper for damages arising of the conviction of the editor for
publishing the matter later held defamatory.40
[s 124.3] Contract of Indemnity under this Section
The Indian Contract Act is both an amending and a consolidating Act, and it is not exhaustive of the law of
contract to be applied by the Courts in India. Sections 124 and 125 do not embody the whole law on the
subject of the contracts of indemnity.41 The subject of contracts of indemnity is much wider than what is
given in this section.42 This section deals only with one particular kind of indemnity which arises from a
promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of
any other person, but does not deal with those classes of cases where the indemnity arises from loss
caused by events or accidents which do not, or may not depend upon the conduct of the indemnifier or
any other person, or by reason of liability incurred by something done by the indemnified at the request of
the indemnifier.43
Sanjay Kataria
Page 6 of 22
[s 124.3.1] Indemnity otherwise than under contract
The right to indemnify is not confined to cases of contract. It exists where the relation between the parties
is such that, either in law or equity, there is an obligation upon one party to indemnify the other.44 A right
of indemnity may arise between a principal and agent, an employer and employee, in favour of a trustee
from the trust fund. Express provisions are found in statutes governing some relationships. For more
details see under heading: “Indemnity under Statutes”.
[s 124.3.2] Indemnity for Acts done at another’s request
The obligation to indemnify may arise out of legal or equitable duty to indemnify in a particular set of
circumstances. Whenever an act is done by one person at the request of another which act in itself is not
manifestly tortious to the knowledge of the person doing it, and such act turns out to be injurious to the
rights of a third party, the person doing it is entitled to indemnity from him who requested that it should
be done.45
The liability is stated to be based on a contract implied by law, the request imparting a promise to
indemnify the other party against the consequences to him of acting upon the request.46 The principle of
indemnity also applies where a person invested with a statutory or common law duty has been called upon
to exercise that duty on the request, direction or demand of another; or where the person seeking the
indemnity is acting in the exercise of his free discretion.47
The Law Commission of India recommended classifying this class of cases as quasi-contractual and
recommended adding a section to that effect.48
[s 124.3.3] Indemnity under Statutes
The present chapter applies in terms only to express promises; but it should be noted that a duty to
indemnify may be annexed by operation of law to various particular kinds of contract.49
Grant of probate or letters of administration by the High Court to the Administrator-General of the state
affords full indemnity to all debtors paying their debts, and all persons delivering up such assets to such
Administrator-General.50 The consignor, in a contract of carriage by air, is liable to indemnify the carrier
against all damage suffered by him, or by any other person to whom the carrier is liable, by reason of the
Sanjay Kataria
Page 7 of 22
irregularity, incorrectness or incompleteness of the particulars and statements furnished by the consignor
in the airway bill.51 In a contract of carriage by sea, the shipper shall be deemed to have guaranteed to the
carrier, at the time of shipment, the accuracy, of the marks, number, quantity and weight, as furnished by
him, and the shipper shall indemnify the carrier against all loss, damages, and expenses arising or resulting
from inaccuracies in such particulars. The right of the carrier to such indemnity does not limit his
responsibility and liability under the contract of carriage to any person other than the shipper.52 The
consignor, in a contract for multimodal transportation of goods, shall indemnify the multimodal transport
operator against loss resulting from inadequacy or inaccuracy of the particulars in the multimodal
transport document.53 The consignor, under a contract of carriage with the railways, shall indemnify the
railway administration against any damage suffered by it by reason of the incorrectness or incompleteness
of the particulars in the forwarding note.54
The directors of a company are liable to indemnify the person whose name appears in the prospectus as a
director, but has not given his consent to be a director, or to the issue of prospectus, or has withdrawn his
consent, against all damages, costs and expenses to which he may be made liable by reason of his name
having been inserted in the prospectus or of the inclusion therein of a statement purporting to be made by
him as an expert—as the case may be—or in defending himself against any suit or legal proceeding
brought against him in respect thereof.55 A company may require the applicant to give indemnity as may
be prescribed for issuing a duplicate share certificate,56 or for registering the transfer of shares where the
share certificate has been lost.57 The depository or participant shall indemnify such beneficial owner
against any loss caused to the beneficial owner of security due to the negligence of the depository or the
participant; and if the loss is due to the negligence of the participant, but has been indemnified by the
depository, the latter shall have the right to recover the same from such participant.58
Where a bill of exchange has been lost before it is overdue, the person who was the holder of it may apply
to the drawer to give him another bill of the same tenor, giving security to the drawer, if required, to
indemnify him against all persons in case the bill alleged to have been lost shall be found again.59 Any
person liable to pay, and called upon by the holder thereof to pay, the amount due on a promissory note,
bill of exchange or cheque, is before payment entitled to have it shown, and is, on payment, entitled to
have it delivered up, to him, or, if the instrument is lost or cannot be produced, to be indemnified against
any further claim thereon, against him.60
Every partner of a firm shall indemnify the firm for any loss caused to it by his fraud, in the conduct of
the business of the firm.61 Subject to a contract between the partners, the firm shall indemnify a partner in
respect of payments made and liabilities incurred by him:
(i) in the ordinary and proper conduct of the business; and

(ii) in doing such act, in an emergency, for protecting the firm from loss, as would be done by a
person of ordinary prudence, in his own case, under similar circumstances.
Sanjay Kataria
Page 8 of 22
A partner is also liable to indemnify the firm for any loss caused to it by his wilful neglect, in the conduct
of the business of the firm.62
Statutes, creating corporations, provide for the directors or specified officers being indemnified by
corporation against all losses and expenses incurred by them in, or in relation to, the discharge of their
duties, except such as are caused by his own wilful act or default.63
In the absence of a contract to the contrary, the mortgagor shall be deemed to contract with the
mortgagee that the mortgagor shall pay the rent where the mortgaged property is on lease, and to perform
the conditions of the lease, and to indemnify the mortgagee against all claims sustained by reason of the
non-payment of the said rent or the non-performance or non-observance of the said conditions.64 The
surety is entitled to an indemnity from the principal-debtor, and to recover any sum he has paid rightfully
under the guarantee.65
A person, other than a trustee who has gained an advantage from a breach of trust, must indemnify the
trustee to the extent of the amount actually received by such person under the breach; and where he is a
beneficiary; the trustee has a charge on his interest for such amount.66
The principal employer is liable to pay compensation under the Employee Compensation Act, 1923 to a
workman employed by a contractor, and is entitled to indemnified by the contractor for such amount.67
[s 124.4] Commencement and Extent of Liability
The text of the Contract Act leaves the matters relating to commencement and extent of liability
undefined, but English authorities, on this point, have been followed.68
The High Courts differ in their views regarding commencement of liability. One view is that when a
person contracts to indemnify another, the latter may compel the indemnifier to place him in a position to
meet the liability that may be cast upon him, without waiting until he (the indemnity-holder) has actually
discharged it.69 The view of the other High Courts is that the indemnifier does not become liable until the
indemnified has incurred an actual loss.70
In Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri,71 the High Court of Bombay reviewed the whole
Sanjay Kataria
Page 9 of 22
subject. It was argued that under section 125 all that the promisee is entitled to recover from the promisor
is damages, which he may be compelled to pay in any suit, in respect of any matter to which the promise
to indemnify applies. However, Chagla J. rejected the argument based on the language of section 125 but
conceded that it would have had considerable force if the whole law of indemnity were embodied in
sections 124 and 125. He observed that it was obviously not so; that the Contract Act, being both an
amending and a consolidating Act, was not exhaustive of the law of contract to be applied by the Courts
in India. He stated:
It is true that under the English Common Law no action could be maintained until actual loss had been incurred. It was very soon
realised that an indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid
the loss. If a suit was filed against him, he had to wait till a judgment was pronounced and it was only after he had satisfied the
judgment that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon
the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he
had done so. Therefore, the Court of Equity stepped in and mitigated the rigour of the Common Law. The Court of Equity held that if
his liability had become absolute then he was entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient
money which would constitute a fund for paying off the claim whenever it was made…I have already held that sections 124 and 125,
Contract Act, are not exhaustive of the law of indemnity and that the Courts here would apply the same equitable principles that the
Courts in England do. Therefore, if the indemnified had incurred a liability and that liability is absolute, he is entitled to call upon the
indemnifier to save him from that liability and pay it off.72
The Law Commission of India accepted the view that “to indemnify does not mean to reimburse in
respect of money paid, but, in accordance with its derivation, to save from loss in respect of the liability
against which the indemnity has been given”, and recommended adding a section to the Contract Act
specifying the rights of the indemnity-holder, and the remedies available to him even in cases when he is
not sued.73
This principle finds an important application in the refusal by Courts to stop the payment under
performance guarantees;74 thus, when the bank has agreed to pay on demand, the liability arises on the
moment of demand, and the bank is obliged to pay irrespective of any dispute about the adequacy of
performance, or of whether any loss or damages have occurred. Such performance guarantees have been
described as exceptionally stringent contracts of indemnity,75 under which the liability of the banks giving
such guarantees is primary. But a bank guarantee has also been described as a “credit note issued by the
bank,”76
In a contract of indemnity, the indemnity holder is not bound to sue the indemnifier. The indemnity
holder may sue only the debtor or only the indemnifier or both. In law, there is nothing that prevents an
agreement or an arrangement between an indemnity holder and the indemnifier as to the manner or
circumstance in and the conditions on which the contract of indemnity may be enforced. There is nothing
that prohibits an arrangement whereby the indemnifier pays the amount due under the contract of
indemnity subject to the condition or on an understanding between the indemnity holder and the
indemnifier that the indemnity holder will continue to pursue its remedies against the debtor and in case it
Sanjay Kataria
Page 10 of 22
is recovering the amount from the debtor it would refund the same to the indemnity holder.77
[s 124.4.1] Commencement subject to condition
Where the promise to indemnity is subject to the fulfilment of a condition, express or implied the liability
will not arise unless the condition is fulfilled. A contract for indemnity in a hire-purchase agreement
arising from a contract becoming enforceable does not become operative if an implied condition of
providing a log book is not fulfilled. The loss in such a case arises because of the plaintiff allowing dealers
to hand over the car without the log book.78
[s 124.4.2] Extent of Liability
The extent of liability under an indemnity depends on the nature and terms of the contract and each case
must be governed by its own facts and circumstances.79 A sale deed, after narrating that there were no
prior encumbrances on the property, contained a clause, “should any dispute arise in respect of the above
property and should you thereby sustain any loss, we shall make good the loss...”, the clause was a specific
covenant to indemnity, and was not confined to the encumbrances, but applied to every dispute which
caused loss to the vendee.80 Where the indemnity bond contained expressions as “may come”, “may from
time to time”, or “may in any way suffer”, and the operative part of the bond contained the expression
“and shall also and at all times indemnify and save harmless the Government from all and every loss,
injury...which has been or shall or may at any times or time hereafter”, the indemnity covered liability for
the past as well as future transactions.81 A manager of a Hindu joint family having an indemnity from the
members of the family for debts incurred for family expenses cannot claim moneys for amounts
misapplied by him.82 Where the policy of insurance against loss of cash or bank notes, provided that the
maximum amount of cash and bank notes in transit at any one time was agreed to be Rs. 40,000/-, it was
held that the clause did not restrict the carrying of cash and bank notes worth more than that amount, but
limited the liability of the insurer to that amount.83 The liability of promisors under a joint indemnity bond
is joint.84
[s 124.5] Conduct of the Promisor
It is a contract of indemnity where the promisor undertakes to save the Government from loss that may
be caused to it by his conduct in not paying the sales tax when demanded.85 An agreement by the
employees of a bank to see the repayment of irregular loan granted by them within a month, or to repay
the amount themselves, was a valid contract of indemnity.86
Sanjay Kataria
Page 11 of 22
[s 124.6] Conduct of “any other person”
In Alice Marie Vandepitte v Preferred Accident Insurance Co. of New York,87 one R was insured against third party
risks. The indemnity was also available to any person operating with the permission of R, the motorcar,
for private or pleasure purposes. The plaintiff was injured in an accident involving a car wherein she was a
passenger and which collided with the car driven by J, the daughter of R, with the permission of her
father. The decree against J not being satisfied, an action was brought against the insurance company. It
was held that R insured only himself, and not J. R had not constituted himself a trustee for J and had not
conferred on her a right to indemnity under the policy which was enforceable under the policy, and the
policy did not confer enforceable rights to anyone. “It constituted merely a promissory representation or
statement of intention on the part of the insurers not binding in law of equity”.
When under the contract of insurance, only the insured was personally indemnified in respect of third
party liability, the insurance company was not liable to indemnify the transferee of the vehicle.88
[s 124.7] Interpretation of an Indemnity Clause: Some Instances
The principles governing an exemption clause would apply to a clause of indemnity. A clause will not
indemnify a person against damage caused by his negligence, where it also indemnifies against damage
otherwise arising, unless it is clearly expressed to have such an effect.
[s 124.8] Illustrative Cases
In a sale by a father—for and as guardian for his minor son—the father guaranteed to indemnify the
purchaser if sale of son’s share was set aside. The guarantee is enforceable if the vendee is dispossessed
because it is only then that there is a failure of consideration. It can also be enforced on the basis of
indemnity.89 However, the vendee will be entitled to recover loss sustained for protecting his possession.90
If a conveyance contains a covenant by a purchaser to pay off an encumbrance on the property sold, the
failure of the purchaser to do so may give rise to two different causes of action. In the first place, the
failure of the purchaser to discharge the encumbrance within such time as is provided expressly or by
implication entitles the vendor to bring an action to have himself put in a position to meet the liability
which the purchaser has failed to discharge. In the second place, it is also open to the vendor to bring a
suit on the contract of indemnity if as a result of the failure of the purchaser to discharge the
encumbrance, the vendor incurs a loss. The court held that a contract of indemnity is implicit in this case
because of the covenant on the part of the purchaser to pay off the previous encumbrance on the
property sold.91
Sanjay Kataria
Page 12 of 22
A statement of an employee to the effect that his employer can terminate his service summarily if found
that the person has procured employment under the same employer based on a false representation
cannot be said to be a contract of indemnity.92
[s 124.9] Assignability and Heritability
A right to be indemnified against a monetary liability is assignable.93 The benefit secured by an insurance
policy forms part of the estate of the deceased policy holder.94 Where commission agents had incurred
liability on behalf of their principals, who had agreed to indemnify them and the agents having
subsequently gone into liquidation, the official liquidator sued the principals for the amount and it was
held that he could recover the said amount even though the agents having gone into liquidation had not
actually paid their vendor.95
[s 124.10] Procedure and Limitation
UnderArticle 83 of the LimitationAct a suit based upon thecontract of indemnityis required to be brought
within three years from the time when the plaintiff was actually damnified. The provisions of Article 83 are
also applicable to a case where the contract of indemnity is implied and not express.96 An indemnifier
cannot sue the debtor in his own name for want of privity of contract, unless he gets an assignment from
the promisee.97 Nor can a creditor of the indemnity holder sue the promisor of the contract of
indemnity.98
Where the defendant’s promise to indemnify is an absolute one, the suit can be filed immediately upon
the failure of performance, irrespective of actual loss.99 Where the plaintiff claimed indemnity in a sale of
property already mortgaged, the defendant having agreed to indemnify the plaintiff against all claims by
third persons, it was held that it was not necessary for actual damage to have occurred before filing of
suit;100 nor is it necessary that the plaintiff must have paid the amount under the indemnity, before
claiming under it.101 It has also been held that the cause of action for a claim against the promisor in a
contract of indemnity accrues to the promisee when the promisee is damnified; a suit before actual loss
being premature.102 It appears that the question rests on the construction of the obligation of the
promisor under the contract of indemnity. As held by the Bombay High Court, the indemnified need not
wait to enforce his indemnity till he has actually paid the loss; if the indemnified had incurred a liability
and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and
pay it off.103
Where the seller of goods, who had an indemnity from the purchaser of goods against the amount of sales
tax that may be levied, and the seller was required to pay it, the cause of action to recover the amount
arose on the date of payment and not on the date he was ordered to pay sales tax, although it was
Sanjay Kataria
Page 13 of 22
permissible for him to call upon the purchaser to pay the amount directly to the sales tax authorities.104
[s 124.11] Position under English Law and other Jurisdictions
English usage of the word “indemnity” is much wider than that in Indian law. It includes promises to save
the promisee from harm or loss caused by events or accidents which do not, or may not, depend on the
conduct of any person, or by liability arising from something done by the promisee at the request of the
promisor; in the latter case, a promise of indemnity may be inferred as a fact from the nature of the
transaction.105 An indemnity is a promise to indemnify the creditor against loss arising out of the principal
contract.106
Contracts of indemnity may be express or implied. Letters given by a buyer’s banker to a charterer of a
ship in favour of the supplier enabling unloading of cargo without production of the bill of lading were
construed as contracts of indemnity, having regard to the surrounding circumstances, the purpose and
object of the transaction and the market in which the parties were operating. These were not merely
documents indicating authentication of execution of documents by purchaser, as was contended by the
buyer’s bankers. It has been observed that courts should be slow in implying an obligation of indemnity in
a contract because such obligation is onerous, and it goes against commercial logic to so imply without
laying down properly defined parameters for the purported indemnity.
The obligation to indemnify may arise out of legal or equitable duty to indemnify in a particular set of
circumstances. This was approved in Sheffield Corpn. v Barclay, where the bankers had innocently presented
a transfer of its own stock for registration to a corporation, and transferees, for value from them, were
registered as owners. The transfer to the bank turned out to be a forgery, and the true owner, in an action
against the corporation, enforced restitution. Holding that the bankers must indemnify the corporation, it
was stated:
Where a person invested with a statutory or common law duty of a ministerial character is called upon to exercise that duty on the
request, direction or demand of another…and without any default on his own part acts in a manner which is apparently legal but is in
fact, illegal and a breach of the duty, and thereby incurs liability to third parties, there is implied by law a contract by the person making
the request to keep indemnified the person having the duty against any liability which may result from such exercise of the supposed
duty. And it makes no difference that the person making the request is not aware of the invalidity in his title to make the request.
The principle of law that a person doing an act at the request of another was entitled to an indemnity if
there was nothing in the act which was apparently illegal and was done without default, but it injured a
third party nevertheless, was a broad principle not limited to a request not made by a party for his own
Sanjay Kataria
Page 14 of 22
benefit. Default on the part of the person doing the act negating the application of the principle only
arose in the event of dishonesty, lack of good faith or failure to comply with the request, and did not
extend to oversight as the bank may have committed. Accordingly, the principle applied to the bank if in
acting on the request of the stockbroker who in the circumstances had promised to indemnify the bank by
acting on the request had accepted that promise which, therefore, became contractual indemnity.107
On the sale of shares in company, the transferee is bound to indemnify the transferor “against future calls,
whether made by the company, or by a liquidator. The liability of the transferor in the event of winding
up is exactly analogous to the case of lessee and assignee, the former of whom is liable for breaches of
covenant committed by the latter, but, being only secondarily liable, has his remedy over, against the
person primarily liable, the assignee”.108 Thus,
[w]here a party is liable at law by immediate privity of contract, which contract also confers a benefit, and the obligation of the contract
is common to him and to the defendant, but the whole benefit of the contract is taken by the defendant, the former is entitled to be
indemnified by the latter in respect of the performance of the obligation.109
Indemnity for defending criminal proceedings is also recognized in English law. In Coulson v News Group
Newspapers Ltd, an editor of a newspaper was entitled to receive from his employer legal and accounting
costs and expenses arising from his having to defend or appear in any proceedings because of being an
editor. Considering the nature of his employment, it was held this indemnity clause would cover costs of
defending libel, contempt of court and criminal proceedings. The test was: “whether the criminal
allegations arise out of how the employee went about the performance of his job”.
1 See under heading: ‘Indemnity under Statutes’.
2 Halsbury’s Laws of England, vol 49, 5th Edn, 1 April 2008, Financial
Services and Institutions, para 1255.
3 Sumitomo Heavy Industries Ltd. v ONGC, AIR

2010 SC 3400 : (2010) 11 SCC 296 .
4 State of Orissa v United India Insurance Co., Ltd.,

(1997) 5 SCC 512 : [1997] 4 Scale 320 .
5 HP Financial Corpn. v Pawna, (2015) 5

SCC 617 ; Deepak Bhandari v HP State Industrial Development Corporation Ltd.,
Sanjay Kataria
Page 15 of 22
AIR 2014 SC 961 : (2015) 5 SCC 518

.
6 Jet Airways (India) Limited v Sahara Airlines Limited,

2011 (113) Bom LR 1725 ; Khetarpal v Madhukur Pictures,
AIR 1956 Bom 106 : (1955) 57 Bom LR 1122
. See also Osman Jamal and Sons Limited v Gopal Purshattam, AIR 1928 Cal 208
: (1928) ILR Cal 262 .
7 The 13th Report of the Law Commission of India, 1958, para 103
recommending the amended section 124 to read as follows:
‘124. ‘Contract of indemnity’ defined—A contract by which one party promises, expressly or impliedly,
to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person or by an event not
depending on such conduct, is called a ‘contract of indemnity.’
8 Tarachand Ghanshyamdas v Commr. of Income Tax,

(1966) 59 ITR 378 , at 383 (Mad).
9 Komu Kutti v Kumara Menon, AIR 1919

Mad 367 ; the Transfer of Property Act, 1882, section 55(5)(b).
10 An undertaking to pay off the mortgage.
11 Keshwar Sao v Guni Singh, AIR 1938

Pat 275 .
12 Komu Kutti v Kumara Menon, AIR 1919

Mad 367 ; Raghunatha Chariar v Sadagopa Chariar, (1911) ILR 36
Mad 348.
13 Tilak Ram v Surat Singh, AIR 1938

All 297 (FB); Mehdalunnissa Begum v Halimatunissa Begum, AIR 1939
Pat 194 ; Kaliyammlal v Kolandavela Goundar, AIR 1918 Mad 1135
.
14 Ranganath v Pachusao, AIR 1935

Ngp 147 : 156 IC 94.
15 Mangladha Ram v Ganda Mal, AIR 1929

Lah 388 (not a mere covenant for title and quiet possession).
16 Krihnaswami Iyer v Thathia Raghavian Chetty,

AIR 1928 Mad 43 ; Keshwar Sao v Guni Singh, AIR 1938 Pat 275
; Daw Nyun v Maung Nyi Pi, AIR 1938 Rang 359
.
17 Krishnaswami Iyer v Thathia Raghaviah Chetty,

AIR 1928 Mad 43 .
Sanjay Kataria
Page 16 of 22
18 Supra, AIR 1938 Rang 359

.
19 Ultratech Cement Ltd. v Sunfield Resources Pty. Ltd., 2018 (3) ArbLR
394(Bom); FAL Oil Co. Ltd. v Petronas Trading Corporation, (2004) 2 Lloyds Rep. 282
: (2004) EWCA Civ 822 .
20 See also section 126 below: “Guarantee and Indemnity”.
21 Ramchandra B Loyalka v Shapurji N Bhownagree,

AIR 1940 Bom 315 : (1940) Bom 552; KV Periyamianna Marakkayar and Sons v Banians and Co.,
AIR 1926 Mad 544 : (1925) 49 Mad 156; Brahmayya & Co. v K Srinivasan
Thangirayar, AIR 1959 Mad 122 (contract of guarantee); Janwatraj v
Jethmal, AIR 1958 Raj 343 .
22 Jagannath Bakhsh Singh v Chandra Bhukan Singh,

AIR 1937 Oudh 19 (implied contract existed between surety and debtor); Nagpur Nagarik Sahakari
Bank v UOI, AIR 1981 AP 153 .

AIR 1940 Bom 315 : (1940) Bom 522.
24 KV Periyamianna Marakkayar and Sons v Banians and Co.,

AIR 1926 Mad 544 : (1925) 49 Mad 156.
25 State Bank of India v Moti Thawardas Dadlani, 2007 (109) Bom L R 483.
26 Larsen & Toubro v Shri Ahuja Properties Realtors Pvt. Ltd., (2018) 2 AIR
Bom R 42 : (2017) 3 Bom CR 542 .
27 Mahabir Prasad v Siri Narayan, AIR 1918

Pat 345 .
28 Radha Kunwar v Ram Narain, AIR 1952

All 587 .
29 Municipal Committee Buldhana v Vishnu Damodhar Bhalerao,

AIR 1949 Ngp 48 .
30 Bank of New India v G Govinda Prabhu,

AIR 1964 Ker 267 .

AIR 1940 Bom 315 : (1940) Bom 522; Brahmayya & Co., Official Liquidators v K Shrinivasan Thangirayar,
AIR 1959 Mad 122 . See also section 126 below under heading:
“Guarantee and Indemnity”.
Sanjay Kataria
Page 17 of 22
32 State Bank of India v Mula Sahakari Sakhar Karkhana Ltd.,

AIR 2007 SC 2361 : (2006) 6 SCC 293
.
33 United India Insurance Co. Ltd. v Kantika Colour Lab.,

(2010) 6 SCC 449 : (2010) 5 Scale 381
.
34 Supra, (1915) 31 TLR 572

.
35 Law Guarantee Trust and Accident Society Ltd. (Re), Liverpool Mortgage
Insurance Co’s Case, (1914) 2 Ch 617 :
(1914–15) All ER Rep 1158 (CA).
36 British India General Insurance Co. Ltd. (Re),

AIR 1971 Bom 102 , at 105.
37 State of Orissa v United India Insurance Co. Ltd.,

(1997) 5 SCC 512 .
38 Tilak Ram v Sural Singh, AIR 1938

All 297 (FB); Mehdatunnissa Begum v Halimatunissa Begum, AIR 1939
Pat 194 ; Kaliyammal v Kolandavela Goundar, AIR 1918 Mad 1135
.
39 Rama Raya Nimgar v Venkatalingam Nayamim Bahadur Varu,

AIR 1934 Mad 1 .
40 Sodhi Gurbachan Singh Koshan v Babu Ram,

AIR 1969 P&H 201 .
41 Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri,

AIR 1942 Bom 302 : (1942) Bom 670 : 44 Bom LR 703; Khetarpal Amarnath v Madhukar
Pictures, AIR 1956 Bom 106 ; State Bank of India v Moti Thawardas Dadlani, 2007
(109) Bom L R 483.
42 Tropical Insurance Co. v Zenith Life Insurance Co.,

AIR 1941 Lah 68 .

AIR 1942 Bom 302 : 44 Bom LR 703; Ramchandra B Loyalka v Shapurji N Bhownagree,
AIR 1940 Bom 315 : (1940) Bom 552.
44 Kadiresan Chettiar v SpRMRm Ramaswami Chettiar,

AIR 1946 Mad 472 : 00(1947) Mad 58 : 227 IC 110.
Sanjay Kataria
Page 18 of 22
45 Dugdale v Lovering, (1875) LR 10

CP 196 quotation of Mr Cave’s argument at 197 : [1874–80] All ER Rep
545 ; Secretary of State v Bank of India Ltd., AIR 1946 Mad 472
: AIR 1938 PC 191 : supra, (1947) Mad 58 : 227 IC 110; Joti
Prashad Jai Gopal v Kartar Singh Sahib, AIR 1960 Pun 425 ; Sheffield Corpn. v
Barclay, [1905] AC 392 , 394 :
[1904–07] All ER Rep 747 .
46 Secretary of State v Bank of India Ltd.,

AIR 1938 PC 191 ; supra, AIR 1946 Mad 472
: (1947) Mad 58 : 227 IC 110; Jyoti Prashad Jai Gopal v Kartar Singh Sahib, AIR 1960
P&H 425 .
48 Law Commission of India, Thirteenth Report, 1958, para 102,

recommending adding section 72A as follows:
“72A.When contract of indemnity may be implied.—When an act is done by one person at the
request of another, and the act, not being in itself manifestly tortious to the knowledge of the person doing it, turns out to be injurious
to the rights of a third party, then, in the absence of express agreement to the contrary, the person doing it is entitled to be indemnified
by the person at whose request it is done.”
49 Compare section 69.
50 Administrator General Act, 1963, section 20.
51 Clause 10(2) of Part III, Chapter I of the Rules in the Second Schedule
of the Carriage by Air Act, 1972.
52 Indian Carriage of Goods by Sea Act, 1925, Schedule, Article III, Entry 5.
53 Multi-Modal Transportation of Goods Act, 1993, section 12(2).
54 Railways Act, 1989, section 64.
55 The Companies Act, 1956, section 62, Companies Act, 2013, section 35.
58 The Depositories Act, 1996, section 16.
59 The Negotiable Instruments Act, 1881, section 45A.
Sanjay Kataria
Page 19 of 22
60 The Negotiable Instruments Act, section 81.
61 The Indian Partnership Act, 1932, section 10.
62 The Indian Partnership Act, section 13.
63 For example, State Bank of India (Subsidiary Banks) Act, 1959, section 53;
Warehousing Corporations Act, 1962, section 37.
64 The Transfer of Property Act, 1882, section 65(d).
65 See section 145 below.
66 The Indian Trusts Act, 1882, section 33.
67 The Employees Compensation Act, 1923, section 12; for similar

provisions see also, Employees’ State Insurance Act, 1948, section 41; Employees’ Provident Funds and Miscellaneous Provisions Act,
1952, section 8A.
68 Osman Jamal & Sons Ltd. v Gopal Purshottam,

AIR 1929 Cal 208 : (1928) 56 Cal 262 ,: 118 IC
882; but see Chand Bibi v Santoshkumar Pal, AIR 1933 Cal 641 :
(1932) 60 Cal 761 : 146 IC 863 (by the same Judge).
69 Kumar Nath Bhuttacharjee v Nobo Kumar Bhuttacharjee,

(1898) 26 Cal 241 ; Profulla Kumar Basu v Gopee Bullabh Sen, AIR 1946 Cal 159
: (1944) 2 Cal 318 : 225 IC 110 (as soon as the
loss or injury becomes imminent); Ramalingathudayan v Unnamalai Achi, AIR 1914 Mad 655
: (1915) 38 Mad 791 : 24 IC 873; Shiam Lal v Abdul Salam, AIR 1931 All 754
: (1931) All LJ 687 : 133 IC 604; Abdul Majeed v Abdul Rashid, AIR 1936 All 598
: (1936) All LJ 940 : 164 IC 665; Chunibhai Patel v Natha Bhai Patel, AIR 1944 Pat 185
: (1944) 22 Pat 655 : 213 IC 385.
70 Shankar Nimbaji Shintre v Laxman Supdu Shelke,

AIR 1940 Bom 161 : 42 Bom LR 175 : 188 IC 663; Sham Sundar v Chandu Lal, AIR
1935 Lah 974 ; Ranganath v Pachusao, AIR 1935 Ngp 147
: 156 IC 94.

AIR 1942 Bom 302 : (1942) Bom 670 : 44 Bom LR 703; distinguishing Shankar Nimbaji
Shintre v Laxman Supdu Shelke, AIR 1940 Bom 161 : 42 Bom LR 175 : 188 IC
663; Centax (India) Ltd. v Vinmar Impex Inc., AIR 1986 Cal 356 : 364–65,
369 (liability under a bank guarantee, letter of credit or indemnity).

AIR 1942 Bom 302 per Chagla J at 304 : (1942) Bom 670 : 44 Bom LR 703; Profulla Kumar
Basu v Gopee Bullabh Sen, AIR 1946 Cal 159 :
(1944) 2 Cal 318 : 225 IC 110; Ramalingathudayan v Unnamalai Achi,
Sanjay Kataria
Page 20 of 22
AIR 1914 Mad 655 : (1915) 38 Mad 791 : 24 IC 853; Abdul Majeed v Abdul Rashid,
AIR 1936 All 598 : (1936) All LJ 940 : 164 IC 665; Chunibhai Patel v Natha Bhai Patel,
AIR 1944 Pat 185 : (1944) 22 Pat 655 : 213 IC 385.
recommended adding a section as follows:
“125A. Rights of indemnity-holder.—(1) The promisee in a contract of indemnity acting within the
scope of his authority may, where a liability has arisen against him in favour of a third party, obtain against the promisor, in an
appropriate case, a decree compelling the promisor to set apart a fund out of which the promisee may meet such liability or directing the
promisor to discharge such liability himself.
(2) The promisee may institute a suit under this section even where no such suit as is referred to in
section 125 has been instituted, and irrespective of whether any actual loss has been sustained by the promisee or not.
Explanation—The promisee is not precluded from obtaining relief under this section merely on the
ground that the promisee’s liability to the third party cannot be effectively enforced against him.”
74 State Bank of India v Economic Trading Co. SAA,

AIR 1975 Cal 145 .
75 Chitty on Contracts, 28th Edn, vol 2, at 1303, paras 44–014.
76 Basant Rlymers v State Chemical and Pharmaceuticals Corpn of India Ltd.,

AIR 1986 Raj 1 ; Pesticides India v State Chemicals and Pharmaceuticals Corpn of India Ltd.,
AIR 1982 Del 78 .
77 Raigad Concrete Industries v ICICI Bank, 2009 (5)

Bom CR 238 .
78 Bentworth Finance Ltd. v Lubert,

[1967] 2 All ER 810 : [1967] 3 WLR 378
, (CA).
79 Smith v South Wales Switchgear Ltd.,

(1978) 1 All ER 18 : (1978) 1 WLR 165
(HL); Gillespie Bros. & Co. Ltd. v Roy Bowles Transport Ltd., (1973) QB 400
: (1973) 1 All ER 193 .
80 Ramamurthi Ayyar v Kuppuswami Ayyar,

AIR 1950 Mad 621 .
81 South Eastern Rly v Amarendra Nath Sarkara,

AIR 1967 Cal 119 .
82 Pokhar Singh v Jagu Singh, AIR 1921

PC 109 .
83 Oriental Fire and General Insurance Co. Ltd. v Murlidhar Gopikisen,

AIR 1985 Cal 301 .
Sanjay Kataria
Page 21 of 22
84 Abdul Latif v Durgah Committee,

AIR 1954 Ajm 7 (2).
85 Hindustan Sugar Mills Ltd. v State of Uttar Pradesh,

AIR 1972 All 8 .
86 Bank of New India v G Govinda Prabhu, AIR

1964 Ker 267 .
87 Alice Marie Vandepitte v Preferred Accident Insurance Co. of New York,

AIR 1933 PC 11 : (1933) AC 70
, (1932) All ER Rep 527 .
88 Anand Sarup Sharma v PP Khurana, AIR

1989 Del 88 , at 94; Peters v General Accident and Life Assurance Corpn. Ltd.,
(1937) 4 All ER 628 .
89 VMR v Ramaswami Chettiar v R Muthukrishna Aiyar,

AIR 1967 SC 359 : (1966) 3 SCR 608 ;
approving Subbaraya Reddiar v Rajagopala Reddiar, AIR 1915 Mad 708 : (1915)
38 Mad 887.
90 VMR v Ramaswami Chettiar v R Muthukrishna Aiyar,

AIR 1967 SC 359 : (1966) 3 SCR 608 ;
approving Subbaraya Reddiar v Rajagopala Reddiar, AIR 1915 Mad 708 : (1915)
38 Mad 887.
91 Borosil Glass Works Ltd. v Tata Motors Ltd., Arbitration Petition No. 1005 of
2009, decided on 20 January 2015.
92 Gopal Chandra Mondal v UOI, (1997) 3 SLR 111

(Cal).
93 British Union and National Insurance Co. Ltd. v Rawson,

(1916) 2 Ch 476 : (1916–17) All ER Rep 293
(CA).
94 Shaik Dawood v Mahmooda Begum, AIR

1985 AP 321 , at 324.
95 Osman Jamal & Sons Ltd. v Gopal Purshattam,

AIR 1929 Cal 208 .
96 Lala Shanti Swarup v Munshi Singh, AIR

1967 SC 1315 : 1967 SCR (2) 312 .
Sanjay Kataria
Page 22 of 22

AIR 1926 Mad 544 : (1929) 49 Mad 156.
98 National Petroleum Co. v Popatlal Mulji, AIR

1936 Bom 344 ; Akolla Suryanarayana Rao v Dwarpudi Basivireddi, AIR 1932 Mad
457 .
99 Ramalingathudayan v Unnamalai Achi, AIR

1914 Mad 655 : (1915) 38 Mad 791 : 24 IC 873; Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri,
AIR 1942 Bom 302 : (1942) Bom 670 : 44 Bom LR 703.
100 AVK Mayappa Chettiar v NKL Kolandaivelu Chettiar,

AIR 1926 Mad 597 .
101 Chiranji Lal v Naraini, AIR 1919 All 279

: (1919) 41 All 395 : 51 IC 158.
102 Sham Sundar v Chandu Lal, AIR 1935 Lah 974

; Shankar Nimbaji Shintre v Laxman Supdu Shelke, AIR 1940 Bom 161
: 42 Bom LR 175 : 188 IC 663; Ranganath v Pachusao, AIR 1935 Ngp 147
: 156 IC 94 (vendee agreeing to pay part of consideration to the creditors of vendor).

AIR 1942 Bom 302 ,per Chagla J.
104 Abdul Hussain Shaikh Gulamali Jambawalla v Bombay Metal Syndicate,

AIR 1972 Bom 252 ; referring to Gajanan Moreshwar Parelkar v Moreshwar Madan
Mantri, AIR 1942 Bom 302 : (1942) Bom 670 : 44 Bom LR 703.
105 Dugdale v Lovering, (1875) LR 10

CP 196 : [1874–80] All ER Rep 545 .
106 Argo Caribbean Group v Lewis, (1976) 2 Lloyd’s Rep 289.
107 Yeung v Hongkong and Shanghai Banking Corporation,

[1980] 2 All ER 599 , 606– 07 (PC); applying Sheffield Corpn v Barclay, [1905] AC 392
: [1904–07] All ER Rep 747 , and explaining dictum of
Lord Davey at 751.
108 Roberts v Crowe, (1872) LR 7

CP 629, at 637 per Willes J; Kellock v Enthoven, (1874) LR 9 QB 241.
109 Moule v Garrett, (1872) LR 7

Ex 101, at 104 per Willes J : [1861–73] All ER Rep 135
.
End of Document
Sanjay Kataria
[s 125] Rights of indemnity-holder when sued.—
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover
from the promisor—
(1) all damages which he may be compelled to pay in any suit in respect of any matter which the
promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did
not contravene the orders of the promisor, and acted as it would have been prudent for him to
act in the absence of any contract of indemnity, or if the promisor authorised him to bring or
defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the promisor, and was one which it would have
been prudent for the promisee to make in the absence of any contract of indemnity, or if the
promisor authorised him to compromise the suit.
The section describes the rights of the promisee under a contract of indemnity, when sued. The promisee
is entitled to recover the damages which he has been compelled to pay in a suit in respect of the matter,
for which he has been indemnified, the costs which he was compelled to pay in the suit, and the amounts
paid by him under the terms of any compromise, in the circumstances given in the section. However, this
section is not exhaustive. It does not set out all the reliefs an indemnity holder may get. It leaves
untouched certain equitable reliefs.110
Sanjay Kataria
Page 2 of 7
[s 125.2] Damages
Sub-section (1) is based on the principle that a judgment obtained after bona fide contest against the party
indemnified in respect of the matter to which a contract of indemnity applies is conclusive against the
indemnifier although the latter was no party to it, not because such judgment binds him as res judicata, but
because the claim against which indemnification has been promised has been conclusively established
against the party indemnified.111
In Parker v Lewis,112 where the promisor was not a party to the suit, it was stated:
...it is obvious that when a person has...altered his position in any way on the faith of a contract of indemnity, and an action is brought
against him for the matter against which he was indemnified, and a verdict of a jury obtained against him, it would be hard indeed if
when he came to claim the indemnity the person against whom he claimed it could fight the question over again, and run the change of
whether a second jury would take a different view and give an opposite verdict to the first. Therefore, by reason of that contract of
indemnity, the judgment is conclusive.
This rule has been followed by the Indian Courts.113 Thus, the promisor, under a contract of indemnity,
cannot impeach the decree passed against the promisee.114
The amount recoverable under this section is an amount which has been paid, whether under compulsion
of adjudication or under terms of a compromise. The measure of damages is the extent to which the
promisee has been damnified.115 The words “compelled to pay” need not be construed as “already
paid”;116 and, therefore, the indemnifier can be asked to indemnify, before a person to be indemnified has
incurred loss.117 In one class of cases, the indemnity-holder is not entitled to ask for a decree for payment
of money to himself, before the damage is incurred by him, and that class of cases is one where the
indemnifier is himself interested in the application of the money. In this class of cases, the only relief to
which the indemnity-holder is entitled is to call upon the indemnifier to perform specifically the contract
of indemnity and pay the amount in question, to the creditor concerned. In all other cases, it may be open
to the indemnity-holder to ask for a decree for the amount in question, in his own favour.118
If the indemnity-holder has incurred a liability and that liability is absolute, he is entitled to call upon the
indemnifier to save him from that liability and to pay it off.119 Although the essence of an indemnity clause
is that the assured must prove loss before claiming the indemnity, sometimes the indemnity may be a pure
and simple contingency insurance. In such a case, the insurance provides for the making of a payment in
the event of a specified event occurring, the payment representing either the loss or the possibility which
Sanjay Kataria
Page 3 of 7
that event entails.120 Payment by the promisor under a bank guarantee or letter of credit where the
promisor undertakes to pay on demand and without demur must be made according to the tenor of the
agreement, and irrespective of whether loss has occurred.121
[s 125.3] Costs
The indemnity-holder can recover all costs he has been compelled to pay in a suit to which the promise to
indemnify relates, if:
(i) the promisor had authorised him to bring or to defend the suit; or if
(ii) in bringing or defending the suit he had not contravened the orders of the promisor, and had
acted in a prudent manner.
In the case of contracts of indemnity, the liability of the indemnified party to a third person is not
contemplated at the time of the indemnity, but is the very moving cause of that contract. And in cases of
such a nature, the costs reasonably incurred in resisting or reducing or ascertaining the claim may be
recovered.122 However, the costs must be such as would have been incurred by a prudent man.123 The
costs recoverable, in proper case, are not confined to the taxed costs.124 A vendee having an indemnity
from a vendor of property against litigation can claim the fees of his pleader, unless the fees are
unreasonable.125
[s 125.4] Amounts Paid under Compromise
The promisee, under a contract of indemnity, is entitled to receive all sums which he may have paid under
the terms of any compromise of any such suit, if:
(i) the promisor authorised him to compromise the suit; or

(ii) the compromise was not contrary to the orders of the promisor and the promisee had acted in a
prudent manner in effecting the compromise.
Sanjay Kataria
Page 4 of 7
Even if the promisee has not given notice to the promisor, the compromise is conclusive against the
promisor if it is affected bona fide, and without collusion, and is not impeached as an imprudent bargain.126
[s 125.4.1] Other Rights
This section is not exhaustive, and the indemnity-holder has other rights besides those mentioned in the
section. The rights given in the section deal only with his rights in the event of his being sued.127
[s 125.4.2] Rights of the Indemnifier
The section deals with the rights of a promisee in a contract of indemnity. There is no provision in the
Contract Act for the rights of a promisor in such a contract. However, the absence, of such a provision
does not take away the rights which such a promisor has according to English law, and which are
analogous to the rights of a surety declared in section 141. Those rights constitute an essential part of the
law of indemnity, and they are of general application, as they are based on natural equity.128 Thus, where
one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to
succeed to all the ways and means by which the person indemnified might have protected himself against,
or reimbursed himself for the loss. This principle is based on natural equity, and is of general application.
It is an essential part of the law of indemnity, and the Contract Act does not impair it.129 The promisor is
not liable, if the promisee suffers damage owing to circumstances which do not come within the scope of
the contract of indemnity.130
[s 125.4.3] Illegality
A contract to indemnify a surety against liability under a recognisance on the admission of an accused
person to bail in criminal proceedings is illegal. There is implied indemnity that accused must abide by his
bond, but not for repayment of amount.131
[s 125.5] Position and Necessity of Notice under English law
In Parker v Lewis,132 it was stated:
Sanjay Kataria
Page 5 of 7
...if a person has (expressly) agreed to indemnify another against a particular claim or particular demand, and an action is brought on
that demand, he (the defendant) may then give notice to the person who has agreed to indemnify him to come in and defend the action,
and if he does not come in, and refuses to come in, he may then compromise at once on the best terms he can, and then bring an action
of the contract of indemnity.
It is not necessary for the indemnity-holder to give notice of proceedings to the indemnifier.133 However,
it is prudent to join him as a third party, or at least to give him notice to enable him to become party to
the proceedings; else it may be open to him to challenge the judgment or compromise. If he does not act
on receiving notice, he would be estopped from denying the validity of the judgment or decree or the
reasonableness of the compromise, and it would be difficult for him to show that any costs incurred in
defending the proceedings were improperly incurred.134

AIR 1942 Bom 302 : (1942) 44 BomLR 703
; Kailash Kumar Kanoria v Shiv Shankar Pasari, (2009) 1 Cal LT 90 : (2009) 77 AIC 553
(Cal).
111 Alla Venkataramanna v Palacherla Manqamma,

AIR 1944 Mad 457 ; Lampleigh v Braithwait (1615) Hob 105.
112 Parker v Lewis, (1873) LR 8

Ch 1035, at 1059 per Mellish LJ.
113 Nallappa Reddi v Vridhachala Reddi, AIR

1915 Mad 36 : (1914) 37 Mad 270 : 25 IC 888; Chiranji Lal v Naraini, AIR
1919 All 279 : (1919) 41 All 395 : 51 IC
158.
114 Gokuldas v Gulab Rao, AIR 1926 Ngp

108 , 113; but see section 149(2) of the Motor Vehicles Act, 1988 entitling the insurer to be heard, and the right
to defend an action on certain grounds.
115 Anwarkhan v Gulam Kasam, AIR 1919 Ngp

126 .
116 Chunibhai Patel v Natha Bhai Patel, AIR

1944 Pat 185 : (1944) 22 Pat 655 : 213 IC 385.
Sanjay Kataria
Page 6 of 7
117 Khetarpal Amarnath v Madhukar Pictures, AIR

1956 Bom 106 ; Ghulam Asadullah Khan v Mahommad Ali Khan, AIR 1943 Mad
360 ; Raghubar Rai v Jaij Raj, (1912) ILR 34 All 429.
118 Supra, AIR 1956 Bom 106

.

AIR 1942 Bom 302 : (1942) Bom 670 : 44 Bom LR 703.
120 British India General Insurance Co. Ltd. (Re),

AIR 1971 Bom 102 .
121 See section 126 below under heading: “Bank Guarantees” for more
details.
122 Pepin v Chunder Seekur Mookerjee, (1880)

ILR 5 Cal 811.
123 Gopal Singh v Bhawani Prasad, (1888) ILR 10

All 531.
124 Sri Rajah Venkata Rangayya Appa Rao Bahadur Zamindar Garu v Sri Rajah
Bommadevara Satyanarayana Varaprasad Rao Naidu Bahadur Zamindar Garu, AIR 1921 Mad 544
: (1920) 43 Mad 898 : 60 IC 164; Mangladha Ram v Ganda Mal, AIR 1929 Lah 388
.
125 Supra, (1920) 43 Mad 898, AIR 1921 Mad

544 , 60 IC 164.
126 Alla Venkataramanna v Palacherla Mangamma, (1944) Mad 867:

AIR 1944 Mad 457 .
127 Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri, (1942) Bom 670,
AIR 1942 Bom 302 , 44 Bom LR 703; Profulla Kumar Basu v Gopee Bullabh Sen,
(1944) 2 Cal 318 , AIR 1946 Cal 159
, 225 IC 110.
128 Maharana Shri Jasvatsingji Fatesingji v Secy of State for India, (1889) 14 Bom
299, 303, (1889–90) ILR 13 –14 Bom 659.
129 (1889–90) ILR 13

–14 Bom 659; Hindustan Corpn. (Hyderabad) Pvt. Ltd. v United India Fire & General Insurance Co. Ltd.,
AIR 1997 AP 347 .
130 Raja Velugoti Sarvagna Kumara Krishna Yachendra Bahadur Garu v Raja
Sobhanadri Apparao Bahadur Zamindar Garu, (1949) 76 IA 120 ,
AIR 1949 PC 234 ; reversing Sri Raja Velugoti Sarvagna Kumara Krishna
Sanjay Kataria
Page 7 of 7
Yachandra Bahadur Garu Raja of Venkatagiri v Sri Raja Sobhanadri Appa Rao Bahadur Zamindar Garu, (1944) Mad 663,
AIR 1944 Mad 211 , 216 IC 120; Ramamurthi Ayyar v Kuppuswami Ayyar,
AIR 1950 Mad 621 .
131 Meherulla v Sariatulla, AIR 1930

Cal 596 : (1929) 57 Cal 1093. See section 23 above under heading: “Procedural Laws”.
132 Parker v Lewis, (1873) LR 8

Ch 1035, at 1059 per Mellish J.
133 Duffield v Scott, (1789) 3 Term Rep 374 : (1775–

1802) All ER Rep 621 ; Smith v Compton, (1832) 3 B & Ad 407.
134 The Millwall, Gaselei v Darling, (1905) P 155 :

[1904–7] All ER Ext 1387 , (CA); Blyth v Smith, (1843) 5 Man & G 405; Broom v Hall,
(1859) 7 CBNS 503 .
End of Document
Sanjay Kataria
[s 126] “Contract of guarantee,” “surety,” “principal-debtor” and “creditor”.—
A “contract of guarantee” is a contract to perform the promise, or discharge the liability of a third person
in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of
whose default the guarantee is given is called the “principal debtor”, and the person to whom the
guarantee is given is called the “creditor”. A guarantee may be either oral or written.
This section defines a contract of guarantee as one in which the promisor promises to perform the
promise of a third person, or to discharge the liability of a third person, in the case of the latter’s default.
It specifically provides that a guarantee need not be in writing—it may also be oral. It may be wholly
written or wholly oral or partly in writing and partly oral.135
[s 126.2] Definition
A guarantee is a promise to answer for the payment of some debt, or the performance of some duty, in
case of the failure of another party, who is in the first instance, liable to such payment or performance.136
A security, in the form of a right of action against a third party is known as guarantee.137
Sanjay Kataria
Page 2 of 51
A guarantee is an accessory contract by which the promisor undertakes to be answerable to the promisee
for the debt, default or miscarriage of another person, whose primary liability to the promisee must exist
or be contemplated.138 The words “debt, default or miscarriage” is descriptive of failure to perform legal
obligations, existing or future, arising from any source, not only from contractual promises, but in any
other factual situations capable of giving rise to legal obligations, such as those resulting from bailment,
tort, or unsatisfied judgments.139 A letter of comfort is a recommendatory letter, and may not be a
guarantee unless there is a specific undertaking to discharge liability in case of default.140
[s 126.3] Nature of a Contract of Guarantee
A contract of guarantee is not a primary transaction but it is an independent transaction containing

independent and reciprocal obligations.141 A contract of guarantee is a complete and separate contract by
itself and an enforcement as per its terms cannot be restrained by considering the terms of the underlying
contract.142 Even in the absence of an express contract, a contract of guarantee can be implied.143
Lord Selborne observed that, “there can be no surety-ship unless there be a principal debtor, who of
course may be constituted in the course of the transaction by matters ex post facto, and need not be so at
the time, but until there is a principal debtor there can be no surety-ship”.144 The principal obligation
guaranteed may be contractual, or also non-contractual, viz, such as those resulting from bailment, tort, or
unsatisfied judgments.
A guarantee is an undertaking to indemnify, if some other person does not fulfil his promise. The liability
under a contract of guarantee is conditional on the default of the principal-debtor, and hence does not
amount to a “promise to pay”; and a guarantee would not attract the provisions of the Bengal Money
Lenders Act.145 A contract of guarantee is not one uberrimae fidei, but a contract of strictissimi juris.146 A
contract of insurance is a contract of the utmost good faith. Contracts of guarantee are not subject to this
doctrine, although there may be a limited duty of disclosure.147
The creditor’s rights under the contract of guarantee are assignable.148 In an assignment of the reversion
of a lease, the benefit of a covenant by a surety guaranteeing performance by the tenant would also pass,
even though the benefit of such covenant is not expressly assigned.149 The liability of a surety cannot form
the subject matter of a trust.150 The legal representatives of a surety continue to be liable for the amount
to the creditor, after the death of the surety,151 but their liability is limited to the extent of the estate
inherited by them from the surety.152 The question whether the representatives hold any estate of the
deceased surety can be raised and decided in the very suit in which the liability of the surety is in
question.153
An arbitration clause, in an agreement of guarantee, may bind the principal-debtor by implication, though
Sanjay Kataria
Page 3 of 51
the principal-debtor has not signed it.154 However, an arbitration agreement between the creditor, debtor
and one surety does not bind another surety.155
In case of indemnity it is the undertaking to see that the amount be paid without proceeding or
demanding even initially the principal debtor and in case of guarantee, it is the very undertaking from the
provision to pay by the guarantor in the event of failure to pay by the principal debtor. However, once
there is a demand, if not even by any written notice at least filing of suit or serving of notice of demand
for the guarantor also to pay from failure of principal debtor. When once there is a decree against all
judgment debtors passed jointly, it enables the decree holder to choose against whom he can proceed for
the safe, early and effective recovery of his fruits of the decree.156
[s 126.4] Kinds of Guarantees
The promisor in a guarantee promises to perform the promise of a third person, or to discharge the
liability of a third person, in the case of the latter’s default. A guarantee could be a specific guarantee,
which pertains to a single debt or transaction or a continuing guarantee which extends to series of
transactions. A transaction contained in more than one document between the same parties must be read
and interpreted together.157 The guarantee may be in writing or oral.158
[s 126.5] Guarantee and Indemnity
[s 126.5.1] Parties and Formation
A contract of guarantee involves three parties: creditor, surety, and principal-debtor.159 A surety is one,
who, in consideration of some act or promise on the part of the creditor, promises to perform the
promise or to discharge the liability of a third party, in case of his default.160 His liability is collateral.161
The liability may be actual or prospective.162 The definition of the word “surety”, in the section, is not
exhaustive and it has been held that it would include a person who, without undertaking a personal
liability on behalf of the principal-debtor, merely deposits documents of his property by way of security.163
A person who gives a guarantee on behalf of a firm without authority to do so will nevertheless be
personally liable.164
A contract of guarantee must, therefore, involve a contract to which all those three parties are privy. Their
express participation or implied assent to have such a contract must be proved by the person who wants
to rely on it.165 In the absence of any liability there can be no contract of guarantee. The liability of the
guarantor /surety presupposes the existence of a separate liability of the principal debtor and the liability
of the surety is normally secondary which comes into existence only in case of default by the principal
Sanjay Kataria
Page 4 of 51
debtor.166 “Contracts of suretyship…require the concurrence of three persons, namely, the principal-
debtor, creditor, and the surety. The surety undertakes his obligation at the request express or implied of
the principal-debtor,” on the true construction of section 141 as well as section 126. Accordingly, if A
enters into a contract with B, and C, without any communication with B, undertakes for a consideration,
moving from A, to indemnify A against damage that may arise from a breach of B’s obligation, this will
not make C a surety for B, or give him a right of action in his own name against B, in the event of B’s
default.167 In order to constitute a contract of guarantee, there must be a third contract by which the
principal-debtor, expressly or impliedly, requests the surety to act as such.168 Without this contract, the
contract is one of indemnity, and not guarantee,169 and it is not possible to work out the liabilities of the
surety.170
Mere use of the words “indemnify” and “indemnified” are not sufficient to conclude that the document in
question is a contract of indemnity, if on a composite reading of the document, it is found to be a
contract of guarantee.171
It is perfectly possible to have a contract of indemnity in which there is no suretyship at all, because, the
party liable under the indemnity has not contracted at the request of another debtor. If a person
undertakes to reimburse another for some loss which may be caused to him, say, by a third person who
having undertaken the liability and having been called upon to make good the loss, will not be able to
recover the loss so caused to him from the principal-debtor, the latter being not privy but virtually a
stranger to the undertaking given to the promisee.172 Thus, a dealer who agrees to indemnify a finance
company by a “recourse agreement”, to indemnify it against a loss under a hire purchase agreement, is not
a surety either against the creditor or against the debtor.173 The mere transfer, by a debtor, of his property
to a trustee for the benefit of his creditors, the trustee not undertaking any personal liability to the
creditors, does not constitute the relation of principal and surety as between the debtor and the trustee.174
A surety may, thus, become primarily liable by any fresh contract between the creditor and principal-
debtor, under which the surety can be said to have undertaken to pay the amount of debt unconditionally.
Where the surety executed a promissory note in favour of the creditor after the principal-debtor had failed
to pay the amount, the surety, became primarily liable.175 Similarly, where the creditor and the principal-
debtor agreed to a new contract and to release the secured vehicle of the principal-debtor in favour of the
surety, the principal-debtor was no longer liable to repay the loan, and the surety became liable for it.176
The signature of the principal debtor on the deed of counter guarantee, does not transform the principal
debtor into a surety within the meaning of section 126177
[s 126.5.2] Nature of Liability under Contracts of Indemnity and Guarantee
Sanjay Kataria
Page 5 of 51
Contracts of guarantee and contracts of indemnity perform similar commercial functions, in providing
compensation to the creditor for the failure of a third party to perform his obligation.178
The obligation of a surety in a contract of guarantee depends substantially on the principal debtor’s
default; under a contract of indemnity, the promisor is primarily and independently liable for loss caused
to promisee by the conduct of promisor or another person.179
There can be no contract of guarantee, unless there is a principal-debtor.180 In a contract of guarantee, the
obligation of the surety depends substantially on the principal-debtor’s default,181 while, under a contract
of indemnity, liability arises from loss caused to the promisee by the conduct of the promisor himself or
by the conduct of another person.182
Therefore, the fact that the person, for whose conduct it is given, is not liable, does not affect the
obligation undertaken by the indemnifier, which is primary liability; but in a contract of guarantee, the
liability of the surety rests on a valid obligation of the principal-debtor. Thus, if the principal-debtor is not
liable, the promisor is still liable under the contract of indemnity.183
An enforceable guarantee presupposes a jural relationship between the creditor, debtor and surety. The
claim against surety is strictissimi juris (of the most strict law).184
[s 126.5.3] Formalities
In a guarantee, a simultaneous tripartite contract between the principal-debtor and creditor and the surety
is not necessary. It is not necessary that a principal-debtor should, as a matter of law, be an express party
to a contract of guarantee. It is sufficient that the principal-debtor is a party to the contract by
implication.185 But, where a person becomes a surety without the knowledge and consent of the principal-
debtor, the only rights which he acquires in that case are those given by sections 140 and 141, and not
those given by section 145.186 It can arise by exchange of emails.187
[s 126.5.4] Construction of Contract
Whether the contract is one of guarantee, or of indemnity, must primarily be construed on the basis of the
terms and conditions contained therein. The Courts cannot supply any words which the author thereof
did not use.188 The description of the agreement as one of “indemnity” or “guarantee” may provide some
Sanjay Kataria
Page 6 of 51
guide, especially if the expression is used in the heading,189 A document though called a guarantee, but
expressly providing that the promisor will indemnify the promisee against losses, claims, damages and
costs suffered by it, was an indemnity.190
[s 126.5.5] Effect
Where a contract is one of guarantee:
(a) the surety need not be called upon to pay unless the principal-debtor has committed a default; and
(b) the surety is entitled to all the rights, viz. of discharge, subrogation of securities, indemnity from
the principal-debtor, etc. provided in sections 133 to 145 below; though an indemnifier is entitled
to rights given by sections 140 and 141.191
[s 126.5.6] Guarantee and Insurance
In an insurance contract, the insurer is not a surety and does not undertake to pay the original debt, but
undertakes to pay a new debt arising out of the contract of indemnity, which may be quantitatively and
qualitatively different from the original debt. The fact that the contract is framed in the form of a policy is
only a prima facie evidence of the intention of the parties, but the form of the contract is not conclusive.
A contract, expressed in the form of a policy, may nevertheless be a guarantee. The risk of default of the
debtor can be as effectively insured as the debt can be guaranteed.192
[s 126.6] Surety
A surety is one, who, in consideration of some act or promise on the part of the creditor, promises to
perform the promise or to discharge the liability of a third party, in case of his default.193 His liability is
collateral.194 The definition of the word “surety”, in the section, is not exhaustive and it has been held that
it would include a person who, without undertaking a personal liability on behalf of the principal-debtor,
merely deposits documents of his property by way of security.195 A person who gives a guarantee on
behalf of a firm without authority to do so will nevertheless be personally liable.196
Sanjay Kataria
Page 7 of 51
[s 126.7] Form
A guarantee under the Contract Act may be oral or in writing.197 It may be expressed in words or may be
implied, or may be inferred from the course of conduct between the parties.198 It is, however, to be borne
in mind that whatever may be the form of the contract, it must be satisfactorily proved. and must be
supported by consideration. It is, however, not necessary that the consideration should flow from the
creditor and be received by the surety. Consideration between the creditor and the principal debtor is a
valid and good consideration for the guarantee given by the surety.199 Any benefit given to the principal
debtor is a consideration to the surety for giving the guarantees.200 A simultaneous tripartite contract
between the surety, creditor, and principal-debtor is not necessary.201 The Supreme Court has held that “if
the transaction is contained in more than one document between the same parties, they must be read and
interpreted together and they have the same legal effect for all purposes as if they are one document”.202
Hence, a transaction of guarantee may be contained in more than one document; then these can be read
and interpreted together.203 A person signing various documents of loan transaction along with the
principal-debtor may nevertheless be considered a surety.204 The contract of guarantee may be constituted
by the surety undertaking a personal liability, or by a charge on property without any personal liability, or
by both.205
Where a person signed in the sale list of toddy shops in a column headed “Certificate of Solvency” against
the name of the auction-purchaser of toddy shops, he cannot be held to have stood surety for the auction-
purchaser, undertaking to pay his liability in the case of his failure to discharge it. He only certified that
the auction-purchaser was a solvent person.206
[s 126.7.1] Contract by Companies
A contract of guarantee may be made:
(i) by a company, by writing under its common seal; or

(ii) on behalf of a company, by any person acting under its authority, express or implied.
No company (other than a private company which is not a subsidiary of a public company or a banking
company) can give a guarantee regarding a loan made by any person, or creditor, to any person, by its
director, or the director of its holding company, or a relative or partner of such director, or a firm in
which a director or relative is partner, or a company in which its director is director or member.207
Sanjay Kataria
Page 8 of 51
[s 126.8] Illustrative Cases of Contracts of Guarantee
An agreement to pay, on failure of others to pay, is a guarantee.208 A bond, executed in pursuance of a

Court order by a person in favour of an officer of the Government for release of the seized property to its
owner was a contract of guarantee.209 Where the son signed as a party in a mortgage by the father—of the
latter’s property—but was not described as a surety, he was held to be a surety and, therefore, entitled to
the benefit of the security to the extent of his contribution of the mortgage debt.210
In Arathil Kandoth Madhattul Balakrishnan v PK Chattu,211 A gave money to B for investment. Instead of
doing so, B. lent it to C on a promissory note drawn by C in favour of B, which B, endorsed in favour of
A. B. informed A that he would come with the borrower and clear the loan. It was held that B. was liable
as a surety. Similarly, a writing by X to Y in the presence of Z, “Please lend Rs. 1200 to Z; there will be no
trouble in the payment of your money. Be assured, if there be any trouble, I hold myself responsible” was
held to make X liable as surety.212 B. became surety under bond to the Government for the treasurer of a
collectorate. The collector examined the accounts yearly, and struck a balance which he certified to be
correct. B, on each occasion executed a new bond, but the old bonds were not cancelled or given up. On
subsequent inquiry, the treasurer was discovered to have embezzled moneys during each year. It was held
that on such discoveries being made, B. was still liable under the old bonds, there having been no
novation.213
[s 126.9] Illustrative Cases: Contracts held not of Guarantee
A statutory Board had in pursuance of policy of the government, agreed to give subsidy to a borrower by
payment of interest to the Bank provided the borrower did not default. The borrower defaulted and the
bank sued the borrower as well as the Board. The Board was held to be neither a borrower nor guarantor
and hence not liable to pay interest on account of borrower’s default.214 Where a person signed in the sale
list in a column headed “certificate of solvency” against the name of an auction-purchaser of a license, he
was not a surety for the auction-purchaser. It only showed that he certified that the auction-purchaser was
a solvent person.215 A mere recommendation by C to A that A should buy goods of B. does not make C a
surety to A against any loss he may suffer as a result of buying goods from B.216 Nor is a relative of a
judgment debtor offering a cheque to the decree-holder in satisfaction of the judgment a surety,217 nor a
person who introduces another as a customer.218
Persons jointly and severally liable on a promissory note are not sureties; one of them, on paying the
whole debt, cannot have any right over the property of the other held in the hands of the creditor.219 A
document under the signature of a person that he will be responsible for the payment of the debt due to
him from another is not a guarantee, but a document creating primary liability.220
Sanjay Kataria
Page 9 of 51
[s 126.10] Existence of Liability
There can be no contract of guarantee if liability does not exist. The liability of the guarantor presupposes
the existence of separate liability of the principal-debtor, and the surety’s liability is thus secondary which
comes into existence only in default of the principal-debtor.221
A contract of guarantee postulates either an existing or future principal obligation. If the principal
obligation which was thought to exist, in fact does not exist, the guarantee is a nullity.
By the word “liability”, in this section, is intended a liability which is enforceable at law;222 if that liability
does not exist, there cannot be a contract of guarantee. A surety, therefore, is not liable on a guarantee for
the payment of a debt which is barred by the law of limitation.223 Where the liability of the principal is not
enforceable on the ground of illegality, the surety is not liable.224 A guarantee may cover both debts,
present and future.225
The liability of the surety arises on default of the principal-debtor, or the occurrence of the event stated in
the guarantee. Nevertheless, the liability of the guarantor is co-extensive with that of the principal
debtor.226
[s 126.11] Construction of a guarantee
A guarantee is governed by the principles of construction, generally governing other contracts.227 Dealing
with a guarantee as a mercantile contract, the Court does not apply to it merely technical rules, but
construes it so, as to reflect what may fairly be inferred to have been the parties’ real intention and
understanding, as expressed by them in writing, and to give effect to it rather than not.228 The document
should be read as a whole and use of terminologies in one of the clauses alone cannot form the basis of
determining if the document in question is a contract of guarantee.229
The object sought to be achieved in construing any commercial contract is to ascertain what were the
mutual intentions of the parties as to the legal obligations each assumed by the contractual words in which
they...chose to express them; or, perhaps more accurately, what each would have led the other reasonably
to assume were the acts that he was promising to do or to refrain from doing by the words in which the
promises on his part were expressed.230
Sanjay Kataria
Page 10 of 51
A guarantee, being a mercantile contract, may be explained by extrinsic evidence relating to circumstances
existing at the time it was made.231 Extrinsic evidence may be allowed to ascertain whether the factual
situation came within particular words; or to find the context in which the contract was made, for
ascertaining the terms of the contract.232 So, a guarantee expressed to cover the liabilities of a named
company was held, on its true construction, to cover also the liabilities of that company’s subsidiary,
through which the loan had in fact been made.233 Similarly, a guarantee which did not state expressly that
it covered the principal-debtor’s own liability as guarantor was held to do so, because the factual
background showed that this was what the parties intended.234 Where the letter of guarantee stated that
any action settled or stated between the bank and the principal-debtor shall be accepted by the surety as
conclusive evidence, the surety was liable to satisfy the decree passed against the principal-debtor, on
admission of liability.235
If, after applying the principles of construction, the words of the guarantee remain ambiguous, the
guarantee may be interpreted against the creditor who drafted it and in favour of the guarantor.236 A
contract of guarantee is a contract of strictissimi juris.237 Surety bonds are to be strictly construed.238 A
surety, who is a “favoured debtor”, can only be held bound if the condition of liability has been
fulfilled;239 and the surety cannot be made liable beyond the terms of his engagement.240 This is because,
firstly, the surety usually receives no benefit in the transaction, and secondly, the creditor usually drafts the
contract, and applying the contra proferentem rule, the guarantee must be construed in favour of the surety in
case of any ambiguity.241 Where a guarantee required the surety to pay on demand, the cause of action
arose only when the guarantee was invoked in the demand.242 Where the managing agent of a company
guaranteed the payment of ultimate balance found on the loan given by a bank to a company, the liability
of the agent did not arise until the ultimate balance was arrived at.243 In State of Maharashtra v MN Kaul,244 a
bank gave a guarantee to remain in force: (i) for one calendar month after the pronouncement of the
judgment and/or; (ii) (a) period of 12 months from the date of the execution of the guarantee whichever
be later; and/or (b) the drawing and sealing of the order (as the case may be) of the Supreme Court finally
disposing of the petition of Dr. Kaul. No order was drawn up, but the writ petition in which the stay
order was passed abated due to the death of the principal, and the Court made no order of the nature
mentioned in clause (ii)(b). It was held that none of the above conditions applied to the facts of the case,
and the guarantee was discharged. The Court held that the guarantor cannot be made liable for more than
he has undertaken. Thus, if the repayment of principal is guaranteed, the guarantor cannot be made liable
for interest.245 It is often said that a surety is a favoured debtor, for he can be bound to the letter of his
engagement, but not beyond the proper interpretation of that engagement. In case of ambiguity when all
other rules of construction fail, the courts interpret the guarantee contra proferentem, that is, in favour of the
surety.246 But whatever the mode employed, the cardinal rule is that the guarantor must not be made liable
beyond the terms of his engagement.247
[s 126.12] Conditional Guarantee
The guarantee may also be conditional where the surety has executed it on the faith of a representation
that it would also be executed by another person as a co-surety, in which case his liability is conditional on
the execution of the guarantee by a co-surety.248
Sanjay Kataria
Page 11 of 51
[s 126.13] Guarantee for Performance of a Promise
There are two types of performance guarantees. The first are the ones which are absolute, and they are
encashable on the very demand of the beneficiary, and the demand according to the terms of the
guarantee is conclusive. In such types of guarantees, the beneficiary is the sole judge or arbiter as to
whether there is any breach of underlying or primary contract on the part of the other party, and as to
how much amount is due to the former. If the enforcement of an “on-demand bank guarantee” is in
terms of the guarantee, courts must not interfere with its enforcement by looking at the underlying
contract.249 The other type is where guarantee is not encashable without proof of breach of underlying
contract. However, in both types of guarantees, bank issuing performance and guarantee is not concerned
with the underlying contract. The duties of a bank in such guarantee are created by the document itself,
which in other words is “independent”, and autonomous is not concerned with the underlying contract,
unless the guarantee itself says that it will be enforceable on the proof of breach of the primary underlying
contract. The exception is the clear case of fraud,250 of which the banks have notice. The fraud
contemplated, however, has direct connection with the contract of guarantee in respect of its coming into
existence, continuance etc.
[s 126.13.1] Performance Bond
A “performance bond or guarantee” is given at the instance of a seller for fulfilment of seller’s obligation
under the contract of sale, the guarantee being that the guarantor would pay on first demand without any
condition or proof.
A contract between the buyer and the seller failed to fructify as the buyer provided no letter of credit. The
seller sought an injunction against the guaranteeing bank not to pay the guarantee, but the injunction was
refused because a “performance bond” is similar to a “confirmed letter of credit” requiring the bank to
honour the guarantee without proof of conditions. It was not concerned whether either party to the
contract which underlay the guarantee was in default except where the seller established fraud on the part
of the buyer. The “performance bond” loan was like a promissory note payable on demand.251
Performance bonds fulfil a most useful role in international trade. If the seller defaults in making delivery,
the buyer can operate the bond. He does not have to go to far away countries and sue for damages, or go
through long arbitration. He can get the damages at once which are due to him for breach of contract.
The bond is given so that, on notice of default being given, the buyer can have his money in hand to meet
his claim for damages for the seller’s non-performance of the contract. If he received too much, that can
be rectified later. The Courts must see that performance bonds are honoured.252
Sanjay Kataria
Page 12 of 51
[s 126.14] Guarantee for Fidelity
There is a substantial distinction between a guarantee for payment of a debt and one for the honesty of a
person; to find out whether a particular transaction belongs to the one class or the other, one has to look
to the terms of the bond itself, and the circumstances of the case.253
The nature of a fidelity guarantee gives rise to a more extensive disclosure than is required in the case of a
guarantee for a bank or other cash account. Where the guarantee is of the good behaviour of an
employee, the omission of the employer to disclose, to the intending guarantor, any previous dishonesty
or misconduct of the employee in his employment, of which the employer is aware, will entitle the
guarantor to avoid the guarantee. Where the guarantee is a continuing guarantee, the duty of disclosure
continues throughout the guaranteed employment.254 If the employer discovers that the employee has
been dishonest, but continues to employ him without telling the guarantor, the guarantor will not be liable
for any subsequent dishonesty by the employee.
In Radha Kanta Pal v United Bank of India Ltd.,255 it was held that the surety’s liability, for the faithful
discharge by another, of his duties depends on the exact terms of that guarantee. The surety is not
discharged from liability for the default of the person whose fidelity has been guaranteed, on the ground
that the default would not have happened if the creditor had used all the powers of superintending the
performance of the debtor’s duty, which he could have exercised, because the employer of that servant
does not contract with the surety, that he will use utmost diligence in checking the servant’s work.
However, if an employer of a servant, whose fidelity has been guaranteed, continues to employ him even
after a proved act of dishonesty, without notice to the surety, and not on mere suspicion or reports of
dishonesty, the surety is discharged.
[s 126.15] Surety Bonds given to Court
Although sections dealing with contract of guarantee and discharge of that contract do not apply to surety
bonds in favour of Courts, the equitable principle underlying these sections applies.256 Therefore, any
substantial variation of the original contract would discharge the surety.257 The principles underlying
sections 133 or 135 would apply, though the provisions of the sections may not be applicable.258 A surety
bond in favour of a Court is literally not a “contract of guarantee”, under section 126. A surety, who had
executed a surety bond for satisfaction of a decree that might be passed by the Court, is not ipso facto
discharged upon passing of a consent decree, if such a consent decree is not the result of any fraud or
collusion between the plaintiff and the defendant, and if no prejudice is caused to the surety. It is a
question of construction of the surety’s contract, whether liability was to be limited to a decree for the
creditor based upon the merits after a contest.259
Sanjay Kataria
Page 13 of 51
[s 126.16] Bank Guarantees
Performance guarantees given by banks are, in essence, exceptionally stringent contracts of indemnity.
They are contractual undertakings, normally granted by banks, to pay, or to repay, a specified sum in the
event of any default in performance by the principal-debtor of some other contract with a third party, the
creditor.260 The term “bank guarantee” has been used by the Indian Courts to describe such guarantees. A
bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not
qualified by the underlying transaction and primary contract between the person at whose instance the
bank guarantee is given and the beneficiary.261 A bank guarantee is very much like a letter of credit. The
courts will do their utmost to enforce it according to its terms. A bank that gives a performance guarantee
must honour it according to its terms.262 A bank guarantee is not merely a contract between the bank and
the beneficiary of the guarantee; it is also a security given to the beneficiary by a third party.263
[s 126.16.1] Conditional and Unconditional Performance Guarantees
A conditional performance guarantee is one where the surety becomes liable to the party, claiming under
the guarantee upon proof of breach of terms of the underlying contract, or on proof of both breach as
well as the loss occurring from the breach. Under an unconditional guarantee, the guarantor becomes
liable to pay the beneficiary the stated amount when the demand is made in the manner provided for in
the guarantee, without the need for that beneficiary to prove any breach or loss; the guarantor is bound
immediately upon the principal failing to perform his contract without further steps taken by anyone, and
without further conditions to be performed.264 Since the conditional performance guarantees are based on
the failure to perform, they are contracts of proper guarantee. The latter are sometimes called “first
demand” or “on demand” guarantees; and their peculiar stringent nature has attracted its names like a
credit note,265 promissory note payable on demand;266 when used in the commercial field, are similar to
“confirmed letters of credit.”267 Where a bank guarantee can be invoked only when certain conditions and
circumstances are in existence, the bank would be justified in refusing encashment when those conditions
are not shown to exist.268
Where the bank unconditionally and irrevocably promises to pay on demand, the amount of liability
undertaken in the guarantee without any demur or dispute under the terms of the guarantee, the liability
of the bank is absolute and unequivocal.269 There is no distinction between a bank guarantee for due
performance of a works contract, and one given towards security deposit for a contract or of any other
kind.270
Such unconditional guarantees can also be distinguished from the guarantee defined in section 126 of
Contract Act in that under a guarantee, the surety’s liability is co-extensive with that of the party for
whose performance the guarantee is given, and the surety is liable only when the principal-debtor is liable,
and to the same extent. On the other hand, under the unconditional bank guarantee, the bank is liable
when the conditions in the guarantee instrument are fulfilled without regard to the underlying transaction
Sanjay Kataria
Page 14 of 51
between the beneficiary and the person for whose obligation the guarantee has been given; and the
liability may arise even when such latter person has not been in default, his actual liability under that
transaction would be much less than the amount paid under the unconditional guarantee.
In Western Coalfields Limited v Rajesh,271 it was held that “A contract of guarantee is an independent contract
between the Bank and the beneficiary thereof and if it is a contract, which permits the creditor to invoke
the Bank Guarantee upon happening of an uncertain future event, then it becomes a “contingent
contract” as defined under section 31 and it cannot be enforced by law unless and until that event has
happened, in view of the provision of section 32. Till happening of an event, it merely remains a contract
which is unenforceable. In case of such contingent contract, the beneficiary has no unfettered right to
invoke the Bank Guarantees and to demand immediate payment. The terms of such contract will have to
be strictly construed and if it prescribes the way performance is to be claimed, it will have to be seen as to
whether the performance is claimed, in the manner so prescribed. If the invocation is not in accordance
with the terms and the manner prescribed, it would be bad. The violation of the terms can be regarded as
the species of the same genus as fraud which disentitles a beneficiary to invoke the Bank Guarantees.”
[s 126.16.1.1] Amount Guaranteed
The bond is not intended to represent an estimate of amount of damages, to which the beneficiary may be
entitled for the breach alleged to give rise to the right to call. The bond is a guarantee of due performance.
If the amount of the bond is not sufficient to satisfy the beneficiary’s claim for the damages, he can bring
proceedings for his loss.
[s 126.16.1.2] Matter of Construction
When such guarantees are reduced to writing, the express terms of this writing, containing the guarantee,
would be the repository of the obligations of the guarantor flowing from the surety bond. The question
whether the express terms of the guarantee give rise to the contract of guarantee sought to be enforced
will be the only limited inquiry which could be gone into by the Courts, while deciding the rights and
obligations flowing from such a contract of guarantee.272 The underlying contract can be read with the
bank guarantee only to understand the terms of the bank guarantee, and not as to override it.273 The
recitals in the guarantee cannot be read into the operative clause so as to convert an unconditional bank
guarantee to a conditional one.274
The question whether the guarantee is a conditional one or an unconditional one, payable on demand, is a
matter of construction in each case from the terms of the bond.275 If the payment under a guarantee is
dependent upon the contractor committing default in performing any of the terms and conditions of the
contract, or in payment of money due to the owner, the statement of the beneficiary would ordinarily be
taken at its face value.276 A bank guarantee, which is payable on demand, implies that the bank is liable to
Sanjay Kataria
Page 15 of 51
pay as and when a demand is made upon the bank by the beneficiary.277 Again, where there was no
unconditional or irrevocable promise to pay, in the guarantee and the promisor merely undertook to
indemnify the company from any loss or damage, that was caused to it or was suffered by it by the act of
the contractor, it was a contract of indemnity, and the beneficiary was required to show the loss, or
damage caused to it.278 Use of the expression “without questioning the right of the Board to make such
demand or the property or legality of the demand” indicates that the bank guarantee was unconditional.279
Absence of words “on demand”, “unconditional”, “unqualified” or “unequivocal”, usually found in bank
guarantees that secure performance, when read with an express provision promising to indemnify claims,
losses, damages etc. indicated that the document was one of indemnity, and the indemnity-holder could
not claim the amount without proving actual loss or damage.280 The banker knows only the letter of credit
which is the only authority to act, and the documents which are presented under it. If the documents
conform to the letter of credit, he pays; otherwise, he is not bound to pay.
The principal debtor has locus standi to complain about non-fulfilment of the conditions of the Bank
Guarantee.281
Whether the bank guarantee was issued towards the security deposit, or mobilisation advance, or working
funds, or the due performance of the contract, if it was unconditional with a stipulation that the banker
should pay on demand without demur, and that the beneficiary should be the sole judge not only on the
question of breach of contract, but also with respect to the amount of loss or damages, the obligation of
the bank would remain the same and that obligation has to be discharged in the manner provided in the
bank guarantee.282 The event, upon which the bank guarantee could be invoked, depends upon the
contract between the parties. Thus, where three bank guarantees were given for covering advances, and
the fourth for due performance, but a separate contract enabled the creditor to invoke any bank guarantee
for breach of contract, injunction could not be issued to restrain payment under the three bank guarantees
even after the advances were adjusted.283 However, where the bank guarantee for securing mobilisation
advance expressly provided that the guarantee payment shall be made in the event the obligations
expressed in the clause in the original contract were not fulfilled by the contractor, the beneficiary did not
have the unfettered right to invoke the guarantee.284
In Federal Bank Ltd. v VM Jog Engg. Ltd.,285 the Supreme Court has held that the Uniform Customs and
Practices for Documentary Credits (UCP) formulated by the International Chamber of Commerce are not
applicable without their being incorporated in the bank guarantee, nevertheless they may be taken into
account as part of mercantile customs and practices; but if the express terms of the contract contradict the
UCP, the terms of the contract will prevail.
[s 126.16.2] Bank Guarantee given to Courts
A guarantee given to the Court for due fulfilment of the decree by a judgment-debtor may provide for
period covered by the suit itself or there may be a guarantee which may make provision for the course of
litigation, even in the appellate Court; or it may be given covering the entire period of litigation between
Sanjay Kataria
Page 16 of 51
the commencement of suit and conclusion of litigation in the highest Court. Where a suit is dismissed in
the trial Court but decreed in appeal, the question whether the guarantee given during pendency of the
suit endures to the benefit of the plaintiff in such cases will depend on the manner in which the bank
guarantee is worded. However, a bank guarantee given as a condition for granting leave to defend a
summary suit cannot be treated as lapsed the moment the suit is decreed, else the exercise of granting
conditional leave would become futile.286
[s 126.16.3] Independent and Autonomous Nature
The Supreme Court in United Commercial Bank’s case287 quoted with approval the judgment of Kerr, J in RD
Harbottle (Mercantile) Ltd. v National Westminster Bank Ltd.:
It is only in exceptional cases that the Courts will interfere with the machinery of irrevocable obligations assumed by banks. They are
the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between
the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the Courts will
leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the
contracts. The Courts are not concerned with their difficulties to enforce the claims; these are risks which the merchants take. In this
case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a
different level. They must be allowed to be honoured, free from interference by the Courts. Otherwise, trust in international commerce
could be irreparably damaged.
A bank guarantee is an independent and distinct contract between the bank and the beneficiary, and is not
qualified by the underlying transaction and the primary contract between the person at whose instance the
bank guarantee is given. In case of an unconditional bank guarantee, the nature of obligation of the bank
is absolute, and not dependent upon any dispute or proceeding between the party at whose instance the
bank guarantee is given and the beneficiary.288 Such a guarantee is independent of the underlying contract,
and is autonomous. The necessary corollary of such independence and autonomy is that one is not to go
beyond that contract and has not to look to any other contract, including the underlying or primary one.
Performance of underlying contract comes into picture only if the guarantee itself makes its encashment,
subject to proof of performance of former contract. If scrutiny is commenced in respect of the
performance of the underlying contract, obviously “autonomy” and “independence” of the contract of an
absolute guarantee will be lost, and the enforcement of the same will acquire “dependence” upon the
result of the inquiry relating to the former (underlying) contract.289 Further, an irrevocable performance
bank guarantee being a distinct separate transaction, the payment under it being invoked, it cannot be
stayed or stopped, pending any settlement of disputes between the beneficiary and the person at whose
instance the guarantee has been given,290 or on the ground that the condition for enforcement of the
guarantee as contemplated in the underlying agreement has not arisen.291 Payment under a bank guarantee
is not affected by any winding up order passed against the company that gave the guarantee,292 or the
commencement of proceedings for declaring the company as a sick industrial undertaking.293 The
beneficiary is entitled to realise such a bank guarantee according to its terms, irrespective of pending
disputes.294 Pendency of proceedings—such as arbitration proceedings—or adjudication of disputes on
Sanjay Kataria
Page 17 of 51
the underlying contract between the beneficiary and the party at whose instance the guarantees were
issued by the bank and the conduct of keeping the guarantees renewed during the pendency of arbitration,
were not grounds for preventing the beneficiary from invoking the guarantees.295 A bank guarantee given
to show earnest and liable to be invoked if bid was withdrawn before the specified date could be so
invoked, and it was no defence that there was a delay in accepting the offer.296
Although the bank guarantee is an independent obligation, an interim injunction restraining payment
under the guarantee could be considered in a proceeding under section 20 of the Arbitration Act, 1940
(repealed), between the parties to the main contract, even though the bank is not a party in that
proceeding.297 Section 9 of the Arbitration and Conciliation Act, 1996 dealing with power of court to order
interim measures of protection does not keep out the substantive law relating to interim reliefs. The
exercise of powers under section 9 must be based on well settled principles governing such grant by
courts.298 The power of the court under section 9 to grant orders of injunction in respect of bank
guarantees as well as the power of the Arbitral Tribunal to grant such relief under section 17 of the
Arbitration & Conciliation Act, 1996 would be governed by the same principles followed by courts in
respect of grant of such interim reliefs in the matter of invocation of bank guarantees.299
[s 126.16.3.1] Liability to account later
A term may be implied in a transaction involving such a guarantee or performance bond, which the
beneficiary would account to the party who provided the bond, for the proceeds received under the bond,
and would only retain the amount of any loss suffered as a result of breach by the latter. If the beneficiary
suffered no loss, any money received under the bond was recoverable to that party.
[s 126.16.4] Obligation of the Bank
The bank is bound to honour an unconditional bank guarantee, according to its terms.
The contract between the banker and beneficiary is independent of and unqualified by the contract of sale
or other underlying transaction.300 It is not concerned in the least with the relations between the supplier
and the customer; nor with the question whether the supplier has performed his contracted obligation;
nor with the question whether the supplier is in default.301 A bank guarantee has been held to resemble
and be analogous to a letter of credit.302 If the enforcement of an “on-demand bank guarantee” is in terms
of the guarantee, the court will not restrain invocation by looking at the terms of the underlying
contract.303
Therefore, the bank must pay, irrespective of any dispute raised by the person at whose instance it has
Sanjay Kataria
Page 18 of 51
been given;304 and it is not entitled to raise a contention that no breach of contract was committed by the
principal-debtor.305 Also, it would not be concerned with the extent of amounts outstanding or
recoverable between the parties to the underlying contract.306 Though as per the terms, the invocation of
bank guarantee was permissible only on breach of terms of Letter of Intent, it was stipulated that decision
of beneficiary as to breach of conditions was absolute and binding on bank. Hence, the moment written
demand was made upon bank pursuant to breach of covenant, the bank was bound to honour the
payment under the guarantee.307 It cannot stop payment under an unconditional guarantee given by it to
cover advance given by purchaser up to a certain limit, on the ground that the purchaser had not
disbursed the full amount of advance as agreed.308 Nor is the liability under the guarantee affected by any
variation in the contract effected by one of the parties under the terms of the contract.309 The bank
remains under a duty to pay the amount stipulated to the beneficiary even if the documents presented,
although conforming on their face with the terms of credit, nevertheless contain in them a statement of
material fact that was not accurate. The bank’s duty to the seller was only vitiated if there was fraud on the
part of the seller. The law in India was also held to be on the same lines. Since the bank pledges its own
credit involving its reputation, it has no defence except in case of fraud.310
A bank may refuse payment under the guarantee, if there is a fraud on the part of the beneficiary, or
where the documents tendered for invoking the guarantee are not according to the terms of the guarantee,
or are forged. The bank may refuse payment if it detects the fraudulent actions with minimal
investigation.311 It is prima facie the right of the guarantor to be the sole arbiter on the question whether
the payment under the guarantee should be refused on the ground of the fraud; but if it is difficult for a
bank to decide on the alleged fraudulent action; it may ask the beneficiary to approach the Court for
injunction.312 Commission of fraud cannot be concluded from breach of contract alone. Fraud which
vitiates the contract must have a nexus with the acts of parties prior to entering into the contract. When a
contract of guarantee is sought to be invoked, it is for the bank to plead a case of fraud and not for the
promisor to set up a case of breach of contract.313
If the bank makes the payment, it can always have recourse to securities given by the party at whose
instance the bank guarantee has been given, and the beneficiary is not concerned with what the bank does
in order to reimburse itself, after making the payment.314 A bank cannot decline payment under a bank
guarantee on the ground that the payment under the counter-guarantee was restrained by a foreign Court,
when there was no other impediment to payment under exchange control regulations.315 The bank is
expected to take reasonable care while examining documents, and must accept or reject the documents
within reasonable time.316 A bank is liable to pay the guarantee if it is invoked within the specified period
of validity, although its payment may happen after the period.317
[s 126.16.4.1] Substantial compliance with terms
The bank may reject the bank guarantee if the beneficiary does not state, at the time of invoking the
guarantee, that the facts showing the conditions of the bank guarantee have been fulfilled; but the bank is
not required to inquire into the truth of the allegations.318 Once the documents are in order and within the
terms of the guarantee, the bank giving the guarantee must honour it and make payment.319
Sanjay Kataria
Page 19 of 51
A bank guarantee is a commercial document and is neither a statutory notice nor a pleading in a legal
proceeding, and it may be invoked in a commercial manner. The invocation would be sufficient and
proper if the bank concerned understands that the guarantee is being invoked by the beneficiary in terms
of the guarantee. The bank is only required to see whether the documents are in conformity on the face of
it with the terms and conditions of the undertaking, and are consistent with one another. The bank shall
have reasonable time in which it is required to examine the demand and any other accompanying
documents and to decide, whether to pay. The bank is not excused for not honouring the guarantee, if the
notice of demand is not strictly in accordance with the language of the bank; substantial compliance with
the terms is sufficient.320 Thus, it was sufficient to state that the vendor had defaulted in satisfactory
execution of the contract without specifically stating that he had failed to fulfil the obligations under the
contract.321 It is not necessary that the beneficiary should assess the quantum of loss, and mention this
ascertained figure while invoking it.322 The invocation of the guarantee must be within the term of the
guarantee and in the manner provided. A guarantee issued in favour of a Chief Engineer could not be
invoked by an Executive Engineer.323 While the bank has no means to ascertain if the conditions under
the guarantee have been met but is obliged to honour the demand, the letter invoking the bank guarantee
should be strictly in terms of the bank guarantee.324 An invocation made in time seeking to request
extending the validity of the guarantee, and if not extended, to treat the notice as notice for encashment, is
a valid invocation.325
[s 126.16.5] No injunction to restrain payment under a bank guarantee
The contract between the banker and beneficiary is independent of and unqualified by the contract of sale
or other underlying transaction. Holding thus the Supreme Court326 quoted with approval the
observations of Jenkins, LJ:
We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit
constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay,
irrespective of any dispute there may be between the parties as to whether the goods are up to the contract or not. An elaborate
commercial system has been built up on the footing that bankers’ confirmed credits are of that character, and in my judgment, it would
be wrong for this Court in the present case to interfere with that established practice.327
Bank guarantees must be allowed to be honoured free from interference by the courts barring the well
settled exceptions. A bank which gives a guarantee must honour the same according to its terms.328
It is not concerned in the least with the relations between the supplier and the customer; nor with the
question whether the supplier has performed his contracted obligation; nor with the question whether the
Sanjay Kataria
Page 20 of 51
supplier is in default.329 A bank guarantee has been held to resemble and be analogous to a letter of credit
and the same considerations which apply to a letter of credit in the matter of interference by a court have
been held to apply to a bank guarantee.330 If the enforcement of an “on-demand bank guarantee” is in
terms of the guarantee, the court will not restrain invocation by looking at the terms of the underlying
contract.331
Where a bank gives a guarantee to pay on “first demand”,332 and “without contestation” and “without
reference to such party” or “notwithstanding any disputes between the parties” ...the guarantor bank is
obliged to pay according to the contractual obligation, and the Court will not give an injunction
restraining the bank for payment.333 Where the guarantee was enforceable on the importer’s failure to take
delivery of goods, but it was also provided that the decision of the beneficiary, as to whether the importer
failed to carry out their obligation shall be final and binding on the bank, it was held that the bank could
not be restrained from making payment under the guarantee on the importer’s plea that the goods
contracted for were not offered for delivery.334 The fact that the guarantee issued by the bank is wider in
terms, than that agreed between the bank and the debtor is also no reason to grant injunction restraining
payment.335
An irrevocable commitment, either in the form of confirmed bank guarantee, or irrevocable letter of
credit, cannot be interfered with except when a case of fraud or apprehension of irretrievable injustice is
made out. In order to restrain the operation either of irretrievable letter of credit or of confirmed letter of
credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of
fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise,
the very purpose of bank guarantees would be negatived and the fabric of trading operations will get
jeopardized.336 Emphasising that courts should be slow in granting an injunction against invocation of
bank guarantee, it was held that only two exceptions had been carved out by courts- (1) a fraud in
connection with the bank guarantee that would vitiate the very foundation of the bank guarantee and (2)
where allowing the encashment of the unconditional bank guarantee would result in irretrievable harm or
injustice to one of the parties concerned. Since in most cases, payment under a bank guarantee would
cause harm or prejudice to the bank and customer, the harm or injustice contemplated should be of such
an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect
of such an injunction on commercial dealings in the country. The two grounds are not necessarily
connected, though both may co-exist in some cases.337 The statement in U.P. State Sugar Corporation that
the law relating to invocation of bank guarantees was well settled was held to be the correct declaration of
the law.338
In view of the clear statement of the law that prohibited grant of injunctions barring the two exceptions,
the wide propositions of law laid down in foreign judgments could not be accepted. Thus invocation for
oblique purpose, invocation in deterrent or abusive manner, misuse in failing to act according to purpose
of the contract, threat with ulterior motive, lack of honest or bona fide belief, nullity, etc. recognised by
foreign judgments as exceptions cannot be grounds for giving injunction.339
[s 126.16.5.1] Exceptions
Sanjay Kataria
Page 21 of 51
Payment under a bank guarantee may be refused or restrained:
(i) where the bank knows that the documents presented by the beneficiary for seeking enforcement
are forged or fraudulent;340
(ii) where a fraud by one of the parties to the underlying contract has been established, and the bank
has notice of the fraud;341
(iii) where a case of apprehension of irretrievable injustice is made out;
(iv) where the guarantee is conditional and the condition has not been complied with;342
(v) where the conditions necessary for invoking a conditional bank guarantee has not arisen;343
(vi) where the purpose for which a conditional guarantee was given has been accomplished;344
(vii) where the period stipulated for invocation of the guarantee has expired.345
Fraud.—The nature of the fraud that the Courts talk about is fraud of an “egregious nature as to vitiate
the entire underlying transaction”. It is the fraud of the beneficiary and not the fraud of somebody else;346
a fraud is that in which the beneficiary would be claiming payment to which he knew he had no
entitlement.347 Mere suspicion or possibility of sharp practice is not enough.348 A very strong prima facie
case, in support of the contention that there is fraud or special equity must be made out, and the Courts
will not interfere with the enforcement of the bank guarantees or letters of credit on mere allegation of
fraud or special equity.349 It would certainly not be sufficient that it rests on the uncorroborated statement
of the customer-beneficiary.350
The evidence of fraud must be clear, both as to the fact of fraud and as to the bank’s knowledge that the
demand for payment is, or will be fraudulent;351 though it also appears that fraud would attract an
injunction only if it occurred in:
(i) entering into the underlying contract with reference to the bank guarantee; or
(ii) in the formation or execution of the bank guarantee.352
Sanjay Kataria
Page 22 of 51
Thus, where S had a contract with a foreign buyer for supply of goods, and then had a contract with I for
supply of these to the foreign buyer, for the performance of which obligation I had given an
unconditional bank guarantee, there was no fraud where S cancelled its contract with the foreign buyer,
and claimed the amount under the bank guarantee alleging default by I.353 Another view is that a demand
under the guarantee may become fraudulent not because of a fraud committed by the beneficiary, while
executing the underlying transaction, but it may become so because of subsequent events and
circumstances.354
One more view is that the fraud contemplated by this exception is one which has direct connection with
the contract of guarantee, in respect of its coming into existence, continuance etc.355 Disputes between the
parties relating to the underlying transaction does not make the invocation of the guarantee fraudulent.356
Although it was once held that where the beneficiary claimed the entire amount guaranteed by
suppressing recoveries already made, the special case of fraud was made out.357 The Supreme Court has
held in a later case that a bank was not concerned with the outstanding amount payable to the beneficiary
by the person for whom the guarantee has been given.358 The mere fact that certain amounts may have
been received by the beneficiary, does not amount to fraud.359 The fact that one of the many
consignments had defective goods,360 or that goods supplied were short of agreed quantity,361 are not
grounds for issue of injunction against invoking the bank guarantee. Nor will injunction be issued because
of discrepancies are found in accounts submitted.362
Where fraud was alleged in the invocation on the ground that performance guarantee was construed as a
bank guarantee, the court negative the contention holding that one party’s construction of the contract
was inconclusive. The bank guarantee being an independent contract, its construction is not controlled by
the parent or underlying contract.363
Irretrievable Injury.—The harm or injustice contemplated for refusing enforcement of a bank guarantee
must be of such an exceptional and irretrievable nature as would override the terms of the guarantee, and
the adverse effect of such an injunction on commercial dealings in the country.364 In Uttar Pradesh Co-op.
Federation Ltd. v Singh Consultants and Engineers Pvt. Ltd.,365 it was held that the exceptional circumstances
making it impossible for the guarantor to reimburse himself, if he ultimately succeeded, have to be
decisively established; “a mere apprehension that the other party will not be able to pay, is not enough”.
The Supreme Court has held366 that irretrievable injury must be of the like in Itek Corpn. v First National
Bank of Boston;367 of such a nature that the beneficiary “has no adequate remedy at law...the allegations of
irreparable harm are not speculative, but genuine and immediate.”368 Thus where the beneficiary failed to
cancel the guarantee after the performance of the contract was completed, and attempted to invoke it,
injunction was issued because the beneficiary was a foreign trader without property or assets in India, and
it was not possible to recover payment from him.369 Payment under a bank guarantee cannot be stopped
on this ground that the beneficiary has become a sick industrial undertaking.370
[s 126.17] Injunction Granted: Other Cases
Sanjay Kataria
Page 23 of 51
Where, there was no unconditional or irrevocable promise to pay in the guarantee in which it was only
undertaken to indemnify the company from any loss or damage that was caused to it or was suffered by it
by the act of the contractor, it was held that the guarantee sought to be enforced amounted to a contract
of indemnity, and the beneficiary had to show the loss or damage caused to it and temporary injunction
could be granted, restraining the company from realising the bank guarantee..371 Where a bid guarantee
was furnished by the bidder in connection with its tender for installing air-conditioning plants at the
satellite earth stations and there was no contract between the parties to keep the bid alive, the bid being
revoked before acceptance, it was held that since the bid guarantee could be invoked only if the contract
were to be awarded to the bidder, and they had failed to perform their part, which stage never arose, and
since the party inviting the bids did not act to their detriment, all the conditions of issuance of temporary
injunction, restraining the bank from making payment were satisfied in the case.372 Where, however, the
bank guarantee was demanded by Union of India not as a part of commercial transaction, but in exercise
of its statutory or executive power as a Government, and where the Government acted arbitrarily or mala
fide in invoking the bank guarantee, the Court could examine the action of the Government, and prevent
enforcement of a bank guarantee.373 The Government could not encash bank guarantees given by dealers
for covering vend fee under challenge before a Court, after the levy was struck down as
unconstitutional.374 A bank guarantee given in lieu of earnest money could not be invoked where the
contractor could not fell trees under the terms of the contract because the forest department refused
permission.375 Payment under a bank guarantee given for earnest money was restrained where the tender
was not accepted in time, and there was no contract.376
[s 126.18] UN Draft Convention on Independent Guarantees and Stand-by Letters of

Credit
Under the Draft Convention on Independent Guarantees and Stand-by Letters of Credit, the guarantor
may refuse payment under the guarantee if the demand is improper. A demand for payment is improper
if:377
(i) any document is forged;

(ii) no payment is due on the basis asserted in the demand and the supporting documents; or
(iii) judging by the type and purpose of the undertaking, the demand has no conceivable basis; i.e.
(a) the contingency or risk against which the undertaking was designed to secure the beneficiary
has undoubtedly not materialised;
(b) the underlying obligation of the principal/applicant has been declared invalid by a Court or
arbitral tribunal; unless the undertaking indicates that such contingency falls within the risk to
be covered by the undertaking;
Sanjay Kataria
Page 24 of 51
(c) the secured obligation has undoubtedly been fulfilled to the satisfaction of the beneficiary;
(d) fulfilment of the underlying obligation has clearly been prevented by wilful misconduct of the
beneficiary.
The Draft Convention also provides for provisional Court orders to prevent the beneficiary from
receiving payment if the demand is improper and in the absence of such an order, the applicant would be
likely to suffer serious harm. But the Court may not issue a provisional order based on any objection to
payment, other than improper demand or use of the undertaking for an illegal purpose.
[s 126.19] Pleadings, Proof and Procedure
A contract of guarantee, its terms, and the consideration for it must be strictly proved. Custom of the
merchants or persons in similar business can be relied upon, and must be given weight while construing
the terms.378 Where the debtor’s agreement was proved against the debtor, the guarantor was bound by
the agreement so proved.379
Under English law, a guarantee is a promise to pay another’s debt if he fails to pay.380 It is a contract to
answer for the payment of a debt, or the performance of some duty by a third person who is primarily
liable for that payment or performance. It is considered a collateral contract, which does not extinguish
the original obligation for payment or performance. It is rendered null and void if the original obligation
fails. The liabilities of a guarantor in law depend upon those of the principal debtor, and when the
principal’s obligations cease the guarantor’s do too381 except in certain cases where the discharge of the
principal debtor is by the operation of the law.382
The statutory requisites of a guarantee are, in England, prescribed by (1) the Statute of Frauds383 which
provides that “no action shall be brought whereby to charge the defendant upon any special promise to
answer for the debt, default or miscarriages of another person, unless the agreement upon which such
action shall be brought, or some memorandum or note thereof, shall be in writing and signed by the party
to be charged therewith, or some other person thereunto by him lawfully authorized”, and (2) Lord
Tenterden’s Act384 which enacts that “no action shall be brought whereby to charge any person upon or
by reason of any representation or assurance made or given concerning or relating to the character,
conduct, credit, ability, trade or dealings of any other person, to the intent or purpose that such other
person may obtain credit, money or goods upon unless such representation or assurance be made in
Sanjay Kataria
Page 25 of 51
writing signed by the party to be charged therewith”
In a contract of guarantee there must always be three parties in contemplation: a principal debtor (whose
liability may be actual or prospective), a creditor, and a promisor (the guarantor) who promises to
discharge the debtor’s liability if the debtor should fail to do so. The guarantor’s liability is therefore
secondary to that of the principal debtor. In a contract of indemnity, however, the promisor is primarily
liable, either alone or jointly with the principal debtor, and undertakes to discharge the liability in any
event whether or not the principal debtor makes default.385
A guarantee is often termed a “collateral” or “conditional” contract, to distinguish it from one that is
“original” or “absolute”.386 The strict literal interpretation of “collateral” is “parallel” or “additional”, and
it does not signify the meaning “secondary”.387 To describe a guarantee as a “collateral contract” does not
sufficiently emphasise its accessory character, although it would seem that the words “collateral security”
might do so, as the word “security”—even by itself—ordinarily means something auxiliary to an
antecedent obligation.388 The obligation of a guarantor may not necessarily be conditional, except in the
broad sense that he will be discharged if the principal-debtor performs the guaranteed obligation. There
are two classes of guarantee: a promise which becomes effective if the debtor fails to perform his
obligations, and a promise that the debtor will perform his obligations. Guarantees in the latter class are
effectively unconditional.389
[s 126.20.1] Kinds of Guarantees
There are two kinds of guarantees. One is a promise by the surety which becomes effective if the
principal-debtor fails to perform his obligations. The other is a promise that the principal-debtor will
perform his obligations.390 In both cases, the surety’s liability is secondary. The surety is under no liability
if the principal-debtor’s obligation is discharged, by performance or otherwise, on or before the date of
performance. In the first case, the conditional promise never becomes effective; and in the other, there is
no breach by the surety.391 A guarantee can arise by exchange of emails.392
[s 126.20.2] Illustrative cases
An arrangement under which the promisor undertakes an obligation which replaces and/or extinguishes
the principal-debtor’s liability, whether by novation or otherwise, is not a guarantee.393
Directors may bind themselves personally by a guarantee which they sign or adopt.394 When, therefore,
they do not intend to bind themselves personally, but are acting solely on behalf of the company, they
Sanjay Kataria
Page 26 of 51
should be careful to word the contract accordingly.395
Mortgage and a guarantee given in favour of a corporate body, which is not under the statute allowed to
do banking business is valid and enforceable, though the statute prohibits it from carrying on business
without authority.396
In AIB Group (UK) plc v Martin,397 a bank lent money to M and G and they charged properties they owned
jointly under a standard form mortgage, under which they agreed that they will pay or discharge all sums
of money advanced to the mortgagor. The deed further stated that if the mortgagor was more than one
person, that expression “shall be construed as referring to all and/or any of those persons and the
obligations of such persons hereunder shall be joint and several”. The bank also lent money to each of
them for which each mortaged his own property as security. On default, the bank sold properties, and
sued on the covenant to pay in the joint mortgage. There was a shortfall. The question was whether G
sould be liable under the joint mortgage for debt of M secured by M’s sole mortgage. It was held that he
was liable. It was observed:
The question is whether each of them also covenanted by way of guarantee to pay the debts of the other and charged his separate
properties with such payment. None of the documents contains an express guarantee. If there is such a guarantee, it derives exclusively
from the way in which the interpretation clause in the joint mortgage is applied to the operative provisions.
Guarantees often contain a clause which states that a certificate or other document signed by or on behalf
of the creditor shall be either prima facie or conclusive evidence against the guarantor, to the extent of the
principal-debtor’s liability to the creditor. Provided that, they are expressed in sufficiently clear and explicit
terms, such clauses are effective to bind the guarantor398 in the absence of proof of fraud,399 bad faith400
or in the case of likelihood of irretrievable injustice,401 or other special circumstances.402
If a loan is guaranteed, and is expressed to be secured, the guarantee may be conditional on the existence
of the security.403 In order to establish such a condition, the guarantor must show that offering some
other security was a part of the contract of guarantee, and the lender accepted this.404
Performance guarantees are really an undertaking by the bank to pay against the beneficiary’s first written
demand for payment, without any further documentation or proof of default, and hence the use of the
term “guarantee” though customary for such instruments, is stated to be a misnomer405 and is referred to
as performance bonds.406 The performance bond is not intended to supplant the right to sue for damages.
However, if there has been a call on the bond which turns out to exceed the true loss sustained, then the
Sanjay Kataria
Page 27 of 51
party who provided the bond is entitled to recover the overpayment.407
Where a bank unconditionally undertook to pay the owner, on demand, any sum up to the limit specified,
the owner was entitled to demand payment of the guaranteed amount, irrespective of whether there had
been want of due and faithful performance of the work.408
It is implicit in the nature of a bond, in the absence of clear words to the contrary, that when the bond is
called, there would, at some stage in the future, be accounting between the parties to determine their
rights and obligations.409
In Australasian Conference Assn. Ltd. v Mainline Constructions Pty Ltd. (in liq),410 a builder gave a bank guarantee
in lieu of retention fund required as security under a building contract for the due performance of the
builder’s obligations under the contract. The owner had the right to take recourse to the guarantee, if the
employment of the builder was determined. The owner determined the builder’s appointment when a
receiver was appointed to the builder’s undertaking. It received the moneys under the guarantee from the
bank. It was held that the owner was entitled to use the security moneys to satisfy the builder’s obligations
to the sub-contractors (a right given to the owner under the contract) who had done the work, but was
not paid by the builder. However, after the payment, any surplus should be released to the builder, and
not to the bank.411
A bank remains under a duty to pay the amount stipulated to the beneficiary even if the documents
presented, although conforming on their face with the terms of credit, nevertheless contain in them a
statement of material fact that was not accurate.412 It is prima facie the right of the guarantor to be the
sole arbiter on the question whether the payment under the guarantee should be refused on the ground of
the fraud.413
In Bolivinter Oil SA v Chase Manhattan Bank,414 the Court of Appeal summarised the principles about
granting ex parte injunction prohibiting payment under letters of credit or performance bonds or
guarantees. It was stated:
The unique value of such [irrevocable] letter, bond or guarantee is that the beneficiary can be completely satisfied that, whatever
disputes may thereafter arise between him and the bank’s customer in relation to the performance or indeed existence of the underlying
contract, the bank is personally undertaking to pay him provided that the specified conditions are met. In requesting his bank to issue
such a letter, bond or guarantee, the customer is seeking to take advantage of this unique characteristic. If, save in the most exceptional
cases, he is to be allowed to derogate from the bank’s personal and irrevocable undertaking given, be it again noted at his request, by
obtaining an injunction restraining the bank from honouring that undertaking, he will undermine what is the bank’s greatest asset,
however large and rich it may be, namely its reputation for financial and contractual probity. Furthermore, if this happens at all
frequently, the value of all irrevocable letters of credit and performance bonds and guarantees will be undermined.
Sanjay Kataria
Page 28 of 51
Judges who are asked, often at short notice and ex parte, to issue an injunction restraining payment by a bank under an irrevocable letter
of credit or performance bond or guarantee should ask whether there is any challenge to the validity of the letter, bond or guarantee
itself. If there is not or if the challenge is not substantial, prima facie no injunction should be granted and the bank should be left free to
honour its contractual obligation, although restrictions may well be imposed on the freedom of the beneficiary to deal with the money
after he has received it. . . irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the
granting of such an injunction and an application by the bank to have it discharged.415
The Court of Appeal also refused on sound policy reasons to recognise the nullity exception for
restraining payment under letters of credit.416
In Themehelp Ltd. v West,417 the Court held that where fraud was raised as between the parties to the main
transaction at an early stage, before any question of the enforcement of the guarantee as between the
beneficiary and the guarantor had arisen; the Court could grant an injunction. Such an injunction would,
in no way threaten the integrity or autonomy of the guarantee.
135 Punjab National Bank Ltd v ShriVikram Cotton Mills Ltd.,

AIR 1970 SC 1973 : [1970] 2 SCR 462
.
136 Fell’s Treatise on the Law of Mercantile Guarantees and of Principal and Surety in
General, second Edn, 1820; quoted in Conley (Re), ex p Trustee v Barclays Bank Ltd., (1938) 2 All ER 127
, at 130–131 (CA).
137 Transcore v UOI, AIR 2007 SC 712

: (2008)1SCC 125.
139 Moschi v Lep Air Services Ltd., (1973) AC 331

, at 347, 348 per Lord Diplock : (1972) 2 All ER 393
, at 401 (HL).
140 United Breweries (Holding) Ltd v Karnataka State Industrial Investment,

AIR 2012 Kant 65 .
Sanjay Kataria
Page 29 of 51
141 Industrial Finance Corporation of India Ltd v Cannanore Spinning and Weaving
Mills Ltd., AIR 2002 SC 1841 : (2002) 5
SCC 54 .
142 National Highways Authority of India v Ganga Enterprises,

AIR 2003 SC 3823 : (2003) 7 SCC 410
.
143 Blueorchard Microfinance Fund v Share Microfin Ltd., (2015) 192 COMP
CASES 9 : (2016) 3 ALD 269 .
144 Lakeman v Mountstephen, (1874) 7 HL Cas 17, at 24–25 per Lord Selborne
LC, (1874–80) All ER Rep 1924 , at 1928.
145 Satyanarayan Kamal Kumar v Birendra Pr Singh,

AIR 1979 Cal 197 .
146 Radha Kanta Pal v United Bank of India Ltd.,

AIR 1955 Cal 217 .
147 Landon General Omnibus Co. Ltd. v Holloway,

(1912) 2 KB 72 : (1911–13) All ER Rep 518 (CA).
148 H Mahommad Khan v Andhra Bank Ltd., AIR

1983 Kant 73 .
149 Kumar v Dunning, (1989) 1 QB 193

: (1987) 2 All ER 801 .
150 Motilal Ramkumar v Akbarbhai Fakhruddin,

AIR 1939 Bom 309 .
151 Durga Priya Chowdhury v Durga Pada Roy, AIR

1928 Cal 204 : (1927) 55 Cal 154 : 109 IC
752; State Bank of India v Jayanthi, AIR 2011 Mad 179 ; H B Basavaraj v
Canara Bank, 2009, AIR SCW 7567 : (2010) 12 SCC 458 ; Kamal Gupta v
Bank of India, AIR 2008 Del 51 ; State Bank of India v Jayanthi,
AIR 2011 Mad 179 .
152 R K Dewan v State of UP, AIR 2005 All 202

: 2005 (3) AWC 2328 :
2005 (1) ESC 581 .
153 Muhammad Ubed-Ullah v Muhammad Insha Ullah Khan,

AIR 1921 All 287 : 61IndCas 138, Technica International Engineering Pvt Ltd v Kokan Mercantile
Coop Bank Ltd, Arbn Pet 85/2010 dec on 2 April 2013 (Bom); Ranjitsingh v Narmadi AIR 1931 Ngp
173 ; Oriental Bank of Commerce v Rajrani AIR 2005 MP 49
: 2004 (1) MPHT 462; Sheonarayan Harilal v Kanhaiyalal Devidin, AIR 1948 Ngp 168
.
Sanjay Kataria
Page 30 of 51
154 Chand Chits and Finance Pvt. Ltd. v Super Advertisers,

AIR 1992 Del 85 .
155 S N Prasad v Monnet Finance Ltd., AIR

2011 SC 442 : (2011) 1 SCC 320 .
156 M/s Margadarsi Chit Fund Limited v Kanupuru Harikumar Reddy, HC of

Andhra Pradesh, 2016 SCC OnLine Hyd 265.
157 S Chattanatha Karayalar v Central Bank of India Ltd,

AIR 1965 SC 1856 : [1965] 3 SCR 318 .
158 KP Kunjan v Kerala State Financial Enterprises Ltd,

2017 SCC Online Ker 6697 .
159 Ramachandra B Loyolka v Shapurji N Bhownagree,

AIR 1940 Bom 315 : (1940) Bom 552 at 556 : 192 IC 375; Edaven Kavungal Kelappan Nambiar v
Moolakal Kunhi Raman, AIR 1957 Mad 164 : (1957) Mad 176; Ram
Narain v Hari Singh, AIR 1964 Raj 76 :
(1963) 13 Raj 973 ; Mahab ir Shum Sher Jung Bahadur Rana v Lloyds Bank Ltd.,
AIR 1968 Cal 371 : 72 Cal WN 94; Nagpur Nagarik Sahakari Bank Ltd. v UOI,
AIR 1981 AP 153 , 162.
160 Bittan Bibi v Kuntu Lal, AIR 1952

All 996 : ILR (1952)2 All 984 .
161 Kavungal Kelappan Nambiar v Moolakal Kunhi Raman,

AIR 1957 Mad 164 : (1957) Mad 176; Ramachandra B Loyolka v Shapurji N Bhownagree,
AIR 1940 Bom 315 : (1940) Bom 552, 556 : 192 IC 375; Mahabir Shum Sher Jung
Bahadur Rana v Lloyds Bank Ltd., AIR 1968 Cal 371 : 72 Cal WN 94;
Nagpur Nagarik Sahakari Bank Ltd. v UOI, AIR 1981 AP 153 , 162.
162 Vandana Global Ltd v IL&FS Financial Services Ltd,

2018 SCC Online Bom 337 .
163 Jagijivandas Jethalal v King Hamilton & Co.,

AIR 1931 Bom 337 : (1931) 55 Bom 677 : 134 IC 545.
164 Nandlal-Chanandas v Kishinchand-Butamal,

AIR 1937 Sind 50 .
165 H Mahommad Khan v Andhra Bank Ltd.,

AIR 1983 Kant 73 , 76 following Ramchandra B Loyalka v Shapurji N Bhownagree,
AIR 1940 Bom 315 : (1940) 42 Bom LR 550
.
166 Lalbhai Trading Co. v UOI, (2006)1

GLR 497 .
Sanjay Kataria
Page 31 of 51

AIR 1926 Mad 544 : (1925) 49 Mad 156, 172, 185 : 95 IC 154; Ramachandra B Loyolka v
Shapurji N Bhownagree, AIR 1940 Bom 315 : (1940) Bom 552 per
Beaumont CJ at 556–57 : 192 IC 375; Municipal Committee v Vishnu Damodhar Bhalerao, AIR 1949
Ngp 48 : (1948) Ngp 350; Radha Kunwar v Ram Narain, AIR 1952 All 587
; Madiraj Chiranjivrao v Venkateshwarrao, AIR 1955 Hyd 261
.
168 Jagannath Bakhsh Singh v Chandra Bhukhan Singh,

AIR 1937 Oudh 19 ; Suresh Narain Sinha v Akhauri Balbhadra Prasad,
AIR 1957 Pat 256 ; Brahmayya & Co. v K Srinivasan Thangirayar,
AIR 1959 Mad 122 ; Prasanjit Mahtha v United Commercial Bank Ltd.,
AIR 1979 Pat 151 .
169 Mir Niyamath Ali Khan v Commercial and Indl. Bank Ltd.,
AIR 1969 AP 294 .

AIR 1926 Mad 544 : (1925) 49 Mad 156 : 95 IC 154; Municipal Committee v Vishnu Damodhar
Bhalerao, AIR 1949 Ngp 48 : (1948) Ngp 350; Suresh Narain Sinha v Akhauri
Balbhadra Prasad, AIR 1957 Pat 256 ; Ramachandra B Loyolka v Shapurji N
Bhownagree, AIR 1940 Bom 315 : (1940) Bom 552 : 192 IC 375;
Janwatraj v Jethmal, AIR 1958 Raj 343 :
(1958) 8 Raj 975 ; H Mahommad Khan v Andhra Bank Ltd.,
AIR 1983 Kant 73 .
171 Larsen & Toubro v Shri Ahuja Properties Realtors Pvt. Ltd., (2018) 2 AIR
Bom R 42 : (2017) 3 Bom CR 542 .
172 Punjab National Bank Ltd. v Shri Vikram Cotton Mills Ltd.,
AIR 1970 SC 1973 : [1970] 2 SCR 462
; AIR 1949 Ngp 48 : (1948) Ngp 350; Radha Kunwar v Ram
Narain, AIR 1952 All 587 ; Janwatraj v Jethmal,
AIR 1958 Raj 343 : (1958) 8 Raj 975
; Brahmayya & Co. v K Srinivasan Thangirayar, AIR 1959 Mad 122 .
173 Chitty on Contracts, 28th Edn, vol II, at 1303, paras 44–013; Allied London
Investments Ltd. v Hambro Life Assurance Ltd., (1983) 269 EG 41 ; Selous
Street Properties Ltd. v Oronel Fabrics Ltd., (1984) 270 EG 643 , at 743.
174 Arunachellam Chetti v Subramanian Chetti,

(1906) ILR 30 Mad 235.
175 Shiam Lal v Mukar Lal, AIR 1945

All 233 ; K Lakshinarasayya v K Venkatakrishnayya, AIR 1912 Mad 119
(execution by principal-debtor of a fresh note in discharge of the first note).
176 Godan Namboothiripad v Kerala Financial Corpn.,

AIR 1998 Ker 31 .
Sanjay Kataria
Page 32 of 51
177 KSIIDC v SBI, 2004 (4) KarLJ 266

.
179 Punjab National Bank Ltd v ShriVikram Cotton Mills Ltd,

AIR 1970 SC 1973 ; Blueorchard Microfinance Fund v Share Microfin Ltd., (2015) 192 COMP
CASES 9 : (2016) 3 ALD 269 .
180 Mountstephen v Lakeman, (1871) LR 7

QB 196, at 202; affirmed in House of Lords Lakeman v Mountstephen, (1874) 7 HL Cas 17 :
(1874–80) All ER Rep 1924 ; Mahommad Ishak v Balaji,
AIR 1934 Ngp 163 (2); State of Madhya Bharat v Hiralalji, AIR 1953
MB 26 .
181 Harburg India Rubber Comb Co. v Martin,

(1902) 1 KB 778 (CA); Manda Suryakanthamma v Distt Registrar of Assurance,
AIR 1986 AP 3 ; Pitts v Jones, [2008] 1 All ER 941
: [2007] EWCA Civ 1301 , CA.
182 Punjab National Bank Ltd. v Sri Bikram Cotton Mills Ltd.,
AIR 1970 SC 1973 : (1970) 2 SCR 462
.
183 Edaven Kavungal Kelappan Nambiar v Moolakal Kunhi Raman,

AIR 1957 Mad 164 : (1957) Mad 176.
184 KP Kunjan v Kerala State Financial Enterprises Ltd.,

2017 SCC Online Ker 6697 .
185 Suresh Narain Sinha v Akhauri Balbhadra Prasad,

AIR 1957 Pat 256 ; Chand Chits and Finance Pvt. Ltd. v Super Advertisers,
AIR 1992 Del 85 , at 86.
186 Muthu Raman Chetty v Chinna Vellayan Chetty,

AIR 1917 Mad 83 : (1916) 39 Mad 965 : 33 IC 508.
187 Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd.,
(2012) 3 All ER 842 .

AIR 2007 SC 2361 : (2006) 6 SCC 293
.
189 Nagpur Nagarik Sahakari Bank Ltd. v UOI,

AIR 1981 AP 153 : 1984 55 COMP CASES 677 AP.
Sanjay Kataria
Page 33 of 51

AIR 2007 SC 2361 : (2006) 6 SCC 293
, reversing Mula Sahakari Karkhana Ltd. v State Bank of India, AIR 2005 Bom 385
.

AIR 1917 Mad 83 : (1916) 39 Mad 965 : 33 IC 508; Joyman
Bewa v Easin Sarkar, AIR 1926 Cal 877 :
(1926) 53 Cal 515 : 95 IC 483.
192 Hukumchand Insurance Co. Ltd. v Bank of Baroda,

AIR 1977 Kant 204 , at 207; New India Assurance Co. Ltd. v Kusumanchi Kameshwara Rao,
(1997) 9 SCC 179 .
193 Bittan Bibi v Kuntu Lal, AIR 1952 All 996

: ILR (1952)2 All984.
194 Guild & Co. v Conrad, [1894] 2 QB 885

, 896 (CA); Edaven Kavungal Kelappan Nambiar v Moolakal Kunhi Raman, AIR 1957 Mad
164 : (1957) Mad 176; Ramachandra B Loyolka v Shapurji N Bhownagree, AIR
1940 Bom 315 : (1940) Bom 552, 556 : 192 IC 375; Mahabir Shum Sher Jung Bahadur Rana v Lloyds Bank Ltd.,
AIR 1968 Cal 371 : 72 Cal WN 94; Nagpur Nagarik Sahakari Bank Ltd.
v UOI, AIR 1981 AP 153 , 162 : 1984 55 COMP CASES 677 AP.
195 Jagijivandas Jethalal v King Hamilton & Co., AIR

1931 Bom 337 : (1931) 55 Bom 677 : 134 IC 545.
196 Nandlal-Chanandas v Kishinchand-Butamal, AIR

1937 Sind 50 .
197 Punjab National Bank Ltd v Shri Vikram Cotton Mills Ltd.,
AIR 1970 SC 1973 .
198 Mathura Das v Secy of State, AIR 1930 All 848

: 1970 AIR 1973 :
1970 SCR (2) 462 .
199 MNA Khan v Com. & Ind. Bank, AIR

1969 AP 294 .
200 Saisudhir Energy Limited v NTPC Vidyut Vyapar Nigam Limited 2016 (5)
ArbLR 137(Delhi).
201 Brahmayya & Co. v K Srinivasan Thangirayar,

AIR 1959 Mad 122 ; Prasanjit Mahtha v United Commercial Bank Ltd., AIR 1979 Pat 151
.
202 Chattanatha Karayalar v The Central Bank of India Ltd.,

AIR 1965 SC 1856 : 1965 SCR (3) 318
.
Sanjay Kataria
Page 34 of 51
203 S Chattanatha Karalayar v Central Bank of India Ltd.,

AIR 1965 SC 1856 : (1965) 3 SCR 318 .
204 AIR 1965 SC 1856

; Parvataneni Venkata Brahmarao v Andhra Bank Ltd., AIR 1964 AP 555
.
205 Smith v Wood, (1929) 1 Ch 14

: [1928] All ER Rep 229 ; Conley (Re), ex p Trustee v Barclays Bank
Ltd., (1938) 2 All ER 127 ; Jagijivandas Jethalal v King Hamilton & Co.,
AIR 1931 Bom 337 : (1931) 55 Bom 677 : 134 IC 545.
206 Joseph Abraham v Tahsildar Meenachil, (1971) 1

Ker 618 , AIR 1971 Ker 334 .
207 The Companies Act, 1956, section 295; Companies Act,2013, section 185.
208 Nandlal Chogalal v Surajmal Gangaram, AIR

1932 Ngp 62 : 138 IC 879.
209 Manda Suryakanthamma v Dist Registrar of Assurance,

AIR 1986 AP 3 .
210 A Rajagopala Iyer v S Ramachandra lyer, AIR

1942 Mad 628 .
211 Arathil Kandoth Madhattul Balakrishnan v PK Chattu,

AIR 1939 Mad 848 (also as an endorser).
212 Jagannath Bakhsh Singh v Chandra Bhukhan Singh,

AIR 1937 Oudh 79 .
213 Lala Banshidhur v Govt of Bengal, (1871) 14 MIA 86 :

(1872) 9 BLR 364 .
214 Karnataka State Khadi and Village Industries Board v Punjab National Bank,
(2014) 1 SCC 625 .
215 Joseph Abraham v Tahsildar of Meenachil, AIR

1971 Ker 334 (FB) : (1971) 1 Ker 618 .
216 Muthu Karu v Alagappa Chettiar v Krishnier, AIR

1927 Mad 62 ; Muthukaruppa Mudali v Pi Mu Kathappudayan, AIR 1915 Mad
528 : (1914) 27 Mad LJ 249 : 25 IC 726.
Sanjay Kataria
Page 35 of 51
217 Karam Din Nawab Din v Anant Ram Lala Hukum Chand Dhal,
AIR 1941 Pesh 6 .
218 Chanana Steel Tubes Pvt. Ltd. v Jaitu Steel Tubes,

AIR 2000 HP 48 : 2000 99 COMP CASES 251 HP.
219 RMMST Vyravan Chettiar v Official Assignee,

AIR 1933 Mad 39 : (1932) 63 Mad LJ 615.
220 Liquidator of Bagha Co-op. Society v Debi Mangal Prasad Sinha,

AIR 1937 Pat 410 .
221 Lima Leitao & Co. Ltd. v UOI, AIR 1968 Goa 29
: 170 Ind Cas 130.
222 Manju Mahadeo Shetti v Shivappa Manju Shetti,

AIR 1918 Bom 197 : (1918) 42 Bom 444 : 46 IC 122.
223 AIR 1918 Bom 197

.
224 AV Varadarajulu Naidu v KV Thavasi Nadar,

AIR 1963 Mad 413 : (1963) Mad 942; but overruled on another point in KM Vishwanatha Pillai v KM Shanmugham
Pillai, AIR 1969 SC 493 .
225 EP George v Bank of India, AIR 2001 Ker 107

.
226 See section 128 below under heading: “Commencement of liability”.
227 Faber v Earl of Lathom, (1897) 77 LT 168

, at 169; Eshelby v Federated European Bank Ltd., (1932) 1 KB 254
, at 266 per Swift J, affirmed, (1932) 1 KB 423 :
(1931) All ER Rep 840 (CA).
228 Halsbury’s Laws of England, vol 49, 5th Edn, 1 April 2008, Financial Services
and Institutions, para 1083; statement in its earlier edition cited with approval and applied in Perrylease Ltd. v Imecar AG,
(1987) 2 All ER 373 , at 378 per Scott J : (1988) 1 WLR 463
, at 469–470.
229 Larsen & Toubro v Shri Ahuja Properties Realtors Pvt. Ltd.,
(2017) 3 Bom CR 542 : (2018) 2 AIR Bom R 42.
230 Pioneer Shipping Ltd. v BTP Tioxide Ltd., (1982)

AC 724 , at 736 per Lord Diplock, (1981) 2 All ER 1030
, at 1035 (HL).
Sanjay Kataria
Page 36 of 51
231 Johnston v Nicholls, (1845) 1 CB 251

, at 269 per Maule J; Hyundai Heavy Inds. Co. Ltd. v Papadopoulos, (1979) 1 Lloyd’s Rep 130 (CA), affirmed,
(1980) 2 All ER 29 : (1980) 1 WLR 1129
: (1980) 2 Lloyd’s Rep 1 (HL).
232 The Indian Evidence Act, 1872, sections 91–100.
233 Amalgamated Investment & Property Co. Ltd. (in liquidalion) v Texas Commerce
Intl. Bank Ltd., (1982) QB 84 : (1981) 3 All ER
577 (CA); Cambridge Credit Corpn. Ltd. v Lombard Australia Ltd., (1977) 136 CLR
608 : (1977) 14 ALR 420 (High Court of
Australia).
234 Coghlan v SH Lock’ (Australia) Ltd., (1987) 3

BCC 183 (PC); Bank of Scotland v Wright, (1991) BCLC 244
.
235 United Bank of India v Bengal Behar Constn. Co. Ltd.,

(1998) 8 SCC 653 .
236 Eastern Counties Building Society v Russell, (1947) 2

All ER 734 (CA); Eastern Counties Building Society v Russell, (1947) 1 All ER
500 , at 503 per Hilbery J; affirmed, (1947) 2 All ER 734
(CA) (applying the contra proferentem rule); National House-Building Council v Fraser, (1983) 1
All ER 1090 , at 1092 per Sir Douglas Frank QC.

AIR 1955 Cal 217 .
238 Chaganti Veeresalingam v Mallampalli Subbarayudu,

AIR 1939 Mad 932 : (1939) 2 Mad LJ 282.
239 Chittaranjan Banerjee v Dy. Commr. of Lakhimpur,

AIR 1980 Gau 62 (FB).
240 State of Maharashtra v MN Kaul, AIR

1967 SC 1634 .
241 Central Bank of India v Virudhunagar Steel Rolling Mills Ltd,

AIR 2016 SC 191 : (2015) 16 SCC 207
;
242 Ram Nagappa v Syndicate Bank, (1986) 88 Bom LR

409 : 1987 (2) BomCR 362 :
(1986) 88 BOMLR 409 : 1987 62 COMP CASES 10 Bom.
243 Punjab National Bank Ltd. v ShriVikram Cotton Mills Ltd.,

AIR 1970 SC 1973 : (1970) 2 SCR 462
.
Sanjay Kataria
Page 37 of 51

1967 SC 1634 : 1968 38 COMP CASES 1 SC.
245 SN Prasad v Monnet Finance Ltd, AIR

2011 SC 442 : (2011) 1 SCC 320 .
246 Adamsab Usmansab Kanakya v Gurushinddayya Lingayya,

AIR 1967 Kant 147 : AIR 1967 Mys 147
.

1967 SC 1634 : (1968) 38 COMP CASES 1.
248 Section 144 for more details.

AIR 2003 SC 3823 : (2003) 7 SCC 410
.
250 United Commercial Bank v Bank of India, AIR

1981 SC 1426 : 1981 SCR (3) 300 . See
under heading: “Bank Guarantees: Fraud.”
251 Edward Owen Engg. Ltd. v Barclays Bank lntl. Ltd.,

(1978) 1 All ER 976 , at 983–84, 986–87 : (1977) 3 WLR 764
.
252 State Trading Corpn. of India Ltd. v ED&F Man, (Sugar) Ltd., [1981] Com
LR 235 : (1981) Times, 22 July; quoted in Cargill Intl. SA v Bangladesh Sugar and Food Inds. Corp.,
(1996) 4 All ER 563 , at 569, affirmed in, (1998) 2 All ER 406
(CA).
253 Gobind Chandra Das v Hayagriba Upadhyaya,

AIR 1932 Pat 162 .

AIR 1955 Cal 217 ; Phillips v Foxall, (1872) LR 7 QB 666;
Sanderson v Aston, (1873) LR 8 Ex 73; Enright v Falvey, (1879) 4 LR Ir 397.
256 Raja Bahadur Dhanraj Girji v Raja P Parthasarathy Rayanimvaru,

[1963] 3 SCR 921 , 926; TN&Q Bank Ltd. v Official Assignee of Madras,
AIR 1944 Mad 396 : (1944) Mad 708; Parvatibai Harivallabhdas Vani v Vinayak Balwant
Jangam, AIR 1939 Bom 23 : (1938) Bom 794; Mahomedalli Ibrahimji v
Lakshmibai Anant Palande, AIR 1930 Bom 122 : (1929) 54 Bom 118 : 124 IC
227; Narsingh Mahton v Nirpat Singh, AIR 1932 Pat 313 : (1932) 11 Pat 590 :
Sanjay Kataria
Page 38 of 51
140 IC 564; Mahommad Yusaf v Ram Govinda Ojha, AIR 1928 Cal 177 (2) :
(1927) 55 Cal 91 .
257 Narayan Ramchandra Bhagwat v Markandya Tukaram,

AIR 1959 Bom 516 ; following Parvatibai Harivallabhdas Vani v Vinayak Balwant Jangam,
AIR 1939 Bom 23 : (1938) ILR Bom 794 ; supra,
AIR 1944 Mad 396 : (1944) Mad 708; Kanailal Mookerjee v Kali Mohan Chatterjee,
AIR 1957 Cal 645 : 62 Cal WN 136; Bankim Bihari Roy v Halima Bibi,
AIR 1962 Ori 54 .
258 Parvatibai Harivallabhdas Vani v Vinayak Balwant Jangam,

AIR 1939 Bom 23 : (1938) ILR Bom 794
; Pirthi Singh v Ram Charan Aggarwal, AIR 1944 Lah 428 ; Narayan
Ramchandra Bhagwat v Markandya Tukaram, AIR 1959 Bom 516 ; Shyam
Lal Ram Krishna Agarwal v Takhatmal Bodhraj, AIR 1957 MP 98 ; Adamsab
Usmansab Kanakya v Gurushinddayya Lingayya, AIR 1967 Mys 147 ; but see
Kurian v Alleppey CCMS Society, AIR 1975 Ker 44 (section 135 can be applied).
259 In the following cases, the surety was held to be discharged: Mahommadalli
Ibrahimji v Lakshmibai Anant Palande, AIR 1930 Bom 122 : (1929) 54 Bom
118 : 124 IC 227; Narsingh Mahton v Nirpat Singh, AIR 1932 Pat 313 : (1932)
11 Pat 590 : 140 IC 564; Mahommad Yusaf v Ram Govinda Ojha, AIR 1928 Cal 177
(2) : (1927) 55 Cal 91 . In the following, the surety was not discharged:
Odayamangalath Appani Nair v Isaak Mackadan, AIR 1920 Mad 355 : (1920)
43 Mad 272 : 53 IC 367; Haji Ahmed Karim v Maruti Ravji Bhongale, AIR 1931 Bom 55
: (1931) 55 Bom 97 : 32 Bom LR 1394 : 128 IC 903; Madanlal Motilal v Radhakishan Laxminarain,
AIR 1935 Ngp 258 : (1935–36) 31 Ngp 83 (supp.).
260 Chitty on Contracts, 28th Edn, vol II, at 1303, paras 44–014.
261 Hindustan Steelworks Construction Ltd v Tarapore & Co.,

(1996) 5 SCC 34 : (1996) 6 JT 295 .
262 United Commercial Bank v Bank of India, AIR

1981 SC 1426 : (1981) 2 SCC 766 .
263 Syndicate Bank v Vijay Kumar (1992) 2 SCC 330

; State Bank of India v Economic Trading Co. AIR 1975 Cal 145
.
264 P Ramanatha Aiyar, The Law Lexicon, 4th ed, 2017, at p 769.
265 Basant Rlymers v State Chemical & Pharmaceulicals Corpn. of India Ltd.,
AIR 1986 Raj 1 ; Pesticides India v SC & P Corporation of India,
AIR 1982 Delhi 78 and BLR Mohan v PS Co-operative Supply & Marketing Federation Ltd.,
Chandigarh AIR 1982 Delhi 357 .

(2003) 7 SCC 410 ; Edward Owen Engg. Ltd. v Barclays Bank Intl. Ltd.,
(1978) 1 All ER 976 , at 983, 986 : (1977) 3 WLR 764
; Harprashad & Co. Ltd. v Sudarshan Steel MilIs, AIR 1980 Del 174
, at 176.
Sanjay Kataria
Page 39 of 51
267 Edward Owen Engg. Ltd. v Barclays Bank Intl. Ltd.,

(1978) 1 All ER 976 , at 983 : (1977) 3 WLR 764
.
268 Basic Tele Services Ltd v UOI, AIR 2000

Delhi 1 : 1999 VIAD Delhi 316 : 2000 101 COMP CASES 132 Delhi : 82 (1999) DLT 224 :
1999 (51) DRJ 655 .
269 Ansal Engg. Projects Ltd. v Tehri Hydro Developmenl Corpn. Ltd.,
(1996) 5 SCC 450 .
270 Oil and Natural Gas Corpn. Ltd. v State Bank of India,
AIR 2000 SC 2548 : (2000) 6 SCC 385
.
271 Western Coalfields Limited v Rajesh,

(2012) 1 Mah LJ 394 : (2012) 1 BC 395
.
272 New India Assurance Co. Ltd. v Kusumanchi Kameshwara Rao,

(1997) 9 SCC 179 .
273 Harprashad & Co. Ltd. v Sudarshan Steel Mills,

AIR 1980 Del 174 ; Premier Tyers Ltd. v State Trading Corporation of India Ltd., [1981] 51 COMP
CASES 316 (Delhi).
274 Maihar Cement v Krishna Gears Pvt. Ltd.,

AIR 2000 Del 362 ; but see Kilburn Engg. Ltd. v Oil and Natural Gas Corpn. Ltd.,
AIR 2000 Bom 405 (absolute clause must be read in conjunction with preamble,
thus making the gaurantee operate only during the period or the purpose for which it is given).
275 National Aluminium Co. Ltd. v RS Builders (India) Ltd.,

AIR 1991 Ori 314 (terms to be determined from the guarantee itself).
276 National Aluminium Co. Ltd. v RS Builders (India) Ltd.,

AIR 1991 Ori 314 (terms to be determined from the guarantee itself); National
Project Constn. Corpn. Ltd. v Sadhu and Co., AIR 1990 P&H 300 ;
National Thermal Power Corpn. Ltd. v Hind Galvanizing and Engg. Co. Ltd., AIR 1990 Cal 421
; Banerjee and Banerjee v Hindusthan Steel Works Constn. Ltd., AIR 1986 Cal 374
.
277 National Thermal Power Corpn. Ltd. v Flowmore Pvt. Ltd.,

AIR 1996 SC 445 : (1995) 4 SCC 515
.
278 Kudremukh Iron Ore Co. Ltd. v Korula Rubber Co. Pvt. Ltd.,
AIR 1987 Kant 139 , at 154 : 1990 68 COMP CASES 450 Kar.
Sanjay Kataria
Page 40 of 51
279 Andhra Pradesh State Electricity Board v Bulk Systems International Ltd.,
AIR 2007 Kant 55 .

AIR 2007 SC 2361 : (2006) 6
SCC 293 , reversing Mula Sahakari Karkhana Ltd. v State Bank of India,
AIR 2005 Bom 385 .
281 Western Coalfields Limited and another v Rajesh, (2012)1BC 395, Bombay
HC.
282 Hindustan Steel Works Constn. Ltd. v Tarapore & Co.,

AIR 1996 SC 2268 : (1996) 5
SCC 34 . See also Radhakrishnan Raghavan Nair v M/s Consul Consolidated Private Limitedand,
(2015) 3 LW 882 : (2016) 1 CTC 514
.
283 BSES Ltd. v Fenner India Ltd.,

AIR 2006 SC 1148 : (2006) 2 SCC 728
; see also ANCL & Co (India) Pvt Ltd v Corporation Bank, Arbitration Petition (L) No 67/2013, decided on 17 January 2013
(Bom).
284 Hindustan Constn. Co. Ltd. v State of Bihar,

AIR 1999 SC 3710 : (1999) 8 SCC 436
; reversing State of Bihar v Hindustan Constn. Co. Ltd., AIR 1998
Bom 331 .
285 Federal Bank Ltd. v VM Jog Engg. Ltd.,

AIR 2000 SC 3166 : (2001) 1 SCC 663
, referring to the Uniform Customs and Practices for Documentary Credits formulated by the International Chamber of
Commerce.
286 Kishan Gopal Jhaver v Ramnarayan Bhattad,

AIR 1986 Mad 26 .
287 United Commercial Bank v Bank of India,

AIR 1981 SC 1426 : (1981) 2 SCC 766
.
288 Gujarat Maritime Board v Larsen & Toubro Infrastructure Development Projects
Ltd., (2016) 10 SCC 46 ; Hindustan Steel Works Constn. Ltd. v Tarapore &
Co., AIR 1996 SC 2268 : (1996) 5
SCC 34 ; Ansal Engg. Projects Ltd. v Tehri Hydro Development Corpn. Ltd.,
(1996) 5 SCC 450 ; Uttar Pradesh State Sugar Corpn. v Sumac Intl. Ltd.,
AIR 1997 SC 1644 : (1997) 1 SCC 568
.
289 Banwari Lal Radha Mohan v Punjab State Co-op. Supply and Marketing
Federation Ltd., AIR 1983 Del 86 , at 89; Syndicate Bank v Vijay Kumar,
(1992) 2 SCC 330 .
Sanjay Kataria
Page 41 of 51
290 Damodar Paints Pvt. Ltd. v Indian Oil Corpn. Ltd.,

AIR 1982 Del 57 ; Pesticides India v State Chemicals and Pharmaceuticals Corpn. of India,
AIR 1982 Del 78 , at 82; Road Machines (India) Pvt. Ltd. v Projects and Equipment Corpn. of
India, AIR 1983 Cal 91 ; National Project Constn. Corpn. Ltd. v G Ranjan,
AIR 1985 Cal 23 ; Alliance Mills (Lessees) Pvt. Ltd. v UOI,
AIR 1985 Cal 112 ; AGG Babcock Ltd. v Straw Products Ltd.,
AIR 1985 Del 237 ; Vinay Engg. v Neyveli Lignite Corpn. Ltd.,
AIR 1985 Mad 213 ; Centax (India) Ltd. v Vinmar Impex Inc.,
AIR 1986 SC 1924 ; Allied Resins & Chemicals Ltd. v Minerals & Metals Trading Corpn. of India Ltd.,
AIR 1986 Cal 346 ; National Building Constn. Corpn. Ltd. v State Bank of Patiala,
AIR 1993 Del 89 .
291 Mahatma Gandhi Sahakara Sakkare Karkhane v National Heavy Engg Coop
Ltd., AIR 2007 SC 2716 : (2007) 6
SCC 470 .
292 Gas Authority of India Ltd. v Official Liquidator,

AIR 2004 Bom 220 : IV (2004) BC 306
: 2004 (3) BomCR 540 : 2005 128 COMP CASES 690 Bom :
2004 (3) MhLj 337 : 2004 53
SCL 209 Bom.
293 Uttar Pradesh State Sugar Corpn. v Sumac Intl. Ltd.,

AIR 1997 SC 1644 : (1997) 1 SCC 568
; National Capital Power Station v Bank of Baroda, AIR 2003 All 360 (under
the the Board for Industrial and Financial Reconstruction under Sick Industrial Companies (Special Provisions) Act, 1985).

AIR 1997 SC 1644 : (1997) 1 SCC 568
.
295 National Thermal Power Corpn. Ltd. v Flowmore Pvt. Ltd.,

AIR 1996 SC 445 : (1995) 4 SCC 515
.
296 National Highway Authority of India v Ganga Enterprises,

AIR 2003 SC 3823 : (2003) 7 SCC 410
.
297 NB Vegad & Co. v UOI, AIR 1995

Bom 337 ; but see State Bank of India v Economic Trading Co. SAA, AIR 1975
Cal 145 (no order can be passed against the bank unless it is a party).
298 Adhunik Steels Limited v Orissa Manganese and Minerals Pvt Ltd,
(2007) 7 SCC 125 ; Arvind Constructions Co Pvt Ltd v Kalinga Mining Corporation,
(2007) 6 SCC 798 ; A1 Biz Solutions Chennai v Cascade Billing Center Incorporated,
Case no. 231 of 2011, decided on 27 July 2011.
299 National Highways Authority of India v Elsamex-TWS-SNC Joint Venture,

(2008) 150 DLT 215 ; Moser Baer Entertainment Limited v Goldmines Telefilms Private
Limited, 2013 (2) Arb LR 448 (Bom); Oil & Natural Gas Corporation
Ltd v Jagson Intl Ltd, AIR 2005 Bom 335 ; SS Infrastructure v DDA,
2014 (1) Arb LR 16 (Del).
Sanjay Kataria
Page 42 of 51
300 Tarapore & Co v VO Tractors Export,

AIR 1970 SC 891 : (1969) 1 SCC 233
.

(1978) 1 All ER 976 , at 983 per Lord Denning at 983 : [1977] 3
WLR 764 ; National Thermal Power Corpn. Ltd. v Hind Galvanizing and Engg. Co. Ltd.,
AIR 1990 Cal 421 ; Kisan Sahakari Chini Mills Ltd. v Richardson and Cruddas,
AIR 1997 Bom 35 ; Daewoo Motors India Ltd. v UOI, AIR 2003
SC 1786 : (2003) 4 SCC 690 .
302 Centax (India) Ltd v Vinmar Impex Inc.,

(1986) 4 SCC 136 : [1986] 2 Scale 254
.

(2003) 7 SCC 410 .
304 Dwarikesh Sugar Inds. Ltd. v Prem Heavy Engg. Works,

AIR 1997 SC 2477 : (1997) 6 SCC 450
.
305 Dena Bank v Fertilizer Corpn. of India Ltd.,

AIR 1990 Pat 221 .
306 General Electric Technical Services Co. lnc v Punj Sons Pvt. Ltd.,
AIR 1991 SC 1994 : (1991) 4 SCC 230
.
307 Gujarat Maritime Board v Larsen & Toubro Infrastructure Development Projects
Ltd, (2016) 10 SCC 46 .
308 Fenner (India) Ltd. v Punjab and Sind Bank,

AIR 1997 SC 3450 .
309 Loyds Steel Inds. Ltd. v Indian Oil Corpn. Ltd.,

AIR 1999 Del 248 : 2007 (4) ARBLR 84 Delhi.
310 United City Merchants (Investments) Ltd v Royal Bank of Canada,

(1982)2 All ER 720 ; Uttar Pradesh Co-op. Federation Ltd. v Singh Consultants and Engrs. Pvt.
Ltd., (1988) 1 SCC 174 .
311 Geo Tech Constn. Co. Pvt. Ltd. v Hindustal Steel Works Constn. Ltd.,
AIR 1999 Ker 72 ; ITC Ltd. v Debts Recovery Appellate Tribunal,
AIR 1998 SC 634 : (1998) 2 SCC 70
(banker’s duty to refuse documents which on their face bear signs of having been altered).
Sanjay Kataria
Page 43 of 51
312 Uttar Pradesh Co-op. Federation Ltd. v Singh Consultants and Engrs. Pvt. Ltd.,
(1988) 1 SCC 174 , at 197 per Shetty, J.
313 Reliance Salt Ltd v Cosmos Enterprises,

(2006) 13 SCC 599 .
314 Maharashtra State Electricity Board v Official Liquidator,

AIR 1982 SC 1497 : 1983 SCR (1) 561
.
315 Oil and Natural Gas Corpn. Ltd. v State Bank of India,
(2000) 6 SCC 385 .
316 Federal Bank Ltd. v VM Jog Engg. Ltd.,

AIR 2000 SC 3166 : (2001) 1 SCC 663
; referring to the Uniform Customs and Practices for Documentary Credits formulated by the International Chamber of Commerce;
referring to Gian Singh & Co. Ltd. v Banque de l’ Indochine, (1974) 2 All ER 754
: (1974) 1 WLR 1234 (PC) (visual inspection is all that is required);
Basse and Selve v Bank of Australasia, (1904) 20 TLR 431 per Bingham J (it
is not part of their duty to verify the genuineness of the documents).
317 Bank of India v Nangia Construction (India) Pvt Ltd.,

AIR 2008 SC 2906 : (2008) 7 SCC 290
.
318 Harprashad & Co. Ltd. v Sudarshan Steel Mills,

AIR 1980 Del 174 b.
319 State of Maharashtra v National Constn. Co.,

AIR 1996 SC 2367 : (1996) 1 SCC 735
; State Trading Corpn. of India v Jainsons Clothing Corpn., AIR 1994
SC 2778 : (1994) 6 SCC 597
(only pre-condition for payment was a certificate by a specified officer of the beneficiary).
320 DTH Constn. Pvt. Ltd. v Steel Authority of India Ltd.,

AIR 1986 Cal 31 (no statement in the demand notice that the beneficiary had
suffered loss and/or damages on account of default by the person on whose behalf the bank guarantee was given).
321 Road Machines (India) Pvt. Ltd. v Project and Equipment Corpn. of India,
AIR 1983 Cal 91 , at 94–95; Hindustan Steel Workers Constn. Ltd. v GS
Atwal & Co. (Engrs) Pvt. Ltd., AIR 1996 SC 131 :
(1995) 6 SCC 76 ; reversing GS Atwal & Co. Engrs. Pvt. Ltd. v Hindustan Steel
Works Constn. Ltd., AIR 1989 Cal 184 .
322 AIR 1996 SC 131

: (1995) 6 SCC 76 .
323 Hindustan Constn. Co. Ltd. v State of Bihar,

AIR 1999 SC 3710 : (1999) 8 SCC 436
.
Sanjay Kataria
Page 44 of 51
324 Jyoti Structure Ltd v Dakshinanshal Vidyut Vitran Nigam Ltd,

2016 SCC Online Del 5035 .
325 Larsen and Toubro Ltd. v Maharashtra State Electricity Board,

AIR 1996 SC 334 : (1995) 6 SCC 68
.
326 Tarapore & Co v VO Tractors Export,

AIR 1970 SC 891 : (1969) 1 SCC 233
.
327 Hamzeh Malas and Sons v British Imex Industries Ltd.,

(1958) 1 All ER 262 .
328 Syndicate Bank v Vijay Kumar, (1992) 2

SCC 330 ; Larsen & Toubro Ltd v Shree Ahuja Properties & Realties P Ltd,
2017 SCC online Bom 327 .

(1978) 1 All ER 976 , at 983 per Lord Denning at 983 : [1977] 3
WLR 764 ; National Thermal Power Corpn. Ltd. v Hind Galvanizing and Engg. Co. Ltd.,
AIR 1990 Cal 421 ; Kisan Sahakari Chini Mills Ltd. v Richardson and Cruddas,
AIR 1997 Bom 35 ; Daewoo Motors India Ltd. v UOI, AIR 2003
SC 1786 : (2003) 4 SCC 690 .
330 Centax (India) Ltd v Vinmar Impex Inc., (1986) 4 SCC 136 :
[1986] 2 Scale 254 .

(2003) 7 SCC 410 .
332 National Highway Authority of India v Ganga Enterprises,

AIR 2003 SC 3823 : (2003) 7 SCC 410
: cannot restrain invocation of an “on demand guarantee” in accordance with its terms by looking at terms of the
underlying contract.
333 Texmaco Ltd. v State Bank of India,

AIR 1979 Cal 44 ; approved in Uttar Pradesh Co-op. Federation Ltd. v Singh Consultants and Engrs. Pvt.
Ltd., (1988) 1 SCC 174 ; Tarapore & Co. v V/O Tractoroexport Moscow,
AIR 1970 SC 891 : (1969) 2 SCR 920
; Yograj Infras Ltd v Ssang Yong Eng and Constrn Co Ltd, 2012 AIR SCW 1658; RD Harbottle (Mercantile) Ltd. v
National Westminster Bank Ltd., (1977) 2 All ER 862 :
(1977) 3 WLR 752 ; Edward Owen Engg. Ltd. v Barclays Bank Intl. Ltd.,
(1978) 1 All ER 976 , at 983 : (1977) 3 WLR 764
, at 773 (bank must pay on demand); Dena Bank v Fertilizer Corpn. of India Ltd., AIR 1990
Pat 221 , at 223.
334 Allied Resins and Chemicals Ltd. v Minerals and Metals Trading Corpn. of India
Ltd., AIR 1986 Cal 346 .
Sanjay Kataria
Page 45 of 51
335 Hindusthan Steel Workers Constn. Ltd. v GS Atwal & Co. (Enggs.) Pvt. Ltd.,
AIR 1996 SC 131 : (1995) 6
SCC 76 .
(1988) 1 SCC 174 ; Centax (India) Ltd. v Vinmar Impex Inc.,
AIR 1986 SC 1924 ; Tarapore & Co. v V/O Tractoroexport Moscow,
AIR 1970 SC 891 : (1969) 2 SCR 920
; Himadri Chemicals Industries Ltd. v Coal Tar Refining Company, AIR 2007 SC 2798
: (2007) 8 SCC 110 ; United City Merchants
(Investments) Ltd. v Royal Bank of Canada, (1982) 2 All ER 720 ; United Commercial
Bank v Bank of India, AIR 1981 SC 1426 ; Vinay Engg. v Neyveli Lignite
Corpn. Ltd., AIR 1985 Mad 213 , at 219; Banwari Lal Radhe Mohan v
Punjab State Co-op. Supply and Marketing Federation Ltd., AIR 1982 Del 357
; BS Aujla Co. Pvt. Ltd. v Kaluram Mahadeo Prosad, AIR 1983 Cal 106 ;
approved in Uttar Pradesh Co-op. Federation Ltd. v Singh Consultants and Engrs. Pvt. Ltd., (1988) 1
SCC 174 ; National Thermal Power Corpn. Ltd. v Hind Galvanizing and Engg. Co. Ltd.,
AIR 1990 Cal 421 , at 436, 437; National Project Constn. Corpn. Ltd. v Sadhu and Co.,
AIR 1990 P&H 300 , at 303.
337 U.P. State Sugar Corporation v Sumac International Ltd.,

AIR 1997 SC 1644 : (1997) 1 SCC 568
.
338 BSES Ltd (now Reliance Energy Ltd) v Fenner India Ltd,
AIR 2006 SC 1148 : (2006) 2 SCC 728
.
339 BSES Ltd. v Fenner India Ltd., AIR 2006

SC 1148 : (2006) 2 SCC 728 .
340 Bolivinter Oil SA v Chase Manhattan Bank,

(1984) 1 All ER 351 ; United City Merchants (Investments) Ltd. v
Royal Bank of Canada, (1982) 2 All ER 720 , at 728
(for a discussion); Adani Exports Limited v Marketing Service Incorporated, AIR 2005 Guj 257
(letter of credit); Federal Bank Ltd. v VM Jog Engg. Ltd.,
AIR 2000 SC 3166 : (2001) 1 SCC 663
.

(1984) 1 All ER 351 , at 352 :
(1984) 1 WLR 392 ; Adani Exports Limited v Marketing Service Incorporated,
AIR 2005 Guj 257 (letter of credit).
342 Banwari Lal Radhe Mohan v Punjab State Co-op. Supply

and Marketing Federation Ltd., AIR 1982 Del 357 ; Banerjee
and Banerjee v Hindusthan Steel Works Consm Ltd., AIR 1986 Cal 374
.
343 Basic Tele Services Ltd. v UOI,

AIR 2000 Del 1 (bank guarantee given to cover withdrawal of bid by a
bidder during period of validity of bid could not be invoked where the bidder never withdrew the bid); Kirloskar Pneumatic Co. Ltd. v
National Thermal Power Corpn. Ltd., AIR 1987 Bom 308
; DS Constructions Limited v Rites Limited, AIR 2006 Del 98
; Sanicons v Governmant of A P, AIR 2006 AP 282 .
Sanjay Kataria
Page 46 of 51
344 Larsen & Toubro Ltd. v Maharasrhtra State Electricity

Board, AIR 1996 SC 334 :
(1995) 6 SCC 68 .
345 Makharia Bros v State of Nagaland,

AIR 1999 SC 3466 :
(2000) 10 SCC 503 .
(1988) 1 SCC 174 ; National Building Constn. Corpn. Ltd. v State
Bank of Patiala, AIR 1993 Del 89 ; General Electric Technical Services
Co. Inc. v Punj Sons Pvt. Ltd., AIR 1991 SC 1994 :
(1991) 4 SCC 230 ; State Trading Corpn. of India v Jainsons Clothing Corpn.,
AIR 1994 SC 2778 ,
(1994) 6 SCC 597 ; Mauria Udyog Ltd. v Corporation Bank, AIR 2007
Del 259 (letter of credit); United City Merchants (Investments) Ltd. v Royal Bank of Canada,
(1982) 2 All ER 720 .
347 Deutsche Ruckversicherung AG v Walbrook Insurance Co. Ltd.,

(1994) 4 All ER 181 .
348 Edward Owen Engg. Ltd. v Barclays Bank Intl. Ltd.,

(1978) 1 All ER 976 , at 986 per Lane LJ :
(1977) 3 WLR 764 .
(1988) 1 SCC 174 ; Banerjee and Banerjee v Hindusthan Steel
Works Constn. Ltd., AIR 1986 Cal 374 ; Arul Murugan Traders v Rashtriya
Chemicals and Fertilisers Ltd., AIR 1986 Mad 161 ; Svenska Handelsbanken
v Indian Charge Chrome, AIR 1994 SC 626 :
(1994) 1 SCC 502 .

(1984) 1 All ER 351 , at 352 : (1984) 1 WLR 392
.
351 [1984] 1 All ER 351

; Texmaco Ltd. v State Bank of India, AIR 1979 Cal 44
; approved in Uttar Pradesh Co-op. Federation Ltd. v Singh Consultants and Engrs. Pvt. Ltd.,
(1988) 1 SCC 174 .
352 State Trading Corpn. of India v Jainsons Clothing Corpn.,

AIR 1994 SC 2778 :
(1994) 6 SCC 597 .
353 State Trading Corpn. of India v Jainsons Clothing Corpn.,

AIR 1994 SC 2778 : (1994) 6
SCC 597 .
354 Hindustan Steel Works Constn. Ltd. v Tarapore & Co.,

AIR 1996 SC 2268 : (1996) 5
Sanjay Kataria
Page 47 of 51
SCC 34 ; Geo Tech Constn. Co. Pvt. Ltd. v Hindustan Steel Works Constn. Ltd.,
AIR 1999 Ker 72 .
355 Banwari Lal Radha Mohan v Punjab State Co-op. Supply and Marketing
Federation Ltd., AIR 1983 Del 86 .

AIR 1997 SC 1644 : (1997) 1 SCC 568
; State Trading Corpn. of India v Jainsons Clothing Corpn., AIR 1994
SC 2778 : (1994) 6 SCC 597 ;
Reliance Salt Ltd. v Cosmos Enterprises, AIR 2006 SCW 6262 :
(2006) 13 SCC 599 .
357 Banerjee and Banerjee v Hindusthan Steel Works Constn. Ltd.,

AIR 1986 Cal 374 : 1990 68 COMP CASES 344 Cal.
358 General Electric Technical Services Co. Inc. v Punj Sons Pvt. Ltd.,
AIR 1991 SC 1994 : (1991) 4
SCC 230 .
359 National Thermal Power Corpn. Ltd. v Hind Galvanizing and Engg. Co. Ltd.,
AIR 1990 Cal 421 .
360 Himadri Chemicals Industries Ltd. v Coal Tar Refining Company,

AIR 2007 SC 2798 : (2007) 8
SCC 110 .
361 Kamini Ferrous Limited v Neelam International Pvt Ltd.,

AIR 2006 Cal 244 .
362 Reliance Salt Ltd. v Cosmos Enterprises,

AIR 2006 SCW 6262 : (2006) 13 SCC 599
.
363 Larsen & Toubro Ltd v Shree Ahuja Properties & Realties P Ltd,
2017 SCC online Bom 327 .

AIR 1997 SC 1644 : (1997) 1 SCC 568
; Vinitec Electronics (P) Ltd v HCL Infosystems Ltd, (2008) 1 SCC 544
: (2007)12 JT 480 .
365 Uttar Pradesh Co-op. Federation Ltd. v Singh Consultants and Engineers Pvt.
Ltd., (1988) 1 SCC 174 , referring to Itek Corpn. v First National
Bank of Boston 566 Fed Supp 1210 (USA) (injunction was granted on the ground that any damages against the purchaser if decreed by
American Courts would not be executable in Iran in the situation of the Iranian revolution, at a time when the American Government
had blocked Iranian assets); Dwarikesh Sugar Inds. Ltd. v Prem Heavy Engg. Works, AIR 1997 SC 2477
, at 2482 : (1997) 6 SCC 450
(irretrievable injury is such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately
succeeds).
Sanjay Kataria
Page 48 of 51
366 Svenska Handelsbanken v Indian Charge Chrome,

AIR 1994 SC 626 : (1994) 1 SCC 502
.
367 Itek Corpn. v First National Bank of Boston, 566 Fed Supp 1210.
368 Itek Corpn. v First National Bank of Boston 566 Fed Supp 1210, at 1217;
quoted with approval in Svenska Handelsbanken v Indian Charge Chrome, AIR 1994 SC 626
: (1994) 1 SCC 502 , at 52.
369 Veer Probhu Marketing Ltd. v National Supply Corporation,

AIR 2006 Cal 301 .

AIR 1997 SC 1644 : (1997) 1 SCC 568
; National Capital Power Station v Bank of Baroda, AIR 2003 All 360
.
371 Kudremukh Iron Ore Co. Ltd. v Korula Rubber Co. Pvt. Ltd.,
AIR 1987 Kant 139 , at 154.
372 Kirloskar Pneumatic Co. Ltd. v National Thermal Power Corpn. Ltd.,
AIR 1987 Bom 308 , at 316; Basic Tele Services Ltd. v UOI,
AIR 2000 Del 1 .
373 Bottle Glass Pvt. Ltd. v UOI, AIR 1985 Del 400
: 1986 59 COMP CASES 750 Delhi.
374 Somaiya Organics (India) Ltd. v State of Uttar Pradesh,

AIR 2001 SC 1723 .
375 Ujjal Transport Agency v Coal India Limited, AIR

2011 Jhar 34 .
376 DS Constructions Limited v Rites Limited, AIR

2006 Del 98 : III (2006) BC 82 :
2006 (1) CTLJ 123 Del : 127 (2006) DLT 1
.
377 Article 19 of the UN Draft Convention on Independent Guarantees and

Stand-by Letters of Credit.
378 Janki Nath Paul v Shokar Mall Kedar Bux, AIR

1935 Pat 376 ; Mir Niyamath Ali Khan v Commercial and Industrial Bank Ltd.,
AIR 1969 AP 294 .
Sanjay Kataria
Page 49 of 51
379 Shree Meenakshi Mills v Ratilal Tribhovandas Thakar,

AIR 1941 Bom 108 : (1941) Bom 273 : (1941) 43 Bom LR 53
: 196 IC 732.
380 Lep Air Services v Rolloswin Investments Ltd, (1973)

AC 331 .
381 Stacey v Hill, 1KB 666 (1901).
382 In Fitzgeorge ex parte Robson (re), I KB 462 (1905).
383 Charles II, 1677: An Act for prevention of Frauds and Perjuryes.’, Statutes of the
Realm: vol 5: 1628–80 (1819), pp 839–42.
384 Statute of Frauds Amendment Act, 1828.
385 Pitts v Jones, (2007) EWCA Civ 1301

; Anson’s Law of Contract, 30th Edn, p 84.
386 Birkmyr v Darne, (1704) 1 Salk 27; Gordon v Martin, (1731) Fitz-G 302, at
303; Kirkham v Marter, (1819) 2 B&Ald 613, at 616; Albert Life Assurance Co. (Re), ex p. Western Life Assurance Society,
(1870) LR 11 Eq 164, at 177 : (1861–73) All ER Rep 1756
.
387 Athill, Athill (Re) v Athill, (1880) 16 ChD 211

, at 222, 225 (CA).
388 National Telephone Co. Ltd. v Inland Revenue Commrs.,

(1899) 1 QB 250 , at 258 per AL Smith LJ (CA); affirmed in, (1900) AC 1
(HL).
389 General Produce Co. v United Bank Ltd., (1979) 2 Lloyd’s Rep 255, at 258–
259 per Lloyd J.
390 Moschi v Lep Air Services Ltd., (1973) AC

331 , at 344–345 per Lord Reid : (1972) 2 All ER 393
, at 398 (HL); General Produce Co. v United Bank Ltd., (1979) 2 Lloyd’s Rep 255, at 258 per Lloyd J.
392 Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd & Anor,
[2012] EWCA Civ 265 (CA) :
[2012] 3 All ER 842 .
393 Browning v Stallard, (1814) 5 Taunt 450; Guild and Co. v Conrad,
(1894) 2 QB 885 (CA).
Sanjay Kataria
Page 50 of 51
394 Dover and Deal Rly. (Re), Cinque Ports, Thanet and Coast Junction Co., Lord
Londesborough’s Case, (1854) 4 De G M & G 411; Chapleo v Brunswick Permanent Building Society, (1881) 6
QBD 696 (CA).
395 Chapman v Smethurst, (1909) 1 KB

927 (CA); distinguishing Dutton v Marsh, (1871) LR 6
QB 361; W and T Avery Ltd. v Charlesworth, (1914) 31 TLR 52
(CA); see also VSH Ltd. v BKS Air Transport Ltd. & Stevens, (1964) 1 Lloyd’s Rep 460; Elpis Maritime Co. Ltd. v Marti Chartering Co. Inc.
(The Maria D), (1992) 1 AC 21 :
(1991) 3 All ER 758 (HL).
396 Yango Pastoral Co. Pvt. Ltd. v First Chicago Australia Ltd.,
(1978) 139 CLR 410 : (1979) 53 ALJ 1
.
397 AIB Group (UK) plc v Martin, [2002] 1 All

ER 353 : [2001] UKHL 63 .
398 Bache & Co. (London) Ltd. v Banque Vernes et Commerciale de Paris SA,
(1973) 2 Lloyd’s Rep 437 (CA); Tai Hing Cotton Mill Ltd. v Liu Chong Hing Bank Ltd., (1986) AC
80 : (1985) 2 All ER 947 (PC).
399 London General Omnibus Co. Ltd. v Holloway,

(1912) 2 KB 72 , at 81 per Farwell LJ : (1911–13) All ER Rep
518 (CA).
400 Dobbs v National Bank of Australasia Ltd.,

(1935) 53 CLR 643 ; see also Jones v Sherwood Computer Services plc.,
(1992) 2 All ER 170 : (1992) 1 WLR 277
(CA) (third party certificate).
401 See under heading: “Irretrievable Injury”.
402 Dobbs v National Bank of Australasia Ltd.,

(1935) 53 CLR 643 , at 651 (all grounds which go to the validity of the debt, viz. illegality, manifest
error). See also under heading: “Bank Guarantee”.
403 Greer v Kettle, (1938) AC 156

: (1937) 4 All ER 396 (HL).
404 Byblos Bank SAL v AI-Khudhairy,

(1987) BCLC 232 ; Gray v TCB Ltd., (1988) FLR 116
; See also Barclays Bank plc. v Quincecare Ltd., (1992) 4 All ER 363
, at 382 : (1988) FLR 166 , at 192.
405 Ward and MacCormack (Re), (2000) 116 LQR 119, at 124.
Sanjay Kataria
Page 51 of 51
406 Wuhan Guoyu Logistics Group Co Ltd & Anor v Emporiki Bank of Greece SA,
[2012] EWCA Civ 1629 .
407 Cargill lntl. SA v Bangladesh Sugar and Food Inds. Corp.,

(1996) 4 All ER 563 ; affirmed in, (1998) 2 All ER 406
(CA).
408 Wood Hall Ltd. v Pipeline Authority,

(1979) 141 CLR 443 (High Court of Australia).
409 Cargill lntl. SA v Bangladesh Sugar and Food lnds Corp.,

(1996) 4 All ER 563 , affirmed in, (1998) 2 All ER 406
(CA).
410 Australasian Conference Assn. Ltd. v Mainline Constructions Pty Ltd. (in liq),
411 Wood Hall Ltd. v Pipeline Authority,

412 United City Merchants (Investments) Ltd. v Royal Bank of Canada,

(1982) 2 All ER 720 .
413 United City Merchants (Investments) Ltd. v Royal Bank of Canada,

(1982) 2 All ER 720 .

(1984) 1 All ER 351 : (1984) 1 WLR 392
.
415 Bolivinter Oil SA v Chase Manhattan Bank, (1984) 1 All ER 351, at 352 :
(1984) 1 WLR 392 .
416 Montrod Ltd. v Grunkotter Fleischvertriebs GmbH,

[2002] 3 All ER 697 : [2002] 1 WLR 1975
.
417 Themehelp Ltd. v West, (1995) 4 All

ER 215 (CA).
End of Document
Sanjay Kataria
[s 127] Consideration for guarantee.—
Anything done, or any promise made, for the benefit of the principal debtor may be a sufficient
consideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee
the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s
promise to deliver the goods. This is a sufficient consideration for C’s promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year,
and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as
requested. This is a sufficient consideration for C’s promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default
of B. The agreement is void.
This section provides that anything done, or a promise made for the benefit of the principal-debtor is
sufficient consideration for the guarantee.
Sanjay Kataria
Page 2 of 5
[s 127.2] Consideration for a Guarantee
The consideration for the surety’s promise does not move from the principal-debtor, but from the
creditor;418 though it may move from both—creditor and principal-debtor.419 The consideration may
benefit the surety;420 but it is not necessary that the surety should receive any benefit under the contract.421
It may consist, wholly, of some advantage given to or conferred on the principal-debtor by the creditor at
the guarantor’s request.422 Lending money or supplying goods to the principal-debtor is the commonest
form of consideration for a surety’s contract, so is forbearing to sue him;423 even forbearance to sue for
some reasonable time.424 Forbearance to execute a decree against the debtor is also a common form.425 In
a guarantee of fidelity of a person, the consideration is found in the principal-debtor being taken into the
service of the creditor. Mere promise to release a claim against another is not consideration for the
guarantee of payment, whereas actual release of the claim is.426 The release from arrest, of a certificated
debtor upon execution of a surety bond, was sufficient consideration for the surety bond.427
It is not necessary that conferment of benefit upon the principal debtor by the creditor must be
contemporaneous with the execution of the surety bond in order to provide consideration for the
agreement of guarantee.428 In Halsbury’s Laws of England429 it has been stated in unequivocal terms that
consideration for the surety bond need not be contemporaneous with the agreement of guarantee as it
may consist of compliance with some stipulated condition which the creditor, without being bound to
observe, must fulfil before the guarantee will attach, it may be fragmentary and therefore divisible. The
consideration for a promise of guarantee need not appear in writing.
The word “done” in the section indicates that past benefit to the principal-debtor can be good
consideration for a bond of guarantee.430 The mere existence of the debt, default or miscarriage of
another person is not sufficient to support the guarantor’s promise to the creditor; it must be founded
upon a new consideration. This is nothing but an application of the wider principle that in all cases of
contract the really necessary element of consideration is the legal detriment incurred by the promisee at
the promisor’s request, and it is immaterial whether there is, any apparent benefit to the promisor
Illustration (c) to section 127 came up for consideration before the Division Bench of the Gujarat High
Court in State Bank of India v Smt. Kusum Vallabhdas Thakkar431. It was held that this kind of illustration
would apply to a total stranger and volunteer who for no consideration whatsoever, agrees to pay in
default of payment by the principal debtor. It was held that only in those cases the agreement would be
void for being without consideration. In the facts of the case, it was held that anything done for the
benefit of principal debtor is a sufficient consideration to the surety and owing to the relationship of the
principal debtor and the creditor in that case, it was held that there was consideration and illustration (c)
of section 127 could not come in the way. Reference was also made to Chitty on Contracts-General
Principles, where the promise not to enforce a valid claim against the debtor or a third person was held to
be a sufficient consideration for a counter-promise by the debtor or a third person i.e. to give security for
the debt or to do some other act.
Sanjay Kataria
Page 3 of 5
In Kali Charan v Abdul Rahman,432 the surety bond though executed at a date subsequent to the principal
agreement (a compromise approved by a Court) was executed in pursuance of one of the terms of the
agreement and their Lordships of the Privy Council held that it amounted to something done or a
promise made for the benefit of the principal debtor was, therefore, a sufficient consideration for a surety
for giving a guarantee. In Chakhan Lal v Kanhaiya Lal,433 a person stood surety for his brother for the
payment of a sum, part of which was due on previous debts of the brother, part was due on hundis jointly
executed by both, part was paid at the time the person agreed to stand as surety and part was to be paid
later by the creditor who did not pay the same. It was agreed that the surety would be released on
payment of a certain sum. The learned Judges held that there was sufficient consideration for the
undertaking of suretyship for the whole sum to render it valid even though the surety may not have
benefited from any of the advances made.
In Ghulam Husain’s case434 it was held that the word, “done” in section 127 of the Contract Act indicated
that past benefit to the principal debtor will be good consideration for a bond of guarantee. Hence, where
a lessee has agreed to pay the amount due under the lease by certain instalment and after some days a
person executes a surety bond binding himself to pay certain amount in default of payment of instalments
the surety bond cannot be said to be without consideration. The cases aforesaid as well as the language of
section 127 clearly show that the creditor must have done something for the benefit of the principal
debtor to sustain the validity of a contract of guarantee. There is some divergence, however, on the view
whether the benefit is given at the time of the execution of the guarantee or even a past benefit can
constitute a valid consideration for the sustenance of such an engagement.435
418 White v Cuyler, (1795) 6 Term Rep 176, at 177; Dutchman v Tooth, (1839) 5
Bing NC 577.
419 Prasanjit Mahtha v United Commercial Bank Ltd.,

AIR 1979 Pat 151 ; relying on Duncan Fox & Co. v North and South Wales Bank,
(1880) 6 App Cas 1 : (1874–80) All ER Rep 1406
; Ratnachandra B Loyolka v Shapurji N Bhownagree, AIR 1940 Bom 315 : (1940)
Bom 552 : 192 IC 375.
420 Willis (Re), ex p Brook, (1850) 6 De G M & G 771.
421 Mathra Das v Shamboo Nath, AIR 1929 Lah 203

; Chakhan Lal v Kanhaiya Lal, AIR 1929 All 72
(consideration partly paid and partly promised to principal-debtor is good);, AIR 1969 AP 294
; Bailey v Croft, (1812) 4 Taunt 611; Ex p. Gardom, (1808) 15 Ves 286. See section 2(d) above under
heading: “Detriment and Benefit”.
422 Coghlan v SH Lock (Australia) Ltd., (1987) 3

BCC 183 (PC); Morley v Boothby, (1825) 10 Moore CP 395; Miles v New Zealand Alford Estate Co.,
(1886) 32 ChD 266 , at 289 per Bowen LJ : (1886–90) All ER
Sanjay Kataria
Page 4 of 5
Rep 1726 (CA); Prakashwati Jain v Punjab State Industrial Development Corporation, AIR
2012 P&H 13 .
423 Jagadindra Nath Roy v Chandra Nath Poddar,

(1903) 31 Cal 242 ; Kanisetti Audilaxamana Rao v Artipalli Raghurami Reddi, AIR
1970 AP 158 (FB); Prasanjit Mahtha v United Commercial Bank Ltd., AIR
1979 Pat 151 ; Stare Bank of India v Premco Saw Mills, AIR 1984 Guj 93
.
424 Payne v Wilson, (1827) 7 B&C 423; Oldershaw v King, (1857) 2 H & N. 517.
425 Narain Singh v Mara Prasad Singh, (1887) All WN 52; State Bank of India v
Premco Saw Mills, AIR 1984 Guj 93 .
426 VV Nagappa Chetty v ARMS Ramanathan Chetty,

AIR 1916 Mad 1213 .
427 District Board of Malda v Rai Bahadur Chandra Ketu Narayan Singh,
AIR 1937 Cal 625 .
428 Jayakunvar Manilal Shah v Syndicate Bank, ILR

1992 KAR 1053 : (1992) 2 KarLJ 583 .
429 4th Edn at Para117.
430 M Ghulam Husain Khan v M Faiyaz Ali Khan,

AIR 1940 Oudh 346 : (1940) 15 Luck 656
: 188 IC 175; but see Ram Narain v Hari Singh, AIR 1964 Raj 76 :
(1963) 13 Raj 973 (anything done for the principal-debtor must be
contemporaneous to the surety’s contract of guarantee).
431 State Bank of India v Smt Kusum Vallabhdas Thakkar,

(1994) 1 GLR 655 .
432 Kali Charan v Abdul Rahman, AIR 1918 PC 226

.
433 Chakhan Lal v Kanhaiya Lal, AIR 1929 All 72

.
434 Ghulam Husain’s case, AIR 1940 Oudh

346 ; Kali Charan’s v Abdul Rahman, AIR 1918 PC 226
; Chakhanlal v Kanhaiya Lal, AIR 1929 All 72 and Jagadindranath
Roy v Chandranath, (1904) 31 Calcutta 242 (followed).
435 Ram Narain v Hari Singh, AIR 1964 Raj 76

: (1963) 13 Raj 793 ; dissenting from
Sanjay Kataria
Page 5 of 5
M Ghulam Husain Khan v M Faiyaz Ali Khan, AIR 1940 Oudh 346 : 188 IC
175.
End of Document
Sanjay Kataria
[s 128] Surety’s liability.—
The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided
by the contract.
Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is
liable, not only for the amount of the bill, but also for any interest and charges which may have become
due on it.
A surety’s liability is co-extensive with that of the principal-debtor, unless the contract of guarantee
provides otherwise.
[s 128.2] Liability of Surety: Co-extensive with that of the Principal-debtor
Surety’s liability is co-extensive with that of the principal-debtor unless the contract otherwise provides.436
However, a surety may limit or restrict his liability by contract.
A surety’s liability to pay the debt is not removed by reason of the creditor’s omission to sue the principal
-debtor; nor is the creditor bound to exhaust his remedy against the principal debtor before suing the
surety. A creditor cannot be restrained from action against the surety, on the ground that the principal is
solvent, or that the creditor may have relief against the principal in some other proceedings.437 It is the
choice of the creditor to recover the amount either from the principal-debtor after his default, or from the
Sanjay Kataria
Page 2 of 33
surety.438 The liability, though co-extensive, is separate;439 and not in the alternative;440 and may not arise
simultaneously.441 If there are several remedies available for the creditor, it is the choice of the creditor as
to which remedy it is to pursue. Neither the defaulter nor the guarantor could compel the creditor to take
recourse to any particular form of remedy or as against particular security. The remedy to be pursued falls
within the exclusive domain of the creditor. The said view has been reinforced by the Supreme Court in a
series of decisions.442 The creditor has the option of recovering the amount in the manner it deems fit.
The Company Court while granting leave to proceed with a pending suit against a company in liquidation,
cannot impose conditions that are contrary to law; the condition imposed that the decretal amount should
first be recovered from the guarantors and the deficit, if any, should be recovered from the company in
liquidation was held to be without justification as the liability was joint and several.443
The word “co-extensive” is an adjective for the word “extent”, and relates to the quantum of the principal
debt.444 This section only explains the quantum of surety’s obligation when the terms of the contract do
not limit it, as they often do, as against the validity of the obligation of the principal-debtor. “Liability”
means liability enforceable at law.445 The liability of a surety is immediate and is not deferred until the
creditor exhausts his remedies against the principal debtor.446
The present section is merely a re-enactment of the Common Law.447 The nature of liability described in
this section may be modified by statute.448 If the surety’s obligation is not co-extensive with, but greater
than that of the principal-debtor, the contract may be one of indemnity, and not guarantee.449 The
provisions of this section do not apply to a surety for a person ordered to keep peace or good
behaviour.450
[s 128.2.1] Extent of Liability
The extent of the liability undertaken by the surety will depend upon the terms of the contract of
guarantee.451 It need not be co-extensive with that of the principal-debtor; but if there is no limit on the
extent of liability, it would be co-extensive with the liability of the principal-debtor. However, a creditor is
not entitled to the benefit of any counter security given by the principal-debtor to the surety.452
A party, who guarantees the payment of a bill, is liable for all that principal would be liable for.453 A surety
is liable not only for the principal amount, but also for interest due under the contract,454 unless the
guarantee is a promise to repay the principal amount only.455 Where the surety has undertaken the due
performance of the decree, which may be passed against a judgment debtor, the liability of the surety does
not extend to the amount payable by the principal-debtor under any compromise which may be affected
between the judgment-debtor and the decree-holder.456 A bank guarantee given for timely payments for
all money “for and in relation to goods” would cover not only the price of goods, but also entry tax and
sales tax levied on those goods.457
[s 128.2.2] Illustrative Cases
A guaranteed to B. the payment of rent becoming due from B. to C, and B. failed to pay the rent. A was
Sanjay Kataria
Page 3 of 33
held liable on true construction of the contract only for the rent, but not for interest on the rent, unless
the bond contained some such words as “with interest thereon.”458 A surety who had guaranteed as
commission agent the supply of mustard oil of pure quality, to the plaintiff, was a surety for the promise
for supply of oil of that quality, and his liability under this section would be co-extensive with that of the
manufacturer.459
Conversely, where the surety had guaranteed the payment of income tax by the principal-debtor, a
charterer of a ship, the surety was not liable when the principal-debtor was found not liable to payment of
income tax.460
[s 128.3] Construction of Contract
Where a commission agent contracts to supply “pure mustard oil”, he is a surety for the quality of the
oil.461 Where security was deposited for faithful discharge of duties by a khazanchi (treasurer) of a bank,
one of his duties being to inform the bank of insolvent circumstances of customers, and he himself dealt
fraudulently with the bank as a customer, the security was liable of forfeiture.462 C wrote to A, who held
B’s promissory note that B will pay the principal and interest within three months, “if he does not so pay,
I shall have the note assigned to my name and pay you the principal and interest.” C was a surety, and
jointly liable with B to A.463 In a guarantee, a surety agreed to be liable for the Sankhyaikal payments,
which was construed to mean all advances, whether given in cash or by transfer to deposits.464
[s 128.4] Strict Construction of Surety’s Obligation
A surety’s liability depends upon the terms of his contract;465 and he is entitled to insist on the strict
adherence to the terms of his obligation by the creditor,466 and cannot be made liable for more than he
has undertaken. The guarantee extends to a liability precisely answering the description contained in the
guarantee.467 His liability cannot be enhanced beyond the proper meaning of his written agreement.468
Hence he has not only those defences available to a principal debtor, but is also entitled to additional
defences against the creditor as well as the principal debtor.469 However, a surety’s liability is not affected,
vis-à-vis a creditor, in the event of any private arrangement, between the principal-debtor and the surety,
made without the knowledge or consent of the creditor.470 A banker’s general lien under section 171 of
this Act does not extend over securities given by the surety. Thus, if the surety clears the loan he secures,
his security cannot be retained for another loan of the principal debtor,471 unless the guarantee so
provides.472
The surety’s liability will not be unduly extended. So, when an assurance company gave a bond to the
Board of Trade covering any loss or damage occasioned to an insolvent’s estate by any default of the
trustee, it was not liable to make good the trustee’s default in payment of the penal interest exacted from
him for improper retention of money of the estate.473
[s 128.5] Commencement of Liability
Sanjay Kataria
Page 4 of 33
The commencement of liability of the surety depends on the terms of the contract of guarantee, and is a
matter of construction of terms;474 and it is open to the parties to agree that the liability of a surety shall
arise only in a particular contingency.475
On the default of the principal-debtor causing loss to the creditor, the surety is, unless the terms of the
guarantee indicate otherwise, immediately liable to the full extent of his obligation.476 He is not entitled to
any notice of the default,477 unless the terms of the guarantee so require.478 When the guarantee provided
that a judgment or award against the principal debtor shall be binding on guarantor, liability cannot be
evaded on the ground that guarantor was not party to the settlement between the creditor and principal
debtor on the basis of which Lok Adalat passed an award.479
[s 128.5.1] Condition Precedent to the Liability of Surety
The contract of guarantee may provide for conditions precedent to the surety’s liability. Where the liability
arises under the contract only on the happening of a contingency, the surety is not liable until the
contingency has taken place.480 Where the guarantee bond secured “the ultimate balance” remaining due
to the creditor, the liability of the surety did not arise until the ultimate balance was determined.481 Where
the terms of the contract of guarantee fixed a last date for enforcement of guarantee, i.e., for making a
claim, and it was not so enforced within that time, the guarantee could not be enforced.482
It is not open to a creditor to call upon the surety to pay under the contract of suretyship, unless the
creditor has performed his part of the contract.483 However, where the guarantee covered advances by
purchaser up to a certain limit, its enforcement could not be refused on the ground that the maximum
amount was not advanced; but the guarantee could be enforced to the extent of the amount advanced.484
In the case of an agreement guaranteeing an employer against loss by the misconduct of a person
employed as agent of the surety, the loss to be recoverable in a suit against the surety must be shown to
have arisen from misconduct on the part of the agent in connection with the business of the agency, and
to be within the scope of the agreement.485 Where the surety had executed a bond to produce in Court the
judgment-debtor, on dismissal of appeal and in case of failure to pay decretal amount, and after the appeal
was dismissed, they were not given notice of failure or requiring production of debtor, the sureties were
not liable to pay the decretal amount. It was held that a reasonable construction of the document was that
the sureties undertook to produce the judgment-debtor in Court after dismissal of appeal, when they were
called upon to do so.486
[s 128.6] Liability for Past Transactions
A surety is not liable for any liability of the principal-debtor, incurred previous to the document of
suretyship;487 unless there is a specific agreement to the contrary.488 Where the directors of a company
became sureties on their becoming directors of the company, their liability will extend to borrowings or
outstandings after they became sureties, and not for earlier liabilities.489
Sanjay Kataria
Page 5 of 33
[s 128.7] Limits on Liability by Contract
The words “unless it is otherwise provided by the contract” in the section indicate that the surety may
limit his liability by contract.490 There is no qualification in the words “if the aforesaid persons fail to pay
the amount thereof I will pay it in accordance with the bond.”491 When a loan agreement, which was the
contract before the Court, had no clause which showed that the liability of the guarantor was not co-
extensive with the principal debtor, the Court held that section 128 will apply without any exception and
the guarantor cannot escape from his liability as a guarantor for the debt taken by the principal debtor.492
There is an important distinction to be observed as to guarantees limited in amount. One important

question of construction that arises is whether the surety has guaranteed the whole liability or debt,
keeping his own liability for the limited amount, or whether he has guaranteed only part of the liability or
debt.
This distinction assumes importance where the debtor or the surety becomes insolvent. The surety who
has guaranteed the whole debt with a limit of his liability does not acquire any rights of subrogation or
contribution until he has paid up to that limit, whereas the surety of a floating balance, up to a limited
amount, is deemed to be surety only for that part of the debt, and is entitled to the benefit, in rateable
proportion, of any dividends paid by the estate of the principal-debtor.493
Evidence of such contrary intention is admissible in either case. For instance, where the security bond
guaranteeing the liability of a judgment-debtor is limited to a specific sum, the liability of such a surety is
limited to the extent of the sum so specified.494 Where the guarantee promises to repay the principal sum
only, the surety is not liable for interest.495 Any limit on liability of the surety cannot be construed by an
agreement “to pay on failure of others to pay”.496 The burden of proving lies on the surety to prove that
the liability under the guarantee is limited.497
The liability of a surety, for a guardian of property, is limited to the amount of his bond.498 Although the
guarantee guarantees payment up to a certain amount, the creditor is not prohibited from advancing more,
the surety will be liable only to the extent of the guarantee.499
Although the liability of surety is co-extensive with that of the principal debtor, yet his liability cannot
exceed that of the principal debtor. A surety is liable to pay interest at such rate as the principal debtor is
liable, although his guarantee provides for higher rate of interest.500
[s 128.8] Liability where Original Contract is Void or Voidable
This section only explains the quantum of surety’s obligation when the terms of the contract do not limit
it. It does not follow, conversely, that a surety can never be liable when the principal-debtor cannot be
Sanjay Kataria
Page 6 of 33
held liable. Thus, a surety is not discharged from liability by the mere fact that the contract between the
principal-debtor and creditor was voidable at the option of the former.501
Unless it can be inferred that contract is one of indemnity, the liability of a surety is ancillary and rests on
the validity of the principal’s debt or liability which he guarantees.502 And where the original agreement is
void, as in the case of a minor’s contract in India, the surety is liable as a principal-debtor;503 for, in such a
case the contract of the so-called surety is not a collateral, but a principal contract.504 The creditor, it has
been stated, falls back upon the contract of indemnity and can enforce the liability where the contract
with the principal-debtor is void or voidable.505 In a later case, the High Court of Madras held that if a
surety guaranteed a debt by a minor, he incurred no liability, as his liability was co-extensive with that of
the principal-debtor, whose contract was void.506 The sureties of an infant’s overdraft at a bank, where all
parties knew the fact, were not liable to the bank, because the contract was to guarantee a debt which was
no debt at all and the contract was no contract.507 This view has been criticised on the ground that this
rule is not necessary for the protection of an infant, and allows the surety to escape a liability which he
deliberately undertakes.508
A surety is not liable under a guarantee for performance of an agreement without consideration.509 If, on
account of a contract of partnership being illegal, the principal’s liability is unenforceable, the surety will
also not be liable.510
[s 128.9] Discharge of Debtor by Operation of Law
A discharge of the principal-debtor by operation of law does not discharge the surety.511 A suit may also
be maintained against the surety for the full amount of the debt where the principal-debtor has been
adjudged insolvent or gone into liquidation under the Companies Act, 1956.512 Approving the statement in
Re Garner’s Motors Ltd513 that a scheme when sanctioned by the Court had a statutory operation and the
scheme does not release other persons not parties to the scheme from their obligations, the Supreme
Court held that a binding obligation created under a composition under section 391 of the Companies Act,
1956 between the company and its creditors did not affect the liability of the surety unless the contract of
suretyship otherwise provided.514 Although a surety is discharged under section 134, if the contract
between the creditor and principal-debtor, or any act or omission of the creditor leads as a legal
consequence to the discharge of the principal-debtor, the surety’s liability is not discharged if the
principal-debtor secures discharge by operation of insolvency or liquidation.515 In terms of section141, the
surety is discharged from liability when the creditor parts with or loses the security held by him. Where
such a situation arises not by any definite act of the creditor or debtor but by an operation of law for
which none of the parties had any control, the creditor’s right of action against the surety is preserved.
The surety is thus not discharged by nationalisation of the principal debtor company.516
[s 128.9.1] Statutory Reduction or Extinguishment of Liability
Section 128 does not deal with the consequences of recovery of debt. A statutory reduction or
Sanjay Kataria
Page 7 of 33
extinguishment of the principal-debtor’s liability operates as a pro tanto reduction of extinguishment of the
surety’s debt (just as would be reduced or extinguished by variation in the decree in appeal or review);
which is quite different from its unenforceability against the principal-debtor by operation of the laws
relating to insolvency or liquidation. To hold otherwise would be to altogether deny the benefit of the
ameliorative provisions of such statutes, viz. those which give relief to agriculturist debtors. Alternatively,
it would be open to the creditor to recover the debt as scaled down from the agriculturist debtor, and the
balance from the surety, and the latter, in his turn, could seek reimbursement from the principal-debtor.
The other view is that the surety remains liable for the whole of the original debt.517 The earlier view is to
be preferred, in view of the plain words of section 128, whereby the liability of the surety is co-extensive
with that of the principal-debtor. The existence of this right of indemnity provides a good reason for
scaling down the liability of surety as well as of principal-debtor. Difficulties are involved in the latter
view, by which the surety is liable in full. Section 145 enables him to recover what he has paid, from the
principal-debtor. The object of the Debt Relief Act is, therefore, defeated, unless the principal-debtor
makes a fresh application to the Board. It is uncertain whether the surety or the principal-debtor bears the
loss, apparently the latter in the absence of any fresh proceedings under the Debt Relief Act, so that the
wheel has come full circle, and the intention of the legislature seems in danger of being defeated. On the
earlier view, the loss caused by scaling down falls upon the creditor.
Thus, if the surety must be made liable for the entire debt despite the operation of such statutes to reduce
or extinguish the debts of the principal-debtor, there must be a provision in the contract to the effect that
notwithstanding any circumstance the surety’s liability shall not be diminished.518
The liability of a surety being co-extensive with that of the principal-debtor, the surety is entitled to any
modification or the variation of the latter’s liability under a statute, e.g. under Agriculturist Debtors Relief
Act;519 but the surety’s liability may not be affected irrespective of whether the recovery from the
principal-debtor has been merely stayed or suspended.520
[s 128.10] Liability where Original Contract is Unenforceable
Where the original contract was unenforceable for want of registration, and the parties were entitled to
equities under the doctrine of part performance, the liability of the surety could not be enforced.521
[s 128.11] Liability where the Original Contract is Found Invalid
In Mir Mahommad Khan v Abdul Karim,522 a dispute was referred to arbitration, and a person stood surety
for any amount that might be awarded against one of the parties to the reference. The surety paid and
sued the debtor for the money paid by him on the debtor’s behalf. The reference to arbitration was illegal
and void in law, but the surety was held entitled to recover. This decision is difficult to understand, since
the sum which the supposed debtor was not, as it turned out, a debtor at all, or liable to pay the sum
which the supposed surety had paid for him.
Sanjay Kataria
Page 8 of 33
[s 128.12] Liability where Original Contract is Suspended
The liability of a surety is immediate and is not deferred until the creditor exhausts his remedies against
the principal debtor.523 The liability of the surety to pay the amount under the guarantee is not
automatically suspended when the liability of the principal-debtor is suspended under some statutory
provision. Thus, a contract of guarantee, being an independent contract, is not affected by liquidation
proceedings against the principal-debtor.524 Suspension of contractual liabilities, of an undertaking other
than the secured liabilities, to bank and financial institutions, would not suspend the remedies against the
sureties.525 Where recovery from the principal-debtor (a judgment-debtor) was stayed by the Debt
Settlement Board, the execution against the surety could proceed.526 However, a suit for enforcement of a
guarantee in respect of a loan or advance granted to an industrial concern against which an inquiry under
section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 was pending, could not lie or be
proceeded with, without the sanction of the Board under that Act. The remedy of the creditor lay in
proceeding with the claim against the surety with the consent of the Board,527 unless it is being wound
up.528
[s 128.12.1] Liability under Surety Bonds given to Court
Liability of surety for a person ordered to keep peace, or to be of good behaviour, in a proceeding under
the Code of Criminal Procedure,529 or for due appearance of a judgment-debtor on the date of hearing as
ordered by the Court,530 or for due appearance of accused let on bail,531 are independent obligations, and
not co-extensive, with that of the person for whose performance the guarantee has been given; the surety
is liable to pay whatever he undertook to pay under the guarantee. A surety to an administration bond, in
proceedings for letters of administration, was liable under his bond, even though the letters of
administration were found to have been obtained by fraudulent misrepresentation, and were cancelled.532
The same principle applies to surety bonds given under the Guardian and Wards Act.533
However, a surety may expressly stipulate that he would be bound by the guarantee, only if a decree is
passed after contest, and not if there is a decree by consent; else the surety is bound also by a decree
passed by consent.534 Surety bonds given to Courts can be enforced without a separate suit.535 The liability
of a surety for a guardian of property is limited to the amount of his bond.536
[s 128.13] Joint and Several Liability
The liability of the surety is joint and several with the principal-debtor.537 It is not affected by the death of
the principal-debtor.538 It is the choice of the creditor to recover the amount either from the principal-
debtor after his default, or from the surety.539 He may file a suit against both the principal-debtor and the
surety,540 or at his option, only against the surety;541 or only against the debtor;542 or against anyone of the
co-sureties.543 Where the debtor had admitted its liability and the creditor did not wish to pursue its
remedy against the principal-debtor, the creditor was entitled to proceed against the guarantors.544 The
surety cannot dictate to the creditor to first pursue the remedy against principal debtor.545 It has been
observed that the creditor has the option provided to him to deal with situations viz. the whereabouts of
the principal debtor are not known.546 A proceeding pending under the Industrial Reconstruction Bank of
Sanjay Kataria
Page 9 of 33
India Act against the principal debtor company for attachment of its mortgaged property did not bar a
separate proceeding against the guarantor director before the Debt Recovery Tribunal under the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993.547 While the liability is co-extensive and the creditor
can move against either or both, the payment by the guarantor to the creditor would enure to the benefit
of principal debtor and the creditor cannot recover the same twice over from each party.548
It was earlier held in two decisions of the Supreme Court that in terms of section 4(2)(b) of the U.P.
Public Moneys (Recovery of Dues) Act, 1972, the right of a creditor to proceed against a surety
commenced only after the securities of the principal debtor are first sold, and the amount realised is not
sufficient to meet the debt. Overruling the said decisions, it was held in Sobran Singh v State of U.P., that the
general principle of law that the liability of a guarantor is co-extensive with that of the principal borrower
continued to hold good. Where the party had created a charge, mortgage or encumbrance, the U.P Act
postulated initiation of proceedings against the person whose property was mortgaged, charged or
encumbered only after such property was sold off. As the guarantor had not provided any mortgage or
charge, the bar against initiation of recovery proceedings until the property was sold had no application to
them and the earlier decisions holding to the contrary were overruled.549
The creditor has the option of recovering the amount in the manner it deems fit. The Company Court
while granting leave to proceed with a pending suit against a company in liquidation, cannot impose
conditions that are contrary to law; the condition imposed that the decretal amount should first be
recovered from the guarantors and the deficit, if any, should be recovered from the company in
liquidation was held to be without justification as the liability was joint and several.550
Section 30 of the Industrial Finance Corporation Act, 1948,551 provides a favoured procedure to the
Industrial Finance Corporation of India to seek recoveries on loans with a summary procedure; the
principles on the obligations of an agreement by which the loan was disbursed continue to be governed by
the Contract Act. The provisions relating to guarantees in this chapter, determine the essential and proper
parties to the contract, independent of the provisions of the Industrial Finance Corporation of India Act.
Thus, the person who stood as a surety in a contract which witnessed the disbursement of a loan was held
to be a proper party in an action brought into Court by the IFCI.552
[s 128.14] Exhausting Remedies against Principal-debtor or Secured Property before

Suit against Surety
Unless expressly provided by the contract of guarantee,553 the creditor is not bound to exhaust his remedy
against the principal, before suing the surety, and a suit may be maintained against the surety though the
principal has not been sued.554 The surety has no right to restrain execution of the decree against him until
the creditor has exhausted his remedy against the principal debtor for the reason that it is the business of
the surety/guarantor to see whether the principal debtor has paid or not. The surety does not have a right
to dictate terms to the creditor as how he should make the recovery and pursue his remedies against the
principal debtor at his instance.555 The liability of the surety is immediate, and before payment the surety
has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the
first instance, nor can such injunction be imposed in a decree by a Court.556 It is the duty of the surety to
pay the decretal amount, after which he will be subrogated to the rights of the creditor under section
142.557 The solvency of the principal-debtor is no ground for restraining the creditor from executing his
Sanjay Kataria
Page 10 of 33
decree.558
Where the surety contracted that he would be responsible if the person supplying goods was “unable to
realise the price thereof from the firm”, the liability was not conditional upon exhaustion of all remedies
against the principal-debtor.559
A surety may be liable in the suit, despite dismissal of the suit against the principal-debtor for default
under Order IX, rule 5 of the Code of Civil Procedure, 1908.560
Overruling its earlier decision in Union Bank of India v Manku Narayana,561 the Supreme Court in State Bank
of India v Indexport Registered,562 held that if, on principle, a surety could be sued without even suing the
principal-debtor, there was no reason, even if the decretal amount was covered by the mortgaged decree,
to force the decree-holder to proceed against the mortgaged property first, and then to proceed against
the surety. The two portions of the decree were not severable. If the decree is a composite decree, which
is both a personal decree as well as a mortgage decree, without any limitation on its execution, the decree-
holder cannot be forced to first exhaust the remedy by way of execution of the mortgage decree alone,
and told that only if the amount recovered is insufficient, he can be permitted to take recourse to the
execution of the personal decree.563
A bank can proceed against the surety under the provisions of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002, without proceeding against the principal debtor.564 A
State Financial Corporation cannot proceed against the guarantor under section 29 of the State Financial
Corporations Act, 1951, but its remedy against the surety under ordinary law is not affected.565
It was earlier held in two decisions of the Supreme Court that in terms of section 4(2)(b) of the U.P.Public
Moneys (Recovery of Dues) Act,1972, the right of a creditor to proceed against a surety commenced only
after the securities of the principal debtor are first sold, and the amount realised is not sufficient to meet
the debt. Overruling the said decisions, it was held in Sobran Singh v State of U.P., that the general
principle of law that the liability of a guarantor is co-extensive with that of the principal borrower
continued to hold good. Where the party had created a charge, mortgage or encumbrance, the U.P Act
postulated initiation of proceedings against the person whose property was mortgaged, charged or
encumbered only after such property was sold off. As the guarantor had not provided any mortgage or
charge, the bar against initiation of recovery proceedings until the property was sold had no application to
them. The principal borrower who had created a mortgage could not however be proceeded against until
the property mortgaged, charged had been sold or the Collector had certified that there were no prospects
of realizing the entire sum through such process of sale within a reasonable time.566
[s 128.15] Suits against Sureties
The creditor may file a suit against both the principal-debtor and the surety,567 or at his option,568 only
against the surety;569 or only against the debtor;570 or against anyone of the co-sureties,571 or against the
heirs or legal representatives of a deceased surety.572 However, a surety is a necessary party to a suit filed
Sanjay Kataria
Page 11 of 33
for the enforcement of mortgage,573 without claiming any relief against him; unless the cause of action has
arisen, no relief can be claimed against him.574 If a suit is filed against the principal-debtor and the sureties
jointly and severally, and the suit abates against the principal-debtor, it abates against the sureties also; else,
there will be two conflicting decrees on the same subject matter.575 A mortgage suit against the principal-
debtor and a surety for shortfall on the sale of mortgage property is maintainable even though no cause of
action has arisen against the surety.576 The surety cannot insist that the creditor proceed against the
principal debtor first, especially when whereabouts of the principal debtor are not known. The option is
provided to the creditor to deal with precisely such circumstances.577
Where a decree was obtained against the principal-debtor under the Cooperative Societies Act, under which
the sureties could not be made parties, and the principal-debtor absconded, a suit against the surety would
not be barred.578
Guarantor issued cheques towards payment of the dues outstanding against the principal debtor (hire-
purchase of car in this case). When the cheques were dishonoured, it was held that arguments based on
sections 126 and 128 of the Contract Act were not relevant in a proceeding under section 138 of the
Negotiable Instruments Act, 1881, as the language of the section left no manner of doubt that the liability
under the section cannot be avoided when the cheque gets returned unpaid.579
[s 128.16] Execution of Decree
Where the creditor obtains a decree against the surety and the principal-debtor, the execution of decree
can be taken against the surety alone,580 and the surety has no right to restrain execution against him, until
the creditor has exhausted the remedies against the principal-debtor.581 The creditor may choose to
execute the decree against all or any of the judgment-debtors of his choice—whether surety, or principal-
debtor. Even where a condition in the surety bond stipulates that the surety will pay on failure of the
principal-debtor, the surety cannot resist execution, on the ground that the creditor has not taken steps to
realise debts from the principal-debtor, where the principal-debtor has not paid by the time execution is
taken out.582
The defendants had a cash credit account with the bank, and they hypothecated their moveable assets as
security. They also deposited, by way of mortgage, the title deeds of their immoveable properties. Another
defendant, insurer, issued a bank loan or cash indemnity policy against losses suffered by the bank in
consequence of default of the principal-debtors in making repayments on due dates. Default having taken
place, the bank brought a suit on the mortgage and for enforcement of the indemnity policy. It was held
that:
(i) the bank could enforce the indemnity policy without first exhausting its remedies against the principal-debtor;
(ii) it was not necessary for the bank to await the obtaining of the mortgage decree and getting its rights under the policy.583
Sanjay Kataria
Page 12 of 33
Where the principal-debtor fails to comply with the direction in a decree passed against him and the
sureties who were jointly and severally liable to pay the decretal amount by monthly instalments, the
decree can be executed against all or any of the judgment-debtors.584
[s 128.17] Evidence
The surety is prima facie entitled to have the debt proved as against him. A judgment or award against the
principal is not admissible as against the surety, unless he was a party to the proceedings in which the
judgment was given, or was a party to the admission of the principal-debtor, or there was a special
agreement to that effect: “In an action against the surety the amount of the damage cannot be proved by
any admissions of the principal”.585 The burden of proving lies on the surety to prove that the liability
under the guarantee is limited.586
[s 128.18] Limitation
Limitation for filing a suit against a surety commences to run according to the terms of the contract of
guarantee.587 The debt of the surety is distinct from that of the principal-debtor.588 The limitation begins
to run against the surety at the same time as against the principal-debtor, depending upon the form of the
contract entered into between the surety and the creditor, and whether the surety and the principal-debtor
are co-contractors.589 This section must be read together with the Limitation Act, 1963, and not so as to
nullify its provision limiting the time within which a suit must be brought after the accrual of a cause of
action.590 However, where a claim is time-barred against the principal-debtor, but not against the surety,
the plaintiff is entitled to a decree against the surety.591 A bank can appropriate the deposits of the surety
lying with it as security even after the claim against the principal debtor is time barred, because limitation
does not affect the right, but merely bars the remedy.592 Where the surety bond is a continuing guarantee,
the question of limitation would not arise against the surety, until breach. So long as the account is a live
account in the sense that it is not settled, and there is no refusal on the part of the guarantor to carry out
the obligation, the period of limitation could not be said to have commenced running.593 Thus, where the
surety has agreed to pay “on demand”, his liability does not begin unless the amount is demanded from
him, and limitation against him does not begin to run until then. If the agreement requires that a notice be
given to the surety, limitation begins to run after the period of notice is over, where the period is agreed;
else from the date of notice.594 When a demand is made against the guarantor, if the claim is a live claim
against the principal debtor, limitation in respect of the guarantor will run from the date of such demand
and refusal/non-compliance thereof. The creditor can then sue the guarantor within three years even if
the claim against the principal debtor gets subsequently time-barred.595 It has been stated:
There is …a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a
guarantee which does not contain such a condition. … The liability to pay may arise, on the principal debtor and guarantor, at the same
time or at different points of time. A claim may be even time-barred against the principal debtor, but still enforceable against the
guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor. …
[T]he extent of liability under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on
Sanjay Kataria
Page 13 of 33
the terms of the contract.596
Where the surety revokes his continuing guarantee, limitation begins to run from the date of revocation,
or on expiry of notice of revocation, if the agreement provides for notice.597
However, the fact that the guaranteed debt was, as against the principal-debtor, time-barred at the time
when he paid it, will not prevent the surety from recovering the indemnity from the principal-debtor.598
[s 128.18.1] Effect of Payment Towards the Debt by Principal-debtor
The payment of interest by debtor, before the expiration of the period of limitation, does not give a fresh
starting point for limitation against the surety under section 19 of the Limitation Act, 1963,599 even in the
absence of a prohibition by the surety against the payment of interest by the debtor on his account.
Payment of interest by the debtor could not be regarded as made by a person liable to pay the surety’s
debt, nor can the surety be, for the purpose of that section, considered the agent of the principal duly
authorised to pay the interest.600 “The fact that the interest was paid with the knowledge and consent of
the surety and even at his request, makes no difference, unless the circumstances could be said to render
the payment on behalf of the surety.”601
However, where the letter of guarantee for repayment of money advanced on a promissory note payable
on demand with interest provided that the guarantee would remain in force until the debt due was fully
and finally adjusted and would not be affected by any forbearance or arrangement for giving time, or
other facilities to the principal-debtor, and the debtor made small payments of interest from time-to-time,
it was held that in view of the terms of the guarantee, the payments extended also the liability of the
surety, and that the surety remained liable until the principal-debtor remained liable.602
[s 128.18.2] Effect of Acknowledgment by Principal-debtor
An acknowledgement by a principal-debtor does not bind the surety;603 but it has also been held that
acknowledgments by the principal-debtor also keep the limitation saved against the surety.604 In any case,
where the surety has specifically empowered the principal-debtor to give consent on behalf of the surety
in respect of all matters concerning the debt, the acknowledgment of liability given by the principal-debtor
is binding on the surety, even though he has not signed the acknowledgments.605 Acknowledgment of a
debt, within a period of limitation, does not exonerate the surety, nor can the surety plead discharge under
section 133; nor does section 137 apply because of mere forbearance to sue till beyond the period of
original limitation. Section 139 has no application, for there is no impairment of the rights of the surety.606
[s 128.19] Position under English law
Sanjay Kataria
Page 14 of 33
The surety’s liability arises only when the principal-debtor has made default.607 It is not necessary for the
creditor, before proceeding against the surety, to first call upon the principal-debtor to pay,608 unless such
a demand is necessary, as a condition to the principal-debtor’s liability to the creditor under their contract,
viz. where the debt is repayable on demand; or where the creditor seeks to accelerate liability for payment
of the whole of a debt otherwise payable by instalments. Whether such a demand is necessary, is a
question of construction of contract.609
Where such demand or request is required under the terms of the guarantee, such demand is a necessary
ingredient of the creditor’s cause of action against the surety610 and such demand must comply exactly as
to form and manner with the requirements imposed by the contract of guarantee.611 About the form of
demand, it has been stated:
There must be a clear intimation that payment is required to constitute a demand; nothing more is necessary, and the word “demand”
need not be used; neither is the validity of a demand lessened by its being clothed in the language of politeness; it must be of a
peremptory character and unconditional, but the nature of the language is immaterial provided it has this effect.612
The contract of guarantee may provide, for instance, that the creditor shall first take proceedings against
the principal-debtor,613 or that the surety would be liable only if the debtor repudiated the transaction.614
Any express or implied conditions precedent to the surety’s liability must be fulfilled before recourse can
be had to him.615 Where a guarantee provides that the surety would be liable for what may “ultimately be
found due from the principal-debtor”, the surety is not liable until the deficiency is found after taking
steps against the latter;616 Any condition to be performed by the creditor, to render the principal-debtor
liable, must be performed before the surety can be made liable.617 if the guarantee stipulates that money is
to be lent to a principal-debtor, the money lent must, apparently, have reached the creditor’s hand, and
then have been lent to the principal-debtor, to render the surety liable.618 Where a guarantee unlimited in
amount is given in respect of goods to be supplied to another, there must be a subsequent genuine supply,
and to a reasonable extent, before a surety can be made liable.619
Where a guarantee provided that the loan to the principal-debtor was secured by a charge upon shares,
and this was also mentioned in the operative part of the guarantee, the existence of the security was held
to constitute a condition precedent to the surety’s liability, and the surety was not estopped by the recital,
from asserting that the shares did not exist.620
Where the sureties had guaranteed the performance by a purchaser in a contract of sale of home unit on
the terms and conditions of the contract “including the payment of all moneys payable under it”, and the
balance of the price was payable “upon settlement”, and the settlement did not occur, no conveyance of
property having taken place, the balance price had not become payable by the purchaser, and the sureties
were not liable to pay the balance of price with interest.621
In Cargill International SA v Bangladesh Sugar and Food lnds Corp.,622 C tendered for supply of sugar to B, and
Sanjay Kataria
Page 15 of 33
submitted a performance bond of a bank covering 10 percent of the total cost. The contract stipulated
that the cargo would be transported in a vessel not more than 20 years old, and would be delivered before
the specified date. The bond was liable to be forfeited upon failure of any term or condition of the
contract, and also if the plaintiff were responsible for any loss or damage suffered by the defendant. The
vessel was older than stipulated, and arrived late. The purchaser rejected the shipment and called the
payment of the bond. Injunction was refused to the defendant.
Where the surety has guaranteed complete performance of the contract by the principal-debtor, the surety
is treated to have guaranteed the complete performance of the contract by the principal-debtor, and when
the debtor commits breach, and the creditor terminates that contract, the surety continues to be liable for
performance, although the principal-debtor’s liability has been transposed to one of damages.623 Where
the surety has assumed greater liability than the principal-debtor, he is not discharged when the principal-
debtor is discharged. Thus, where the defendant agreed to indemnify the hire purchase company against
any loss suffered by it, if the hirer terminated the contract prematurely, the defendant was liable though
the hirer was discharged.624
In a contract for sale of a home unit, the sureties had guaranteed the performance of the terms and
conditions of the contract “including the payment of all moneys payable under it”. It was held that the
sureties could not be held to have promised to pay a sum of money in the event the purchaser did not
complete the contract; but the promise was that the purchaser would perform its contractual obligations,
including the payment of all moneys payable under the contract.625
Under the terms of a letter of guarantee, the guarantors guaranteed the payment of instalments due, or to
become due, from the purchasers of the ship which was being built for them, if the buyers defaulted.
Under the contract, if the buyers defaulted in paying the second instalment, the ship-builder had, in
addition to other rights, the right to recover damages, cancel or rescind the contract and sell the ship by
public auction. The buyers defaulted in paying the second instalment, and the ship-builders cancelled the
contract and sued the guarantor for the second instalment and interest. The guarantors contended that by
the notice of cancellation the contract had terminated and the right to recover the second instalment had
been destroyed and there was the only remedy in damages which had replaced the other claims and,
therefore, the guarantors were not liable. It was held that the buyers were liable for the second instalment
liability which arose before the notice of cancellation, and accordingly the guarantors remained liable.
Secondly, the guarantors were liable even if the right was replaced by claim for damages, because the
object of the guarantee was to enable the ship-builders to recover, from the guarantors, irrespective of the
position between the ship-builders and the buyers.626
A person may make himself a surety, “with a limit on the amount of his liability, for the whole of a debt
exceeding that limit”; and a guarantee of limited amount for an ascertained debt is presumed to be a
guarantee for the whole. However,
...where the surety has given a continuing guarantee, limited in amount, to secure the floating balance which may from time to time be
due from the principal to the creditor, the guarantee is as between the surety and the creditor to be construed, both at law and in equity,
as applicable to a part only of the debt co-extensive with the amount of his guarantee, and this upon the ground, at first confined to
equity, but afterwards extended to law, that it is inequitable in the creditor, who is at liberty to increase the balance or not, to increase it
Sanjay Kataria
Page 16 of 33
at the expense of the surety.627
Thus, where A guaranteed Z against trade debts to be contracted by M “as a running balance of account
to any amount not exceeding GBP 400,” and M became indebted to Z for GBP 625 and made a
composition with his creditors for 8s 7d in the pound, leaving a balance of GBP 365 due to Z, it was held
that, as between A and Z. A was entitled to deduct from that balance, the amount of the dividend paid
upon GBP 400, the maximum of A’s guarantee, and was liable to Z only for the difference. For, the
guarantee was, on its true construction, only a guarantee for GBP 400, being part of M’s entire debt to Z,
not a guarantee for an unknown amount with liability limited to GBP 400; and that being so, the dividend
paid by M was to be applied rateably in reduction of every part of the debt, and the liability of A, on the
part for which he had undertaken, was diminished accordingly.628 In a later case, held to be
indistinguishable from this, it was said:
If a person guarantees a limited portion of a debt, all the authorities show that if he pays that portion he has in respect of it all the rights
of a creditor. The question is whether the surety means “I will be liable for £ 250 of the amount which A, B. shall owe you”, or “I will
be liable for the amount which A, B. shall owe you, subject to this limitation, that I shall not be called upon to pay more than £250…”
It is true that a surety may enter into an obligation to be liable to a limited amount for the ultimate balance remaining after all moneys
obtainable from other sources have been applied in reduction of the debt.629
Such an intention ought to be clearly expressed.630
A surety is not discharged from liability when the creditor terminates his contract with the principal-
debtor, viz. under an express right of termination, or by accepting the repudiation by the principal-
debtor.631 The liability being co-extensive, with that of the principal-debtor, the surety is liable for any loss
sustained by the creditor, through the principal-debtor’s default.632 Thus, where a creditor accepts the
repudiation by a debtor, of an agreement to pay a debt by instalments, the surety for that agreement is
liable to the creditor for instalments accrued but unpaid at the date of termination,633 and for damages
representing the total debt.634
436 Central Bank of India v CL Vimla, AIR

2015 SC 2280 : (2015) 7 SCC 337 ; Narayan
Singh v Chattarsingh, AIR 1973 Raj 347 ; Maharashtra State Electricity Board v
Official Liquidator, AIR 1982 SC 1497 ; Lakhi Ram Ram Dass v Har Prasad Syal :
AIR 1971 SC 1956 : (1972) 3 SCC 337
.
437 Bank of Bihar Ltd. v Damodar Prasad, AIR

1969 SC 297 : (1969) 1 SCR 620 ; Industrial
Financial Corporation of India Ltd. v Cannanore Spg. and Wvg. Mills Ltd., AIR 2002 SC 1841
: (2002) 5 SCC 54 .
Sanjay Kataria
Page 17 of 33
438 National Project Constn. Corpn. Ltd. v Sadhu and Co.,

AIR 1990 P&H 300 .
439 Nandlal Shankarlal Tiwari v Laxman Umakant Malkarjun,

(1970) 72 Bom LR 715 (proceedings in insolvency against principal-debtor do not affect the
liability of the surety); Charu Chandra Bandopadhaya v L Faithful, AIR 1919 Cal 636
; Birdhichand v Kachri Bai, AIR 1946 Ngp 135 ; V Somanath Raju v
Konchada Ramamurty Subudhi, AIR 1957 Ori 106 ; Hukumchand Insurance Co. Ltd.
v Bank of Baroda, AIR 1977 Kant 204 ; Balakrishnan v H Chunnilal,
AIR 1998 Mad 175 .
440 Jagannath Ganeshram Agarwala v Shivnarayan Bhagirath,

AIR 1940 Bom 247 : (1940) Bom 387 : 42 Bom LR 451 : 190 IC 73; Industrial Investment Bank
Ltd. v Bishwanath Jhunjhunwala, 2009, AIR SCW 5359 : (2009) 9 SCC 478
.
441 Hukumchand Insurance Co. Ltd. v Bank of Baroda,

AIR 1977 Kant 204 ; Syndicate Bank v Channaveerappa Beleri, AIR 2006 SC 1874
: (2006) 11 SCC 506 .
442 Industrial Investment Bank of India Ltd. v Biswanath Jhunjhunwala,

(2009) 9 SCC 478 : (2009) 7 Mad LJ 129; United Bank of India v Satyawati Tondon,
AIR 2010 SC 3413 : (2010) 8 SCC 110
; Ram Kishun v State of U.P., (2012) 11 SCC 511 and
Central Bank of India v CL Vimla, AIR 2015 SC 2280 :
(2015) 7 SCC 337 .
443 Harihar Nath v State Bank of India, (2006) 4

SCC 457 .
444 Gopilal J Nichani v Trac Inds. and Components Ltd.,

AIR 1978 Mad 134 .
445 Manju Mahadeo Shetti v Shivappa Manju Shetti,

AIR 1918 Bom 197 : (1918) 42 Bom 444 : 46 IC 122.
446 State Bank of India v Saksaria Sugar Mills Ltd.,

AIR 1986 SC 868 : (1986) 2 SCC 145 .
447 Hajarimal v Krishnarav, (1881) ILR 5

Bom 647, at 650.
448 Supra, (1881) 5 Bom 647, 650 (debt-relief law).
449 Chitty on Contracts, 28th Edn, vol III, at 1325, paras 44–051.
450 Narain Sahai v Emperor, AIR 1946 All 333

.
Sanjay Kataria
Page 18 of 33
451 Moschi v Lep Air Services Ltd., (1973) AC

331 , at 345 : (1972) 2 All ER 393 , at 399
(HL).
452 Bank of Bengal v William Arratoon Lucas,

AIR 1924 Cal 578 ; Walker (Re), Sheffield Banking Co. v Clayton,
(1892) 1 Ch 621 : (1891–94) All ER Rep 888
.
453 Ackermann v Ehrensperger, (1846) 16 M&W 99, at 103 per Pollock CB.
454 Zaki Husain v Deputy Commr. of Gonda,

AIR 1929 All 687 (interest on amount of liability of principal-debtor for tort of embezzlement);
Swaminatha Pillai v SL Lakshmana Ayyar, AIR 1935 Mad 748 .
455 S N Prasad v Monnet Finance Ltd.,

AIR 2011 SC 442 : (2011) 1 SCC 320
.
456 Amar Chand v Bhano, AIR 1995

SC 871 .
457 Punj Lioyd Ltd. v India Cements Ltd.,

AIR 2005 Del 389 .
458 Maharaja of Benares v Har Narain Singh,

(1905) 28 All 25 : (1906–07) ILR 27
–28 All 17.
459 Firm Pursottam Das Ganpati Rai v Gulab Khan,

AIR 1963 Pat 407 .
460 Lima Leitao & Co. Ltd. v UOI,

AIR 1968 Goa 29 .
461 Firm Pursottam Das Ganpati Rai v Gulab Khan,

AIR 1963 Pat 407 .
462 SN Sen v Bank of Bengal, AIR 1920 PC 35

: (1920) 47 IA 164 : 58 IC 1.
463 Chokalinga Chettiar v Dandayuthapani Chettiar,

AIR 1928 Mad 1262 : 113 IC 337.
464 Chandukutty Nambiar v Raman Nair, AIR

1959 Ker 176 .
465 Syndicate Bank v Channaveerappa Beleri, (2006)

11 SCC 506 ; Mercantile Bank v Tahilram Pessumal, AIR 1914 Sind 154
Sanjay Kataria
Page 19 of 33
; Maqsudul Hasan v Collector of Farukhabad, AIR 1931 Oudh 430

; Ranjit Kumar Roy v Kabiraj Kisori Mohan Gupta, AIR 1940 Cal 401
; Mani Bhusan Malik v Pioneer Bank Ltd., AIR 1959 Cal 746 ; A Firma “Agencia
Nacional Limitada” v A Sociedade “Chowghule and Cia Limitada”, AIR 1967 Goa 88
; Adamsab Usmansab Kanakya v Gurushinddayya Lingayya, AIR 1967 Mys 147
; see also section 126 under heading: “Construction of Guarantee”.
466 Motilal Ramkumar v Akbarbhai Fakhruddin,

AIR 1939 Bom 309 : (1939) 41 BOMLR 538 .
467 SN Prasad v Monnet Finance Ltd, (2011) 1

SCC 320 ; Chandukutty Nambiar v Raman Nair, AIR 1959 Ker 176
(liability for moneys due only).
468 Mathura Das v Secy. of State, AIR 1930 All 848

.
469 Karnataka State Financial Corporation v N Narasimahaiah,

AIR 2008 SC 1797 : (2008) 5 SCC 176
.
470 TH Hancock v Imperial Bank of Canada, AIR

1930 PC 272 .
471 Alekha Sahoo v Puri Urban Co-operative Bank Ltd.,

AIR 2004 Ori 142 .
472 Biswanath Bhuwania v Indian Bank, AIR

2007 Cal 191 (personal accounts of surety frozen under terms of general lien provided in the guarantee).
473 Board of Trade v Employers’ Liability Assurance Corpn. Ltd.,

(1910) 2 KB 649 (CA).
474 Subhankhan Ramjankhan v Lalkhan Haji Umarkhan,

AIR 1948 Ngp 123 : (1947) Ngp 643; Pyda Subbaranayya Chetty v Premier Bank of India,
AIR 1959 AP 96 ; Mohd Sultanuddin v Mohd Dastagir, AIR 1960 AP 210
.
475 Pyda Subbaranayya Chetty v Premier Bank of India,

AIR 1959 AP 96 ; see also under heading: “Commencement Subject to Condition”.

AIR 1986 SC 868 : (1986) 2 SCC 145 .
477 Carter v White, (1883) 25 ChD 666

: [1881–85] All ER Rep 921 (CA) :
[1881–85] All ER Rep 921 .
478 Pyda Subbdranayya Chetty v Premier Bank of India,

AIR 1959 AP 96 .
Sanjay Kataria
Page 20 of 33
479 Central Bank of India v CL Vimla, (2015) 7

SCC 337 .

AIR 1948 Ngp 123 : (1947) Ngp 643; Pyda Subbaranayya Chetty v Premier Bank of India,
AIR 1959 AP 96 .
481 Punjab National Bank Ltd. v Shri Vikram Cotton Mills Ltd.,
AIR 1970 SC 1973 : (1970) 2 SCR 462
.
482 State of Maharashtra v MN Kaul,

AIR 1967 SC 1634 : (1968) 38 COMP CASES 1.
483 Probodh Kumar Das v Gillanders Arbuthnot & Co.,

AIR 1934 Cal 699 : 59 Cal LJ 503 : 152 IC 571; Seth Pratapsingh Moholalbhai v Keshavlal Harilal
Setalwad, AIR 1935 PC 21 : (1934) 62 IA 23 : (1934) 59 Bom 180 : 153 IC
700; Chaganti Veeresalingam v Mallampalli Subbarayudu, AIR 1939 Mad 932
: (1939) 2 Mad LJ 282 (a surety bond is to be strictly construed); M Paramasivam Pillai v AVRMSPS Ramaswami, (1939) Mad 290,
AIR 1939 Mad 152 : 180 IC 406; Pannaji Devichand v Basappa Virappa Bellary,
AIR 1943 Bom 243 : (1943) Bom 636 : 45 Bom LR 510 : 209 IC 161.
484 Fenner (India) Ltd. v Punjab and Sind Bank,

AIR 1997 SC 3450 .
485 Kishen v Secy. of State for India in Council,

(1885) 12 Cal 143 : (1886) ILR 12
–13 Cal 98. This was a case on the construction of an undertaking in the nature of a ‘fidelity guarantee’ on very peculiar facts; the
Contract Act is not referred to at all.
486 Thakur Mahipal Singh v Athal Singh,

AIR 1925 All 5 .
487 Chittaranjan Banerjee v Dy. Commr. of Lakhimpur,

AIR 1980 Gau 62 ; Seth Pratapsingh Moholalbhai v Keshavlal Harilal Setalwad AIR
1935 PC 21 : 62 IA 23 : (1934) 59 Bom 180 : 153 IC 700; Blest v Brown, (1862) 4 De GF & J 367, 376.
488 Union Bank of India v Avinash P Bhonsle, (1991) 2

Mah LJ 1004 ; N Sulochana v State of Andhra Pradesh, AIR 1984 AP 173
(surety bond for arrears).
489 J Harigopal Agarwal v State Bank of India, AIR

1976 Mad 211 , at 212 : (1976) 1 Mad LJ 250.
490 Kaloosingh v Sunderbai, AIR 1926 Ngp

449 .

1932 Ngp 62 : 138 IC 879.
Sanjay Kataria
Page 21 of 33
492 Central Bank of India v CL Vimla, (2015) 7

SCC 337 .
493 Parvateneni Bhushayya v Pothuri Suryanarayana,

AIR 1944 Mad 195 : (1944) Mad 340.
494 Yarlagadda Bapanna v Devata China Yerakayya,

AIR 1966 AP 151 .
495 S N Prasad v Monnet Finance Ltd., AIR

2011 SC 442 : (2011) 1 SCC 320 .

1932 Ngp 62 : 138 IC 879; Hazari Lal v Chhaju Ram, AIR 1960 Raj 319
.
497 Bharat National Bank Ltd. v Thakar Das Madhok,

AIR 1935 Lah 729 .
498 Gauri Lal v Raja Babu, AIR 1929 Pat 626

.
499 Hajee Moosa Sait & Bros. v PSP Abdul Kareem,

AIR 1937 Mad 360 ; Suwalal Vemichand v Fazle Hussain Rajabali Bohra, AIR
1939 Ngp 31 .
500 B G Vasantha v Corporation Bank, (2005)

10 SCC 215 .
501 South Indian Exports Co. Ltd. v A Condiah Chetty,

AIR 1916 Mad 1066 (but not actually avoided).
502 Edaven Kavungal Kelappan Nambiar v Moolakal Kunhi Raman,

AIR 1957 Mad 164 : (1957) Mad 176; referring to ALSPPl Subramania Chettiar v Moniam P
Narayanaswami Gounder, AIR 1951 Mad 48 (FB) : (1951) Mad 305; AV
Varadarajulu Naidu v KV Thavasi Nadar, AIR 1963 Mad 413 : (1963) Mad 942,
(illegal partnership); overruled on another point in KM Vishwanatha Pillai v KM Shanmugham Pillai, AIR
1969 SC 493 ; Blest v Brown, (1862) 4 De GF&J 367, 376; Seth Pratapsingh Moholalbhai v Keshavlal Harilal
Setalwad, AIR 1935 PC 21 : (1934) 62 IA 23 : (1934) 59 Bom 180 : 153 IC
700; MS Anirudhan v Thomco’s Bank Ltd., AIR 1963 SC 746 : [1963] 1 Supp SCR
63, 77.
503 Chhajju Singh v Emperor, AIR 1921 Lah 79

; Ganga Prasad v Hayat Mahommad, AIR 1919 Oudh 276
.
504 Kashiba v Shripat Narshiv, (1894) 19 Bom 697 :

(1895–96) ILR 19 –20 Bom 466; Tikki Lal Jaithu Teli v Komalchand, AIR 1940 Ngp
327 : (1940) Ngp 632.
Sanjay Kataria
Page 22 of 33
505 Kashiba v Shripat Narshiv, (1894) 19 Bom 697; Ganga Prasad v Hayat
Mahommad, AIR 1919 Oudh 276 .
506 Edaven Kavungal Kelappan Numbiar v Moolakal Kunhi Raman,

AIR 1957 Mad 164 : (1957) Mad 176; distinguishing and explaining Coutts & Co. v Browne-
Lecky, (1947) 1 KB 104 : (1946) 2 All ER
207 ; Wauthier v Wilson, (1911) 27 TLR 582
on appeal : (1912) 28 TLR 239 ; distinguishing Kashiba v Shripat
Narshiv, (1895–96) ILR 19 –20 Bom 466.
507 Coutts & Co. v Browne-Lecky, (1947)1 KB 104

: (1946) 2 All ER 207 , at 210 per Oliver J.
508 Cohn (Re), (1947) 10 MLR 40.
509 Pestonji Manekji Mody v Bai Meherbai, AIR

1928 Bom 539 : (1928) 30 Bom LR 1407 : 112 IC
740.
510 AV Varadarajulu Naidu v KV Thavasi Nadar,

AIR 1963 Mad 413 : (1963) Mad 942 (overruled on other point in KM Vishwanatha Pillai v KM Shanmugham
Pillai, AIR 1969 SC 493 ).
511 Jagannath Ganeshram Agarwala v Shivnarayan Bhagirath,

AIR 1940 Bom 247 : (1940) Bom 387 : 42 Bom LR 451 : 190 IC 73 (insolvency); Bank of
India Ltd. v Rustom Fakirji Cowasjee, AIR 1955 Bom 419 , at 428
(liquidation); Aypunni Muni v Devassy Kochouseph, AIR 1966 Ker 203
(insolvency).
512 Supra, (1940) Bom 387, AIR 1940 Bom

247 : 42 Bom LR 451 : 190 IC 73; Ram Kripal Singh v State of UP, AIR 2007 SC (Supp) 1153 :
(2007) 11 SCC 22 .
513 Garner’s Motors Ltd (Re), (1937) Ch 594

.
514 Punjab National Bank v Shri Vikram Cotton Mills,

(1970) 1 SCC 60 .

AIR 1982 SC 1497 .
516 Industrial Finance Corpn of India Ltd. v Cannanore Spinning & Weaving Mills
Ltd., AIR 2002 SC 1841 : (2002) 5 SCC 54
; Makhan Lal Harnarain v Karamchand Thaper & Bros Pvt Ltd., AIR 2004 Jhar 143
.
517 Balkrishna v Atmaram, AIR 1944

Ngp 277 ; Shivajiram Dhannalal v Kisan, AIR 1952 Ngp 201
Sanjay Kataria
Page 23 of 33
. Apparently it would not held the surety to invoke section 56; so held in Janakumara Nainar v TS Samanthabadra Nainar,
AIR 1945 Mad 98 : (1945) Mad 491; a decision by the same Bench as decided
in Al Sp S Rm Subramanian Chettiar v Chinnamuthu Batcha Rowther, AIR 1942 Mad 145
: (1941) 2 Mad LJ 751.
518 Aypunni Mani v Devassy Kochouseph,

AIR 1966 Ker 203 ; Babu Rao Ramchandra Rao v Babu Manaklal Nehrmal,
AIR 1938 Ngp 413 ; Balkrishna v Atmaram, AIR 1944 Ngp 277
; ALSPPl Subramania Chettiar v Moniam P Narayanaswami Gounder, AIR 1951
Mad 48 (FB) : (1951) Mad 305.
519 Aypunni Mani v Devassy Kochouseph,

AIR 1966 Ker 203 (FB); ALSPPl Subramania Chettiar v Moniam P Narayanaswami Gounder,
AIR 1951 Mad 48 (FB) : (1951) Mad 305 (Madras Agriculturists Debt Relief
Act), overruling ALSPPl Subramanian Chettiar v Chinnomuthu Batcha Rowther, AIR 1942 Mad 145
: (1941) 2 Mad LJ 751; Narayan Singh v Chattarsingh, AIR 1973 Raj 347
; but see Shivajiram Dhannalal v Kisan, AIR 1952 Ngp 201
(settlement of debt by a debt relief Court does not affect the liability of a surety who has executed a bond for discharge of debt created
by decree passed against judgrnent-debtor).
520 Gopendra Narain Dhar v Radha Krishna Dhar,

AIR 1940 Cal 224 (recovery from principal-debtor stayed by Debt Settlement Board); Gopilal J
Nichani v Trac Inds. and Components Ltd., AIR 1978 Mad 134 (suit against debtor
barred under statute relating to relief undertakings).
521 Seth Gokuldas Nathani v Lal Artatran, AIR

1926 Ngp 466 ; AV Varadarajulu Naidu v KV Thavasi Nadar, AIR 1963 Mad
413 ; overruled on another point in KM Vishwanatha Pillai v KM Shanmugham Pillai,
AIR 1969 SC 493 .
522 Mir Mahommad Khan v Abdul Karim, AIR

1939 Lah 187 .

AIR 1986 SC 868 : 1986 SCR (1) 290 , Industrial
Investment Bank of India Ltd. v Biswasnath Jhunjhunwala, (2009) 9 SCC 478
; and United Bank of India v Satyawati Tondon, AIR 2010 SC 3413 .

AIR 1982 SC 1497 ; State Bank of India v Saksaria Sugar Mills Ltd., AIR 1986 SC 868
(statute taking over sugar undertakings excluding from its operation who secured loans given by banks
or financial institutions); SCIL (India) Ltd. v Indian Bank, AIR 1992 Bom 131
, at 133; Ram Kripal Singh v State of UP, AIR 2007 SC (Supp) 1153 : (2007) 11 SCC 22
.

AIR 1986 SC 868 , at 872 (notification under section 7(1)(b) of the Sugar Undertakings (taking over of
management) Act); Bank of Bihar Ltd. v Damodar Prasad, AIR 1969 SC 297
: (1969) 1 SCR 620 .
526 Gopendra Narain Dhar v Radha Krishna Dhar,

AIR 1940 Cal 224 .
Sanjay Kataria
Page 24 of 33
527 Patheja Bros. Forgings and Stamping v ICICI Ltd.,

AIR 2000 SC 2553 : (2000) 6 SCC 545 (no
reference to Contract Act, decision based on interpretation of section 22 of the 1985 Act); overruling Madalsa Intl. Ltd. v Central Bank of
India, AIR 1998 Bom 247 .
528 Ram Kripal Singh v State of UP, AIR 2007 SC (Supp) 1153 :
(2007) 11 SCC 22 .
529 Narain Sahai v Emperor, AIR 1946

All 333 .
530 People’s Bank of Northern India Ltd. v Nanikram Charatsing,

AIR 1939 Sind 270 .
531 Abul Karim v Emperor, AIR 1933

Sind 320 .
532 Debendra Nath Dutt v Administrator-General of Bengal,

(1908) 35 IA 109 : (1908) 35 Cal 955
(PC); affirming (1906) 33 Cal 713 .
533 Sarat Chandra Roy v Rajoni Mohan Roy, (1908) 12 Cal WN 481.

AIR 1967 Mys 147 .
535 Shivajiram Dhannalal v Kisan, AIR 1952

Ngp 201 (bond under section 145 of Code of Civil Procedure); section 446(2) of the Code of Criminal Procedure, 1973
under which when a bond has been forfeited, the amount is recovered as a fine under the Code; see also section 145 of the Code Civil
Procedure, 1908, under which where a person has become liable as a surety:
(i) for the performance of any decree,;
(ii) for restitution of property taken in execution in a decree; or
(iii) for payment of any money or fulfilment of any condition imposed on any person under order of the Court in any suit or
proceeding, the decree or order may be executed against him upon sufficient notice, in the manner provided for the execution of
decrees, and he will be deemed a party within the meaning of section 47 of the Code.
536 Gauri Lal v Raja Babu, AIR 1929

Pat 626 : 123 Ind Cas 634.
537 Depak Dath Chaudhuri v Secy. of State, AIR

1929 Lah 393 : 118 IC 443; Diyalu Mal v Nandu Shah Dev Raj, AIR 1931 Lah 691
; Dalichand v State of Rajasthan, AIR 1976 Raj 112
.
Sanjay Kataria
Page 25 of 33
538 Laxman v Gorakhji, AIR 1920 Ngp 275

; Maula Dad v Wadhawa Singh, AIR 1924 Lah 428
.
539 National Project Constn. Corpn. Ltd. v Sadhu and Co.,

AIR 1990 P&H 300 ; Depak Dath Chaudhari v Secy. of State, AIR 1929 Lab 393
: 118 IC 443; Diyalu Mal v Nandu Shah Dev Raj, AIR 1931 Lah 691
; Dalichand v State of Rajasthan, AIR 1976 Raj 112 .

AIR 1928 Mad 1262 : 113 IC 337.
541 Gurdit Singh v Gujjar Singh, AIR 1919 Lah 355

; Panna Lal v Marwar Bank Ltd. of Hissar, AIR 1919 Lah 450
; Bahroomal Khushiram v Mazar, AIR 1919 Sind 103
; Swaminatha Pillai v SL Lakshmana Ayyar, AIR 1935 Mad 748 ; Daljit Singh v
Harkishan Lal Sah & Bros, AIR 1940 All 116 ; Tumdu Dhansingh v Province of
Bombay, AIR 1947 Bom 403 ; Badri Batan Lal Rawat v Vindhya Pradesh
Government, AIR 1952 VP 18 ; Suresh Narain Sinha v Akhauri Balbhadra Prasad,
AIR 1957 Pat 256 ; Asharfibai v Parshadilal, AIR
1959 MP 26 ; Ram Sagar Singh v Yogendra Narain Pd Singh, AIR 1975 Pat 239
; Infrastructure Leasing & Financial Services Ltd. v Vijaya Prabhu, AIR
2010 Bom 72 .
542 Muslim Bank of India Ltd. v Mahommad Ateeq,

AIR 1943 All 289 (surety not a necessary party).
543 State Bank of India v GJ Herman, AIR

1998 Ker 161 .
544 Punjab National Bank v Mehra Bros. Pvt. Ltd.,

AIR 1983 Cal 335 .
545 Amar Nath Dhiman v Punjab & Sind Bank,

2017 SCC Online HP 2533 .
546 A Mohamed Ali v Tamil Nadu Industrial Investment Corporation Ltd.,

AIR 2009 Mad 44 .
547 Industrial Investment Bank Ltd. v Bishwanath Jhunjhunwala,

AIR 2009 SCW 5359 : (2009) 9 SCC 478
.
548 Sterling Trade v Triambak Ispat P Ltd, 2018

SCC Online Bom 12339 .
549 See UP Public Moneys (Recovery of Dues) Act, 1972; see Sobran Singh v
State of Uttar Pradesh, (2014) 10 SCC 799 overruling Pawan Kumar Jain
v Pradeshiya Industrial and Investment Corporation of UP Limited, (2004 (6) SCC 758
and Ashok Mahajan v State of UP, AIR 2006 SCW 4925 :
(2006) 10 SCC 332 .
Sanjay Kataria
Page 26 of 33
550 Harihar Nath v State Bank of India, (2006) 4

SCC 457 .
551 Now repealed by the Industrial Finance Corporation (Transfer of Undertaking

and Repeal) Act, 1993 (28 of 1993).
552 Industrial Finance Corpn. of India v PVK Papers Ltd.,

AIR 1992 All 239 .
553 Firm Narsingh Das Ladu Mal v Trilokchand Paddiwal,

AIR 1961 Raj 247 (provision that the surety would be liable only if decretal amount could not be recovered
from the. properties of the judgment-debtor); Dialoo Mal v Firm Nandu Shah Jai Lal, AIR 1927 Lah 846
.
554 These observations were quoted with approval in State Bank of India v
Indexport Registered, AIR 1992 SC 1740 , at 1743; Bank of Bihar Ltd. v Damodar
Prasad, AIR 1969 SC 297 : (1969) 1 SCR 620
; State Bank of India v Saksaria Sugar Mills Ltd., AIR 1986 SC 868
; United Bank of India v Satyawati Tandon, (2010) 8 SCC 110
; Ram Kishun v State of UP, AIR 2012 SC 2288 :
(2012) 11 SCC 511 ; Central Bank of India v CL Vimla, (2015) 7
SCC 337 ;Sankana Kalana v Virupakshapa Ganeshapa, (1883) ILR 7
Bom 146; Depak Dath Chaudhari v Secy. of State, AIR 1929 Lah 393
: 118 IC 443; Mahanth Singh v U Ba Yi, AIR 1939 PC 110 : 66 IA 198; Badri
Batan Lal Rawat v Vindhya Pradesh Government, AIR 1952 VP 18 ; Suresh Narain Sinha
v Akhauri Balbhadra Prasad, AIR 1957 Pat 256 ; Hazari Lal v Chhaju Rain,
AIR 1960 Raj 319 ; Madho Sah v Sitaram Sah, AIR
1962 Pat 405 ; KN Sriniwasan v PV Subramaniam, (1965) 2 Mad LJ 502; Arumugham Chettiar v Sadasivam
Pillai, AIR 1971 Mad 321 : (1971) 1 Mad LJ 228; Budh Singh v Mukund Murari
Lal, AIR 1975 All 201 ; Hukumchand Insurance Co. Ltd. v Bank of Baroda,
AIR 1977 Kant 204 ; Nagpur Nagarik Sahakari Bank Ltd. v UOI,
AIR 1981 AP 153 , at 159; Punjab National Bank v Mehra Bros. Pvt. Ltd.,
AIR 1983 Cal 335 ; Sukur Pradhan v Orissa State Financial Corpn.,
AIR 1992 Ori 281 , at 284; Triputi Plywood Product Pvt. Ltd. v Pradeshik Industrial Investment Corpn.,
AIR 1997 All 364 .
555 Ram Kishun v State of U.P., AIR 2012 SC 2288

: (2012) 11 SCC 511 ; HDFC v Gautam
Kumar Nag, (2012) 5 SCC 604 .
556 AIR 1969 SC 297

: (1969) 1 SCR 620 ; relying on Wright v Simpson,
(1775-1802) All ER Rep 257 : 31 ER 1272, at 1282; Sunder Singh v Punjab
National Bank, AIR 1992 All 132 , at 134.

1969 SC 297 : (1969) 1 SCR 620 .

1969 SC 297 : (1969) 1 SCR 620 .
559 Kuckreja Ltd. v Said Alam, AIR 1941 Lah 16

; Daljit Singh v Harkishan Lal Sah & Bros, AIR 1940 All 116
.
Sanjay Kataria
Page 27 of 33
560 Orissa Agro Inds. Corpn. Ltd. v Sarbeswar Guru,

AIR 1985 Ori 270 ; but see Kurnool Chief Funds (P) Ltd. v P Narasimha, AIR
2008 AP 38 .
561 Union Bank of India v Manku Narayana, AIR

1987 SC 1078 (execution against surety was held to be maintainable since the decree-holder had already
proceeded against the mortgaged property, but there was no offer for its purchase and also against the principal-debtor).
562 State Bank of India v Indexport Registered, AIR

1992 SC 1740 , at 1745; overruling the decision in Union Bank of India v Manku Narayana,
AIR 1987 SC 1078 .
563 However, see: a simple mortgage decree as prescribed in No. 5 of

Appendix D of the Code of Civil Procedure appears to provide that when the sum realised on sale of the mortgaged property is insufficient
then the judgment-debtor can be proceeded with personally.
564 Section 29 gives powers to the State Financial Corporation to take over
management or possession of an industrial concern, and to transfer its secured property.
565 Karnataka State Financial Corporation v N Narasimahaiah,

AIR 2008 SC 1797 : (2008) 5 SCC 176
; see also Shiv Charan Singh v Haryana State Industrial, AIR 2012 P&H 50
. (The following cases i.e., KT Sulochana Nair v Managing Director of Orissa State Financial Corpn.,
AIR 1992 Ori 157 , G Kailasam v Tamil Nadu Industrial Investment Corpn Ltd, AIR
2005 Mad 297 ; A N Ponnappan v Kerala Financial Corporation, AIR 2007 Ker 234
are no longer good law after the judgement of the Supreme Court in Karnataka State Financial
Corporation v N Narasimahaiah, AIR 2008 SC 1797 ).
566 See UP Public Moneys (Recovery of Dues) Act, 1972; see Sobran Singh v
State of Uttar Pradesh (2014) 10 SCC 799 overruling Pawan Kumar Jain v Pradeshiya
Industrial and Investment Corporation of UP Limited, 2004 (6) SCC 758; Ashok Mahajan v State of UP, 2006, AIR SCW 4925 :
(2006) 10 SCC 332 .

AIR 1928 Mad 1262 : 113 IC 337.
568 Depak Dath Chaudhari v Secy. of State, AIR

1929 Lah 393 : 118 IC 443; Diyalu Mal v Nandu Shah Dev Raj, AIR 1931 Lah 691
.
569 Gurdit Singh v Gujjar Singh, AIR 1919 Lah 355

; Panna Lal v Marwar Bank Ltd. of Hissar, AIR 1919 Lah 450
; Bahroomal Khushiram v Mazar, AIR 1919 Sind 103
; Swaminatha Pillai v SL Lakshmana Ayyar, AIR 1935 Mad 748 ; Daljit Singh v
Harkishan Lal Sah & Bros, AIR 1940 All 116 ; Tumdu Dhansingh v Province of
Bombay, AIR 1947 Bom 403 ; Badri Batan Lal Rawat v Vindhya Pradesh
Government, AIR 1952 VP 18 ; Suresh Narain Sinha v Akhauri Balbhadra Prasad,
AIR 1957 Pat 256 ; Asharfibai v Parshadilal, AIR
1959 MP 26 ; Ram Sagar Singh v Yogendra Narain Pd Singh, AIR 1975 Pat 239
; United Bank of India v Satyawati Tondon, AIR 2010 SC 3413
: (2010) 8 SCC 110 (under the Securitisation and
Reconstruction of Financial Assests and Enforcement of Security Interest Act, 2002); Infrastructure Leasing & Financial Services Ltd. v Vijaya
Prabhu, AIR 2010 Bom 72 .
Sanjay Kataria
Page 28 of 33
570 Muslim Bank of India Ltd. v Mahommed Ateeq,

AIR 1943 All 289 (surety not a necessary party).
571 State Bank of India v GJ Herman, AIR

1998 Ker 161 .
572 R K Dewan v State of UP, AIR 2005 All 202

; State Bank of India v Jayanthi, AIR 2011 Mad 179
; Kamal gupta v Bank of India, AIR 2008 Del 51 .

AIR 1948 Ngp 123 : (1947) Ngp 643 (under Order XXXIV, rule 1 of the Code of Civil Procedure read with section
91 of the Transfer of Property Act, 1882).

AIR 1948 Ngp 123 : (1947) Ngp 643.
575 T Raju Shetty v Bank of Baroda, AIR 1992 Kant

108 ; Syndicate Bank v Pamidi Somaiah, AIR 2002 AP 12
.
576 Ramkumar v Bastu Singh, AIR 1971 Raj 124

.
577 A Mohamed Ali v Tamil Nadu Industrial Investment Corporation Ltd.,

AIR 2009 Mad 44 .
578 Traders Co-op. Bank Ltd. v AK Mallick, AIR

1934 Pat 52 .
579 ICDS Ltd v Beena Shabeer, (2002)6 SCC 426

: 2002 Cr LJ 3935 .
580 State Bank of India v Indexport Registered, AIR

1992 SC 1740 ; Pl Rm Kr. Karuppan Chettiar v A Ct N Nagappa Chettiar, AIR
1934 Mad 186 ; Balakrishnan v H Chunnilal, AIR 1998 Mad 175
.

1969 SC 297 : (1969) 1 SCR 620 ; Ram
Kishun v State of U.P, (2012) 11 SCC 511 ; Arumugham Chettiar v Sadasivam Pillai,
AIR 1971 Mad 321 : (1971) 1 Mad LJ 228 (2); Ram Sagar Singh v Yogendra Narain
Pd Singh, AIR 1975 Pat 239 ; Dalichand v State of Rajasthan,
AIR 1976 Raj 112 ; Hukumchand Insurance Co. Ltd. v Bank of Baroda,
AIR 1977 Kant 204 ; Nagpur Nagarik Sahakari Bank Ltd. v UOI, AIR 1981 AP 153
.
582 Budh Singh v Mukund Murari Lal, AIR

1975 All 201 .
Sanjay Kataria
Page 29 of 33
583 Hukamchand Insurance Co. Ltd. v Bank of Baroda,

AIR 1977 Kant 204 , 207; quoting Halsbury’s Laws of England
third Edn, vol 22, para 819; relying on Subhankhan Ramjankhan v Lalkhan Haji Umarkhan, AIR
1948 Ngp 123 : (1947) Ngp 643.
584 State Bank of India v Sajita Engg. Works, AIR

1992 Ori 237 : 1992 II OLR 84.
585 Kitchin, ex parte Young (Re), (1881) 17 ChD 668

, at 671; Shree Meenakshi Mills v Ratilal Tribhovandas Thakar, AIR 1941 Bom
108 : (1941) Bom 273 : (1941) 43 Bom LR 53
: 196 IC 732.

AIR 1935 Lah 729 .
587 Charu Chandra Bandopadhaya v L Faithful, AIR

1919 Cal 636 ; Daljit Singh v Harkishan Lal Sah & Bros, AIR 1940 All 116
; Mohd Sultanuddin v Mohd Dastagir, AIR 1960 AP 210
; National & Grindlays Bank Ltd. v Tikam Chand Daga, AIR 1964 Cal 358
.
588 V Somanath Raju v Konchada Ramamurty Subudhi,

AIR 1957 Ori 106 .
589 V Somanath Raju v Konchada Ramamurty Subudhi,

AIR 1957 Ori 106 .
590 Gopal Daji Sathe v Gopal Bin Sonu Bait, (1903) 28 Bom 248 :
(1903–04) ILR 27 –28 Bom 592.
591 Brojendra Kissore Roy Chowdhury v Hindustan Co-op Insurance Society Ltd.,
AIR 1918 Cal 707 : (1917) 44 Cal 978
: 39 IC 705; U Ba Pe v Ma Lay, AIR 1932 Rang 88
; but see Manju Mahadeo Shetti v Shivappa Manju Shetti, AIR 1918 Bom 197
: (1918) 42 Bom 444 : 46 IC 122.
592 Punjab National Bank v Surendra Prasad Sinha,

AIR 1992 SC 1815 , at 1817 : (1993) Supp (1) SCC 499
; Argo Caribbean Group Ltd. v Lewis, (1976) 2 Lloyd’s Rep 289 (CA).
593 Margaret Lalita Samuel v Indo Commercial Bank Ltd.,

AIR 1979 SC 102 ; Syndicate Bank v Channaveerappa Beleri, AIR 2006 SC 1874
: (2006) 11 SCC 506 ; C P Sreelal v District Collector
Thiruvananthapuram, AIR 2007 Ker 131 .
594 Syndicate Bank v Channaveerappa Beleri, AIR

2006 SC 1874 : (2006) 11 SCC 506 ; C P
Sreelal v District Collector Thiruvananthapuram, AIR 2007 Ker 131 .
595 Syndicate Bank v Channaveerappa Beleri, AIR

2006 SC 1874 : (2006) 11 SCC 506 .
Sanjay Kataria
Page 30 of 33
596 Syndicate Bank v Channaveerappa Beleri,

AIR 2006 SC 1874 : (2006) 11 SCC 506
.
597 Tamil Nadu Industrial Investment Corpn Ltd. v Sudarsanam Industries,

AIR 2009 Mad 15 .
598 Wolmershausen v Gullick, (1893) 2 Ch 514

: (1891–94) All ER Rep 740 .
599 Brojendra Kissore Roy Chowdhury v Hindustan Co-op. Insurance Society Ltd.,
AIR 1918 Cal 707 : (1917) 44 Cal 978
: 39 IC 705; V Somanath Raju v Konchada Ramamurty Subudhi, AIR 1957
Ori 106 .
600 Gopal Daji Sathe v Gopal Bin Sonu Bait, (1903) 28 Bom 248 :
(1903–04) ILR 27 –28 Bom 592.
601 Brojendra Kissore Roy Chowdhury v Hindustan Co-op. Insurance Society Ltd.,
AIR 1918 Cal 707 : (1917) 44 Cal 978
, 993 : 39 IC 705.
602 Gana Nath Sen v Ranjit Ray, (1942) ILR

1 Cal 11.
603 Diyalu Mal v Nandu Shah Dev Raj,

AIR 1931 Lah 691 ; Federal Bank of India Ltd. v Som Dev Grover,
AIR 1956 P&H 21 ; Hazara Singh Gujjar Singh v Bakhshish Singh Mula Singh,
AIR 1962 P&H 495 .
604 Mahanth Singh v U Ba Yi, AIR 1939

PC 110 : 66 IA 198; Subramania Aiyer v Gopala Aiyer, (1909) 33 Mad 308 :
(1909–11) ILR 32 –34 Mad 568; Wandoor Jupiter Chits Pvt. Ltd. v KP Mathew,
AIR 1980 Ker 190 ; State Bank of Patiala v Durga Oil and Flour Mills,
AIR 1984 NOC 22 (HP).
605 R Lilavati v Bank of Baroda, AIR 1987

Kant 2 ; State Bank of Patiala v Durga Oil and Flour Mills, AIR 1984 NOC 22
(HP).
606 Mahanth Singh v U Ba Yi, AIR 1939

PC 110 : 66 IA 198; Subramania Aiyer v Gopala Aiyer, (1909) 33 Mad 308 :
(1909–11) ILR 32 –34 Mad 568; Wandoor Jupiter Chits Pvt. Ltd. v KP Mathew,
AIR 1980 Ker 190 ; but see Federal Bank of India Ltd. v Som Dev Grover,
AIR 1956 P&H 21 ; Hazara Singh Gujjar Singh v Bakhshish Singh Mula Singh,
AIR 1962 P&H 495 .
607 Moschi v Lep Air Services Ltd., [1973] AC 331

: [1972] 2 All ER 393 (HL); General Produce Co. v
United Bank Ltd., [1979] 2 Lloyd’s Rep 255; Belford Union Guardians v Pattison, (1856) 11 Exch 623; affirmed sub nom Pattison v Belford Union
Guardians 1 H & N 523, Ex Ch.
Sanjay Kataria
Page 31 of 33
608 J Brown’s Estate, Brown (Re) v Brown, (1893) 2

Ch 300 .
609 N Joachimson v Swiss Bank Corpn., (1921) 3

KB 110 , at 129 per Atkin LJ at 129 : (1921) All ER Rep 92
(CA); MS Fashions Ltd. v Bank of Credit and Commerce Intl. SA (in liquidation) (No 2), (1993) 3
All ER 769 , at 785 per Dillon LJ : (1993) 3 WLR 220
, at 238 (CA).
610 J Brown’s Estate, Brown (Re) v Brown, (1893) 2

Ch 300 ; Bradford Old Bank Ltd. v Sutcliffe, (1918) 2 KB 833
(CA); Esso Petroleum Co. Ltd. v Alstonbridge Properties Ltd., (1975) 3 All ER 358
: (1975) 1 WLR 1474 ; MS Fashsions Ltd. v Bank of Credit and Commerce Intl.
SA (in liquidation) (No 2), (1993) 3 All ER 769 (CA); see also Tate v Crewdson,
[1938] Ch 869 : (1938) 3 All ER 43
.
612 Colonial Finance Mortgage, Investment and Guarantee Corpn. Ltd. (Re), (1905) 6
SR (NSW) 6, at 9 per Walker J.
613 Holl v Hadley, (1835) 2 A&E 758 (civil proceedings); Lawrence v Walmsley,
(1862) 12 CBNS 799 (civil proceedings); London Guarantee Co. v Benjamin Lister
Fearnley, (1880) 5 App Cas 911 (criminal proceedings).
614 Reliance Car Facilities Ltd. v Roding Motors, (1952) 2

QB 844 : (1952) 1 All ER 1355 .
615 Associated Japanese Bank (Intl) Ltd. v Credit du Nord SA,

(1988) 3 All ER 902 : (1989) 1 WLR 255
.
616 Carr Lazarus Phillips v Alfred Ernest Mitchell,

AIR 1930 Cal 17 ; Moss, ex p. Hallet (Re), (1905) 2 KB 307
, at 314 per Darling J : (1904–07) All ER Rep 713 .
617 Eshelby v Federated European Bank Ltd., (1932) 1

KB 423 : (1931) All ER Rep 840 (CA).
618 Halford v Byron, (1701) Prec Ch 178; Stone v Compton, (1838) 5 Bing NC 142
: (1835–42) All ER Rep 659 ; Burton v Gray, (1873) 8 Ch App 932; Offord v
Davies, (1862) 12 CBNS 748 : (1861–73) All ER
Rep 868 : 133 RR 491; Grahame v Grahame, (1887) 19 LR Ir 249.
619 Westhead v Sproson, (1861) 6 H & N 728 : (1861–

73) All ER Rep 1634 ; Boyd v Moyle, (1846) 2 CB 644
, at 650; Johnston v Nicholls, (1845) 1 CB 251 ; Broom v Batchelor, (1856) 1 H & N 255;
Wood v Benson, (1831) 2 Cr & J 94.
Sanjay Kataria
Page 32 of 33
620 Parent Trust and Finance Co. Ltd. (Re), (1936) 3

All ER 432 (CA); affirmed sub nom Greer v Kettle, (1938) AC 156
: (1937) 4 All ER 396 (HL); Associated Japanese Bank (Intl) Ltd. v
Credit du Nord SA, (1988) 3 All ER 902 : (1989) 1
WLR 255 .
621 Sunbird Plaza Proprietary Ltd. v Maloney, (1988)

166 CLR 245 .
622 Cargill International SA v Bangladesh Sugar and Food lnds Corp.,

(1998) 2 All ER 406 (CA).
623 Hyundai Heavy Inds. Co. Ltd. v Papadopoulos, (1979) 1 Lloyd’s Rep 130 (CA);
affirmed, (1980) 2 All ER 29 : (1980) 1 WLR
1129 : (1980) 2 Lloyd’s Rep 1 (HL); Moschi v Lep Air Services Ltd., (1973)
AC 331 : (1972) 2 All ER 393 (HL).
624 Goulston Discount Co. Ltd. v Clark, (1967) 2

QB 493 : (1967) 1 All ER 61 :
(1966) 3 WLR 1280 ; Bentworth Finance Ltd. v Lubert, (1968) 1
QB 680 : (1967) 2 All ER 810 :
(1967) 3 WLR 378 (CA).
625 Sunbird Plaza Proprietary Ltd. v Maloney, (1988)

166 CLR 245 .
626 Supra, (1980) 2 All ER 29

, 38, 40, 42 : [1980] 1 WLR 1129 : [1980] 2 Lloyd’s Rep 1 (HL);
applying dictum in Moschi v Lep Air Services Ltd., [1973] AC 331 :
(1972) 2 All ER 393 , at 403, 407; distinguishing Palmer v Temple, (1839) 9 Ad&E 520; Dies v
British and International Mining and Finance Corporation Limited, (1939) 1 KB 724 .
627 Ellis v Emmanuel, (1876) 1 Ex Div 157, at 163 per Blackburn J :

(1874–80) All ER Rep 1081 .
628 Bardwell v Lydall, (1831) 7 Bing 489 : 33 RR 540.
629 Hobson v Bass, (1871) LR 6

Ch 792.
630 Hobson v Bass, (1871) LR 6

Ch 792 at 794 per Lord Hatherley.
631 Hyundai Heavy Inds. Co. Ltd. v Papadopoulos, (1979) 1 Lloyd’s Rep 130 (CA);
affirmed, (1980) 2 All ER 29 : (1980) 1
WLR 1129 : (1980) 2 Lloyd’s Rep 1 (HL); Moschi v Lep Air Services Ltd.,
(1973) AC 331 : (1972) 2 All ER 393 (HL).
Sanjay Kataria
Page 33 of 33
632 Oastler v Pound, (1863) 11 WR 518

; Moschi v Lep Air Services Ltd., (1973) AC 331 , at 349 :
(1972) 2 All ER 393 , at 402 per Lord Diplock (HL).
633 Hyundai Heavy Inds. Co. Ltd. v Papadopoulos, (1979) 1 Lloyd’s Rep 130 (CA)
affirmed : (1980) 2 All ER 29 : (1980) 1
WLR 1129 : (1980) 2 Lloyd’s Rep 1 (HL).

: (1972) 2 All ER 393 (HL).
End of Document
Sanjay Kataria
[s 129] “Continuing guarantee”.—
A guarantee which extends to a series of transactions is called a “continuing-guarantee.”
Illustrations
(a) A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be
responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This
is a continuing guarantee.
(b) A guarantees payment to B, a tea-dealer, to the amount of £ 100, for any tea he may from time to time
supply to C. B supplies C with tea to above the value of £ 100, and C pays B for it. Afterwards, B supplies
C with tea to the value of £ 200. C fails to pay. The guarantee given by A was a continuing guarantee, and
he is accordingly liable to B to the extent of £ 100.
(c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid
for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C
does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not
liable for the price of the four sacks.
[s 129.1] Continuing Guarantee
A continuing guarantee is one which extends to a series of transactions, and is not exhausted by or
confined to a single credit or transaction.635 Some of the transactions may be unknown at the time of
giving the guarantee.636 For instance, it may relate to collection of rents payable periodically or to supply
of goods from time-to-time. In the case of a continuing guarantee, the liability endures until the credits or
Sanjay Kataria
Page 2 of 6
transactions contemplated by the parties and covered by the guarantee have been exhausted, or until the
guarantee itself has been revoked.
Therefore, continuing guarantee speaks of continuous transactions, not the period of such transactions.
The guarantee may be confined to a series of transactions, but restricted or limited to a certain period of
time.637 A security bond was given for the payment of each years theka money by the contractor for a
period of five years, and was continued in the name of the widow of the contractor; the surety was liable,
the guarantee being given for the period of the theka, was regarded as being also a guarantee on behalf of
the heirs and successors of the thekedar in the absence of a contrary intention in the security bond.638 A
guarantee is not a continuing one merely because the guarantee says so.639
The question, whether the guarantee for the price of goods supplied or money lent up to a specified limit,
is one for a single or definite number of transactions, or a continuous one, is a question of construction,
and a difficult question to decide. If it is for a single or a definite number of transactions, the payment by
the principal-debtor discharges the surety. However, if it is continuous, the surety continues to be liable
on further supply of goods or loans by the creditor to the principal-debtor. The question of limitation also
depends upon the nature of transaction. A guarantee for the payment, by instalments, of a sum certain
within a definite time is not a continuing one.640
Where a guarantor gives a continuing guarantee, limited in amount, to secure a floating balance which
may, from time-to-time, be due from the principal-debtor to the creditor, the guarantee is as between the
guarantor and the creditor to be construed, prima facie at least, as applicable to a part only of the debt co-
extensive with the amount of the guarantee.641
A continuing guarantee is usually given as security for an overdraft facility, since the overdraft fluctuates
in amount, and will often continue for an indefinite period. Guarantees for bank overdrafts usually state in
terms that they are to be by way of continuing security, and that they are not to be satisfied, discharged or
affected by any intermediate payment or settlement of account.
[s 129.2] Illustrative Cases
A surety bond to produce the judgment-debtor in Court on each occasion when attendance is called
for;642 and also a guarantee given by a member of a club guaranteeing payment of rent by the club for
premises leased to it were held to be continuing guarantee.643
A guarantee of the fidelity of a person appointed to a place of trust in a bank is not a continuing
Sanjay Kataria
Page 3 of 6
guarantee, there being no series of transactions; the guarantee being given for one transaction of
appointment, so long as the person continues in service, the guarantee remains in operation;644 and it is
submitted that illustration (a) to section 129 is wrong as a statement of law.645 Yet, once exact information
reaches the surety that the person for whom he has remained surety has been guilty of misconduct, the
surety is entitled to recall the guarantee as against the creditor or the obligee in the bond. However, this is
an equitable relief and such a relief must be very strictly administered. The misconduct must be clearly
proved at the time of revocation.646
A contract of surety-ship under Order XLI, rule 6 of the Code of Civil Procedure is not a continuing
guarantee;647 nor a surety under a bond under section 55(4) of the Code of Civil Procedure.648
[s 129.3] Limitation
Where the guarantee is expressed to be a continuing guarantee and to apply to the balance from time-to-
time owing by the principal-debtor to the creditor, time runs only from the date when each of such
balance is constituted by the excess of total debits over total credits, not from the date when each advance
is made to the principal-debtor.649 This judgment of the Judicial Committee was approved by the Supreme
Court .In that case of a continuing guarantee, it was held that so long as the account is a live account in
the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the
obligation, the period of limitation for a suit to enforce the bond could not be said to have commenced
running.650 While considering a case where the deed specifically provided that the guarantors agree to pay
the bank on demand (in Margaret Lalita Samuel v Indo Commercial Bank Ltd,651 the continuing guarantee did
not provide that payment shall be made by the guarantor on demand by the bank), it was held that
limitation begins to run when the demand is made and guarantor commits breach. The term “live
account” was used in Margaret Lalita Samuel’s case to refer to an account where the balance had not been
struck by an account stated or account settled.652 A promise of the principal debtor to pay which is made
after expiry of limitation period, will bind the surety.653
[s 129.4] Position under English and other laws
Whether in a particular case a guarantee is continuing is a question of the intention of the parties, “as
expressed by the language they have employed, understanding it fairly in the sense in which it is used; and
this intention is best ascertained by looking to the relative position of the parties at the time the
instrument is written”.654 Surrounding circumstances must be looked “to see what was the subject matter
which the parties had in their contemplation when the guarantee was given.”655 A guarantee “for liabilities
incurred by A to B. to the extent of £ 50” was, having regard to the extrinsic surrounding circumstances
of the case, held to extend to GBP 41 due from the principal-debtor at the date of the guarantee and
subsequent advances up to GBP 9.656 The Court has power “not to alter the language, but to fill up the
instrument where it is silent, and to apply it to subject matter to which the parties intended it to be
applied.”657 In construing the language of the parties, the whole of their expressions must be looked to
Sanjay Kataria
Page 4 of 6
and, not merely the operative words. Thus, the words “Having every confidence in him, he has but to call
upon us for a cheque and have it with pleasure for any account he may have with you; and when to the
contrary we will write you”, were held to show that a guarantee, which otherwise might have been
confined to a single transaction, was intended to be continuing.658 The fact, that a guarantee is a
continuing one, may sometimes be implied from a statement that the guarantor is to be liable for the
ultimate balance.659
A guarantee in this form, “I, M, will be answerable for GBP 50 that butcher, may buy of H,” was held to
be a continuing guarantee to the extent of GBP 50 when it appeared from the circumstances that the
parties contemplated a continuing supply of stock to Y in the way of his trade.660
A guarantee which was expressed to cover “future advances” was held not to extend to the situation
where, on the date for repayment, a fresh loan is arranged at an enhanced rate of interest, but no money
actually passes.661
and Institutions, para 1013.
636 Kantichand v Thakur Udaybhansha, AIR

1925 Ngp 7 .
637 Eastern Bank Ltd. v Parts Services of India Ltd.,

AIR 1986 Cal 61 : 89 Cal WN 1021.
638 Kapurthala Estate v Sheo Shankar, AIR

1942 Oudh 325 .
639 See for example Subhash Chand Jain v Haryana Financial Corporation,
AIR 2008 P&H 99 .
640 Bhagvandas Rangildas Vani v Secy. of State for India,

AIR 1926 Bom 465 : 28 Bom LR 662 : 96 IC 248.
Services and Institutions, para 178; Ellis v Emmanuel, (1876) I ExD 157 (CA) : (1874–80) All ER Rep 1081
; Huggard v Representative Church Body, (1916) 1 IR 1
; Aditya Narayan Chouresia v Bank of India, AIR 2000 Pat 222 .
Sanjay Kataria
Page 5 of 6
642 Wali Mahommad v Ganpat, AIR 1931 All 243

: (1930) 52 All 1014 : 132 IC 813.
643 Sherumal Chainrai v H Greenfield, AIR

1930 Sind 316 : 129 IC 897.
644 SN Sen v Bank of Bengal, AIR 1920 PC 35

: (1920) 47 IA 164 : 58 IC 1; (quaere
whether in the particular case there was any guarantee at all see 47 IA 164, 170).
645 Myingyan Municipal Committee v Maung Po Nyun,

AIR 1930 Rang 173 .
646 Myingyan Municipal Committee v Maung Po Nyun,

AIR 1930 Rang 173 .
647 Kumari v Nil Kanth Narayan Singh, AIR

1917 Cal 594 : 32 Ind Cas 807.
648 S Sankaranarayana Iyer v Paramasivam Pillai,

AIR 1942 Mad 101 : (1941) 2 Mad LJ 650.
649 Wright v New Zealand Farmers Co-op. Assn of Canterbury Ltd.,

(1939) AC 439 : (1939) 2 All ER 701
(PC).

AIR 1979 SC 102 ; Wandoor Jupiter Chits Pvt. Ltd. v KP Mathew, AIR 1980 Ker 190
; Aditya Narayan Chouresia v Bank of India, AIR 2000 Pat 222
; but see Union Bank of India, Ernakulam v TJ Stephen, AIR 1990 Ker 180
, at 185; Indian Bank v State of Tamil Nadu, AIR 2002 Mad 423
.

AIR 1979 SC 102 .
652 Syndicate Bank v Channaveerappa Beleri, (2006)

11 SC 506 .
653 State Bank of India v Meghraj Contractor, AIR

2012 Chhat 149 .
654 Coles v Pack, (1869) LR 5

CP 65, at 70 per Bovill CJ; Hasan Ali v Waliullah, AIR 1930 All 730
.
655 Heffield v Meadows, (1869) LR 4

CP 595, at 599 per Willes J.
Sanjay Kataria
Page 6 of 6
656 Chalmers v Victors, (1868) 16 WR 1046

.

CP 595, at 601 per Montague Smith J.
658 Nottingham Hide Skin and Fat Market Co. v Bottrill,

(1873) LR 8 CP 694; see also Wali Mahommad v Ganpat, AIR 1931 All 143
: (1930) 52 All 1014 : 132 IC 813.
659 See also Wright v New Zealand Farmers Co-op. Assn of Canterbury Ltd.,
(1939) AC 439 : (1939) 2 All ER 701
(PC).

CP 595.
661 Burnes v Trade Credits Ltd., (1981) 1 WLR 805

.
End of Document
Sanjay Kataria
[s 130] Revocation of continuing guarantee.—
A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to
the creditor.
Illustrations
(a) A, in consideration of B’s discounting, at A’s request, bills of exchange for C, guarantees to B, for
twelve months, the due payment of all such bills to extent of 5,000 rupees. B discounts bills for C to the
extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This revocation
discharges A from all liability to B for any subsequent discount. But A is liable to B for the 2,000 rupees
on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon
him. B draws upon C, C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A
is liable upon his guarantee.
[s 130.1] Revocation of Continuing Guarantee
A contract of guarantee is not a contract regarding a primary transaction, but is an independent

transaction containing independent and reciprocal obligations. It is on principal-to-principal basis and by
reasons where for the statute has provided both the creditor and the guarantor some relief specified
between sections 130 to 141of the Contract Act.662
Sanjay Kataria
Page 2 of 7
Where a continuing relationship is constituted on the faith of a guarantee, it cannot be revoked during the
continuance of that relationship.663 However, a material change in the guaranteed situation may justify a
revocation.
Illustration (a) is based on Offord v Davies.664 The truth is, as the judgment of the Court explains, that A’s
guarantee is, in such circumstances, nothing but an offer until B has acted upon it by discounting a bill;
for, if B does not promise to discount C’s bills, there is no immediate legal detriment to B. When B does
discount a bill, A’s offer becomes a promise to that extent, from time-to-time. The standing offer is,
therefore, revocable by A at any time.
This promise by itself creates no obligation. It is in effect conditioned to be binding if the plaintiff acts
upon it, either to the benefit of the defendant or to the detriment of himself. But, until the condition has
been at least in part fulfilled, the defendants have the power of revoking it. Each discount is considered as
a separate transaction, creating a liability on the defendants till it is repaid, and after repayment leaving the
promise to have the same operation that it had before any discount was made, and no more.
[s 130.1.1] Mode of Revocation
When the contract of suretyship prescribes a particular mode of giving notice of termination of a
continuing guarantee by surety, notice must be given in that mode, and no other mode will be effective.
Therefore, where the surety set up an oral intimation of the factum of partition of the surety’s family, the
guarantee is not discharged and the section of the Act cannot be interpreted by reference to other sections
of the Act.665 The mere denial of liability by the surety in a previous suit instituted by the creditor against
him and the principal does not operate as a notice under this section.666
[s 130.2] Future Transactions
The words “future transactions” must be taken to imply that the operation of this section is confined to
cases where a series of distinct and separate transactions is contemplated. However, it would be otherwise
in the case of an entire consideration.
[s 130.3] Revocation of Surety Bonds Given to Courts
Sanjay Kataria
Page 3 of 7
The Bombay High Court has held that this section does not apply to a surety bond required by the Court
on the appointment of a guardian of the property of a minor.667 The surety, in that case, applied to the
Court to be released from his obligation as such on account of the guardian’s maladministration of the
minor’s estate, but the Court refused the application, stating that “the very object of requiring such
security was to guarantee the minor against such mismanagement on the part of the guardian.” However,
the Calcutta High Court has held that this section applies to a surety bond passed under the Probate and
Administration Act, 1881,668 and, that a surety for the administrator of an estate can, as to future
transactions, by giving notice, be released from its obligation as surety on account of maladministration of
the estate by the administrator.669 As to Bombay case, it was said that though it was similar in principle,
the surety there had a remedy in as much as he might have applied to the Court, as the next friend of the
minor, for the discharge of the guardian; while, in the Calcutta case, the surety was absolutely without
remedy, for, being neither a legatee nor a creditor, he could not take any steps to protect either the estate
or himself by instituting administration proceedings. On the other hand, the Madras High Court held,
following the principle of the Bombay decision that this section does not apply to surety bonds passed
under the Probate and Administration Act, 1881, and stated:
If the section applies the “creditor” would presumably be the obligee under the bond, i.e., the Judge or Registrar, and the surety could,
without any action or any other legal proceeding, put an end to his liability by giving notice to the Judge or Registrar. This is contrary to
the well-established practice and might lead to great inconvenience.670
However, a surety accepted by the Court, for a receiver appointed under a mortgage decree, cannot
discharge himself simply by giving notice to the decree-holder, without the consent of the Court.671
In goods of Dr Avinash Chandra Banerji (Re),672 it was held that although the surety could not claim as of right
to be relieved of all liability by merely expressing his intention to do so, whether by notice or by
application to the Court, and although the case of a surety whose security has been accepted by the Court
cannot be treated as one falling under sections 129-130 of Contract Act so as to end the guarantee at his
will, yet the High Court to which the guarantee was given, had the power to exonerate the surety from all
liability for future transactions. Accepting this view, the Law Commission of India recommended adding
an exception to the section providing that a guarantee given to the Court could not be revoked without
the permission of the Court.673
However, a surety, to produce a judgment-debtor in Court, can revoke the guarantee for future
transactions even on the day prior to the date fixed for appearance; and a special provision allowing the
power to revoke is not required.674
Sanjay Kataria
Page 4 of 7
[s 130.4] Continuing Guarantee and Change in the Status of Creditor
Unless expressly provided by statute,675 it is a question of construction of the guarantee whether a change
in the status or constitution of the creditor discharges a guarantee as to future transactions between the
creditor and the principal-debtor. Unless the parties have agreed otherwise, any change in the identity of
the creditor terminates the liability of a guarantor under a continuing guarantee in respect of future
transactions.676 For instance, a continuing guarantee given either to a firm, or to a third party in respect of
the transactions of a firm, is in absence of agreement to the contrary, revoked as to future transactions
from the date of any change in the constitution of the firm.677 Similarly, the subsequent incorporation of a
proprietary concern,678 will generally terminate the guarantor’s liability as to future transactions under it
However, the parties may agree otherwise. The Companies Act, 1956 also provides that any change of name
of a company does not affect its rights and obligations.679
[s 130.5] Waiver
As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him
by any Act or as it is said, can contract himself out of the Act, unless it can be shown that such an
agreement is in the circumstances of the particular case opposed to public policy. Where the guarantee
contains an express provision that the surety shall “continue in operation in respect of all subsequent
transactions” and the surety has waived the benefit of this provision, the revocation of guarantee by him
is of no effect.680
[s 130.6] English law on continuing guarantee
A continuing guarantee, where the consideration is not an entire consideration, but given in respect of a
continuing indebtedness, then, in the absence of a provision as to notice, may be terminated by the
guarantor at any time. In that event, he remains responsible for any sums incurred by the principal-debtor
covered by the guarantee up to the time the notice was given, but he can, by giving notice, prevent himself
from incurring further liability after the date of the notice.681 In the common case of a continuing
guarantee for a servant’s honesty, proved dishonesty on the servant’s part entitles the surety to say: “After
this you must employ such a man, if you will, at your own peril.”682
The plaintiff, a director of a football club, gave a guarantee to a bank for the club’s overdraft. The liability
was to arise on a demand by the creditor for all liabilities certain or contingent. The guarantee provided
Sanjay Kataria
Page 5 of 7
that the liability was continuing, until the receipt of a notice in writing, by the plaintiff of discontinuance.
The plaintiff resigned as a director and on his information to the bank, the account was closed. The
plaintiff called upon the club to discharge his guarantee by paying the creditor. He sought a declaration
that he was entitled to the declaration in equity. On the account being closed and the liability becoming
fixed, the plaintiff was entitled to be discharged by the debtor paying off, and it was immaterial that the
creditor had to give notice to the surety before proceeding against him.683
The subsequent incorporation of a voluntary society or private partnership to which a guarantee is given,
will generally terminate the guarantor’s liability as to future transactions under it;684 and except where an
amalgamation or consolidation of two companies is effected by a statute which expressly or impliedly
preserves rights against a guarantor,685 a guarantee given to either of those companies is, generally
invalidated as to future transactions by that amalgamation or consolidation.686 Where a change in the
constitution operates to discharge the guarantee as to future transactions, rendering the guarantee
inoperative as to future transactions under it, the guarantor’s liability under the guarantee in respect of
past transactions must be enforced by the persons to whom the guarantee was originally given, unless the
cause of action has been assigned to the new body.687
A guarantee expressed to be in favour of a bank, its successors and assigns and any company with which it
may amalgamate, covered advances made by a successor bank with which it had amalgamated and to
which its assets and undertaking had been transferred.688 A mere change in the name of the creditor
company by which the rights of the creditor and the obligations of the guarantor are not altered, will not
release the guarantor from liability.689
Ltd., AIR 2002 SC 1841 : (2002) 5 SCC 54
.
663 Hasan Ali v Waliullah, AIR 1930 All 730

, Lloyd’s v Harper, (1880) 16 ChD 290 per Fry J
at 306, [1874–80] All ER Rep 1337 .
664 Offord v Davies, (1862) 12 CBNS 748

: [1861–73] All ER Rep 868 , 133 RR 491; Morrell v Cowan,
(1877) 7 ChD 151 per Baggallay LJ at 154 :
[1874–80] All ER Rep 1799 .
665 Seth Dhanoomal Parsaram v P Kuppuraj,

AIR 1977 Mad 274 , at 279; distinguishing UOI v Pearl Hosiery Mills,
AIR 1961 P&H 281 .
Sanjay Kataria
Page 6 of 7
666 Bhikabhai Ratanchand v Bai Bhuri,

(1903) ILR 27 Bom 418.
667 Bai Somi v Chokshi lshvardas Mangaldas, (1895–

96) ILR 19 –20 Bom 166.
668 Now, the Indian Succession Act, 1925.
669 Raj Narain Mookerjee v Ful Kumari Debi, (1901)

29 Car 68 .
670 Subroya Chetty v Ragammall, (l903–05) ILR 26–28 Mad 1102 : (1904) 28
Mad 161; relying on Stark (Re), (1866) LR 1 P&D 76.
671 Mahommad Ali Mamoojee v Howeson Bros, AIR

1926 PC 32 : (1925) 30 Cal WN 266 : 98 IC 506; cf Pothera Kallur Veettil Narayan Nambiar v Pothera Lkallur
Veettil Kunhathayi Amma, AIR 1940 Mad 730 : (1940) 1 Mad LJ 939 : 191 IC
896.
672 AIR 1932 All 262

: (1932) 54 All 293 ; Mahommad Ali Mamoojee v Howeson Bros,
AIR 1926 PC 32 : (1925) 30 Cal WN 266 : 98 IC 506.
673 13th Report of the Law Commission of India, 1958, para 106
recommended adding an exception to section 130 thus:
“Exception: A continuing guarantee given to a Court cannot be revoked by the surety as to future
transactions, without the permission of the Court.”
674 Wali Mahommad v Ganpat, AIR 1931 All 243

: (1930) 52 All 1014 : 132 IC 813.
675 Indian Partnership Act, 1932, section 38.
676 First National Finance Corpn. Ltd. v Goodman,

(1983) BCLC 203 , at 209 (CA) (any change in the identity of the creditor will discharge the surety unless the
contract otherwise provides).
677 Indian Partnership Act, 1932, section 38.
678 Satish Chandra Jain v National Small Industries Corp Ltd.,

AIR 2003 SC 623 .
679 The Companies Act, 1956, section 23(3) corresponds to section 13 of the
Companies Act, 2013.
Sanjay Kataria
Page 7 of 7
680 Sita Ram Gupta v Punjab National Bank, AIR

2008 SC 2416 : (2008) 5 SCC 711 ; HR
Basavaraj v Canara Bank, 2009 AIR SCW 7567 : (2010) 12 SCC 458 .
681 Coulthart v Clementson, (1879) 5 QBD 42

, 46 : [1874–80] All ER Rep 865 ; Lloyd’s v Harper,
(1880) 16 ChD 290 , 319–320 : [1874–80] All ER
Rep 1337 (CA); Ascherson v Tredegar Dry Dock & Wharf Co. Ltd., [1909] 2 Ch 401
: [1908–10] All ER Rep 510 .
682 Phillips v Foxall, (1872) LR 7

QB 666, at 677, 681; following on this point a dictum in Burgess v Eve, (1872) LR 13
Eq 450, at 458; see also section 139 for more details.
683 Thomas v Notts Inc. Football Club Ltd., (1972) 1

All ER 1176 , at 1182.
Services and Institutions, para 1206; Dance v Girdler, (1804) 1 Bos & PNR 34, where the guarantee was given to named persons as
governors of a society and their successors.
685 London, Brighton and South Coast Rly. Co. v Goodwin, (1849) 3 Exch 320
(consolidation did not affect the responsibility of the principal under a guarantee of fidelity); Eastern Union Rly Co. v Cochrane, (1853) 9
Exch 197.

(1983) BCLC 203 , at 211 (CA).
687 Lloyd’s v Harper, (1880) 16 ChD 290

: [1874–80] All ER Rep 1337 (CA); Moller v
Lambert, (1810) 2 Camp 548.

(1983) BCLC 203 , at 211 (CA).
689 Wilson v Craven, (1841) 8 M&W 584; Groux’s Improved Soap Co. Ltd. v Cooper,
(1860) 8 CBNS 800 ; Capital and Counties Bank v Bank of England,
(1889) 61 LT 516 ; Prescott, Dimsdale (CA) ve, Tugwell & Co. v Bank of England,
(1894) 1 QB 351 (CA).
End of Document
Sanjay Kataria
[s 131] Revocation of continuing guarantee by surety’s death.—
The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a
continuing guarantee, so far as regards future transactions.
[s 131.1] Revocation of Continuing Guarantee by Death of Surety
The liability of the guarantor which existed on the date of his death is not extinguished. It is well settled
that on the death of the guarantor, the liability exists and such liability can be fastened on the estate of the
deceased, being inherited by his legal heirs, and the creditor can recover the dues out of the estate of the
deceased.690 When there is a clause in the Letter of Guarantee that specifically stipulates that the guarantee
shall not be determined unless and until the same is revoked by a notice in writing either by the original
guarantor or his/her legal representative, the death of the surety, by itself would not amount to a
revocation of the guarantee in question.691
[s 131.2] Contract to the Contrary
The “contract to the contrary” need not be in express terms.
Sanjay Kataria
Page 2 of 3
Where A guaranteed payment of rent to a lessor, and B. in turn promised A to be responsible for all rent
that might not be paid by the lessee, and which he might, under his guarantee, become liable to pay, it was
held that, assuming that the latter transaction was a continuing guarantee, it was not revoked by B’s death,
and that B’s representative was liable to A for rent paid by A to the lessor after B’s death on failure of the
lessee to pay the same.692 However, a surety under Order XLI, rule 6 of the Code of Civil Procedure, 1908
must be taken to have accepted all natural risks, and is not entitled to be discharged at the death of the
principal-debtor.693 The rights conferred on a surety by Chapter 8 of the Contract Act can be waived by
him and the continuing guarantee despite the variation of the terms would then stand. In the absence of
specific written document by the guarantor prior to his death revoking the guarantee, his legal
representatives would be liable to repay the loan.694
[s 131.3] Position under English Law
“Where a continuing relationship is constituted on the faith of a guarantee…the guarantee cannot be

annulled during the continuance of that relationship”;695 and as the surety could not determine it himself
by notice, so his death does not relieve his estate from liability; the nature of the transaction implies a
contract to the contrary under section 131. The father of a person admitted as an underwriting member of
Lloyd’s (a position from which he could not be removed except for certain causes specified in the rules of
the association) gave a guarantee to Lloyd’s “for all his engagements in that capacity”; it was held that the
guarantee was not confined to transactions within the society, that it was not recoverable while the son
continued to be an underwriting member, and that the guarantor’s death did not revoke it.696
Under ordinary circumstances, a continuing guarantee is also revoked as to future advances by notice of
the death of the guarantor.697 The representatives of a continuing guarantor can terminate their liability
and obtain a release.698 However, in the case of a joint and several continuing guarantee, on the death of
one of the sureties the survivor remains liable in respect of subsequent advances until notice is given by
him to determine his liability.699
The English rule appears to be that where there is a guarantee, subject to revocation by notice, and the
surety dies without having revoked it, notice of his death to the creditor (or at all events of his death
leaving a Will) operates as a revocation.700 An express provision that a guarantor or his representatives
may determine the guarantee by notice is an example of a contract to the contrary; in such a case, mere
notice of the death will not be enough.701
690 State Bank of India v Mrs Jayanthi, AIR

2011 Mad 179 .
Sanjay Kataria
Page 3 of 3
691 Shri Rajan Gupta v Bank Of India, AIR

2008 Del 51 .
692 Gopal Singh v Bhawani Prasad, (1888) ILR 10

All 531.
693 Kumari v Nil Kanth Narayan Singh, AIR

1917 Cal 594 : 32 IC 807.
694 HR Basavaraj(dead) v Canara Bank, (2010)

12 SCC 458 .

per Fry J at 306 : (1874–80) All ER Rep 1337 .

per Fry J at 306 : (1874–80) All ER Rep 1337 .

, (1874–80) All ER Rep 865 ; but see Sherry,
London and County Banking Co. (Re) v Terry, (1884) 25 ChD 692 (CA)
(the principle considered open to doubt).
698 Ascherson v Tredegar Dry Dock and Wharf Co. Ltd.,

(1908–10) All ER Rep 510 .
699 Beckett & Co. v Addyman, (1882) 9 QBD 783

(CA).

: (1874–80) All ER Rep 865 per Bowen J at 868;
Beckett & Co. v Addyman, (1882) 9 QBD 783 at per Cotton LJ 792.
701 Silvester (Re), (1895) 1 Ch 573

; Bradbury v Morgan, (1862) 1 H&C 249; Harriss v Fawcett, (1873) LR 8
Ch 866; Muhammad Ubed-Ullah v Muhammad Insha Ullah Khan, AIR 1921 All 287
.
End of Document
Sanjay Kataria
[s 132] Liability of two persons, primarily liable, not affected by arrangement between
them that one shall be surety on other’s default.—
[s 132] Liability of two persons, primarily liable, not affected by arrangement between
them that one shall be surety on other’s default.—
Where two persons contract with a third person to undertake a certain liability, and also contract with
each other that one of them shall be liable only on the default of the other, the third person not being a
party to such contract, the liability of each of such two persons to the third person under the first contract
is not affected by the existence of the second contract, although such third person may have been aware
of its existence.
Illustration
A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C knows
this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety
for B, is no answer to a suit by C against A upon the note.
[s 132.1] Arrangement between two Persons Primarily Liable
The rule in this section does not extend beyond its literal terms. Where one of two joint debtors is, to the
knowledge of the creditor, in fact a surety for the other as between themselves, his immediate liability to
the creditor is not qualified.702 But it has been held that he may be entitled to the rights of a surety under
sections 133, 134–135.703 It was stated in Rouse v Bradford Banking Co:704
Sanjay Kataria
Page 2 of 3
[s 132] Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on other’s
default.—
When two or more persons bound as full debtors arrange, either at the time when the debt was contracted or subsequently, that inter se
one of them shall only be liable as a surety, the creditor after he has notice of the arrangement must do nothing to prejudice the interest
of the surety in any question with his co-debtors. That appears to me to be the law as settled by the judgments of this House in Oakeley
v Pasheller705 and Overend, Gurney & Co. (Liquidators) v Oriental Financial Corpn. (Liquidators)706
This includes the case where one member of a firm retires and another continues the business and agrees
to indemnify the outgoing partner: there the retired partner has the rights of a surety (as to discharge by
giving time and the like) as against a creditor having notice of the dissolution and its terms.707
There need not be any assent by the creditor, much less a new agreement to accept the secondary debtor
in the relation of surety.708
In two Indian cases, both decided under the English law, the opinion was expressed that if the creditor,
with knowledge of the contract between the co-debtors, does any of the acts specified in sections 133,
134, or 135, the legal consequence of which is the discharge of the surety, the debtor, who is in fact a
surety, will thereby be discharged from liability.709
The provisions of this section do not apply where the liability undertaken is not the same. A party, who
accepts bills of exchange for the accommodation of another, is not precluded by this section from
pleading that he was an accommodation acceptor only. The liability undertaken by the acceptor and
drawer of a bill is in no sense a joint liability, and though they each contract to pay the same sum of
money, they contract severally in different ways, and subject to different conditions.710
Where two persons execute a promissory note, making themselves jointly and severally liable, oral
evidence cannot be led to vary the terms of the promissory note and seek to avoid liability on the basis of
any private arrangement between them, which was not known to the promisee;711 but parole evidence was
allowed where the document did not declare in express terms the rights inter se between them, and the
person seeking to limit liability did not intend to affect the rights of the creditor to demand immediate
payment from either or both the co-obligors or joint promisors.712
702 Moolji Murarji Sunderji v MC Pinto, AIR

1926 Sind 156 ; Lal Bihari Lal v Allahabad Bank Ltd., AIR 1929 All 664
Sanjay Kataria
Page 3 of 3
[s 132] Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on other’s
default.—
; Gopala Maller v Vallithokuvayil Krishnan, AIR 1942 Mad 134

(also refers to section 92 of the Indian Evidence Act, 1872); MV Mahalinga Aiyer v Union Bank Ltd.,
AIR 1943 Mad 216 .
703 Punchanun Ghose v Daly, (1875) 15 Beng LR 331 (the judgment refers at its
very end to section 132 of the Act); Harjiban Das v Bhagwan Das, (1871) 7 Beng LR 535.
704 Rouse v Bradford Banking Co, (1894) AC 586

, at 598 per Lord Watson at 598.
705 Oakeley v Pasheller, (1835–43) All ER Rep

653 : (1836) 4 Cl & F 207, 42 RR 1.
706 Overend, Gurney & Co. (Liquidators) v Oriental Financial Corpn. (Liquidators),
(1874) LR 7 HL 348 :
(1874–80) All ER Rep 1269 .
707 Goldfarb v Barlett, (1920) 1 KB 639

; Rouse v Bradford Banking Co., (1894) AC 586 (HL).
708 Wythes v Labouchere, (1859) 3 De G&J 593 : 599, 121 RR 238, 242.
709 Punchanun Ghose v Daly, (1875) 15 Beng LR 331 (the judgment refers at its
very end to section 132 of the Act); Harjiban Das v Bhagwan Das, (1871) 7 Beng LR 535.
710 M. Pogose v Bank of Bengal, (1877) ILR 3

Cal 174, at 184; Over end Gurney & Co. (Liquidators) v Oriental Financial Corpn. (Liquidators),
(1874) LR 7 HL 348; (1874–80) All ER 1269
. See Negotiable Instruments Act, 1881, sections 37, 38.
711 Gopala Maller v Vallithokuvayil Velloth Krishnan,

AIR 1942 Mad 134 ; relying on TR Narasimham AT Ramaswami, (1912) 24 Mad LJ 91.
712 Moolji Murarji Sunderji v MC Pinto, AIR

1926 Sind 156 .
End of Document
Sanjay Kataria
[s 133] 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
713[debtor] and the creditor, discharges the surety as to transactions subsequent to the variance.
Illustrations
(a) A becomes surety to C for B’s conduct as manager in C’s bank. Afterwards, B and C contract, without
A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses on
overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from
his surety-ship by the variance made without his consent, and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which
the duties are defined by an Act of the Legislature. By a subsequent Act the nature of the office is
materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability
under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.
(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for B’s
duly accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent,
C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary.
A is not liable for subsequent misconduct of B.
(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on
credit. Afterwards B becomes embarrassed, and, without the knowledge of A, B and C contract that C
shall continue to supply B with oil for ready money, and that the payments shall be applied to the then,
existing debts between B and C. A is not liable on his guarantee for any goods supplied after this new
arrangement.
(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees
to B on the 1st January; A is discharged from his liability, as the contract has been varied in as much as C
Sanjay Kataria
Page 2 of 23
might sue B for the money before 1st March.
[s 133.1] Discharge of Surety
Sections 133-139 of the Contract Act provide certain circumstances in which a surety is discharged. A
surety is discharged by the variance in the terms of the contract between the principal-debtor and creditor
(section 133); by the release or discharge of the principal-debtor by the creditor (section 134); by the
composition by the creditor with the principal-debtor, or when the creditor gives time to, or agrees not to
sue the principal-debtor (section 135); by any act or omission of the creditor impairing the surety’s
eventual remedy (section 139); or where the creditor loses or parts with the security (section 141). The
provisions contemplate situation of actions prior to suit and cannot include a post decretal situation where
the judgment debtor is granted time for making payment in instalments.714
[s 133.1.1] Discharge by Frustration of contract and Variation
A contract of guarantee being first a contract, it is discharged in any way a contract would be discharged.
Thus, the surety will be discharged where the underlying contract is discharged by frustration before the
time for performance;715 unless the surety has agreed to continue to remain liable despite such an event.
However, a surety bond, given to guarantee payment of a deposit in a bank with its head office at Dacca,
was not discharged due to partition of the country and the bank suspending payment and its Indian
branch consequent thereon.716
Where the terms of the contract of guarantee fixed a last date for enforcement of guarantee, and it was
not so enforced within that time, the guarantee could not be enforced.717 Thus, in State of Maharashtra v
MN Kaul,718 a bank gave a guarantee to remain in force:
(i) for one calendar month after the pronouncement of the judgment; and/or
(ii)
(a) a period of 12 months from the date of the execution of the guarantee whichever be later;
and/or
Sanjay Kataria
Page 3 of 23
(b) the drawing and sealing of the order (as the case may be) of the Supreme Court finally
disposing of the petition of Dr Kaul.
No order was drawn up but the writ petition in which the stay order was passed abated due to the death
of the principal, and the Court made no order of the nature mentioned in clause (ii) (b). It was held that
none of the above conditions applied to the facts of the case, and the guarantee was discharged.
If the creditor and principal-debtor vary their contract without the consent of the surety, the surety is
discharged in respect of transactions made after the variation.
[s 133.2] Discharge of Surety on Variation
The surety, like any other party, cannot be bound to something for which he has not contracted. If the
original parties have expressly agreed to vary the terms of the original contract, unless the surety has
assented to the new terms, there is nothing to which he can be bound, for the final obligation of the
principal-debtor will be something different from the obligation which the surety guaranteed; the parties
having made it impossible for the guaranteed performance to take place. He is discharged forthwith on
the contract being altered without his consent. Even under section 128 of the Contract Act, the liability
only extends to the liability on the contract guaranteed, and not on something for which he has not
contracted.719 Therefore, the true rule is that if there is any agreement between the principals with
reference to the contract guaranteed, the surety ought to be consulted, unless such alteration is not self-
evidently unsubstantial, or to the surety’s disadvantage.720
The rule of discharge applies also to a surety who is under no personal liability, but has merely deposited
documents, viz. title deeds, as security.721 Any variation in terms of the original contract discharges not
only the surety, but also the counter-guarantor who has given a counter-indemnity bond;722 and it not only
discharges the surety from personal liability, but also releases the property which was included in the
contract as security for the promise guaranteed.723
This rule of long standing has been expressed thus in Bonar v Macdonald:724
Any variance in the agreement to which the surety has subscribed, which is made without the surety’s knowledge or consent, which may
prejudice him, or which may amount to a substitution of a new agreement for a former agreement, even though the original agreement
Sanjay Kataria
Page 4 of 23
may, notwithstanding such variance, be substantially performed, will discharge the surety.
The section has been deduced from the principle:
The party who is surety for another for the performance of an engagement can only be called upon to guarantee the performance of
that engagement when the engagement is carried into complete, literal, and strict effect… He enters into a particular and specific
contract, and that contract alone he is bound to perform.725
The Privy Council summed up the doctrine regarding its principal applications:726
In pursuance of this principle, it has been held that a surety is discharged by giving time to the principal, even though the surety may
not be injured, and may even be benefited thereby. The reason of this rule is thus given by Lord Eldon in the case of Samuell v
Howarth.727 The surety discharged for this reason, because the creditor in so giving time to the surety has put it out of the power of the
surety to consider whether he will have recourse to his remedy against the principal or not...It has been truly stated that the renewal of
bills might have been for the benefit of the surety, but the law has said that the surety shall be the judge of that...The creditor has no
right, it is against the faith of his contract, to give time to the principal, even though manifestly for the benefit of the surety, without the
consent of the surety.
The provision that the surety is discharged, as regards future transactions, indicates that the section would
not apply in case of a contract consisting of a single transaction.
[s 133.3] Strict Interpretation
A surety is not liable beyond the terms of the guarantee.
You bind him to letter of his engagement. Beyond the proper interpretation of that
Sanjay Kataria
Page 5 of 23
engagement you have no hold upon him. He receives no benefit and no consideration.728
In the case of ambiguity when all other rules of construction fail, the Courts interpret the guarantee contra
proferentem, in a manner favourable to the surety or use the recitals to control the meaning of the operative
part where that is possible. However, whatever the mode employed, the cardinal rule is that the guarantor
must not be made liable beyond the terms of his engagement.729 In order to determine whether the surety
has consented to the creditor making any changes in the agreement with the principal-debtor, the terms of
the guarantee would be strictly construed.
[s 133.4] Degree of Variation
An alteration made in an instrument, after its execution, in some particular which is not material, does not
discharge the surety from liability. Where, however, the alteration is material, the surety can claim to be
discharged. It is also the law that if the custodian of the document makes or allows an alteration to be
made while it is in his custody, he cannot sue upon it because it is his duty to preserve the document in
the state in which he got it.730
A change in the contract between the creditor and the principal-debtor must materially affect the position
of the surety before the latter can be absolved from liability;731 or must be substantial, even if there is no
actual prejudice to the surety.732 This is because neither the Court, nor the jury will go into the question
whether there has been any actual prejudice. The surety is the sole judge as to whether he will continue to
remain liable on the new contract.733
Attempts have been made to confine the rule to cases where the variance materially affects the surety’s
interest, and to treat it as a question in each case whether the change is material for this purpose.
[s 133.5] Without the Consent of Surety
The guarantor is not discharged by any variation of the principal contract made with his consent. The
onus of proving that the guarantor has consented is upon the person seeking to enforce the guarantee.
Sanjay Kataria
Page 6 of 23
[s 133.5.1] Contracting Out or Waiver by Surety of Rights under this Section
Section 128 of the Contract Act specifically provides that the liability of surety is co-extensive with that of
the principal-debtor, unless it is otherwise provided by the contract. A similar phrase, enabling contracting
out of the provisions of a section, does not appear in those provisions of Chapter VIII relating to the
rights of the sureties. Until the authoritative pronouncement of the Supreme Court, different views had
been expressed by the High Courts as to whether it is open to contract outside those provisions of
Chapter VIII relating to the rights of sureties. It had been held, on the one hand, that the phrase enabling
contracting out being absent in section 133, its provisions were not subject to a contract to the contrary
between the parties to the contract.734 Another view was that it was not necessary for the legislature to
provide the words in the absence of any contract in sections 133, 135 or 141, because the sections
themselves speak of consent of the surety.; and that the rights conferred on the surety under sections 133,
135 or 141 could be waived by specific agreement in the deed of guarantee, such an agreement amounting
to consent of surety within the meaning of these sections.735 One more view was that the words “unless it
is otherwise provided in the contract” occurring in section 128 of the Contract Act would also govern the
other provisions contained in Chapter VIII of the Contract Act and enable the surety to give up the rights
available to him. It was held that a stipulation in a contract of guarantee whereby the surety purports to
waive all his rights, legal, equitable, statutory or otherwise, which may be inconsistent with the guarantee,
will not deprive him of his right to discharge under this section.736
The Supreme Court has set at rest the conflict by holding that a surety can waive all rights available to him
under Chapter VIII because these are advantages for his benefit.737
A contract by the surety purporting to waive their rights conferred under sections 133-135, 139 and 141
does not defeat any provision of law,738 nor is unlawful,739 nor is it opposed to public policy:
Public policy lies in one not being allowed to defeat the debt of the creditor. If the creditor lays down certain conditions with a view to
secure his debt, it cannot be said that the same are opposed to public policy.740
[s 133.6] Time of Discharge
The surety stands discharged forthwith on the contract being varied without his consent,741 or being so
altered.742
Sanjay Kataria
Page 7 of 23
[s 133.7] Extent of Discharge
The discharge is not total. The surety continues to be liable for transactions effected before such variation.
The surety is discharged as to the transactions subsequent to the variance.743
[s 133.8] Unauthorised Material Alteration
An unauthorised material alteration by the promisee whether that is by adding anything to or by striking
out any part of a written contract, avoids the contract against the person otherwise liable upon it. The
alteration even if made by a stranger without the knowledge of the promisee or his agent, while the
contract document is in possession of the promisee or his agent, also discharges the contract; but if it is
altered by a stranger while the document was not in the custody of the promisee or his agent, the
promisor is not discharged.744 An unauthorised material alteration in a deed of guarantee—alteration in
amount guaranteed, rate of interest and date of contract—will discharge the deed of guarantee if it is
without the knowledge of the surety.745 So also, where the signatures of the surety were obtained on blank
guarantee forms before filling the blanks in the form, such filling of blanks has been held as material
alteration, discharging the surety.746 Where the creditor filled the details in the blank space in the
guarantee bond about the details of the surety’s service agent, it was held that the alteration was not
potentially prejudicial to the surety’s rights. It did not make any difference to the operation of the
guarantee, or to its business effect, neither did it alter nor accelerate the surety’s liability to make payment
under the guarantee.747
In MS Anirudhan v Thomco’s Bank Ltd.,748 a guarantor stood surety for an overdraft by a bank. The bank
gave a blank guarantee form to the principal-debtor who filled it up by stating the maximum debt
guaranteed as Rs. 25,000/-. The bank was not prepared to accept the guarantee or give accommodation
for more than Rs. 20,000/-. The principal-debtor made an alteration reducing the sum to Rs. 20,000/- and
gave the document to the bank. In a suit against the principal and the surety, the surety pleaded discharge
of liability on the basis of the alteration. The principal-debtor was held to have acted as the agent of the
surety. This alteration was held not to discharge the surety.749 The judges differed in the reasons in
holding the surety liable. Kapur J approved the statement of law set out in Halsbury’s Laws of England
that an unauthorized material alteration avoids a contract so that if a promisee after a written contract is
executed, materially alters it, without the consent of the promisor, whether by adding anything to the
contract or striking out any part of it or otherwise, the contract is avoided as against the person who was
otherwise liable upon it. Even if the alteration is made by a stranger without the knowledge of the
promisee, the other person is discharged if the contract is in the possession of the promisee or his agent.
But if the contract is altered by a stranger when the contract was not in the possession of the promisee,
the promisor is not discharged. It was held that the document was not altered while in the possession of
the promisee.750 Justice Hidayatullah held that it was an unsubstantial alteration which did not change the
nature of the document, and hence could not discharge the surety.751 Unsubstantial alterations in an
instrument, which are to the benefit of the surety, do not discharge the surety from the liability. The
surety may be discharged if the alteration made is to his disadvantage or its unsubstantial character is not
Sanjay Kataria
Page 8 of 23
self-evident.
The general rule that a surety is discharged if any material alteration is made in the contract between the
creditor and the principal-debtor, without reference to the surety, applies to a surety who is under no
personal liability, but has merely deposited documents by way of security.752
The issue of unauthorised material alteration in the written contract must be distinguished from variation
in the contract between the creditor and principal debtor that discharges the surety.753
[s 133.9] Instances of Variation Operating as Discharge
Where the guarantee was given for an advance of a certain amount on security of four properties, but the
creditor gave an advance of a less amount on security of three properties, the sureties could not be held
liable.754 The surety for cash credit facility was discharged where the creditor permitted overdrawals
resulting in variation of some terms of the agreement.755 A guarantor of a particular bank account will be
discharged where the bank agrees to open a second account for the principal-debtor while the guarantee is
still current, thereby making it possible for the principal-debtor to make payments into the bank without
reducing the guarantor’s liability on the guaranteed account.756 In Indian Bank v S Krishnaswamy,757 a bank
granted a loan to a mill on third patty surety. Later, the mill was taken over by the Government. On
discovering the short-fall in the key loan, the bank obtained a second mortgage, from the principal-debtor,
as additional security, but without the consent of the surety. The surety stood discharged. Transfer of
management of a company and transfer of shares in favour of nominee directors under an arrangement
involving the creditor amounted to variance of the contract, and discharged the surety.758
A became surety to C for payment of rent by B. under a lease. Afterwards, B. and C contracted, without
A’s consent, that B. will pay rent at a higher rate. A was discharged from his suretyship in respect of
arrears of rent accruing subsequent to such variance.759 Where a tax-collector’s son was allowed to collect
the tax and misappropriated the moneys, the surety for honesty of the tax-collector was discharged.760 A
surety for one partner was discharged when the partners extended the business and increased its capital,
thus making that partner liable for losses more than were contemplated at the date of the bond.761 Where
A employed B at one place and C stood surety for B, but later A terminated the employment, and
employed B. at another place, C was discharged.762 Conversion of a proprietary business into a private
limited company with the consent of the creditor, but without the consent of the surety, discharged the
surety.763
The principles of sections 133 to 141 have been held to surety bonds in favour of Courts, although the
sections may not themselves be applicable;764 but the principles would not apply where the Court, in
whose favour the surety bond is executed, is not responsible for the change, viz. where the decree-holder
has arrived at certain arrangements with the principal judgment-debtor.765 Thus, where the case against an
Sanjay Kataria
Page 9 of 23
accused, for appearance in Court X was assured under a surety bond, and the case was transferred to
Court Y where a new surety bond was executed by another person, X was discharged, and continued to
remain so, even after the case was re-transferred from Court Y to Court X.766 A surety for appearance of
defendant arrested before judgment stands discharged when the plaint is returned for presentation to a
Court having jurisdiction.767 Upon passing of a consent decree, a surety for due performance of the
decree, is not discharged by the compromise of the case or consent decree being passed, unless fraud or
collusion between the consenting parties or any prejudice having caused to the surety by the consent
decree is pleaded,768 or unless there was an express stipulation in the surety bond to restrict the surety to
the decrees passed upon contest.769 A term in the surety bond, that a surety would only be liable if a
decree is passed against the principal-debtor after a contest, is a valid term.770 However, where the surety
had executed a surety bond in favour of the Court agreeing to pay the decretal dues to the decree-holder
in case the judgment-debtor failed to appeal or obtain a stay from the appellate Court, and on failure to do
so, the judgment-debtor and decree-holder effected a compromise that the decretal amount be paid in
instalments with interest, the surety became unenforceable no sooner the arrangement was arrived at. It
did not matter that the judgment-debtor had not furnished security which was a condition for coming into
force of the compromise.771 A surety for payment of instalments of the debt on the strength of the
property that was attached before judgment was discharged when the Court gave permission for private
alienation after the decree.772
Where by the terms of a consent decree for the payment by instalments of a sum of money with interest
passed against certain defendants as principal-debtors, and against other defendants, as sureties, it was
stipulated that on default of payment of any one instalment, the decree-holder should sell the properties
of the principal-debtors for the whole amount remaining due under the decree, and the liability of the
sureties was limited to the deficiency, it was held by the Privy Council that the omission of the decree-
holder to sell the properties until several years after the first order for sale for the purpose of increasing
the interest payable to him under the decree discharged the sureties to the extent of the interest that had
accrued due after the date of that order; on the ground that the conduct of the decree-holder in delaying
the sale has the result of “laying an additional burden upon the sureties.”773 Where a bus attached in the
suit was released on execution of a surety bond, and, in a compromise decree which followed, gave the
latter instalments, and the bus was not sold till much later, the surety was discharged.774
[s 133.10] Variation when does not Discharge
The intention of a “settlement” contract, for repurchase of goods by the seller from the buyer, is not that
the original contract shall be discharged, but that the two contracts shall stand together.775 Accordingly, a
contract of resale by the seller does not discharge a surety from his original contract.776 A surety for
performance of an agreement to buy a certain quantity of cotton at a certain rate and time is not
discharged by the subsequent agreement by the plaintiff to sell the same cotton at a higher rate.777 So long
as the account with the bank is unbroken, a surety would not be prejudiced by any departure from the rule
of appropriation of items in order of character of his engagement.778 Nor is a surety to a bank to the
extent of Rs. 300,000/- discharged by the bank opening a second account with the principal-debtor on
deposit of Rs. 20,000/- by the depositor;779 or where the promissory note reciting consideration of Rs.
3000/- on which only Rs. 1000/- were paid in cash, and the rest adjusted for old dealings.780
Sanjay Kataria
Page 10 of 23
A plain reading of section 14 of the Insolvency and Bankruptcy Code leads to the conclusion that moratorium
referred to therein can have no manner of application to personal guarantors of a corporate debtor. The
resolution plan under section 31 of the Code approved by the Committee of creditors is binding on the
corporate debtor as well as the guarantor and the resolution plan will not constitute a variation in terms of
this section so as to discharge the surety. This is also made clear by section 31(1) of the Code.781
A surety is not discharged merely because the demand made under a surety bond is set aside. Reduction in
the amount of arrears mentioned in a surety bond is not a variation, and does not discharge a surety.782 An
acknowledgment of debt, by the principal-debtor, does not involve any variance of contract under this
section.783 Nor does a breach of contract amount to any variation so as to discharge the surety.784 After a
decree is passed against the principal-debtor and the surety, their liability becomes one under the decree
and not one under the original contract; hence, no question of variation of the contract can arise after the
decree.785 A change in the management of a principal-debtor company does not vary the contract to
discharge the surety, or any change in the members of the board of directors, or appointment of another
managing director.786 A bail bond is not discharged on the transfer of a case from one Court to another. It
continues to be operative until the decision of the case.787
An attempted variation effected by private instructions by a bank to its cashier, and entries made to effect
first a reduction of credit limit from Rs. 100,000/- to Rs. 50,000/-, and back to Rs. 100,000/-, were not
binding on the principal-debtor, and hence did not discharge the surety.788 A surety giving security to
Court under Order XXXVIII, rule 5 of the Code of Civil Procedure for the value of the property attached
before judgment was not discharged where the suit was decreed not by decree of the Court, but by an
award of arbitrators.789
An attempted variance which is inoperative, as being against the local law applicable to the creditor and
the principal-debtor, will not discharge the surety. Thus, where a Canadian banker’s loan and interest were
guaranteed and the bank increased the rate of interest from 7-8 percent, 7 percent being the highest that
the bank could legally charge in Canada, the guarantors remained bound for principal and lawful
interest.790
The promisee must show performance of the contract before he can hold the promisor to his promise,
and, therefore, even though an attempted variance is invalid in law, the guarantor will not be held liable if
the promisee has failed to perform the original contract. Thus, where the guaranteed transaction was an
advance of Rs. 1,25,000/- on security of four properties, and the transaction was carried out on an
advance of Rs. 1,00,000/- with security of three properties only, the surety was not liable.791
[s 133.11] Discharge of Surety by Variation under English Law
Sanjay Kataria
Page 11 of 23
Where the guaranteed obligation is properly discharged by performance, the obligations of a surety of that
obligation are also thereby discharged.792 Performance by the principal-debtor which discharges him will
also discharge the surety. For instance, where the surety had guaranteed payment by a hirer under a hire
purchase agreement, and the hirer terminated the agreement in pursuance of the hire purchase agreement,
and paid the amounts due till then, the surety was discharged,793 but where the surety had assumed greater
liability than the principal-debtor, he was not discharged when the principal-debtor was discharged. Thus,
where the defendant agreed to indemnify the hire purchase company against any loss suffered by it if the
hirer terminated the contract prematurely, the defendant was liable, though the hirer was discharged.794
Like any other contract, a contract of suretyship may be invalidated by total failure of the consideration,
as, where the consideration for an intended guarantee was postponing the sale of the debtor’s goods, but
the creditor was unable to stop the sale for want of the consent of other necessary parties,795 or where the
consideration was withdrawal of a criminal prosecution against the debtor, but the Court would not
sanction the withdrawal, the offence being non-compoundable.796 A surety is also discharged when the
principal-debtor is discharged by operation of law,797 unless the guarantee is expressed to make the surety
liable despite the discharge of the principal-debtor. In that case, the contract is really one of an
indemnity.798 If the creditor takes, from the guarantor, a further security such as a deed of charge by way
of legal mortgage in lieu of the original simple contract guarantee, the original guarantee is thereby
discharged by the doctrine of merger.799 Merger will only occur where the higher security appears to be
intended to be taken in lieu of the lower, and not where the parties intend the new security to be
additional or collateral.800
The Court of Appeal, in Holme v Brunskill,801 based on the principle laid down by Lord Eldon in the case
of Samuell v Howarth802 had released the surety. The defendant gave the plaintiff a bond that the tenant of
his farm would on the expiration of his tenancy redeliver a flock of sheep on the farm in good order and
condition. By an agreement between the plaintiff and the tenant, the tenant gave up a field on the farm,
and held the remainder at a reduced rental. The jury, at the trial, having found that the surety was not
prejudiced by this agreement.
The ratio decidendi is thus stated:
The plaintiff attempts to substitute for the contract that the flock shall be given up in good condition with the farm as then demised a
contract that it should be delivered up in like condition with a farm of different extent…The surety ought to have been asked to decide
whether he would assent to the variation. He never did assent, and in my opinion, was discharged from liability.
To the same effect is Polack v Everett,803 where, there being a stipulation that half the book debts of the
debtor should, under certain circumstances, be made over the creditor, he released the book debts, and
Sanjay Kataria
Page 12 of 23
accepted in lieu thereof a supposed equivalent. The ground of the decisions is thus stated by Quain J:
The contract of the surety should not be altered without his consent, and the creditor should not undertake to alter the contract and
then say, Although the contract has been altered, and I have put it out of my power to carry it out by a voluntary act, I now offer you an
equivalent.
The effect of a variation of agreement, between the creditor and principal-debtor, upon the liability of the
surety depends on the construction of the contract, i.e., on the nature of the obligation or obligation
guaranteed.804 For instance, where the terms of the contract between the creditor and the principal-debtor
are incorporated expressly or impliedly in the contract of guarantee, any such variation in these terms by
the creditor and the principal-debtor which is not manifestly unsubstantial or incapable of prejudicing the
surety, would discharge the surety.805 For instance, the contract between the creditor and the principal-
debtor was the basis of the surety bond and had been shown to the sureties before the bond was
executed, and was referred to in the body of the document.806 A qualification (not an exception) to the
generality of the rule is that, where a guarantee is for the performance of several and distinct contracts or
duties, a change in one of those contracts or duties will not affect the surety’s liability as to the rest.807
If the guarantee relates, as it frequently does, to the obligations without special reference to any specific
contract between the creditor and principal-debtor, viz. in respect of obligations arising out of a
contemplated course of dealing, without incorporating the terms of any contract between the creditor and
principal-debtor, this principle would have limited application.808 In such a case, the creditor would be
able to vary the terms so long as the dealing remains within the scope of the guarantee. Thus, where a
surety guaranteed the liability of a commission agent up to a specified amount, and the guarantee was
silent about the mode of accounting between the agent and the creditor, the variation in the mode of
accounting did not discharge the surety, because the guarantee related to the liability irrespective of
changes in the mode of accounting.809
The provision that the surety is discharged, as regards future transactions, indicates that the section would
not apply in case of a contract consisting of a single transaction.810 Where the guarantee is given in respect
of obligations arising out of a contemplated course of dealing without incorporating, expressly or
impliedly, the terms of any specific contract, it is open to the creditor to vary the terms applying to the
course of dealing so long as that course of dealing remains within the scope of the guarantee.811
A guarantee purporting to continue to bind “notwithstanding the giving of time for payment…or the
varying of the terms of payment hereof or the rate of interest thereon’ was held discharged where the
creditor renewed the mortgage of the principal-debtor for a further term.”812
Sanjay Kataria
Page 13 of 23
For example, where the guarantee stipulates that the creditor must give a certain period of credit to the
principal-debtor, this stipulation must be strictly adhered to.813 A guarantor who has agreed to pay
whatever another party is made to pay under an insurance policy is not liable for sums paid by that other
party under a scheme of arrangement substituted for the policy.814
The test of deciding whether the guarantor was discharged by a variation was whether he was prejudiced
by the alteration,815 or that variation altered the risk that the guarantor had contracted to undertake. Thus,
as a guarantor cannot succeed to the owner’s rights of seizure of goods under a hire purchase agreement;
he cannot be prejudiced by the alteration of those rights, and consequently is not released thereby.816
[s 133.12] Alterations operating as discharge under English law
There may be “cases where it is without inquiry evident that the alteration is unsubstantial, or that it
cannot be otherwise than beneficial to the surety,” and in such cases “the surety may not be discharged”,
but:
If it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court will not in an
action against the surety, go into an inquiry as to the effect of the alteration, or allow the question whether the surety is discharged or
not to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of
the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable
notwithstanding the alteration, and that if he has not so consented he will be discharged.817
Where the guarantee document contained matter in print, type and ink, an amendment in pencil was held
not intended to be a final alteration, and did not constitute such an alteration as would discharge the
surety.818
In a case, X owed Rs. 1300/- to Y. Z afterwards requested Y to forbear to sue X for a week, and
deposited Rs. 1300/- with Y as security. Y agreed to forbear as requested. X failed to pay within a week. Y
afterwards obtained from X a promissory note payable on demand for Rs. 1800/-. Z was discharged from
the suretyship, and was entitled to recover back his deposit from Y.819
In Polack v Everett,820 N owed £ 3,400 to P, and was about to dispose of his business to a company to be
formed. It was agreed between N and P that N should pay off the debt within a time named, and in the
Sanjay Kataria
Page 14 of 23
meantime transfer to P shares in the company of the nominal value of £ 6,000, and redeem them at par
within twelve months; and (among other terms) N’s book debts should be collected by one V and divided
equally between P and a certain other creditor, P’s share to be applied towards redemption of the shares
mentioned above. E guaranteed the redemption of the shares. Some months later, P released his interest
in the book debts to N. Later, N failed to deliver the shares, as promised. This was a variance from the
original contract which discharged E, the surety.
The surety at the time he entered into the suretyship had a right to have these book debts appropriated to reduce the principal debt, and
that right he has been deprived of by the act of the creditor in releasing the book debts…The surety is entitled to remain in the position
in which he was at the time when the contract was entered into.
A guarantee given for the due performance of a ship-building contract which stipulates for payment by
instalments as certain stages of the work are reached is discharged if the building owner makes advance
payments greater than those permitted by the contract.821
Where several persons, being in fact the individual members of a private company, deposited the title-
deeds of properties belonging to them respectively with a person who was practically financing the
company, as security for the company’s debts to him, and such person allowed one of the depositors to
have her title-deeds back to raise money for a purpose of her own; this was held to discharge the other
depositors.822
Where a company was entitled under its Articles to forfeit shares for default in paying up unpaid
instalments, and by another Article the owners of forfeited shares were made immediately liable for the
amount of the calls due and incidental expenses with interest until payment, the company’s election to
forfeit shares was held to discharge sureties who had guaranteed payment of the calls, for a new and more
onerous obligation was imposed on the debtor, and the sureties were deprived of their right of lien on the
shares.823
A creditor’s acceptance of a debtor’s wrongful repudiation does not amount to any variation to discharge
the surety.824 A creditor cannot be forced to continue his contract when principal-debtor indicates
inability to perform, and an election by the creditor to accept repudiation by the principal-debtor of the
contract is not a variation.825
Sanjay Kataria
Page 15 of 23
713 The word “debtor” was inserted by the Repealing and Amending Act, 1917 (24 of 1917), section
2 and Schedule 1.
714 Bal Mukand Mohinder Kumar Iron Steel Commission Agents v Punjab National
Bank, (2014) 1 ICC 1007: (2015) 1 BC 373.
716 Suresh Narain Sinha v Akhauri Balbhadra Prasad,

AIR 1957 Pat 256 ; United Commercial Bank Ltd. v Okara Grain Buyers Syndicate Ltd.,
AIR 1968 SC 1115 .

AIR 1967 SC 1634 : 1968 38 COMP CASES 1 SC.

AIR 1967 SC 1634 : 1968 38 COMP CASES 1 SC.
719 Seth Pratapsingh Moholalbhai v Keshavlal Harilal Setalwad,

AIR 1935 PC 21 : (1934) 59 Bom 180 : 153 IC 700; Nuserwanji Cursedji Bhesania & Co. v
Mahamayi Ammal, AIR 1938 Mad 585 .
720 S Perumal Reddiar v Bank of Baroda, AIR

1981 Mad 180 : (1981) 1 Mad LJ 419.
721 Jagjivandas Jethmal v King Hamilton & Co., AIR

1931 Bom 337 : (1931) 55 Bom 677 : 134 IC 545; Emperor v Pandhi Khan, AIR
1934 Sind 152 : 152 IC 874; Smith v Wood, [1929] 1 Ch 14
: [1928] All ER Rep 229 (CA).
722 UOI v Pearl Hosiery Mills, AIR 1961 P&H

281 .
723 Bolton v Salmon, (1891) 2 Ch 48

; Smith v Wood, (1929) 1 Ch 14 : (1928)
All ER Rep 229 (CA).
724 Bonar v Macdonald, 3 HLC 226, at 238, 239 per Lord Cottenham; Charles
Dudley Robert Ward v National Bank of New Zealand, (1883) 8 App Cas 755 , at 763.
725 Bonser v Cox, (1844) 10 LJ Ch 395

per Lord Lyndhurst LC : 55 RR 120 : (1835–42) All ER Rep 173
.
726 Charles Dudley Robert Ward v National Bank of New Zealand,

(1883) 8 App Cas 755 , at 763–764 per Sir R Collier.
Sanjay Kataria
Page 16 of 23
727 Samuell v Howarth, (1817) 3 Mer 272.
728 Blest v Brown, (1862) 4 De GF&J 367 per Lord Westbury LC at 376; Seth
Pratapsingh Moholalbhai v Keshavlal Harilal Setalwad, AIR 1935 PC 21 : (1934)
62 IA 23 : (1934) 59 Bom 180 : 153 IC 700; MS Anirudhan v Thomco’s Bank Ltd., [1963] 1 Supp SCR 63 at 77,
AIR 1963 SC 746 ; quoting at 752 Blest v Brown, (1862) 4 De GF&J 367; State of Maharashtra v MN Kaul,
AIR 1967 SC 1634 .

1967 SC 1634 , at 1936 per Hidayatullah J; MS Anirudhan v Thomco’s Bank Ltd.,
AIR 1963 SC 746 , at 752 : (1963) 1 Supp SCR 63 : 62 IA 23 : 153 IC 700; Mani Bhushan Malik v Pioneer Bank
Ltd., AIR 1959 Cal 746 .
730 MS Anirudhan v Thomco’s Bank Ltd., AIR

1963 SC 746 , at 747, 749, 751, 753 per Hidayatulla J : (1963) Supp 1
SCR 63; not applying Blest v Brown, (1862) 4 De GF&J 367 : (1865) 45 ER 1225; and Pigot’s case,
[1558–1774] All ER Rep 50 : (1614) 11 Co. Rep 26–b.
731 Mathra Das v Shamboo Nath, AIR 1929 Lah 203

: 112 IC 843; Prag Das v Dhani Ram, AIR 1931 Oudh 426
; S Perumal Reddiar v Bank of Baroda, AIR 1981 Mad 180 : (1981) 1
Mad LJ 419; but see DK Mahommad Ehiya Sahib v RMPV Valliappa Chettiar, AIR 1936 Mad 576
(small variation absolves the surety).
732 Keshavlal Harilal v Pratapsing Moholalbhai, AIR

1932 Bom 168 : (1932) 34 Bom LR 167 .
733 AIR 1932 Bom 168

; Holme v Brunskill, (1878) 3 QBD 495 .
734 UOI v Pearl Hosiery Mills, AIR 1961

P&H 281 .
735 Citibank NA v Juggilal Kamlapat Jute Mills Co. Ltd.,

AIR 1982 Del 487 : 1984 56 COMP CASES 509 Delhi; Hodges v Delhi and London Bank Ltd. 27 IA
168 : (1901) 23 All 137 (PC); AR Krishnaswami Ayyar v Travencore National
Bank Ltd., AIR 1940 Mad 437 : (1940) Mad 75; T Raju Shetty v Bank of
Baroda, AIR 1992 Kant 108 ; Mukesh Gupta v Sicom Ltd. Mumbai,
AIR 2004 Bom 104 ; State Bank of India v Vivek Garg,
AIR 2011 Sikkim 7 .
736 KR Chitguppi & Co. v Vinayak Kashinath Khadilkar,

AIR 1921 Bom 164 : (1921) 45 Bom 157 : 58 IC 184 (suggestion that nothing short of a specific
consent to the particular variation will suffice); Indian Bank v S Krishnaswamy, AIR 1990 Mad 115
at 123; but see Citibank NA v Juggilal Kamlapat Jute Mills Co. Ltd., AIR 1982
Del 487 (rights conferred on the surety under sections 133, 135 or 141 could be waived by specific agreement
in the deed of guarantee, such an agreement amounting to consent).
737 H B Basavaraj v Canara Bank, 2009, AIR SCW 7567 :

(2010) 12 SCC 458 (decided in the context of waiver of rights under section 130); HDFC
v Gautam Kumar Nag, 2012 AIR SCW 993 : (2012) 5 SCC 604 (section 139).
Sanjay Kataria
Page 17 of 23
738 Anil Kumar v Central Bank of India,

AIR 1997 HP 5 .
739 State Bank of India v Vivek Garg,

AIR 2011 Sikk 7 .
740 Central Bank of India v Multi Block Pvt. Ltd.,

AIR 1997 Bom 109 , at 113; approving T Raju Shetty v Bank of Baroda,
AIR 1992 Kant 108 ; Anil Kumar v Central Bank of India,
AIR 1997 HP 5 ; State Bank of India v Vivek Garg,
AIR 2011 Sikkim 7 .
741 Supra, AIR 1935 PC 21

, at 25 : (1934) 62 IA 23 : (1934) 59 Bom 180 : 153 IC 700.
742 State Bank of Patiala v Shri Durga Oil and Flour Mills,
AIR 1984 NOC 22 (HP).
743 KR Chitguppi & Co. v Vinayak Kashinath Khadilkar,

AIR 1921 Bom 164 ; Indian Bank v S Krishnaswamy, AIR 1990 Mad 115
.

1963 SC 746 , at 748 : (1963) 1 Supp SCR 63, at 65 (Sarkar J contra); Davidson v Cooper, (1844) 13 M&W
343; also see section 62 under heading: “Material Alteration”.
745 S Perumai Reddiar v Bank of Baroda, AIR

1981 Mad 180 , at 192 : (1981) 1 Mad LJ 419; MS Anirudhan v Thomco’s Bank Ltd.,
AIR 1963 SC 746 , at 748 per Kapur J : (1963) 1 Supp SCR 63.
746 S Perumal Reddiar v Bank of Baroda, AIR

1981 Mad 180 : (1981) 1 Mad LJ 419.
747 Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd.,

(2000) 3 All ER 274 .

1963 SC 746 : (1963) 1 Supp SCR 63.
749 AIR 1963 SC 746

per majority, Sarkar J dissenting.
750 AIR 1963 SC 746

at 748 : (1963) 1 Supp SCR 63 at 66 of SCR.
Sanjay Kataria
Page 18 of 23
751 AIR 1963 SC 746

at 754 : (1963) 1 Supp SCR 63 at 82 of SCR, affirmed in Ram Khilona v Sardar, AIR 2002 SC 2548
: (2002)6 SCC 375 .
752 Smith v Wood, [1929] 1 Ch 14

: (1928) All ER Rep 229 (CA); Jagjivandas Jethmal v King Hamilton
& Co., AIR 1931 Bom 337 : (1931) 55 Bom 677 : 134 IC 545.
753 See Subhash Chand Jain v Haryana Financial Corporation,

AIR 2008 P&H 99 that fails to make this distinction.

: (1934) 62 IA 23 : (1934) 59 Bom 182 : 153 IC 700.
755 Bishwanath Agarwala v State Bank of India, AIR

2005 Jhar 69 : III (2005) BC 217 :
2005 (2) JCR 232 Jhr.
756 National Bank of Nigeria Ltd. v Awolesi, [1964] 1

WLR 1311 : (1965) 2 Lloyd’s Rep 389 (PC).
757 Indian Bank v S Krishnaswamy, AIR 1990 Mad

115 .
758 Anil Kaur v Haryana Financial Corporation, AIR

2011 P&H 140 .
759 Khatun Bibi v Abdullah, (1880–82) ILR 3

–4 All 1; Holme v Brunskill, (1878) 3 QBD 495 (a
variation of the terms of tenancy may discharge the surety even though it actually diminishes the rent payable).
760 H Pin Sein v Paungde Municipality, AIR

1938 Rang 126 : 177 IC 75.
761 Jowand Singh v Tirath Ram, AIR 1939 Lah 193

: 183 IC 740.
762 Bishal Chand Jain v Chattur Sen, AIR 1967 All 506
: (1968) IILLJ 708 All.
763 Satish Chandra Jain v National Small Industries Corp Ltd.,

AIR 2003 SC 623 : JT 2001 (10) SC 416
: RLW 2002 (2) SC 225 .
764 Pirthi Singh v Ram Charan Aggarwal, AIR

1944 Lah 428 ; TN&O Bank Ltd. v Official Assignee of Madras, AIR 1944 Mad
396 ; B Narayana Rao v SK Francis, AIR 1953 Mys 68
; Kanailal Mookerjee v Kali Mohan Chatterjee, AIR 1957 Cal 645
Sanjay Kataria
Page 19 of 23
; Narayan Ramchandra Bhagwat v Markandya Tukaram, AIR 1959 Bom 516

; Dalichand v State of Rajasthan, AIR 1976 Raj 112 ; but see Madanlal Motilal v
Radhakisan Laxminarain, AIR 1935 Ngp 258 (sections 133–139 do not
apply).
765 Supra, AIR 1935 Ngp 258

: (1935–36) 31 Ngp 83 (Supp); Guranditta Mal v Firm Gurdasmal-Ramchand, AIR 1925 Lah 552
: 91 IC 772; Lala Nathu Shah v Mulk Raj, AIR 1936 Lah 470
.
766 Emperor v Pandhi Khan, AIR 1934 Sind

152 : 152 IC 874.
767 KA Mahommad Sheriff Sahib v Hussain Ghouse,

AIR 1939 Mad 933 .
768 Amin Abdul Kader Murtasa v Jivraj Otmal Ratnagiri Bhagidari,

AIR 1972 Bom 88 ; distinguishing Parvatibai Harivallabhdas Vani v Vinayak Balvant Jangam,
AIR 1939 Bom 23 : (1939) Bom 794 :
(1938) 40 Bom LR 989 : 179 IC 258; Hodges v Delhi and London Bank Ltd.,
(1900) 27 IA 168 : (1901) 23 All 137 (PC);
Adamsab Usmansab Kanakya v Gurushinddayya Lingayya, AIR 1967 Mys 147
; Citibank NA v Juggilal Kamlapat Jute Mills Co. Ltd., AIR 1982 Del 487 .

AIR 1967 Mys 147 .

AIR 1967 Mys 147 .
771 Narayan Ramchandra Bhagwat v Markandya Tukaram,

AIR 1959 Bom 516 ; TN&O Bank Ltd. v Official Assignee of Madras, AIR 1944 Mad
396 ; but see Guranditta Mal v Firm Gurdasmal-Ramchand, AIR 1925 Lah 552
: 91 IC 772.
772 Darshan Ram-Ganesh Das v Khair Din-Allah Baksh,

AIR 1924 Lah 194 .
773 Ramanund Koondoo v Chowdhry Soonder Narain Sarungy,

(1879–80) ILR 4 –5 Cal 210.
774 John Kuruvilla v Parameswaran Pillai, AIR

1980 Ker 87 ; but see Mohan Lal v Suraj Mani, AIR 1973 J&K 92
.
775 Arbitration between Uttam Chand Saligram (Re) v Mahmood Jewa Mamooji,
AIR 1920 Cal 143 : (1919) 46 Cal 534
at 542 : 54 IC 285.
Sanjay Kataria
Page 20 of 23
776 Uderam Premsukh v Shivbhajan Rampratab, AIR

1920 Bom 78 : (1920) 22 Bom LR 711 : 58 IC
272.
777 Uderam Premsukh v Shivbhajan Rampratab, AIR

1920 Bom 78 : (1920) 22 Bom LR 711 : 58 IC
272.
778 Corey Bros. Ltd. v Mecca, (1897) AC 256

.
779 Supra, AIR 1917 Cal 537

: (1916) 20 Cal WN 562 : 33 IC 34; but see National Bank of Nigeria Ltd. v Awolesi, [1964] 1
WLR 1311 : [1965] 2 Lloyd’s Rep 389 (PC).
780 Swaminatha Pillai v SL Lakshmana Ayyar, AIR

1935 Mad 748 : 157 Ind Cas 979.
781 State Bank of India v V Ramakrishnan, 2018 SCC Online SC 963.
782 N Sulochana v State of Andhra Pradesh, AIR

1984 AP 173 .
783 Wandoor Jupiter Chits Pvt. Ltd. v KP Mathew,

AIR 1980 Ker 190 .
784 Kanai Prosad Bose v Jotindra Kumar Roy Chowdhury, (1909) ILT 36 Cal 626 :
(1909) ILR 36 Cal 626.
785 Velappa Kumar v Kosamattom Chit Fund 1978

Ker LT 10 ; Nellore Co-op. Urban Bank Ltd. v Akili Mallikarjunayya, AIR
1948 Mad 252 : (1948) Mad 707; Charan Singh v Security Finance Pvt. Ltd., AIR
1988 Del 130 , at 133; but see Sardar Kahn Singh v Tek Chand Nanda, AIR 1968 J&K, taking a different
view.
786 Punjab National Bank v Lakshmi Industrial and Trading Company Pvt Ltd.,
AIR 2001 All 28 : 2000 (4) AWC 3013 : (2002) 111 COMP CASES 109.
787 lnder Singh v State, AIR 1960 All 419

: 1960 Cr LJ 873 .
788 Amrit Lal Goverdhan Lalan v State Bank of Travancore,

AIR 1968 SC 1432 : (1968) 3 SCR 724 .
789 Umermal Janimal v Firm of Bhojraj Hassomal,

AIR 1918 Sind 53 (2) : 45 IC 429 (Sind).
Sanjay Kataria
Page 21 of 23
790 Egbert v Northern National Crown Bank, AIR

1918 PC 210 .

at 25 : (1934) 62 IA 23 : (1934) 59 Bom 180 : 153 IC 700.
792 General Produce Co. v United Bank Ltd., (1979) 2 Lloyd’s Rep 255 per Lloyd J
at 258–59.
793 Western Credit Ltd. v Alberry, (1964) 2 All ER

938 : [1964] 1 WLR 945 ; but see Goulston
Discount Co. Ltd. v Clark, [1967] 2 QB 493 : (1967) 1
All ER 61 : [1966] 3 WLR 1280 .
794 (1967) 2 QB 493

: (1967) 1 All ER 61 : (1966) 3 WLR
1280 ; Bentworth Finance Ltd. v Lubert, (1968) l QB 680; (1967) 2 All ER 810
: (1967) 3 WLR 378 (CA).
795 Cooper v Joel, (1859) 1 De G F&J 240.
796 Het Ram v Devi Prasad, (1881) 1 All WN 2.
797 Chitty on Contracts, 28th Edn, at 1340, paras 44–079.
798 General Produce Co. v United Bank Ltd., (1979) 2 Lloyd’s Rep 255.
799 Clarke v Henty, (1838) 3 Y &C Ex 187; Boaler v Mayor,

(1865) 19 CBNS 76 .
800 Stamps Commissioner v Hope, [1891] AC 476

: [1891–94] All ER Rep 315 (PC); Barclays Bank Ltd. v
Beck, [1952] 2 QB 47 : [1952] 1 All ER 549
(CA).
801 Holme v Brunskill, (1878) 3 QBD 495

.
802 Samuell v Howarth, (1817) 3 Mer 272.
803 Polack v Everett, (1876) 1 QBD 669

.
804 Mercers Co. v New Hampshire Insurance Co., (1992) 3

All ER 57 .
Sanjay Kataria
Page 22 of 23

(CA); Polack v Everett, (1876) 1 QBD 669 (CA);
Sherry, London and County Banking Co. (Re) v Terry, (1884) 25 ChD 692 (CA);
Hurnes v Trade Credits Ltd., (1981) 2 All ER 122 :
[1981] 1 WLR 805 (PC); National Westminster Bank plc v Riley, (1986) BCLC 268
(CA); Mercers Co. v New Hampshire Insurance Co., (1992) 3 All ER 57
.
806 Seth Pratapsingh Moholalbhai v Keshavlal Harilal Setalwad,

AIR 1935 PC 21 : (1934) 62 IA 23, 25 : (1934) 59 Bom 180 : 153 IC 700.
807 Skillett v Fletcher, (1867) LR 2

CP 469; Croydon Gas Co. v Dickinson, (1876) 2 CPD 46 ; WR Simmonds Ltd.
v Meek, [1939] 2 All ER 645 ; cf Midland Motor Showrooms v Newman,
[1929] 2 KB 256 : [1929] All ER Rep 521
(CA) (contracts not severable).
808 Stewart v M’Kean, (1855) 10 Exch 675; Sanderson v Aston,

(1873) LR 8 Exch 73; National Westminster Bank plc v Riley, [1986]
BCLC 268 (CA).
809 Stewart v M’Kean, (1855) 10 Exch 675.

1932 Bom 168 : (1932) 34 BOMLR 167 .
811 City of London v New Hampshire Insurance Co. (18 January 1991, unreported),
QBD, but summarised at (1991) 3 JIBFL 144; reversed on the particular facts of the case sub nom Mercers Co. v New Hampshire Insurance
Co., [1992] 3 All ER 57 n: [1992] 1 WLR 792
n : [1992] 2 Lloyd’s Rep 365 (CA); Stewart v M’Kean, (1855) 10 Exch 675; Sanderson v Aston,
(1873) LR 8 Exch 73; National Westminster Bank plc v Riley, [1986]
BCLC 268 (CA).
812 Manulife Bank of Canada v Conlin, (1996) 3 SCP 415 (Supreme Court of
Canada).
813 Bacon v Chesney, (1816) 1 Stark 192 per Lord Ellenborough CJ at 193.
814 Mortgage Insurance Corpn. Ltd. v Pound, (1894)

64 LJQB 394 (CA); affirmed (1895) 65 LJQB 129
(HL).
815 Chatterton v Maclean, (1951) 1 All ER 761

.
816 Chatterton v Maclean, (1951) 1 All ER 761

.
Sanjay Kataria
Page 23 of 23

per Cotton and Thesiger JJ at 505; followed in Bolton v Salmon, [1891] 2 Ch
48 at 54.
818 Co-operative Bank plc v Tipper, (1996) 4 All ER

366 .
819 Creet v Seth and Seth, (1887) All WN 136.

.
821 General Steam-Navigation Co. v Rolt, (1858) 6

CBNS 550 .
822 Smith v Wood, [1929] 1 Ch 14

: (1928) All ER Rep 229 (CA).
823 Darwen and Pearce (Re), (1927) 1 Ch 176

.

: (1972) 2 All ER 393 (HL).
825 Lep Air Services Ltd. v Rolloswin Investments Ltd.,

(1971) 3 All ER 45 , at 54.
End of Document
Sanjay Kataria
[s 134] Discharge of surety by release or discharge of principal debtor.—
The surety is discharged by any contract between the creditor and the principal debtor, by which the
principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is
the discharge of the principal debtor.
Illustrations
(a) A gives a guarantee to C for goods supplied by C to B. C supplies goods to B, and afterwards B
becomes embarrassed and contracts with his creditors (including C to assign to them his property in
consideration) of their releasing him from their demands. Here B is released from his debt by the contract
with C, and A is discharged from his suretyship.
(b) A contracts with B to grow a crop of indigo on A’s land and to deliver it to B at a fixed rate, and C
guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation
of A’s land, and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B within a stipulated time, B supplying the
necessary timber. C guarantees A’s performance of the contract. B omits to supply the timber. C is
discharged from his suretyship.
Any contract between the creditor and the principal -debtor, which has the effect of releasing the
principal-debtor, or any act of the creditor which has the effect of discharging the principal-debtor,
discharge the surety.
[s 134.2] Principle
Sanjay Kataria
Page 2 of 13
A surety is discharged if the creditor, without his consent, unconditionally releases the principal-debtor;826
the reason for this principle being that the release extinguishes the principal obligation. Another basis for
this principle is that such release adversely affects the right of the surety to sue the principal-debtor,827 and
deprives the surety of his right to compel the debtor to perform his own obligation to the creditor.828
If the creditor, without the consent of the surety, by his own act destroys 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.829
It would also be a fraud on the principal-debtor for the creditor to release him from liability if the creditor
were then able to proceed against the surety, who, in his turn, might sue the principal-debtor;830 and the
release would be rendered nugatory.831
[s 134.3] Contract Causing Release of Principal-debtor
Every granting of time or accepting of additional security will not discharge the surety, unless it comes
under section 134 involving a new contract between the creditor and the principal-debtor to which the
surety is not a party.832
A was employed at Agra branch of a bank. C was a surety for A. His employment was terminated, and he
was employed afresh by his employer at another place where another person stood surety. C was thereby
discharged.833
[s 134.3.1] Implied Release
A guarantor is also discharged from liability where the release of the principal-debtor is not express, but
results as a legal consequence from some transaction. A surety is discharged if the creditor accepts a
second security in discharge of the original one,834 or substitutes a security for the personal liability of the
principal-debtor. The mere acceptance of additional security from the principal-debtor will not have the
effect of discharging the surety.835
Where a creditor, without ceasing to hold the principal-debtor liable, prefers to sue the more solvent of
two sureties for the debt, such action does not release the principal-debtor, and hence does not discharge
the other surety.836
[s 134.4] Act of Omission of the Creditor Discharging the Principal-debtor
Sanjay Kataria
Page 3 of 13
The acts or omissions contemplated by this section may be those referred to in sections 39, 53, 54, 55, 63
and 67 of the Contract Act. The facts of illustration (c) to this section are similar to those of illustration
(b) to section 54. If the principal-debtor is discharged from his obligation by reason of any acts or
omissions specified in those sections, the liability of the surety will determine. However, the act or
omission must be one of which the legal consequence is the discharge of the principal-debtor.837 The
mere omission, therefore, of a creditor, in a suit by him against a principal-debtor and a surety, to effect
service of summons on the principal-debtor, does not discharge the surety, for the principal-debtor is not
thereby discharged from liability to the creditor. The only consequence of such an omission is to enable
the Court to dismiss the suit as against the principal-debtor;838 but the plaintiff would still be at liberty to
bring a fresh suit against the surety under the provisions of that section.839 The same principle applies
where the suit against the principal-debtor has abated on his death during the pendency of the suit.840
The creditor’s act in taking over the estate of the principal-debtor discharges the principal-debtor by the
doctrine of merger, and hence discharges the surety.841 Discharge of the debtor without the consent of the
surety discharges the surety of liability, though the surety signed as a co-executant, when the creditor knew
that he was a surety.842
The liability of the principal-debtor after a decree is passed, no longer remains one under the original
contract. Therefore, a discharge after decree, of the judgment-debtor who was the principal-debtor, for
whatever reason, cannot discharge the surety of the liability.843 A compromise decree passed without the
knowledge of the surety does not necessarily discharge the surety.844
[s 134.5] Valid defences
Unless the surety has undertaken to pay the guaranteed amount in a given event,845 he is entitled to any
valid defence which the debtor may have against the claim of the creditor, viz. that the sum claimed by the
creditor is in the nature of a penalty, or that the creditor has failed to mitigate the damages, or that the
creditor has already elected to exercise a remedy inconsistent with a claim of damages.846
[s 134.6] Omission to sue the Principal-debtor within Limitation
The question, whether a surety is discharged when a creditor allowed his remedy against the principal-
debtor to become barred by limitation, gave rise to different views of the High Courts; the majority of
them holding that the surety is not in such circumstances discharged.847 This conflict arises because of the
provisions of section 137, especially the words “mere forbearance” occurring in that section. It was
conceded by the Bombay and Calcutta High Courts, that if section 134 stood alone, the omission of a
creditor to sue the principal-debtor within the period of limitation would discharge the surety under that
section, as having the legal consequence of discharging the principal-debtor; but Madras High Court relied
on the well-known distinction between the barring of the remedy by action (which is consistent with the
debtor not being discharged for other purposes) and the complete extinction of a debt. In Mahant Singh v
U Ba Yi,848 the reasoning of the majority of the High Courts has been preferred by the Privy Council and
the point, therefore, may now be regarded as settled; and a surety is not discharged for this reason, unless
Sanjay Kataria
Page 4 of 13
there is a specific term to that effect in the security bond. In Bombay Dyeing & Mfg Co. Ltd. v State of
Bombay,849 the Supreme Court has also held that a creditor is entitled to recover the debt from the surety,
even though the suit against the principal-debtor is time-barred.
The Law Commission of India recommended adding an explanation adopting the view of the Privy
Council in Mahant Singh v U Ba Yi,850 to clarify the position.851
[s 134.7] No Discharge
[s 134.7.1] Express Terms
Where the guarantee contains provisions preserving the liability of the surety, giving the creditor the right
to allow discharge or release of the principal-debtor, the surety may not be discharged.852
Waiver of rights by the surety has been discussed in section 133 above under heading: “Contracting Out
and Waiver of Rights”.
[s 134.7.2] Reservation of Right by Creditor
If the creditor, while giving up his claim against the principal-debtor,853 expressly, reserves his remedies
against the surety, or generally his securities and remedies against the persons other than the principal-
debtor, the surety is not discharged,854 whether the creditor has done so with or without his consent or
knowledge. “Where the principal has entered into a deed of arrangement containing a release, subject to
the reservation of the creditor’s rights of recourse against the surety, the latter has no right to raise
objection.”855 The principle of the English law that discharge of principal-debtor will not affect the right
of suit against sureties where there is a reservation to proceed against them, is applicable in India, and it is
really quite consistent with the terms of the present section.856 The reason of the doctrine is that a
nominal release of the debtor, subject to a reservation of securities, is not a release destroying the debt,
but operates only as a covenant not to sue the principal-debtor; who remains, however, liable to
indemnify the surety.857 The surety’s right to indemnity against the principal-debtor is a necessary result of
such a reservation.858
In Annadana Jadaya Goundar v Konammal,859 it was stated:
If a creditor agrees to discharge a principal-debtor, it would be breach of agreement against the surety for the latter would in his turn
enforce his remedy against the principal-debtor, and thus the creditor’s agreement to discharge the principal-debtor would be rendered
inoperative; but if the very agreement to discharge the principal-debtor contains a reservation of rights against the surety, the agreement
cannot operate as an absolute release, for the obvious reason that the principal-debtor has notice that the creditor’s remedies against the
surety are preserved and the latter’s right of recourse against him is not extinguished.860 ...If it is made a condition of the agreement that
Sanjay Kataria
Page 5 of 13
the rights of the creditor to sue or receive money from the surety are reserved...the principal takes the indulgence upon the footing that
he must continue exposed to a claim at the instance of the surety, ...the principal-debtor knows that he is still exposed to a suit at the
will of the surety.
But if there is an absolute and unconditional release, the remedy against the surety is gone because the
debt is extinguished.861
[s 134.7.3] Relief to the Principal-Debtor on Account of Debt-Relief
Section 134 would not apply where the release or discharge is not caused at the instance of or by any act
of the creditor. Where a decree was obtained against the principal-debtor and a surety, and thereafter the
principal-debtor applied to a Debt Conciliation Board, which discharged him from the debt on failure of
the decree-holder to prove his debt, the surety was not discharged, but became liable as a judgment-
debtor.862 However, where no decree had been passed, or the surety had been provided after the decree,
the surety was discharged under section 134 if the principal-debtor applied to a Debt Conciliation Board,
and the creditor failed to prove his debt, or declared that he would recover the debt from the surety, and
not from the principal-debtor.863 The fact, that the debtor is discharged under section 4(b) of the Tamil
Nadu Relief Undertaking Act, would also not discharge the liability of the surety when it gives relief to the
principal-debtor.864 Nor does a discharge, which the principal-debtor may secure by operation of law, in
bankruptcy (or in liquidation proceedings in the case of a company), absolve the surety of his liability.865
The Law Commission of India was inclined to accept the view of the earlier editors of this book, and that
of the Madras High Court,866 that where the creditor proved his debt but the debt was scaled down under
the Debt Relief Acts, the surety was liable only for the reduced amount.867
[s 134.7.4] Guarantee not Given to the Creditor
Section 134 presupposes the existence of a contract of guarantee to which the creditor and the surety, if
not also the debtor, are parties. The liability of the surety arises from an undertaking given by him to the
creditor in consideration of something done by the latter. Hence, where there are no contracts between
the sureties and creditor, and the security bonds are executed by the sureties at the instance of the debtor
and in pursuance of the orders of the Court granting a stay, the creditors are not a party to the contract of
guarantee though empowered under the security bonds to enforce,868 and the surety is not discharged. If
the Court is not responsible for the changed situation—for instance there is a compromise or consent
decree—it is a question of construction of the surety’s contract whether liability was to be limited to a
decree for the creditor based upon the merits after a contest.869
[s 134.8] Effect of such Contract, Act or Omission
Such a contract, act or omission discharges the surety with effect from the release or discharge of the
principal-debtor.
Sanjay Kataria
Page 6 of 13
Where there is a final and full release of the principal-debtor by a complete novation or otherwise, “the
remedy against the surety is gone because the debt is extinguished, and where such actual release is given
no right can be reserved because the debt is satisfied, and no right of recourse remains when the debt is
gone.” Acceptance of a new debtor instead of the old one puts an end to the liability of a surety for old
debt.870 A surety for payment of instalments under a hire-purchase agreement was discharged when the
creditor seized the goods before having recourse to the principal-debtor, and thereby determined the
agreement.871
Where a bailee is discharged from performance because the goods were stolen from his possession, but
without negligence on his part, his surety is discharged;872 unless the surety had agreed to be liable for loss
of goods by any means, and not merely default of the bailee in his obligations.
Where a surety has guaranteed payment of a sum due from the debtor under an entire or lump sum
contract, and the creditor is unable to sue the debtor, there being no completed performance, and the
surety is not liable under the guarantee.873 A breach by the creditor of the terms of the principal contract
will not discharge the guarantor, unless it is a repudiatory breach.874
If the creditor commits breach of contract as against the debtor, and as a result debtor is discharged, a
surety cannot be liable any more than the debtor.875 A repudiatory breach of contract by the creditor once
accepted by the debtor discharges both the debtor and the guarantor, while a non-repudiatory breach will
not discharge the guarantor, unless it involves a non-substantial departure from a term of the principal
contract which has been itself “embodied” into the guarantee.876 If such a departure is established, then
discharge occurs on the ground of variation of surety’s obligations.877 But by accepting wrongful
repudiation of liability of principal-debtor, a guarantee is not discharged from existing liability even
though the debt becomes liability for damages; and acceptance of repudiation could not be treated as a
variation of terms of conduct.878
But in McDonald v Dennys Lascelles Ltd.,879 R agreed to purchase certain land from A, himself a purchaser
under a contract of sale. A assigned his rights to D but R made default in payment of an instalment of
purchase money. M guaranteed payment of the instalment in consideration of time for payment given to
R. When it appeared to R that the vendor would be unable to complete the contract, he repudiated the
contract, which was accepted by the vendor. D brought an action for the recovery of the instalment
guaranteed by M. But the action failed because the unpaid instalment ceased to be payable by the
purchasers when the contract was discharged, and, therefore, the purchasers ceased to be liable for the
instalment guaranteed. The guarantor was discharged on the terms of the guarantee.
A surety may claim a right by way of set-off of the amount which the debtor is entitled as a counter-claim
from the creditor, where breach by the creditor does not discharge the debtor.880
Sanjay Kataria
Page 7 of 13
However, where the principal-debtor has committed repudiatory breach of the principal contract, and the
creditor has accepted it, the surety is not discharged although it has the effect of discharging the principal-
debtor from his primary obligation, further to perform the principal contract. This is because the primary
obligation is substituted by a secondary obligation upon the principal-debtor to pay to the creditor
compensation for the loss sustained by the creditor due to the failure to perform the primary obligation.881
It is also thought in England that omission of the creditor to sue within the period of limitation does not
discharge a surety for another and more substantial reason that “the surety can himself set the law in
operation against the debtor”.882
The surety is also not discharged where he agrees with the creditor for continuation of liability, before the
release of the debtor by the creditor.883
In Perry v National Provincial Bank of England,884 the surety had executed mortgages to a bank to secure the
overdraft of a firm which composed of his own two sons. Each deed contained a declaration that the
bank might “without affecting their rights herein” compound or make arrangements with the debtors.
Under a scheme of arrangement made by the debtors with their creditors, including the bank, the
mortgage security was released only for a certain portion of the debt as to which was an express and
complete substitution of a new security. Holding that if the surety has, by the agreement, given liberty to
the creditor to release the principal-debtor, wholly or in part, without affecting his liability, he is not
discharged thereby. It was observed:
Where the whole debt has not been discharged, but the debt as to part remains undischarged, but the principal-debtor cannot be
pursued by the creditor for the balance, the surety may by apt words be left liable although the principal-debtor has as regards such
balance been released as between himself and the creditor.
If the creditor, while giving up his claim against the principal-debtor, expressly, reserves his remedies
against the surety, or generally his securities and remedies against the persons other than the principal-
debtor, the surety is not discharged, whether the creditor has done so with or without his consent or
knowledge.885
826 Mahant Singh v U Ba Yi, AIR 1939 PC 110

: (1939) 66 IA 198 :
(1939) 41 Bom LR 742 : 181 IC 1; Commercial Bank of Tasmania v Jones,
[1893] AC 313 : [1891–94] All ER Rep Ext 1652
(PC); Perry v National Provincial Bank of England, [1910] 1 Ch 464 (CA).
Sanjay Kataria
Page 8 of 13
827 Supra, AIR 1939 PC 110

: (1939) 66 IA 198 : (1939)
41 Bom LR 742 : 181 IC 1; Holme v Brunskill, (1878) 3 QBD 495
per Cotton LJ at 505 (CA); cf Polack v Everett, (1876) 1 QBD 669
per Blackburn J at 674 (CA).

, at 348 per Lord Diplock : (1972) 2 All ER 393 , at 401
(HL).
829 Cragoe v Jones, (1873) LR 8

Ex 81, at 82 per Kelly CB.
830 Nellore Co-op. Urban Bank Ltd. v Akili Mallikarjunayya,

AIR 1948 Mad 252 : (1948) Mad 707 (discharge of principal-debtor does not affect his
liability to the surety).
831 Natal Investment Co. (Re), Nevill’s case, (1870) 6 Ch App 43 per Mellish LJ at
47; AIR 1939 PC 110 : (1939) 66 IA 198
: (1939) 41 Bom LR 742 : 181 IC 1.
832 Ushadevi Malhotra v Bhagwandas Tiwari, AIR

1967 MP 250 ; T Subramania Aiyar v Shaw Wallace & Co., AIR 1920 Mad
259 .
833 Bishal Chand Jain v Chatlur Sen, AIR 1967 All 506
.
834 Ishar Singh v Ram Saran Das, AIR 1958

P&H 337 (on facts, acceptance of surety bond of another held released the first surety).
835 Ushadevi Malhotra v Bhagwandas Tiwari,

AIR 1967 MP 250 .
836 Bhagvandas Rangildas Vani v Secy. of State for India,

AIR 1926 Bom 465 ; United Bank of India v Modern Stores (India) Ltd.,
AIR 1988 Cal 18 , at 24.

.
838 The Code of Civil Procedure, 1908, Order IX, rule 5; Shaik Alli v Mahommad,
(1889–90) ILR 13 –14 Bom 637 : (1889) 14 Bom 267.
839 Supra, AIR 1939 PC 110

: (1939) 66 IA 198 : (1939)
41 Bom LR 742 : 181 IC 1; Nathabhai Tricamlal v Ranchodlal Ramji, AIR
1914 Bom 242 : (1915) 39 Bom 52 : 27 IC 165; Kanahai Missir v Sukananan,
AIR 1937 Rang 72 : (1937) 14 Rang 594 : 168 IC 815; Firm Ayili Mallappa Sanna v Parasetti Sidramappa,
AIR 1937 Mad 501 : (1937) 1 Mad LJ 469 : 169 IC 679.
Sanjay Kataria
Page 9 of 13
840 Nur Din v Allah Ditta, AIR 1932 Lah 419

: (1932) 13 Lah 817 : 138 IC 305; but see Nur Din v Allah Ditta, AIR
1928 Lah 246 (legal heirs of deceased principal-debtor were held discharged because creditor had no
remedy against them upon abatement of suit after death of principal-debtor); Ram Saran v Bindeshri, AIR
1920 Oudh 75 ; T Raju Shetty v Bank of Baroda, AIR 1992 Kant 108
(suit abates against principal-debtor, abates also against the surety); Syndicate Bank v Pamidi Somaiah,
AIR 2002 AP 12 (suit against surety abates if legal representatives of principal debtor are
not brought on record in time); referring to Sri Chand v Jagdish Pershad Kishan Chand, AIR 1966 SC 1427
(a case in which appeal of three co-sureties had abated upon death of one of them); Vinod v Shri Ram
Chit Funds P Ltd, 2017 SCC Online Bom 8161 .
841 Jekkannu Sami Iyer v Mutukumara Ramaswami Chettiar,

AIR 1923 Mad 340 .
842 Maung Sein v Ma Saw, AIR 1924 Rang

360 .
843 Velappa Kumar v Kosamattom Chit Fund 1978

Ker LT 10 ; Nellore Co-op. Urban Bank Ltd. v Akili Mallikarjunayya, AIR
1948 Mad 252 : (1948) Mad 707,; Charan Singh v Security Finance Pvt. Ltd., AIR
1988 Del 130 , at 133.
844 Mohan Lal v Suraj Mani, AIR 1973 J&K 92

; overruling Sardar Kahn Singh v Tek Chand Nanda, AIR 1968 J&K 93
. See also section 128 for more details under heading: “Liability under Surety Bonds Given to Court”.
845 Maharashtra Slate Electricity Board v Official Liquidator,

AIR 1982 SC 1497 ; Vinay Engg. v Neyyeli Lignite Corpn. Ltd., AIR 1985 Mad
213 .
846 Chitty on Contracts, 28th Edn, vol 2, at 1338, para 44–075.
847 Sankana Kalana v Virupakshapa Ganeshapa, (1883) 7 Bom 146; Krishto Kishori
Chowdhrain v Radha Romun Munshi, (1885) 12 Cal 330 ; Subramania Aiyar v
Gopala Aiyar, (1909) 33 Mad 308 : 7 IC 898; Dil Mahommad v Sain Das, AIR 1927 Lah 396
: 100 IC 922; Narain Das v Nenu, AIR 1929 Ngp 145 : 116 IC
421 (agreeing with the views expressed in this work); U Ba Pe v Ma Lay, AIR 1932 Rang 88
: (1932) 10 Rang 398 : 139 IC 138; Bharat National Bank Ltd. v Thakar Das Madhok,
AIR 1935 Lah 729 : (1935) 16 Lah 757; Hazari v Chunni Lal, (1886) 8 All 259
(creditor’s action barred because of express time limit in the surety bond).

: (1939) 66 IA 198 :
(1939) 41 Bom LR 742 : 181 IC 1.
849 Bombay Dyeing & Mfg Co. Ltd. v State of Bombay,

AIR 1958 SC 328 : [1958] SCR 1122 at 1135;
Mahant Singh v U Ba Yi, AIR 1939 PC 110 :
(1939) 66 IA 198 : (1939) 41 Bom LR 742 : 181 IC
1; Subramania Aiyar v Gopala Aiyar, (1909) 33 Mad 308 : 7 IC 898; Dil Mahommad v Sain Das, AIR 1927 Lah 396
: 100 IC 922; Aziz Ahmad v Sher Ali, AIR 1956 All 8
; overruling Radha v Kinlock, (1889) 11 All 310 ; Ranjit Singh v Naubat,
(1902) 24 All 504 ; Salig Ram Misir v Lachhman Das,
AIR 1928 All 46 : (1927) 50 All 211 : 107 IC
42; Anand Singh v Collector of Bijnor, AIR 1932 All 610 : (1932) All LJ 868;
Dass Bank v Kali Kumari Debi, AIR 1958 Cal 530 : 62 Cal WN 493; Mohd
Sanjay Kataria
Page 10 of 13
Sultanuddin v Mohd Dastagir, AIR 1960 AP 210 ; Punjab National Bank v

Surendra Prasad Sinha, AIR 1992 SC 1815 :
(1993) Supp (1) SCC 499 (Bank can recover time-barred loan from the Fixed Deposits pledged by the
surety with it).

: (1939) 66 IA 198 :
(1939) 41 Bom LR 742 : 181 IC 1.
851 The 13th Report of the Law Commission of India 1958, para 108
recommending adding an explanation to the section as follows:
Explanation.—For the purposes of this section, the following do not amount to acts or omissions the
legal consequence of which is discharge of the principal-debtor:
(i) mere failure to sue the principal-debtor within the time specified by any law relating to limitation for the time being in force;
(ii) inability to sue the principal-debtor, arising by reason of any provision contained in any of the Orders in the First Schedule to the
Code of Civil Procedure, 1908 (5 of 1908).
852 P Murugappa Mudaliar v Munuswami Mudali,

AIR 1920 Mad 216 : (1919) 38 Mad LJ 131 : 54 IC 758; Jawala Singh v Raj Kaur,
AIR 1930 Lah 812 ; Annadana Jadaya Goundar v Konammal,
AIR 1933 Mad 309 : (1933) 56 Mad 625 : 141 IC 852; Meenakshisundaram Chettiar v Velambal Ammal,
AIR 1944 Mad 423 ; Perry v National Provincial Bank of England,
[1910] 1 Ch 464 .
853 Jawala Singh v Raj Kaur, AIR 1930

Lah 812 .
854 P Murugappa Mudaliar v Munuswami Mudali,

AIR 1920 Mad 216 : (1919) 38 Mad LJ 131 : 54 IC 758; supra,
AIR 1930 Lah 812 ; Annadana Jadaya Goundar v Konammal,
AIR 1933 Mad 309 : (1933) 56 Mad 625 : 141 IC 852; Mahant Singh v U Ba Yi,
AIR 1939 PC 110 : (1939) 66 IA 198
: (1939) 41 Bom LR 742 : 181 IC 1 (giving time or agreement
not to sue); Abdul Rahiman v Deputy Tahsildar, Kerala State Financial Enterprises Limited, (2001) 107 COMP CASES 306 : (2001) 2 KLT (SN
38) 34; Kearsley v Cole, (1846) 16 M&W 128 at 135; Bateson v Gosling, (1871) LR 7
CP 9; Cole v Lynn, [1942] 1 KB 142 :
[1941] 3 All ER 502 .
855 Supra, (1871) LR 7

CP 9 at 13 per Willes J; quoted with approval in P Murugappa Mudaliar v Munuswami Mudali,
AIR 1920 Mad 216 : (1919) 38 Mad LJ 131 : 54 IC 758.
856 Supra, AIR 1920 Mad 216

: (1919) 38 Mad LJ 131 : 54 IC 758.
857 Bateson v Gosling, (1871) LR 7

CP 9; Green v Wynn, (1869) LR 4 Ch 204;
following Webb v Hewitt, (1857) 3 K&J 438 at 442; AIR 1920 Mad 216 : (1919)
38 Mad LJ 131 : 54 IC 758.
Sanjay Kataria
Page 11 of 13
858 Supra, (1853) 4 De GM&G 176 at 185; affirmed in Cole v Lynn,

[1942] 1 KB 142 : [1941] 3 All ER 502
(CA); United Bank of India v Modern Stores (India) Ltd., AIR 1988 Cal 18
, at 24.
859 Annadana Jadaya Goundar v Konammal,

AIR 1933 Mad 309 at 311 : (1933) 56 Mad 625 : 141 IC 852.
860 Rowlatt on Principal and Surety, second Edn, at 260.
861 Supra, AIR 1920 Mad 216

at 217 : (1919) 38 Mad LJ 131 : 54 IC 758; Mahant Singh v U Ba Yi, AIR 1939 PC 110
at 111 : (1939) 66 IA 198 :
(1939) 41 Bom LR 742 : 181 IC 1.
862 Nellore Co-op. Urban Bank Ltd. v Akili Mallikarjunayya,

AIR 1948 Mad 252 ; following a Debtor (Re) v Petitioning Creditor and Official Receiver,
[1913] 3 KB 11 : [1911–13] All ER Rep
659 .
863 Babu Rao Ramchandra Rao v Babu Manaklal Nehrmal,

AIR 1938 Ngp 413 : (1939) Ngp 175 : 176 IC 686.
864 Gopilal J Nichani v Trac Inds and Components,

AIR 1978 Mad 134 ; relying on Ramachandra B Loyolka v Shapurji N Bhownagree,
AIR 1940 Bom 315 : (1940) Bom 552 : 192 IC 375; distinguishing ALSPPL Subramania
Chettiar v Moniam P Narayanswami Gounder, AIR 1951 Mad 48 (FB);
Maharashtra State Electricity Board v Official Liquidator, AIR 1982 SC 1497 .

AIR 1982 SC 1497 , at 1500; United Bank of India v Modern Stores (India) Ltd.,
AIR 1988 Cal 18 , at 24; Kanchanlal Chandulal Parikh v Bank of India,
AIR 1988 Bom 40 , at 45. See also section 128 above under heading: “Statutory
Reduction or Extinguishment of Liability.”
866 ALSP PL Subramania Chettiar v Moniam P Narayanaswami Gounder,

AIR 1951 Mad 48 .
867 The 13th Report of the Law Commission of India, 1958; but the
Commission did not consider it necessary to amend this section for this purpose.
868 B Jang Bahadur Singh v Basdeo Singh,

AIR 1936 All 549 .
869 In the following cases the surety was held to be discharged: Mahomedalli
Ibrahimji v Lakshmibai Anant Palande, AIR 1930 Bom 122 : (1929) 54 Bom
118 : 124 IC 227; Narsingh Mahton v Nirpat Singh, AIR 1932 Pat 313 : (1932)
11 Pat 590 : 140 IC 564; Mahommad Yusaf v Ram Govinda Ojha, AIR 1928 Cal 177
(2) : (1927) 55 Cal 91 . In the following the surety was not discharged:
Odayamangalath Appani Nair v Isaak Mackadan, AIR 1920 Mad 355 : (1920)
43 Mad 272 : 53 IC 367; Haji Ahmed Karim v Maruti Ravji Bhongale, AIR 1931 Bom 55
Sanjay Kataria
Page 12 of 13
: (1931) 55 Bom 97 : 32 Bom LR 1394 : 128 IC 903; Madanlal Motilal v Radhakisan Laxminarain,
AIR 1935 Ngp 258 : (1935–36) 31 Ngp 83 (supp).
870 Commercial Bank of Tasmania v Jones, (1893)

AC 313 , at 316 : (1891–94) All ER Rep Ext 1652
.
871 Hewison v Ricketts, (1894) 63 LJQB 711

; Midland Motor Showrooms v Newman, [1929] 2 KB 256 :
(1929) All ER Rep 521 (CA); Unity Finance Ltd. v Woodcock,
(1963) 2 All ER 270 : [1963] 1 WLR 455 .
872 Walker v British Guarantee Assn, (1852) 18 QB 277

.
873 Eshelby v Federated European Bank Ltd., [1932] 1

KB 423 at 431 : (1931) All ER Rep 840 .
874 National Westminster Bank plc v Riley, (1986)

BCLC 268 , at 275–276 (CA); Wardens and Commonality of the Mistery of Mercers of the City of London v New
Hampshire Insurance Co., (1992) 2 Lloyd’s Rep 365 (CA).
875 Watts v Shuttleworth, (1861) 7 H&N 353.
876 National Westminster Bank plc v Riley supra.
877 Chitty on Contracts, 28th Edn, at 1338, paras 44–075; citing National
Westminster Bank plc v Riley, (1986) BCLC 268 , at 275–276.
878 Lep Air Services Ltd. v Rolloswin Investments Ltd.,

(1971) 3 All ER 45 at 50, 52, 54.
879 McDonald v Dennys Lascelles Ltd., (1933)

48 CLR 457 .
880 Bechervaise v Lewis, (1872) LR 7

CP 372; Wilson v Mitchell, [1939] 2 KB 869 :
(1939) 2 All ER 869 .

: (1972) 2 All ER 393 (HL).
882 Carter v White, (1883) 25 Ch 666

: (1881–85) All ER Rep 921 per Lindley LJ at 672.
883 Davidson v McGregor, (1841) 8 M&W 755.
Sanjay Kataria
Page 13 of 13
884 Perry v National Provincial Bank of England, (1910) 1

Ch 464 , at 478 per Buckley LJ; distinguishing Commercial Bank of Tasmania v Jones,
[1893] AC 313 at 316 : (1891–94) All ER Rep Ext 1652
.
885 Supra, (1846) 16 M&W 128 at 135 per Parke B; Webb v Hewitt, (1857) 3
K&J 438; Renton (Re), ex p Glendinning, (1819) Buck 517; Boaler v Mayor, (1865) 19 CBNS 76
; Close v Close, (1853) 4 De GM&G 176; Owen and Gutch v Homan, (1853) 4 HL Cas 997; Wyke v Rogers, (1852) 1 De GM&G
408; Bateson v Gosling, (1871) LR 7 CP 9, at 13 per Willes J.
End of Document
Sanjay Kataria
[s 135] Discharge of surety when creditor compounds with, gives time to, or agrees
not to sue, principal-debtor.—
[s 135] Discharge of surety when creditor compounds with, gives time to, or agrees not
to sue, principal-debtor.—
A contract between the creditor and the principal debtor, by which the creditor makes 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.
If the creditor, by a contract with a principal-debtor, makes composition with him, or promises to give
him time, or not to sue him, discharges the surety, unless he has assented to such contract.
[s 135.2] Principle
The idea behind the section is that where the creditor does something behind the back of the surety, and
does it to his prejudice, by advancing facilities to the principal-debtor, which are likely to harm the surety,
the surety is not bound by his undertaking.886 This section is attracted when:
Sanjay Kataria
Page 2 of 15
[s 135] Discharge of surety when creditor compounds with, gives time to, or agrees not to sue, principal-debtor.—
(i) a contract between the creditor and principal-debtor;

(ii) giving time to the principal-debtor;
(iii) was made without the surety’s consent.
On these three elements being satisfied, the surety stands discharged.887
The effect of such an agreement granting time is to prevent the surety from either requiring the creditor
to call upon the principal debtor to pay off the debt or himself paying off the debt and then suing the
principal debtor, thereby causing prejudice to the surety.888 Where after the decree, the judgment debtor is
given time to make payment in instalments, this section has no applicability, for, after the decree, what is
enforced, is not the contract, but it is the decree and any benefit given to the judgment debtor ought to be
taken only as legally permissible so long as it is not against public policy or against terms of any law.889
[s 135.3] Composition with Debtor
The surety is not discharged by the creditor’s innocent acceptance from the principal-debtor of a payment
which is, in fact, a fraudulent preference.890 The mere fact of striking a balance between the creditor and
the principal-debtor, so as to decide what is due, was held not to discharge the surety.891 Filing a suit by
the creditor against the principal-debtor and obtaining a decree for the full amount, does not amount, to
“composition”, resulting in discharge of liability of the surety, even though it is a consent decree.892
Deleting the original borrower from the proceeding would amount to not suing the principal debtor
resulting in discharge of surety.893
[s 135.3.1] Composition in Compromise Decree
The question whether a surety is discharged of his bond on a decree passed on compromise and not by
the decision of the Court on merits in invitum depends on the terms of the bond, and if the bond shows
that it is not applicable to a decree on an amicable settlement, the surety will be discharged.894 If the
parties contemplated that there might be an amicable settlement and a decree thereon and the surety
executed the bond with that knowledge, the surety will be liable.895 A compromise decree without the
consent of the surety will not discharge his liability, although the giving of time may have that effect.896 A
surety giving a surety bond for whatever decree is passed in a suit is not ipso facto discharged by a
compromise decree between the creditor and the principal-debtor, unless there is fraud or collusion, or
unless the surety is prejudiced thereby;897 but the surety is not discharged if the order of the Court was
made in spite of opposition of the creditor, or if the surety also had consented.898
Sanjay Kataria
Page 3 of 15
A surety bond made the surety liable if the decree appealed to the Privy Council was reversed or varied.
The Privy Council remitted the matter to the trial Court for assessment of the amount due to the creditor.
The parties compromised the matter, the property in dispute was given to the creditors, and the dispute
was thus settled. The decree was not immediately executable, gave to the principal-debtor time, and also
covered a matter extraneous to the judicial proceedings. The surety bond was held to be discharged.899
The scheme submitted by the Principal debtor under Section 391 and 394 of the Companies Act, 1956 and
accepted by court amounts to compounding with the principal debtor leading to the discharge of the
surety.900 However, the binding obligation under a composition in terms of section 391 of the Companies Act,
1956 (repealed by Companies Act,2013) was held to not affect the liability of the surety unless the contract
of suretyship otherwise provided.901
[s 135.4] No Discharge where Person is not a Surety
Where, on its true construction, the contract is one of indemnity, and not of guarantee, the creditor can
compromise without the consent of the indemnifier. Thus, in a sub-brokerage contract on behalf of a
broker to introduce constituents, the sub-broker can compromise without the broker’s consent.902 Nor
can a person executing a promissory note, making himself jointly and severally liable, claim benefit of this
section, unless he brings himself within the definition of surety under this section.903
This section does not apply to a surety who has executed a bond in favour of the Court. A contract of
guarantee postulates the existence of the surety, the principal debtor and the creditor, and this
requirement is not satisfied in the case or 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 not.904
[s 135.5] Contract to give Time to Principal-debtor
Where a creditor, without the consent of the surety, contracts with the principal debtor to extend time for
the payment of debt, the surety is discharged,905 unless the surety consents to such extension, or the
creditor has expressly reserved his rights against the surety. The principal basis for such a provision is that
the surety’s right, at any time, to require the creditor to call upon the principal-debtor to pay off the
guaranteed debt, or himself to pay the debt and then to sue the principal-debtor in the name of the
creditor, is thereby interfered with.906 “Its effect is to alter prejudicially his position by tying the creditor’s
hands from receiving payment from the guarantor and so enabling the guarantor to sue the principal-
debtor.”907
[s 135.5.1] Binding Contract to Give Time
Sanjay Kataria
Page 4 of 15
The words “promises to give time” do not mean mere forbearance to sue, but entering into a binding
agreement by which a creditor precludes himself from suing within a certain time;908 what really
constitutes giving of time is the extension of the period at which, by the contract between them, the
principal debtor was originally obliged to pay the creditor by substituting a new and valid contract
between them to which the surety does not assent.909 The agreement, giving time, must be really binding
and capable of enforcement,910 for valuable consideration, made with the principal-debtor,911 and must
actually give time.912 A surety will be discharged only by a subsequent contract between the creditor and
the principal-debtor, whereby time originally given has been subsequently extended.913 Mere delay in
recalling loan or filing of suit after defaults are committed cannot be considered as promise to give time.914
The making of a new and valid contract, to which the guarantor does not assent, between the creditor and
the principal-debtor which extends the period at which, by the original contract between them, the
principal-debtor was obliged to pay the creditor, amounts to a giving of time.915 Thus, an agreement that if
the creditor forbears to require due repayment of a loan the debtor will thereafter pay a higher rate of
interest was not an agreement to give time, since the creditor retained the option as to whether he would
require such repayment.916 The act of giving time to the borrowers to make up the quantity of the goods
pledged to the bank found short on weight by the bank could not be considered as a “promise to give
time” in a contract with the bank where the borrowers were to be responsible for the quantity and quality
of goods pledged, and also for the correctness of the statements and returns furnished to the bank.917 As
it is not necessary that the contract should be express: a tacit or implied contract inferred from the acts of
the parties is equally binding as an express one, the acceptance of interest in advance by a creditor
operates as a general rule as an agreement to give time to the principal-debtor and consequently as a
discharge to the surety; for the creditor is in that event precluded from suing the principal until the time
covered by the payment in advance has expired.918
[s 135.5.2] Prejudice to Surety Not Necessary
What really constitutes giving of time is the extension of the period at which, by the contract between
them, the principal-debtor was obliged to pay the creditor, by substituting a new and valid contract
between the creditor and the principal-debtor, to which the surety does not assent.919 A mere taking of
additional security, unless accompanied by an express or implied contract to give time,920 or an
acknowledgment by the principal-debtor921 will not affect the surety’s liability. A nominal giving of time
may have the effect, in substance, of accelerating the creditor’s remedy, as where, having commenced an
action against the principal-debtor, the creditor took a recorded acknowledgement of the debt, and
undertook not to enforce it before a certain day, which, however, was earlier than the time at which he
could have obtained judgment in the action in the ordinary course. In such a case, the surety, being
manifestly not prejudiced, is not discharged.922
[s 135.5.3] Compromise Decrees Giving or Extending Time
Sanjay Kataria
Page 5 of 15
The mere compromise between the creditor and the principal-debtor in execution proceedings by which
the decretal amount was to be paid by instalments, did not discharge the surety, even if the compromise
was without the surety’s knowledge, since its tenor was within the contemplation of the parties as shown
by the terms of the surety bond;923 it was for the surety to prove that the recitals in the surety bond
specifically excluded—either expressly or impliedly—the passing of a consent decree.924 However, where
a bank had obtained a decree against the principal-debtor and the surety, and in execution proceedings
granted instalments to the principal-debtor, the legal representative of the original surety not being a party
thereto, the surety was discharged. It was observed that right of surety under sections 140 and 141
continued even after the decree was passed, and the relationship between him and the principal-debtor
continued as principal-debtor and the surety.925 So also, a surety bond given to raise an attachment raised,
though outside the purview of the provisions relating to guarantees under Contract Act, under its
principles, the surety was discharged when without the consent of the surety, a compromise decree was
passed giving the principal-debtor nine months to pay.926 It was also held that the principle of giving of
time did not presuppose that time must be stipulated in the original contract, which was enlarged.927 But
where, after the suit was decreed, the execution was stayed on the judgment-debtor furnishing security as
a condition precedent, a surety for a sum which may be decreed, was not discharged.928
[s 135.6] Promise not to Sue
A contract, whereby the creditor promises to give time to the principal-debtor, must be distinguished
from an unconditional contract not to sue him. In the former case, the remedy of the creditor is merely
suspended, until the determination of the fixed period. In the latter case, the principal-debtor is
completely released from his obligation so as to entitle the surety to a discharge under section 134, apart
from the specific provisions of this section. In either case, the mere formation of the contract is sufficient
to operate as a discharge of the surety, irrespective of any forbearance that may be exercised under it. The
reason of this rule appears to be that a surety has a right, immediately on the debt becoming due, to insist
upon proceedings being at once taken by the creditor against the principal-debtor, and any contract that
would prevent the creditor from suing him would be inconsistent with that right.929 But the contract must
be a binding one supported by consideration; forbearance to sue, therefore, exercised in pursuance of an
agreement without consideration, would not discharge the surety as it does not amount to anything more
than “mere forbearance” within the meaning of section 137.930 A consent decree, made without the
surety’s consent, for payment by instalments, of the sum due from the principal-debtor discharges the
surety,931 unless such compromise was within the contemplation of parties.
[s 135.7] Assent of Surety
The operation of the rule, as to giving time to the principal-debtor may be excluded by express
agreement.932 If the instrument creating the debt and the suretyship declares that the surety or sureties
shall be taken, as between themselves and the creditor, to be principal-debtors, and shall not be released
by reason of time being given, or of any other forbearance, act, or omission of the creditor which, but for
this provision, would discharge the sureties, then any defence on these grounds is effectually barred, and it
Sanjay Kataria
Page 6 of 15
is unnecessary to consider whether the facts would otherwise raise it.933
However, the surety will not be discharged, if he consents to the contract. Such consent may be a general
one, and it has been held by the Privy Council that a stipulation between a creditor, principal-debtor, and
a surety that the surety should not be released by any dealings between the creditor and the principal-
debtor, followed by a contract to give time to the principal-debtor, does not discharge the surety.934 The
assent of the surety may be obtained before the alteration of terms, or obtained subsequently by way of
ratification;935 a surety will not be discharged where he has acquiesced in the giving of time to the
debtor.936 The assent may have been given by an agent authorised or authority subsequently ratified.937
Thus, where the surety had guaranteed the payment of a fixed sum by the principal-debtor, and had
agreed as regards instalments and their due dates, that he would abide by the decision of the creditor, the
surety was not discharged when the creditor extended the time for payment of instalments without
reference to him.938 A provision, in a deed of guarantee, allowing the creditor to give time or other
indulgence to the principal-debtor does not include the giving of time, coupled with material variation in
the rate of interest.939 An express agreement to the effect that indulgence given to the principal-debtor will
not affect the surety’s liability does not discharge the contract of guarantee.940 The assent given by the
surety can be implied based on the factual circumstances and the conduct of the parties.941
[s 135.7.1] Reservation of Right by Creditor
A creditor may reserve his rights by notifying the debtor that he does so, and this reservation is effective
not only where the time of payment is postponed, but even where the creditor has entered into an
agreement not to sue the debtor.942
[s 135.8] Composition or Promise given by Person other than the Creditor
In an ordinary surety bond under section 55(4) of the Code of Civil Procedure, the principal creditor is not the
decree-holder, but the Court, and it is really in the discretion of the Court to enforce the bond or not.943
Sections 133, 135 and 139 cannot, in terms, apply to transactions where the bond is given to the Court in
view of the fact that there is no creditor as required by section 126,944 but the equitable principles
underlying these sections can be applied,945 and if the Court to which the security has been given has itself
been responsible for varying the terms, the surety is justified in applying to the Court to be relieved, and
the Court will exonerate him if his position has been materially affected.946 If the Court is not responsible
for the changed situation, for instance there is a compromise or consent decree, it is a question of
construction of the surety’s contract whether liability was to be limited to a decree for the creditor based
upon the merits after a contest;947 and therefore whether the surety is discharged948 or not.949 If the effect
of the compromise is to give time to the principal-debtor, the surety is discharged, unless he consented.950
Giving time to the principal-debtor discharges the surety under section 135 if the time is given without the
Sanjay Kataria
Page 7 of 15
assent of the sureties.951 In Bharat Nidhi Ltd. v Bhagwandas Mehra,952 a consent decree was passed against the
principal-debtor, by which he agreed to pay Rs. 20,000/- out of the claim for Rs. 22,000/- odd, and the
creditor gave two years’ time to the principal-debtor to pay, on the condition that if the amount was so
paid, the creditor will not be entitled to cost. There was extension of time, without the assent of the
sureties and, therefore, they were discharged.953 Although a compromise decree without the consent of
the surety may not discharge his liability, but giving the time will.954
[s 135.9] Effect of Discharge
If the surety has paid part of the debt, and subsequently there is a compromise between the principal-
debtor and the surety, the surety cannot recover such part payment from the creditor under section 135,
for, as regards such payment, he is no longer a surety but a principal-creditor, as the effect of part
payment is to transfer to him, so much of the cause of action against the principal-debtor.955 The release
extends not only to the guarantor’s personal liability, but also to any security he has given.956
The giving of time will not discharge someone who is not a guarantor, but merely occupies a position of
secondary liability.957 Therefore, a director liable for company’s debt because the full name of the
company was not stated on company cheque signed by him was not discharged by any agreement between
the creditor and the company, to give time.958
The general principle can be thus stated:
It is the clearest and most evident equity not to carry on any transaction without the privity of him who must necessarily have a concern
in any transaction with the principal-debtor. You cannot keep him bound and transact his affairs (for they are as much his as your own)
without consulting him.959
A creditor can be said to have given time where the creditor has agreed to accept amounts in instalments
instead of one lump-sum or where the creditor has taken additional security in discharge of the original
security, and thereby agreed to waive his rights on the original debt.960
Sanjay Kataria
Page 8 of 15
Under this principle, the guarantor is released, irrespective of whether he is prejudiced by the giving of
time.961 “If this right be suspended for a day or an hour, not injuring the guarantor to the value of one
farthing, and even positively benefiting him, nevertheless, by the principles of equity, he is discharged.”962
If the clause preserving the guarantor’s liability itself contains any conditions—(such as notification to the
guarantor) — the clause will be ineffective unless those conditions are complied with.963 Thus, where the
agreement, creating the suretyship, includes a term that the guarantee is not to be avoided by the creditor
giving time to the principal-debtor, but the creditor must inform the surety if any payment is more than
30 days overdue, the surety is released if time is given by the creditor, and the surety is not informed when
the payment is more than 30 days overdue.964
A provision, in a deed of guarantee, allowing the creditor to give time or other indulgence to the principal-
debtor does not include the giving of time, coupled with material variation in the rate of interest.965
886 Radha Kunwar v Ram Narain, AIR 1952 All 587

.
887 John Kuruvilla v Parameswaran Pillai, AIR

1980 Ker 87 , at 89.

AIR 1968 SC 1432 : [1968] 3 SCR 724 .
889 Bal Mukand Mohinder Kumar Iron Steel Commission Agents v Punjab National
Bank, (2014) 1 ICC 1007 : (2015) 1 BC 373.
890 Petty v Cooke, (1871) LR 6

QB 790 : (1861–73) All ER Rep Ext 1300 .
891 Devi Das v Sant Singh-Mohan Singh, AIR

1931 Lah 627 (1) : 133 IC 652.

AIR 1982 Del 487 , at 500 (creditor got the entire claim under the consent decree).
893 Natpur Co-operative Bank Ltd. v Manisha Pankajkumar Soni, Decided on

30.06.2016 (Gujarat HC).
Sanjay Kataria
Page 9 of 15
894 Raja Bahadur Dhanraj Giriji v Raja P Parthasarathy Rayanimvaru,

[1963] 3 SCR 921 at 927; TN&Q Bank Ltd. v Official Assignee,
AIR 1944 Mad 346 : (1944) Mad 708; Parvatibai Harivallabhdas Vani v Vinayak Balvant
Jangam, AIR 1939 Bom 23 : (1938) Bom 794 :
(1938) 40 Bom LR 989 : 179 IC 258.

[1963] 3 SCR 921 at 926; Kanailal Mookerjee v Kali Mohan Chatterjee,
AIR 1957 Cal 645 : 62 Cal WN 136.
896 Bankim Bihari Roy v Halima Bibi,

AIR 1962 Ori 54 ; Kurian v Alleppey CCMS Society, AIR 1975
Ker 44 : (1974) 2 Ker 1 ; John Kuruvilla v
Parameswaran Pillai, AIR 1980 Ker 87 .
897 Amin Abdul Kader Murtasa v Jivraj Otmal Ratnagiri Bhagidari,

AIR 1972 Bom 88 at 91 (bond for payment of decree amount passed after trial);
distinguishing Parvatibai Harivallabhdas Vani v Vinayak Balvant Jangam, AIR 1939 Bom 23
: (1939) Bom 794 : (1938) 40 Bom LR 989 : 179 IC
258.
898 TN & Q Bank Ltd. v Official Assignee,

AIR 1944 Mad 346 : (1944) Mad 708.

(1963) 3 SCR 921 , at 927–928.
900 Shri Kundanmal Dabriwala v Haryana Financial Corporation., decided on 20

December, 2011 (P&H HC).
901 Punjab National Bank Ltd v Sri Bikram Cotton Mills,

(1970) 1 SCC 60 .
902 Ramachandra B Loyolka v Shapurji N Bhownagree,

AIR 1940 Bom 315 : (1940) Bom 552 : 192 IC 375.
903 MV Mahalinga Aiyar v Union Bank of India,

AIR 1943 Mad 216 : (1942) 2 Mad LJ 532.
904 Ramswaroop v State Bank Of Bikaner & Jaipur,

2002 (3) WLN 430 .
905 Maung Po Lu v JA Begbie & Co., AIR

1915 LB 62 .

: (1939) 66 IA 198 :
(1939) 41 Bom LR 742 : 181 IC 1; Rouse v Bradford Banking Co.,
[1894] 2 Ch 32 per Smith LJ at 75 (CA); affirmed [1894] AC 586
(HL) : [1891–94] All ER Rep 1397 ; Swire v Redman,
Sanjay Kataria
Page 10 of 15
(1876) 1 QBD 536 at 541–42, [1874–80] All ER Rep 1255

; Polack v Everett, (1876) 1 QBD 669 per
Blackburn J at 674 (CA); Holme v Brunskill, (1878) 3 QBD 495 per
Cotton LJ at 505 (CA); Moschi v Lep Air Services Ltd., [1973] AC 331 at 348 :
[1972] 2 All ER 393 per Lord Diplock at 401 (HL).
907 Overend Gurney & Co. (Liquidators) v Oriental Financial Corpn. (Liquidators),
(1871) LR 7 Ch 142 : [1874–80] ALL ER Rep
1269 per Lord Hatherley LC at 152; affirmed in Overend, Gurney & Co. (Liquidators) v Oriental Financial Corpn.
(Liquidators), (1874) LR 7 HL 348 : [1874–
80] All ER Rep 1269 .
908 TNS Firm v VPS Mahommad Hussain,

AIR 1933 Mad 756 : 65 Mad LJ 458 : 146 IC 608.

AIR 1968 SC 1432 : (1968) 3 SCR 724
.
910 Clarke v Birley, (1889) 41 ChD 422

; Rouse v Bradford Banking Co., (1894) AC 586
, at 594 per Lord Herschell LC : (1891–94) All ER Rep 1397 (HL).
911 See section 136 for more details.
Services and Institutions, para 1226; Bolton v Buckenham, (1891) 1 QB 278
(CA); Rouse v Bradford Banking Co., (1894) AC 586 :
(1891–94) All ER Rep 1397 .
913 Lal Behari Lal v Allababad Bank Ltd.,

AIR 1929 All 664 ; Sankaranarayana lyer Saraswathy Ammal v Kottayam Bank Ltd., AIR 1950 Tr &
Coch 66 (FB).
914 Bank of Baroda v Avdoot Bhagwant Naik,

AIR 2005 Bom 224 .
and Institutions, para 1227.
916 York City and County Banking Co. v Bainbridge,

(1880) 43 LT 732 ; but see Burnes v Trade Credits Ltd., (1981) 2 All
ER 122 : [1981] 1 WLR 808 (PC)
(no such right retained, surety discharged). See also section 137.

AIR 1968 SC 1432 : (1968) 3 SCR 724
.
Sanjay Kataria
Page 11 of 15
918 Protab Chunder Dass v Gour Chunder Roy,

(1879–80) ILR 4 –5 Cal 85; Gourchandra Rai v Protapchandra Dass,
(1881) ILR 6 –7 Cal 157 (surety had consented to advance interest being taken).

AIR 1968 SC 1432 : (1968) 3 SCR 724
.
920 TNS Firm v VPS Mahommad Hussain,

AIR 1933 Mad 756 : 65 Mad LJ 458 : 146 IC 608; T Subramania Aiyar v Shaw Wallace & Co.,
AIR 1920 Mad 259 : 58 Ind Cas 648 : (1920) 43 Mad LJ 402.
921 Diyalu Mal v Nandu Shah Dev Raj,

AIR 1931 Lah 691 .
922 Hulme v Coles, (1827) 2 Sim 12, 29 RR 52.
923 Mohan Lal v Suraj Mani, AIR 1973

J&K 92 (FB); relying on Raja Bahadur Dhanraj Giriji v Raja P Parthasarathy Rayanimvaru,
[1963] 3 SCR 921 ; dissenting from Manohar Lal Beli Ram v Har Kishan Lal,
AIR 1968 Del 108 .
924 Mohan Lal v Suraj Mani, AIR 1973

J&K 92 (FB).
925 Maharashtra Apex Corpn. Ltd. v Poovappa Salian,

AIR 1985 Kant 116 .
926 Kurian v Alleppey CCMS Society,

AIR 1975 Ker 44 : (1974) 2 Ker 1
; distinguishing Amrit Lal Goverdhan Lalan v State Bank of Travancore, AIR 1968 SC 1432
: (1968) 3 SCR 724 .
927 Supra, (1974) 2 Ker 1

at 9, AIR 1975 Ker 44 ; Mahant Singh v U Ba Yi,
AIR 1939 PC 110 : (1939) 66 IA 198
: (1939) 41 Bom LR 742 : 181 IC 1; Parvatibai
Harivallabhdas Vani v Vinayak Balvant Jangam, AIR 1939 Bom 23 : (1939)
Bom 794 : (1938) 40 Bom LR 989 : 179 IC 258; Pirthi Singh v
Ram Charan Aggarwal, AIR 1944 Lah 428 ; Kanailal Mookerjee v Kali
Mohan Chatterjee, AIR 1957 Cal 645 ; supra,
AIR 1968 SC 1432 : [1968] 3 SCR 724
.
928 Kunda Chinna Dasappa v Gopalakrishna Co.,

AIR 1949 Mad 194 .
929 Protab Chunder Dass v Gour Chunder Roy, (1879–

80) ILR 4 –5 Cal 85. See Indian Contract Act, 1872, section 139.
Sanjay Kataria
Page 12 of 15
930 Damodar Das v Mahommad Husain, (1900)

22 All 351 ; supra, AIR 1933 Mad 756 : 65 Mad LJ 458 :
146 IC 608; Sonepat Co-op Society Ltd. v Kapuri Lal, AIR 1936 Lah 305 : (1935)
16 Lah 583 : 157 IC 124; Sankaranarayana Iyer Saraswathy Ammal v Kottayam Bank Ltd., AIR 1950 Tr & Coch 66 (FB); Radha Kunwar v Ram
Narain, AIR 1952 All 587 .
931 National Coal Co. v Kshitish Bose and Co., AIR

1926 Cal 818 : 95 IC 409 : (1926) 30 Cal WN 540 (the judgment based on the fact that payment by
instalments gave time to the debtor); Annadana Jadaya Goundar v Konammal, AIR 1933 Mad 309
: (1933) 56 Mad 625 : 141 IC 852 (same principles apply to surety bond executed in favour of the Court);
Balkrishna v Atmaram, AIR 1944 Ngp 277 (if extension of time is granted
by the Court, the surety is not released); Narayan Ramchandra Bhagwat v Markandya Tukaram, AIR 1959 Bom
516 ; Bankim Bihari Roy v Halima Bibi, AIR 1962 Ori 54
.
932 Ram Ranjan Rakshit v Chief Administrator of Rehabilitation,

AIR 1960 Cal 416 : 64 Cal WN 126; AR Krishnaswami Aiyar v Travancore National Bank Ltd.,
AIR 1940 Mad 437 : (1940) Mad 757; Bank of Hindustan Ltd. v N
Govindarajalu, AIR 1934 Mad 75 (principle applicable to all negotiable
instruments); Amar Chand v Bhano, AIR 1995 SC 871 .
933 Greenwood v Francis, [1899] 1 QB 312

(CA); AR Krishnaswami Aiyar v Travancore National Bank Ltd., AIR 1940 Mad 437
: (1940) Mad 757.
934 Hodges v Delhi and London Bank Ltd., (1900)

27 IA 168 : (1901) 23 All 137 (PC).
935 Hariprashad Narayanjee Jaiwal v Chandrojrao Shambajeerao Angre,

AIR 1962 MP 69 .
936 Balkrishna v Atmaram, AIR 1944 Ngp

277 .
937 Dorothy Valentine Burnard v William Douglas Lysnar,

AIR 1929 PC 273 .
938 Hariprasad Narayanjee Jaiwal v Chandrojrao Shambajeerao Angre, Supra.
939 Burnes v Trade Credits Ltd., (1981) 2 All ER

122 , at 124 : [1981] 1 WLR 805 (PC).
940 Ram Ranjan Rakshit v Chief Administrator of Rehabilitation, Supra. As regards

waiver of rights under this section, see discussion in sections 128 and 133 above.
941 Malaysian International Trading ... v Mega Safe Deposit Vaults (Pvt.) Ltd, 2006
(3) BomCR 109 : 2006 (68) SCL 52 Bom.
942 Mahant Singh v U Ba Yi, AIR 1939

PC 110 at 110 : (1939) 66 IA 198 :
Sanjay Kataria
Page 13 of 15
(1939) 41 Bom LR 742 : 181 IC 1. See also section 134 under heading:
“Reservation of Right by Creditor” for discussion of the principles.
943 Dhari Mal v Kanshi Ram, AIR 1927 Lah 336

: 100 IC 762; Ram Chand Diwan Chand v Sant Singh, AIR 1930 Lah 896
(2) (decree-holder gave time to judgment-debtor); Mahommad Ramzan v Khadija Sultan Begum,
AIR 1938 Lah 472 .
944 Parvatibai Harivallabhdas Vani v Vinayak Balvant Jangam,

AIR 1939 Bom 23 : (1939) Bom 794 at 800 : (1938) 40 Bom LR
989 : 179 IC 258; B Narayana Rao v SK Francis, AIR 1953 Mys 68
.

[1963] 3 SCR 921 at 926; TN&Q Bank Ltd. v Official Assignee,
AIR 1944 Mad 346 : (1944) Mad 708; supra, AIR 1939 Bom 23
: (1939) Bom 794 : (1938) 40 Bom LR 989 : 179 IC 258;
Mahomedalli Ibrahimji v Laxmibai Anant Palande, AIR 1930 Bom 122 : (1929)
54 Bom 118; Narsingh Mahton v Nirpat Singh, AIR 1932 Pat 313 : (1932)
11 Pat 590 : 140 IC 564.

: (1938) Bom 794 at 801 : (1938) 40 Bom LR 989 : 179 IC 258;
Hiralal Ambalal v Manilal Maganlal, AIR 1926 Bom 565 ; Darshan Ram-
Ganesh Das v Khair Din-Allah Baksh, AIR 1924 Lah 194 ; supra,
AIR 1932 Pat 313 : (1932) 11 Pat 590 : 140 IC 564.

(1963) 3 SCR 921 , at 926; Chakkunny v Viswanatha Iyer, AIR
1961 Ker 312 ; Manohar Lal Beli Ram v Har Kishan Lal, AIR 1968 Del 108
(compromise decree allowing principal-debtor to pay in instalments).

: (1930) 54 Bom 118 : 124 IC 227; supra, AIR 1932 Pat 313
: (1932) 11 Pat 590 : 140 IC 564; Mahommad Yusaf v Ram Govinda Ojha, AIR 1928 Cal 177
(2) : (1927) 55 Cal 91 .
949 Odayamangalath Appanni Nair v Isaak Mackadam,

AIR 1920 Mad 355 : (1920) 43 Mad 272 : 53 IC 367; Haji Ahmed Karim v Maruti Ravji Bhongle,
AIR 1931 Bom 55 : (1931) 55 Bom 97 : (1930) 32 Bom LR
1394 : 128 IC 903; Madanlal Motilal v Radhakisan Laxminarain, AIR 1935 Ngp
258 : (1935–36) 31 Ngp 83 (supp); Kanailal Mookerjee v Kali Mohan Chatterjee,
AIR 1957 Cal 645 ; Chakkunny v Viswanatha Iyer, AIR 1961 Ker 312
(a surety may expressly stipulate to be bound only on a decree passed after contest).
950 Annadana Jadaya Goundar v Konammal, AIR

1933 Mad 309 : (1933) 56 Mad 625 : 141 IC 852; supra, AIR 1932 Pat 313
: (1932) 11 Pat 590 : 140 IC 564.
951 Bharat Nidhi v Bhagwandas Mehra CA SC 939–64 decided on 3 January 1967

(SC).
Sanjay Kataria
Page 14 of 15
952 Bharat Nidhi v Bhagwandas Mehra CA SC 939–64 decided on 3 January 1967

(SC).
953 Kanailal Mookerjee v Kali Mohan Chatterjee, AIR

1957 Cal 645 ; Pirthi Singh v Ram Charan Aggarwal, AIR 1944 Lah 428
; but see Jai Bai v Joharnull Bothra, AIR 1932 Cal 858
; Bankim Bihari Roy v Halima Bibi, AIR 1962 Ori 54 .
954 Bankim Bihari Roy v Halima Bibi, AIR

1962 Ori 54 .
955 Bombay Co. Ltd. v Official Assignee of Madras,

AIR 1921 Mad 236 : (1921) 44 Mad 381 : 63 IC 173.
956 Bolton v Salmon, [1891] 2 Ch 48

; Smith v Wood, [1929] 1 Ch 14 at 23–24 : 27–28
[1928] All ER 229 (CA).
957 Way v Hearn, (1862) 11 CBNS 774

; British Airways Board v Parish, (1979) 2 Lloyd’s Rep 361 (CA).
958 Supra, (1979) 2 Lloyd’s Rep 361 (CA).
959 Rees v Berrington, (1795) 2 Ves 540 per Lord Loughborough, 3 RR 3;

Bharat Nidhi v Bhagwandas Mehra CA SC 939–64 as decided on 3rd January 1967 by the Supreme Court.
960 Wyke v Rogers, (1852) 21 LJ Ch 611

; Mercantile Bank of Sydney v Taylor, (1893) AC 317 .

at 674 (CA); Ex parte Wilson, (1805) 11 Ves 410 at 411; Samuell v Howarth, (1817) 3 Mer 272 at 279 (even though
manifestly for the benefit of the guarantor); Swire v Redman, (1876) 1 QBD 536
at 541–42 : [1874–80] All ER Rep 1255 ; Holme v Brunskill,
(1878) 3 QBD 495 (CA); Greenwood v Francis, [1899] 1
QB 312 per AL Smith LJ at 320 (CA).

, at 674 per Blackburn J at 674 (CA).
963 Midland Counties Motor Finance Co. Ltd. v Slade,

[1951] 1 KB 346 : (1950) 2 All ER 821 (CA).
964 Midland Counties Motor Finance Co. Ltd. v Slade,

[1951] 1 KB 346 : (1950) 2 All ER 821 (CA).
965 Burnes v Trade Credits Ltd., (1981) 2 All ER

122 , at 124 : [1981] 1 WLR 805 (PC).
Sanjay Kataria
Page 15 of 15
End of Document
Sanjay Kataria
[s 136] Surety not discharged when agreement made with third person to give time to
principal-debtor.—
[s 136] Surety not discharged when agreement made with third person to give time to
principal-debtor.—
Where a contract to give time to the principal-debtor is made by the creditor with a third person, and not
with the principal debtor, the surety is not discharged.
Illustration
C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts
with M to give time to B, A is not discharged.
A surety is not discharged if the creditor has contracted not with the principal-debtor, but with a third
person, to give time to the principal-debtor.
[s 136.2] Agreement with Third Person
“It is clear that when the creditor enters into a binding contract with the principal-debtor to give him time
without the assent of the sureties, and without reserving his remedy against the sureties, such giving of
Sanjay Kataria
Page 2 of 2
[s 136] Surety not discharged when agreement made with third person to give time to principal-debtor.—
time discharges the sureties...But, to produce this result, two things are necessary. There must be a binding
contract to give time, capable of being enforced; and the contract must be with the principal-debtor. If
merely made with a third party it will not do, as was decided in Frazer v Jordan,966 where, an action by the
holder against the drawer of a bill of exchange, it was held to be no defence to the drawer that the holder
had, without the drawer’s consent, made a binding contract with a third party to give time to the acceptor,
in consideration of an undertaking by the third party to see the bill paid.”967
966 Frazer v Jordan, (1857) 8 E&B 303 : 112 RR 572.
967 Clarke v Birley, (1889) 41 ChD 422

, at 434 per North J.
End of Document
Sanjay Kataria
[s 137] Creditor’s forbearance to sue does not discharge surety.—
Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy
against him does not, in the absence of any provision in the guarantee to the contrary, discharge the
surety.
Illustration
B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt
has become payable. A is not discharged from his suretyship.
A surety is not discharged by the mere forbearance of the creditor to sue the principal-debtor, or the
failure of the creditor to enforce any other remedy against the principal-debtor, unless the guarantee
provides otherwise.
[s 137.2] “Mere Forbearance” to Sue
Mere forbearance to sue the principal-debtor or to enforce any other remedy against him does not, in the
absence of any provision in the guarantee to the contrary, discharge the surety;968 and the surety is not
Sanjay Kataria
Page 2 of 4
discharged unless there is a positive agreement to postpone enforcement.969 Thus, the surety was not
discharged even though the creditor bank did not sue the principal-debtor even after receiving letters
from the surety about the principal-debtor’s plans to sell the hypothecated property.970
Where, under a hire-purchase agreement, the owner did not, at once, file a suit on the failure of the
principal-debtor to pay, nor did he seize the vehicle but gave notice to the hirer and the surety to pay, and
when that was not replied, gave another notice, and then filed a suit instead of seizing the vehicle. It was
held that the conduct of the creditor did not fall under section 139, and the surety was not discharged.971
Surety is not discharged even if the suit against the principal-debtor is dismissed under Order IX, rule 5 of
the Code of Civil Procedure, 1908.972 Where the creditor gave time to the principal-debtor to enable the latter
to raise money by private sale of a portion of his property with a view to enable him to discharge the debt,
it was “mere forbearance” within the meaning of this section, and not a contract within the meaning of
section 135.973
If there is no binding agreement to give time, mere omission on the creditor’s part, to press the principal-
debtor for payment, will not discharge the guarantor, even if the debtor subsequently becomes insolvent,
but a surety may be discharged if the creditor is bound to use the utmost efforts to obtain payment from
the principal-debtor before suing the guarantor.974
Section 135 deals with the case in which a surety is discharged by a contract between the creditor and the
principal-debtor, entered into without the surety’s consent, to give time to, or not to sue, the principal-
debtor. This section deals with the case of “mere forbearance” to sue, as distinguished from forbearance
springing from a contract,975 and provides that the surety shall not be discharged in such a case. Now the
forbearance to sue, which does not arise from a contractual obligation, may be exercised for a period—
short of the period of limitation prescribed for the suit—or it may continue until the expiration of the
limitation period. The illustration to the section affords an instance of the former case, the limitation
period for the suit being three years, and the forbearance exercised only for a year. The surety is not
discharged in such a case, and it is equally clear that he would not be discharged even if the forbearance
continued for a longer period, provided it fell short of the period of limitation. It has been held that it
makes no difference if the forbearance continues until the period of limitation has elapsed, and the failure
to sue the principal-debtor until the recovery is barred by limitation does not discharge the surety.976
The question whether any particular act on the part of the creditor constitutes mere forbearance to sue or
constitutes an act by which the creditor puts it out of his power to hand over security to the surety, will
depend upon the facts and circumstances of a particular case.977 In Hazari v Chunni Lal,978 a decree-holder
D agreed to accept payment of decretal amount in instalments, and S stood surety to the effect that if any
instalment was not paid, the whole amount would be payable. The judgment debtor delayed payment, and
D failed to execute the decree, which ultimately got barred by limitation. D then claimed the amount from
S. It was held that as the bond had laid down a period within which D had to execute his decree in case of
default, his action in not doing so was much more than “mere forbearance” in favour of his debtors, and
the suit was liable to be dismissed.
Sanjay Kataria
Page 3 of 4
The fact that the creditor has not sued the principal-debtor and exhausted the remedies against him is no
defence to an action against the surety.979 Nor is it necessary that the creditor must proceed and exhaust
his remedies against the properties mortgaged or given as security.980
If you agree with the principal to give him time, it is contrary to that agreement that you should sue the
surety, because if you sue the surety, you immediately turn him upon the principal, and therefore your act
breaks the agreement into which you have entered with the principal. But this applies only where there is a
binding agreement. It is not simply neglecting to sue the principal which would have any effect upon the
surety, but there must be a positive agreement with the principal that the creditor will postpone the suing
of him to a subsequent period.981
968 Kali Charan v Abdul Rahman, AIR 1918 PC 226

; Ushadevi Malhotra v Bhagwandas Tiwari, AIR 1967 MP 250
; Bhabani Sankar Patra v State Bank of India, AIR 1986 Ori 247
; United Bank of India v Modern Stores (India) Ltd., AIR 1988 Cal 18 ; Bank of
Baroda v Avdoot Bhagwant Naik, AIR 2005 Bom 224 .
969 Sankarayana Iyer Saraswathy Ammal v Kottayam Bank Ltd., AIR 1950 Tr &
Coch 66.
970 Bhabani Sankar Patra v State Bank of India, AIR

1986 Ori 247 ; but see MR Chakrapani Iyengar v Canara Bank, AIR 1997 Kant
216 .
971 Vasireddi Seetharamaiah v Srirama Motor Finance Corpn.,

AIR 1977 AP 164 , at 169.
972 Orissa Agro Inds. Corpn. Ltd. v Sarbeswar Guru,

AIR 1985 Ori 270 , at 273.
973 Radha Kunwar v Ram Narain, AIR 1952 All 587

.
Sanjay Kataria
Page 4 of 4
975 Hajarimal v Krishnarav, (1881) 5 Bom 647 at 651; Damodar Das v Mahommad
Husain, (1900) 22 All 351 (the agreement to give time being without
consideration, the case was not one of contract to give time to the principal-debtor, but of “mere forbearance” within the meaning of
the section); Radha Kunwar v Ram Narain, AIR 1952 All 587 ; Sankaranarayana
Iyer Saraswathy Ammal v Kottayam Bank Ltd., AIR 1950 Tr & Coch 66.
976 Bombay Dyeing and Mfg Co. Ltd. v State of Bombay,

AIR 1958 SC 328 : [1958] SCR 1122 at 1135;
Mahant Singh v U Ba Yi, AIR 1939 PC 110 :
(1939) 66 IA 198 : (1939) 41 Bom LR 742 : 181 IC
1; Aziz Ahmad v Sher Ali, AIR 1956 All 8 (FB).
977 Bhabani Sankar Patra v State Bank of India, AIR

1986 Ori 247 , at 252.
978 Hazari v Chunni Lal, (1886) ILR 8

All 259.
979 Swaminatha Pillai v SL Lakshmana Ayyar, AIR

1935 Mad 748 ; Punjab National Bank v Mehra Bros. Pvt. Ltd., AIR 1983 Cal 335
; see section 128 under heading; “Exhausting Remedies Against Principal-debtor or Secured Property
Before Suit Against Surety”.
980 State Bank of India v Balak Raj Abrol, AIR

1989 HP 41 ; Abid Husain v Lachhmi Narain, AIR 1935 Oudh 260
; see section 128 under heading; “Exhausting Remedies Against Principal-debtor or Secured Property Before Suit
Against Surety”.
981 Overend Gurney & Co. (Liquidators) v Oriental Financial Corpn. (Liquidators),
(1871) LR 7 Ch 142 : [1874–80] All ER Rep 1269
per Lord Hatherley at 150; affirmed in Overend, Gurney & Co. (Liquidators) v Oriental Financial Corpn.,
(Liquidators) (1874) LR 7 HL 348 : [1874–
80] All ER Rep 1269 .
End of Document
Sanjay Kataria
[s 138] Release of one co-surety does not discharge others.—
Where there are co-sureties, a release by the creditor of one of them does not discharge the others, neither
does it free the surety so released from his responsibility to the other sureties.982
If the creditor releases one of many co-sureties, it does not discharge the other co-sureties. Such a released
co-surety continues to be liable to the other co-sureties.
[s 138.2] Release of One of Several Sureties
This section is a necessary consequence of the principle laid down in section 44, and must be taken as a
deliberate extension of a rule which in the common law is limited to the case of co-sureties contracting
severally and not jointly:
the release of a surety discharges a joint co-surety, but not a co-surety severally bound.983
Sanjay Kataria
Page 2 of 3
Only where co-sureties have contracted jointly, i.e., where the joint surety-ship of the others was part of
the consideration for the contract of each, whether a release of one of them by the creditor discharges the
others.984 The present section appears to abolish this distinction in common law.
The liability of the surety is joint and several, and if a guarantor seeks to enforce the surety bond against
some of the joint sureties only, the other sureties will not, on that account, be discharged, nor will release
by the creditor of one of them discharge the other.985 The principle of this section has also been applied
to security bonds executed in favour of the Court.986
The mere fact that the obligation arising under a covenant may be enforced severally against all the
covenantors does not make the liability of each covenantor distinct. It is true that in enforcement of the
claim of the decree-holder, the properties belonging to the sureties individually may be sold separately.
But that is because the properties are separately owned and not because the liability arises under distinct
transactions. Thus, enforcement of surety bond given by sureties for satisfaction of decree—against one
or release of one—does not operate as discharge of others. Their liability is joint and several, and not
distinct.987
Where one of the co-sureties dies pending suit, remaining sureties are not discharged by reason of the
plaintiff not proceeding against principal-debtor, or allowing the suit to be dismissed against it. Nor is any
suit against these sureties affected by the principles of res judicata.988
982 Section 44 supra.
983 Leake, 8th Edn, at 716; Armitage (Re), ex parte Good,

(1877) 5 ChD 46 .
984 Charles Dudley Robert Ward v National Bank of New Zealand,

(1883) 8 App Cas 755 , at 764, 765.
985 United Bank of India v Modern Stores (India) Ltd.,

AIR 1988 Cal 18 , at 25 : (1990) 69 COMP CASES 697 : 91 Cal WN 1186.

AIR 1967 Mys 147 .
Sanjay Kataria
Page 3 of 3
987 Sri Chand v Jagdish Pershad Kishan Chand, AIR

1966 SC 1427 .
988 United Bank of India v Modern Stores (India) Ltd.,

AIR 1988 Cal 18 ; distinguishing Sri Chand v Jagdish Pershad Kishan Chand, AIR
1966 SC 1427 (appeal of co-sureties from decree passed against them abated after death of one co-surety,
and failure to bring his legal representatives on record in time).
End of Document
Sanjay Kataria
[s 139] Discharge of surety by creditor’s act or omission impairing surety’s eventual
remedy.—
[s 139] Discharge of surety by creditor’s act or omission impairing surety’s eventual

remedy.—
If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act
which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the
principal-debtor is thereby impaired, the surety is discharged.
Illustrations
(a) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain
stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A,
prepays to B the last two instalments. A is discharged by this pre-payment.
(b) C lends money to B on the security of a joint and several promissory notes made in C’s favour by B,
and by A as surety for B, together with a bills of sale of B’s furniture, which gives power to C to sell the
furniture, and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but, owing
to his misconduct and wilful negligence, only a small price is realised. A is discharged from liability on the
note.
(c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part that he
will at least once a month; see M makes up the cash. B omits to see this done as promised, and M
embezzles. A is not liable to B on his guarantee.
Sanjay Kataria
Page 2 of 15
[s 139] Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.—
The surety is discharged if the creditor:
(i) does an act inconsistent with the rights of the surety; or

(ii) omits to do any act which his duty to the surety requires him to do, and as a result the surety’s
eventual remedy against the principal-debtor is thereby impaired.
[s 139.2] The Principle
The injurious quality, to be considered, is tendency to diminish the surety’s remedy or increase his liability.
Transactions having an immediate tendency to cause or permit the principal-debtor to make default are
only one species of those to which the surety may object.
To enable the surety to enforce his right against the principal-debtor:
(i) the debt itself must subsist; and

(ii) the remedy of the surety against the principal-debtor must remain unimpaired.989
Section 139 is a residuary section, the object of which is to ensure that no arrangement different from that
contained in the surety’s contract is forced upon him and the surety, if he pays the debt, has the benefit of
every remedy which the creditor had against the principal-debtor.990
[s 139.3] Acts Inconsistent with the Rights of the Surety
The surety was held discharged where the creditor, without the surety’s consent, granted time to the
debtor and allowed instalments;991 where the bank allowed, without the consent of the surety the opening
of a second account by the principal-debtor whose previous account was guaranteed;992 where the Court
obtaining a security bond by hypothecation of immovable property for securing the proper disposal of
money due to minors, acted inconsistently with the rights of sureties;993 where the creditor consented to
the release of attachment over the properties;994 where the creditor bank which had advanced loan for the
Sanjay Kataria
Page 3 of 15
purchase of a vehicle failed to register the charge with the Regional Transport Office;995 where the
creditor in a contract for sale of a tea garden failed to execute the conveyance of the property to
purchaser, payment of price by whom had been guaranteed by the surety;996 and where the creditor
prepays any instalment of payment before the debtor has rendered that performance upon which the
payment fell due.997
Where a surety had guaranteed full payment, with interest, of any amount deposited in a bank in case the
bank went into liquidation, and in such liquidation, the creditor realised dividend from the liquidator, the
act of the creditor, in so receiving the dividend, was not inconsistent with the rights of the surety as to
discharge the surety from payment of deposit with interest, or his remedy against the principal-debtor.998
Nor was the surety discharged where the creditor, in breach of the agreement with the surety, commenced
suit of recovery against the principal-debtor;999 or where the creditor obtained an acknowledgement of
debt from the principal-debtor;1000 or by the suit against the principal-debtor being dismissed for
default,1001 or the creditor allowing the suit to abate as against a deceased principal-debtor.1002
In UOI v Narayana Setti Jugadeswararao,1003 A consigned the goods and transferred the railway receipt in
favour of B. In the meantime, A executed an indemnity bond with a surety D, alleging to have lost the
railway receipt, and requiring the consignment to be delivered to another transferee C. B, who had
endorsed the railway receipt in favour of a bank, sued the railway for recovery of amount paid by him as
consideration for transfer of the railway receipt in his favour. After satisfying the decree in this suit, the
railways sued the surety to recover the amount paid by it to B. It was held that the act of the railway staff
in delivering goods on the strength of the indemnity bond, knowing that the original railway receipt was
with somebody else, discharged the surety.
[s 139.4] Omission to do any Act which the Creditor’s Duty to the Surety Requires
him to do
It is the substance of section 139 that it is the duty of the person who has secured a guarantee to do every
act necessary for the protection of the rights of the surety.1004 Illustration (c) to the section illustrates this
principle.
Where the liability of a surety guaranteeing payment by a judgment debtor of the amount of a decree by
instalments was expressly made dependent on the execution of the decree by the decree-holder on the
occurrence of a single default, the decree-holder owed a duty to the surety under the terms of the
guarantee, to seek execution according to its terms.1005
Where the creditor subsequently obtains a mortgage of the properties of the principal-debtor, not referred
to in the contract of suretyship, there is no breach of duty owed by the creditor to the surety, and this
section does not apply.1006 Thus, an equitable mortgage executed by the principal-debtor, of most of his
Sanjay Kataria
Page 4 of 15
properties, for another debt of the principal-debtor does not discharge the surety as there is no breach of
duty owed by the creditor to the surety, and section 139 is not applicable.1007
As regards the taking of security by the creditor to secure the debt, a creditor is not bound to insist upon
any particular kind of security from the principal-debtor. However, if he does take any security from the
principal-debtor, it is his duty to see that that security remains enforceable against the principal-debtor. If
any formalities are required by law regarding that security, it is his duty to see that such formalities are
observed. The creditor is not required to do anything more than this.1008 However, where the creditor
failed to register the charge on the property of the company under section 125 of the Companies Act, 1956,
and there was no undertaking by the creditor to the surety that the debt will be secured, the surety was not
discharged because the charge could have been registered by the surety also, and the surety did not show
that he had received any injury in consequence of the creditor’s conduct;1009 nor was the surety discharged
for such non-registration, where the liquidator of the principal-debtor company held that the
encumbrance on the property was a pledge not requiring such registration.1010
The principle of impairment of security does not apply to discharge the surety in the case of security of a
bank deposit of the surety, unless the creditor improperly does away with the security. By going into
liquidation, the bank cannot be said to have done away with the security improperly.1011 Thus, if a surety
pledges his deposit with a bank as security for the loan of a third party, he cannot have the loan set-off
against the deposit, unless the deposit becomes due and if, in the meanwhile, the bank goes into
liquidation, there can be no set-off but the dividend payable by the bank in liquidation, will be payable
towards the deposit.1012
A guarantor gave a guarantee of payment in consideration of the creditor “undertaking not to sue or to
take any proceedings against” a company “in respect of the debt, the company owed to the creditor, for a
period of six months.” The creditor made a written demand within the six months, pursuant to section
222(2) of the Companies Act, 1956, intimating that unless the payment was made within a specified time, a
petition for winding up would be taken. The demand was not complied with, but no petition was
presented. Such notice, it was held, did not amount to “taking of proceedings” as contemplated under the
guarantee.
In Panakkatan Sankaran v District Board of Malabar,1013 the surety had executed a surety bond to guarantee
performance under a lease of the right to collect tolls. The lease contained a clause that if the payment of
the kist1014 fell in arrears, the administration could re-sell the rights. It was held that the surety was not
discharged on the ground that the administration did not pursue these options, although this course of
action was an alternative, entirely within the option of the administration.
The creditor’s omission to sue the principal-debtor, within limitation, is not an act or omission of the kind
contemplated under this section.1015 A creditor owes no duty to a guarantor of a loan to act reasonably to
ensure that the loan is applied for the purposes for which it is given, whether such duty is put by way of
Sanjay Kataria
Page 5 of 15
an implied term in the contract, or of the tort of negligence.1016
There is no general principle that “irregular” conduct of a creditor, even if prejudicial to the interest of the
surety, will discharge him. “Short of bad faith, misrepresentation or concealment amounting to
misrepresentation, connivance with the default of the principal-debtor, or variation of the terms of the
contract to the possible prejudice of the surety the creditor can act as he chooses.”1017
[s 139.5] Negligence of the Creditor
Where, due to negligence of the creditor, the security given by the principal-debtor is lost and the right of
the surety against the principal-debtor is impaired due to any action or inaction of the creditor, the surety
is discharged to that extent under the combined effect of sections 139 and 141 of the Contract Act.1018
Loss of security by the creditor will discharge the surety under section 141, to the extent of the value of
the security,1019 and not under this section; section 139 must be read along with section 141, and not in a
way as to abrogate section 141 when it applies.1020
This is particularly so when the security is in the possession of the creditor, but the surety may not be
discharged where the security is in possession of the principal-debtor;1021 nor when the goods are in
possession of a third party having a claim over the goods.1022 Thus, where, due to the negligence of the
bank, there was a shortfall in respect of securities kept under the lock and key of the bank, it was held that
the sureties were discharged from their liabilities by the negligence of the bank in losing the goods in their
custody.1023
The bank must exercise greater vigilance in the case of hypothecated goods. It must prominently display
that the machinery or goods stand hypothecated to it.1024
Where a creditor can, under the terms of a guarantee, give time or indulgence in payment to the debtor,
and can vary exchange or take other securities or release, “any other securities held by him, and such an
act will not discharge the surety or affect his liability”, the creditor cannot, under the above terms, act
negligently and lose the security in its custody or in its charge. Release of a security is an act of volition,
and cannot include negligence. Expression “any security” refers to security other than the pledged goods.
Further, the expression “any other guarantee security or remedy” mentioned in a letter of guarantee, was
held as referring to securities other than the goods pledged when giving the cash-credit facility when the
surety gave his guarantee.1025
The onus lies on the surety, to prove that the securities were lost due to the negligence of the creditor.1026
Sanjay Kataria
Page 6 of 15
[s 139.5.1] No Obligation to Realise Security
A debt was borrowed on a promissory note and the security of the debtor’s truck, and on the guarantee of
sureties. The creditor had the power of seizure of the truck which it did not exercise. When it filed a suit
for recovery of the debt, the truck had become scrap. However, it was held that mere passivity or passive
negligence does not discharge the surety.1027
[s 139.6] Laches of Creditor
It is not mere laches or acquiescence on the part of the creditor which will discharge the surety, but his
positive act to the prejudice of the surety.1028
A creditor is not guilty of laches if, knowing that security held by him for the guaranteed debt is declining
in value, he omits to exercise his power of sale so that the security eventually becomes worthless.1029
However, the terms of the contract of guarantee may impose obligations on the creditor, which, if
unperformed, will prevent him from claiming against the guarantor; it is then something which the
creditor is bound to do for the surety as contemplated under this section. So also, where the creditor fails
to take action to exercise its rights in respect of the hypothecated goods after the surety has brought to
the notice of the creditor the possibility of loss, or damage, or transfer or deterioration, the surety is
discharged.1030 Thus, where the surety established his bona fides by informing the bank that the
hypothecated machinery was transferred, and also the location of the machinery, but the bank failed to
take any action, the surety was discharged.1031
[s 139.7] Impairing Surety’s Eventual Remedy
In order to attract the provisions of this section, there must not only be an act inconsistent with the rights
of the surety, or the omission to do an act which it is the creditor’s or employer’s duty to do, but it is
essential that thereby the eventual remedy of the surety is impaired.1032 The case in which a party is
discharged by an act or omission of the creditor, of which the legal consequence is the discharge of the
principal-debtor, has been dealt with in section 134. Under the present section, a surety will be discharged
by acts or (subject to the caution above given) omissions of the creditor specified therein which, though
not having the legal consequence of discharging the principal, impair the eventual remedy of the surety
against him.1033 A surety, for instance, will be released if the creditor, due to 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.1034
Sanjay Kataria
Page 7 of 15
Where the liability, of a surety guaranteeing payment by a judgment-debtor of the amount of a decree by
instalments was expressly made dependant on the execution of the decree by the decree-holder on the
occurrence of a single default, it was held that the omission to execute the decree on the happening of the
default until execution had become time-barred, discharged the surety under the provisions of this
section; the decree-holder owed a duty to the surety under the terms of the guarantee, and his failure to
perform that duty until the decree became defunct by lapse of time which had impaired the “eventual
remedy” of the surety against the judgment-debtor.1035 Similar impairment was held to have been caused
where the creditor, by negligence, lost the benefit of an additional remedy against the principal-debtor
when he abandoned the execution against the debtor;1036 where the creditor excluded the debt guaranteed
by the surety, from his statement of debts, after the principal-debtor had applied to the Debt Conciliation
Board for settlement.1037
Thus, where the creditor withdrew the suit against the principal-debtor, but continued the suit against the
surety, the latter was not discharged because his remedy against the principal-debtor was not impaired.1038
[s 139.8] No Discharge
Mere passive acquiescence by the creditor, in irregularities on the part of the principal-debtor such as
laxity in the time and manner of rendering accounts by a collector of public moneys whose fidelity is
guaranteed, will not of itself discharge the surety.1039 Nor is the surety discharged from liability for the
principal-debtor’s default in a manner within the terms of the guarantee.
The fact that the mortgaged property of the principal debtor has been acquired does not impair the
surety’s eventual remedy.1040
[s 139.9] Surety for Performance of Act
A surety, who has bound himself for a person’s doing certain things, is not discharged from his liability
unless it is shown that the creditor has, by his conduct, either prevented the things from being done or
connived at the omission or enabled the person to do what he ought not to have done, and that but for
such conduct, the omission would not have happened.1041
[s 139.10] Surety bond in Favour of the Court
Sanjay Kataria
Page 8 of 15
Although the section does not apply to surety bonds given to Court, there being no creditor since the
surety bond is given to Court1042, the principles underlying the section can be applied.1043
[s 139.11] Surety for Employee’s Honesty
The surety’s liability for the faithful discharge by a servant of his duties depends, in each case, on the exact
terms of the guarantee. The employer of a servant, whose due performance of working is guaranteed,
does not contract with the surety that he will use utmost diligence in checking the servant’s work. Hence,
the surety is not discharged from liability for the employee’s default on the ground that the default would
not have happened if the creditor had used all the powers of superintending the performance of the
debtor’s duty, which he could have exercised.1044 Mere negligence of the creditor would not discharge
such a surety.1045 However, if the employer of a servant, whose fidelity has been guaranteed, continues to
employ him after a proved act of dishonesty, the surety is discharged.1046 Where the manager, for whose
fidelity the surety had guaranteed, misappropriated amounts, and the directors of the employer bank had
connived in the fraud, the surety was discharged; because the employer, by his own conduct, had assisted
the infidelity of the employee.1047 Wilful connivance of the creditor in the default of the principal-debtor,
whose honesty has been guaranteed by the surety, discharges the surety.1048
[s 139.12] Waiver of Rights under the Section
The right of the surety, under this section, may be given up by the surety.1049
In almost every case where the surety has been released either in consequence of time being given to the
principal-debtor, or of a compromise being made with him, it has been contended that what was done
was beneficent to the surety, and the answer has always been that the surety himself was the proper judge
of that, and that no arrangement different from that contained in his contract is to be forced upon him
and bearing in mind that the surety, if he pays the debt, ought to have the benefit of all the securities
possessed by the creditor, the question always is whether what has been done lessens that security.1050
Equity intervenes to discharge a surety when the creditor has failed to deal with the security for the debt,
as he ought1051 to reduce or extinguish liability to the extent to which the security would have satisfied the
debt, and not absolutely.1052 In some cases, the surety has been denied relief for the creditor’s negligence
on the ground that the creditor owed no duty to take care towards the surety.1053 However, this view was
repudiated by the Court of Appeal, reaffirming authority imposing a duty of care on a mortgagee who
Sanjay Kataria
Page 9 of 15
exercises a power of sale, and holding that such a duty of care was owed to a surety as well as to the
mortgagor. A sale at a gross under-value was held to discharge the surety as well as the debtor to the
extent of the deficiency.1054
Where a guarantee was given on the terms that “all amounts payable by the guarantor... shall be paid in
full, free of set-off or counter-claim”, it was effective to prevent resistance to the creditor’s claim for
summary judgment by the surety on the ground of creditor’s negligent realisation of the security for the
loan. “Guarantees, such as these, are the equivalent of letters of credit and only in exceptional
circumstances should the Court exercise its power to stay execution.”1055 The creditor is entitled to decide
whether to sue the principal-debtor, the surety or to realise the security, or to do none of these.1056 While
negligent sale of the secured property at an undervalue may discharge the surety,1057 failure to realise at all
will not, even if the property declines in value, unless the creditor was personally responsible for the
decline.1058
In general, a creditor is entitled to consult his own interests, and is not obliged to take positive steps to
protect or to improve the guarantor’s position;1059 for, it is the task of the guarantor, not of the creditor,
to see that the principal-debtor performs the guaranteed obligation.1060 No creditor could carry on the
business of lending if he could become liable to a mortgagee and to a surety or to either of them for a
decline in value of mortgaged property, unless the creditor was personally responsible for the decline.1061
A surety cannot claim to be discharged on the ground that his position has been altered by the conduct of
the person with whom he has contracted where that conduct has been caused by a fraudulent act or
omission against which the surety by the contract of suretyship has guaranteed the employer.1062

AIR 1938 Ngp 413 : (1939) Ngp 175 : 176 IC 686.
990 Parvataneni Venkata Brahmarao v Andhra Bank Ltd.,

AIR 1964 AP 555 ; BOI v Suneel Kumar Dubey, (2017) 4BC 594.
991 Pirthi Singh v Ram Charan Aggarwal, AIR

1944 Lah 428 .
992 AKA Khan Ghuznavi v Nalional Bank of lndia,

AIR 1917 Cal 537 : (1916) 20 Cal WN 562 : 33 IC 34.
993 Bhagwan Das v M Ghulam Mahommad, AIR

1935 Lah 863 .
Sanjay Kataria
Page 10 of 15
994 Ram Prasad v Gordhan, AIR 1934 All 616

(surety discharged to the extent of the property released).
995 Jose Inacio Lourence v Syndicate Bank, (1989)

65 Com Cas 698 : 1988 Bank J 509 (Bom).
996 Probodh Kumar Das v Gillanders Arbuthnot & Co.,

AIR 1934 Cal 699 .
997 Illustration (a); Calvert v London Dock Co., (1838) 2 Keen 638.
998 Malawa Ram v Swami Das, AIR 1922 Lah 89

.
999 Suroj Bhan v Motu Ram, AIR 1930 Lah

1029 .
1000 Wandoor Jupiter Chits Pvt. Ltd. v KP Mathew,

AIR 1980 Ker 190 .

AIR 1935 Lah 729 : (1935) 16 Lah 757.
1002 Nur Din v Allah Ditta, AIR 1932 Lah 419

: (1932) 13 Lah 817 : 138 IC 305.
1003 UOI v Narayana Setti Jugadeswararao, AIR

1981 AP 215 .
1004 Chandrasekhara Pai v Town Co-op. Bank Ltd.,

AIR 1965 Mys 209 .

All 259; Babu Rao Ramchandra Rao v Babu Manaklal Nehrmal, AIR 1938 Ngp 413
: (1939) Ngp 175 : 176 IC 686 (special provisions of a Provincial Debt Conciliation Act affected the surety’s rights).
1006 Parvataneni Venkata Brahmarao v Andhra Bank Ltd.,

AIR 1964 AP 555 .
1007 Supra, AIR 1964 AP 555

.
1008 Bank of India Ltd. v Rustom Fakirji Cowasjee,

AIR 1955 Bom 419 : (1955) 57 BOMLR 850 .
Sanjay Kataria
Page 11 of 15
1009 MM Meyyappa Chettiar v Jayanthi Films (Madurai) Pvt. Ltd.,

AIR 1964 Mad 134 ; Vasireddi Seetharamaiah v Srirama Motor Finance Corpn.,
AIR 1977 AP 164 (the surety who could himself have taken steps to payoff the amount
and exercise the rights over the hypothecated vehicle, was not discharged by decrease in value of vehicle after it met with an accident
later).
1010 Supra, AIR 1964 Mad 134

.
1011 Mani Bhushan Malik v Pioneer Bank Ltd., AIR

1959 Cal 746 .
1012 Travancore National and Quilon Bank Ltd. (Re) (In Liquidation) v Cyril Gill,
AIR 1941 Mad 622 ; Mani Bhushan Malik v Pioneer Bank Ltd.,
AIR 1959 Cal 746 .
1013 Panakkatan Sankaran v District Board of Malabar,

AIR 1934 Mad 85 : 147 Ind Cas 964 : (1934) 66 Mad LJ 108.
1014 Means “instalment”.
1015 Dil Mahommed v Sain Das, AIR 1927 Lah 396

: 100 IC 922; Nur Din v Allah Ditta, AIR 1932 Lah 419
: (1932) 13 Lah 817 : 138 IC 305; section 134 under heading: “Omission to Sue the Principal-debtor within Limitation”.
1016 Barclays Bank pIc v Quincecare Ltd., (1992) 4

All ER 363 : [1988] FLR 166 .
1017 Chitty on Contracts, 28th Edn, vol 2, at 1348, paras 44–097; Bank of India v
Trans Continental Commodity Merchants Ltd. and Patel, (1983) 2 Lloyd’s Rep 298 (CA).
1018 State Bank of Saurashtra v Chitranjan Rangnath Raja,

AIR 1980 SC 1528 at 1531; quoting with approval Halsbury’s Laws of England, fourth Edn, Vol 20, para 820; State
of Madhya Pradesh v Kaluram, AIR 1967 SC 1105 :
[1967] 1 SCR 266 : (1967) SCJ 823 ; Hannen J’s dictum in
Wulff v Jay, [1872] LR 7 QB 756; Amrit Lal Goverdhan Lalan v State Bank of
Travancore, AIR 1968 SC 1432 : [1968] 3
SCR 724 ; Central Bank of India v BK Nayar, AIR 1985 P&H 161
(in absence of evidence that bank was negligent, guarantor not discharged).

AIR 1980 SC 1528 ; State Bank Of India v Vipul Enterprises, 1995 (34) DRJ 233
.

AIR 1949 Mad 194 .
Sanjay Kataria
Page 12 of 15
1021 Kamla Prasad Jadawal v Punjab National Bank,

AIR 1992 MP 45 , at 47; distinguishing State Bank of Saurashtra v Chitranjan Rangnath Raja,
AIR 1980 SC 1528 and State of Madhya Pradesh v Kaluram, AIR
1967 SC 1105 : (1967) 1 SCR 266 :
(1967) SCJ 823 .
1022 Vasireddi Seetharamaiah v Srirama Molor Finance Corpn.,

AIR 1977 AP 164 (vehicle under a contract of hire purchase in possession of the repairer,
who had lien over it for repair charges).
1023 Indian Bank v S Krishnaswamy, AIR 1990 Mad

115 .
1024 MR Chakrapani Iyengar v Canara Bank, AIR

1997 Kant 216 : 1997 (2) KarLJ 357 .

AIR 1980 SC 1528 , at 1532; Amrit Lal Goverdhan Lalan v State Bank of Travancore,
AIR 1968 SC 1432 : (1968) 3 SCR 724 , at 731,
at 1436.
1026 Gopal Chandra Bagaria v State Bank of India,

AIR 1994 Ori 329 .
1027 Karnataka Bank Ltd. v Gajanan Shankararao Kulkarni,

AIR 1977 Kant 14 at 17–18, quoting American Jurisprudence, vol 50, p 978, § 114; Rainbow
v Juggins, (1880) 5 QBD 138 ; Wulff v Jay,
[1872] LR 7 QB 756; and distinguishing State of Madhya Pradesh v Kaluram,
AIR 1967 SC 1105 : [1967] 1 SCR 266
: (1967) SCJ 823 .
1028 Ah Yan v President of Wakema Municipal Committee,

AIR 1938 Rang 90 ; Central Bank of India v B K Nayar, AIR 1985 P&H 161
.
1029 China and South Sea Bank Ltd. v Tan, (1990) 1

AC 536 , at 545 : (1989) 3 All ER 839 (PC);
Karnataka Bank Ltd. v Gajanan Shankararao Kulkarni, AIR 1977 Kant 14
, at 17–18.
1030 MR Chakrapani Iyengar v Canara Bank, AIR

1997 Kant 216 .
1031 M R Chakrapani Iyengar v Canara Bank, AIR

1997 Kant 216 .
1032 AKA Khan Ghuznavi v National Bank of India,

AIR 1917 Cal 537 ; Radha Kanta Pal v United Bank of India Ltd., AIR 1955 Cal 217
; Vasireddi Seetharamaiah v Srirama Motor Finance Corpn, AIR 1977 AP 164
Sanjay Kataria
Page 13 of 15
; Bhabani Sankar Patra v State Bank of India, AIR 1986 Ori 247
; Bank of India v Suneel Kumar Dubey, 2017 SCC Online MP 815 .
1033 M Pogose v Bank of Bengal, (1877) 3 Cal 174

(a deed of trust for the benefit of creditors did not impair the eventual remedy of the surety against the
principal-debtor); AKA Khan Ghuznavi v National Bank of India, AIR 1917 Cal 537
: (1916) 20 Cal WN 562 : 33 IC 34; Radha Kanta Pal v United Bank of India Ltd., AIR 1955 Cal 217
at 221; Bhabani Sankar Patra v State Bank of India, AIR 1986 Ori 247
at 251.
1034 Rees v Berrington, (1795) 2 Ves 540; referred to in Amrit Lal Goverdhan Lalan
v State Bank of Travancore, (1968) 3 SCR 724 : 1968 SC 1432.

All 259.
1036 Watson v Allcock, (1853) 4 De G M&G 242; illustration (b).

AIR 1938 Ngp 413 : (1939) Ngp 175 : 176 IC 686.

: (1939) 66 IA 198 :
(1939) 41 Bom LR 742 : 181 IC 1; Bharat National Bank Ltd. v Thakar Das Madhok,
AIR 1935 Lah 729 : (1935) 16 Lah 757.
1039 Aldermen and Citizens of Durham v Fowler, (1889)

22 QBD 394 ; Sonepat Co-op Society Ltd. v Kapuri Lal, (1935) 16 Lah 583, AIR
1936 Lah 305 : 157 IC 124.
1040 C P Sreelal v District Collector Thiruvananthapuram,

AIR 2007 Ker 131 .
1041 T Subramania Aiyar v Shaw Wallace & Co., AIR

1920 Mad 259 : 58 Ind Cas 648 : (1920) 43 Mad LJ 402.
1042 B Narayana Rao v SK Francis, AIR 1953 Mys 68

.
1043 Parvatibai Harivallabhdas Vani v Vinayak Balvant Jangam,

AIR 1939 Bom 23 : (1939) Bom 794 : (1938) 40 Bom LR
989 : 179 IC 258; Pirthi Singh v Ram Charan Aggarwal, AIR 1944 Lah 428
; Trilok Nath v Kehar Singh, AIR 1962 J&K 72 ; Adamsab
Usmansab Kanakya v Gurushinddayya Lingayya, AIR 1967 Mys 147 ;
Dalichand v State of Rajasthan, AIR 1976 Raj 112 .

AIR 1955 Cal 217 , at 221.
Sanjay Kataria
Page 14 of 15
1045 Guardians of Mansfield Union v Wright, (1882) 9

QBD 683 (negligence in not demanding accounts).
1046 Phillips v Foxall, [1872] LR 7

QB 666; Radha Kanta Pal v United Bank of India Ltd., AIR 1955 Cal 217
at 223 (the act must be proved: suspicion does not suffice); Cooperative Commission Shop Ltd. v Udham Singh,
AIR 1944 Lah 424 ; section 126 under heading: “Guarantee for Fidelity”.
1047 Chandrasekhara Pai v Town Co-op. Bank Ltd.,

AIR 1965 Mys 209 : AIR 1965 Mys 209 : (1964) 2
MysLJ.
1048 Dawson v Lawes, (1854) 23 LJ Ch 434

. See also illust. (c).

108 ; Central Bank of India v Multi Block Pvt. Ltd., AIR 1997 Bom 109
; Anil Kumar v Central Bank of India, AIR 1997 HP 5 ; Mukesh
Gupta v Sicom Ltd. Mumbai, AIR 2004 Bom 104 ; HDFC v Gautam Kumar Nag,
2012 AIR SCW 993 : (2012) 5 SCC 604. See section 133 above under heading: “Contracting out or Waiver by Surety of Rights under
this Section”.
1050 Calvert v London Dock Co., (1838) 2 Keen 638, at 644 per Lord Langdale.
1051 Mutual Loan Fund Assn v Sudlow, (1858) 5

CBNS 449 .
1052 Watts v Shutlleworth, (1861) 7 H&N 353; Chitty on Contracts, 28th Edn, vol 2,
at 1346, paras 44–095.
1053 Aldermen and Burgesses of Kingston-upon-Hull v Harding,

(1892) 2 QB 494 ; Barclays Bank Ltd. v Thienel, (1978) 242 EG 385
; Lachford v Beirne, (1981) 3 All ER 705 .
1054 Standard Chartered Bank Ltd. v Walker, [1982] 3

All ER 938 : [1982] 1 WLR 1410 (CA);
American Express Intl Banking Corpn v Hurley, [1985] 3 All ER 564 .
1055 Continental Illinois National Bank and Trust Co. of Chicago v Papanicolaou, The
Fedora, The Tatiana and The Eretrea II, (1986) 2 Lloyd’s Rep 441, at 445 (CA); Standard Chartered Bank Ltd. v Walker,
(1982) 3 All ER 938 : [1982] 1 WLR 1410 (CA);
American Express Intl. Banking Corpn. v Hurley, (1985) 3 All ER 564 .

AC 536 : (1989) 3 All ER 839 (PC).
1057 Standard Chartered Bank Ltd. v Walker, (1982) 3

All ER 938 (CA); American Express Intl. Banking Corpn. v Hurley, (1985) 3
All ER 564 .
Sanjay Kataria
Page 15 of 15
1058 Supra, (1990) 1 AC 536

, at 545 : (1989) 3 All ER 839 , at 842 (PC.

AC 536 , at 545 : (1989) 3 All ER 839 , at 842
(PC).
1060 Wright v Simpson, (1802) 6 Ves 714 : [1775–

1802] All ER Rep 257 ; M’Taggart v Watson, (1836) 3 Cl & Fin 525 per Lord Brougham at 540 (HL);
Aldermen and Citizens of Durham v Fowler, (1888) 22 QBD 394 ; Bank of India v
Trans Continental Commodity Merchants Ltd. and Patel, [1983] 2 Lloyd’s Rep 298 (CA).

AC 536 : (1989) 3 All ER 839 (PC).
1062 Aldermen and Burgesses of Kingston-upon-Hull v Harding,

(1892) 2 QB 494 , at 504 per Bowen LJ (CA).
End of Document
Sanjay Kataria
[s 140] Rights of surety on payment or performance.—
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.
The surety is invested with all the rights which the creditor has against the principal-debtor, after he has
paid the guaranteed debt or performed whatever he was liable for, upon the guaranteed debt becoming
due, or the principal-debtor defaulting in the duty guaranteed.
[s 140.2] Right of Subrogation
This section lays down a general principle, of which the most important practical application is found in
section 141. The whole doctrine of principal and surety with all its consequences of contribution etc.
developed from established principles of a Court of equity. The surety will be entitled to every remedy
which the creditor has against the principal debtor, to enforce every security and all means of payment; to
stand in the place of the creditor, not only through the medium of contract, but even by means of
securities entered into without the knowledge of the surety, having a right to have those securities
transferred to him, though there is no stipulation for that and to avail himself of all those securities against
Sanjay Kataria
Page 2 of 8
the debtor.1063
The Supreme Court1064 observed that it is the duty of the surety to pay the debt, and on such payment, he
shall be entitled to recover the entire amount from the principal debtor. Therefore, it is not as if the surety
is put to any peril. It was on the assurance of the surety that the creditor ventured to provide credit to the
principal debtor. When it comes to the point of recovery or repayment of the said debt, it is open for the
creditor or rather it is the right of the creditor to seek for realization of the debt by resorting to the easiest
recoverable mode and against the security which he considers as the most feasible one for effecting
recovery. At the said point of time, neither the principal debtor/borrower nor the guarantor is entitled to
dictate to the creditor as to the manner in which or as against which of the securities, recovery
proceedings are to be taken by the creditor. It is purely within the wisdom of the creditor to proceed in
the manner in which he considers as the most suitable. As soon as the guarantor has paid to the creditor,
what is due to the creditor under the guarantee, he is entitled, unless he has waived them, to be
subrogated to all the rights possessed by the creditor in respect of the debt, default or miscarriages to
which the guarantee relates.1065
A surety paying off the debt is entitled to all the rights and securities of the creditor as against the
principal-debtor.1066 The surety’s right to the creditor’s securities on payment of the guaranteed debt arises
from the obligation, imposed on the principal-debtor, of indemnifying the surety,1067 which makes it
inequitable for a creditor, by electing not to avail himself of the securities for the guaranteed debt, to
throw the whole liability on to the guarantor.
On the same foundation stands the right of the surety who has paid the debt, or the portion of it which
he guaranteed, to stand in the creditor’s place in the administration of the debtor’s estate. The principle is
undoubted, and the only difficulty is to be sure whether the surety has really guaranteed, only a certain
part of the debt, or is surety for the whole, but with a limit of liability.1068
“When a surety is only a surety for a part of the debt, and has paid that part of the debt, he is entitled to
receive the dividend which the principal-debtor pays in respect of that sum which the surety has
discharged”.1069 In such a case, it may be said that “the right of the surety arises merely by payment of the
part, because the part, as between him and the principal creditor, is the whole.” If the surety has paid part
of the debt, as regards such payment, he is no longer a surety but a principal-creditor, as the effect of part
payment is to transfer to him so much of the cause of action against the principal-debtor.1070
[s 140.2.1] Subrogation is Automatic
After the debt is due, or the default occurs in the performance of the promise which has been guaranteed,
and the surety has paid the surety or performed his liability under the guarantee, the surety can sue the
Sanjay Kataria
Page 3 of 8
principal-debtor in his own name. The word “invested”, in the section, dispenses with the necessity of any
written assignment or transfer of the rights, from the creditor to the surety.1071 This is the right of a surety.
An indemnifier cannot sue in his own name without an assignment from the creditor, but a surety can.1072
[s 140.2.2] Provisions of section not Applicable, principles apply
The provisions of section 140 do not apply to bonds given in favour of the Court, though its principles
may apply.1073 A surety, for appearance of a judgment-debtor1074 or an accused1075 in Court is not entitled
to recover any sum forfeited under the surety bond, either from the person for whom he stood surety, or
from any person who induced him to execute the surety bond.
[s 140.3] Sections 140 and 141
Please see under section 141 below.
[s 140.4] All the Rights of the Creditor
The surety on paying the creditor is subrogated to all the remedies and rights which the creditor has, not
only against the principal, but also all persons claiming under him, and to all the securities and right of
action generally which the creditor has in respect of the debt.1076
The surety is entitled to those benefits only which arise out of the transaction which gave rise to his right
or liability.1077 Therefore, where the surety’s liability is on the credit loan account of the debtor, he cannot,
on payment of that loan, claim the benefit of money lying in the cash-credit account.1078
Where the guaranteed debt is secured by a mortgage executed by the principal-debtor, the guarantor is, on
payment of the debt, entitled to a transfer of the mortgage even though he was not originally aware of its
existence. A surety is entitled to redeem if he has mortgaged property of his own to secure the debt due
from the principal-debtor, or if he has joined in a mortgage of the principal-debtor’s property, so as to
render himself liable to payment of principal or interest, and the principal-debtor defaults. When the
guarantor redeems a mortgage by the principal-debtor, he is deemed to do so for his own benefit, and is
not presumed, like the mortgagor, to have done so for the benefit of subsequent encumbrances; for, the
guarantor is not in privity with them, and towards them he has not undertaken any obligation for the
discharge of their debts. Therefore, he is entitled to have the mortgage assigned to him as against them,
Sanjay Kataria
Page 4 of 8
even though their securities were created before the contract of guarantee.1079
[s 140.5] Rights before Demand of Payment
The rights of a surety against the creditor accrue to him from the relationship created by the guarantee,
and arise at the time of his becoming guarantor, and not merely when he discharges the principal-debtor’s
obligation to the surety, and, therefore, it is not the law that the guarantor has no rights until he pays the
guaranteed debt.1080
[s 140.5.1] Injunction
It has been held that, even before the payment of the debt by the guarantor to the creditor, the guarantor,
by invoking the equitable doctrine of subrogation, can apply for temporary injunction for restraining the
principal-debtor from disposing of his personal properties till the disposal of the suit filed by the
creditor.1081
[s 140.6] Analogous Transactions
The benefit of this principle is extended to persons who, though not actually sureties, are in an analogous
position. A was surety for B for a liquor shop license and deposited cash security with the Government. B
then took C as a partner in the business. They, having failed to pay the license fee, Government recovered
it from the cash security. It was held that A could recover the amount from both B and C as both had
benefited.1082
The provision for subrogation enables to keep alive for the surety’s benefit any right of the creditor, under
a security or otherwise, which would otherwise have been extinguished at law by the payment of the debt
or performance of the duty.1083
However, a surety, who has become such, though with limited liability, in respect of the entire debt, has
Sanjay Kataria
Page 5 of 8
no rights by way of subrogation or in preference to the creditor until the creditor is fully paid.1084
Where the surety is reimbursed under a counter-guarantee, he loses his rights of subrogation, which are
transferred by operation of law to the counter-guarantor.1085 Once the surety has paid the creditor, he
becomes the creditor of the principal-debtor to that extent.1086 He is entitled to the same priority, as the
creditor, in the event of insolvency or winding up of the principal-debtor.1087 He is also entitled to the lien,
where the creditor was so entitled over the property of the principal-debtor given as security.1088
The surety, on payment of the price of the goods to the seller, is also invested with the seller’s right to
stop in transit, and, in an appropriate case, seller’s lien.1089 Where, by the custom of trade, a broker who
buys for an undisclosed principal is liable to the seller of the goods for the buyer’s default, and has himself
paid the seller, he is entitled to the seller’s lien as against the buyer.1090
A surety (or person in similar position), who has paid his principal’s debt, has also been held entitled to
the same rate of interest as the person who has made the advance.1091
When the creditor has acquired a right to immediate payment of the debt from the guarantor, the
guarantor is entitled to call upon the principal-debtor to pay the amount of the debt guaranteed, so as to
relieve the guarantor from his obligation, even though the guarantor has paid nothing under the
guarantee, and even though the creditor has not demanded payment from him, or the principal-debtor.1092
This right is based on the general equitable rule that a person entitled to an indemnity may enforce his
right to it, before he has suffered loss. This right is not available before the debt is due to the creditor, and
the surety is not entitled to relief until the debt is payable by him1093 The indorser of a bill of exchange “is
primarily liable as principal on the bill, and is not strictly a surety for the acceptor” but he has this in
common with a surety for the acceptor, that after notice of dishonour “he is entitled to the benefit of all
payments made by the acceptor, and is entitled on paying the holder, to be put in a situation to have a
right to sue the acceptor.”1094

AIR 1968 SC 1432 quoting with approval arguments of Sir Samuel Romilly approved in Craythorne v Swinburne,
(1807) 14 Ves 160 per Lord Eldon at 169 : [1803–13] All ER Rep 181 at 182;
1064 Bank of Bihar v Damodar Prasad, AIR

1969 SC 297 : [1969] 1 SCR 620 .
Sanjay Kataria
Page 6 of 8
Services and Institutions, para 1138; Kadamba Sugar Inds. Pvt. Ltd. v Devru Ganapathi Hegde Bhairi, AIR
1993 Kant 288 .
1066 Darbari Lal v Mahbub Ali Mian, AIR

1927 All 538 : (1927) ILR 49 All 640 (case of
part payment of debt).
1068 Section 128 above under heading: “Limits on Liability by Contract”.
1069 Gray v Seckham, (1872) LR 7

Ch 680, at 683 per Mellish LJ; Parvateneni Bhushayya v Pothuri Suryanarayana, AIR 1944 Mad
195 : (1944) Mad 340 (case of mortgage).
1070 Bombay Co. Ltd. v Official Assignee of Madras,

AIR 1921 Mad 236 : (1921) 44 Mad 381 : 63 IC 173.

AIR 1968 SC 1432 , at 1437 : (1968) 3 SCR 724
; Coorla Spining and Weaving Mills Co. Ltd. v Vallabhdas Kallianji, AIR 1925
Bom 547 .

AIR 1926 Mad 544 : (1925) 49 Mad 156 : 95 IC 154.
1073 Pirthi Singh v Ran Charan Aggarwal,

AIR 1944 Lah 428
1074 Bhana Mal v Bharti Mal-Bansi Dhar,

AIR 1932 Lah 23 ; but see Tirumala Savuri Naicker v Royar,
AIR 1921 Mad 530 .
1075 Pirthi Singh v Ran Charan Aggarwal,

AIR 1944 Lah 428 ; Bhupati Charan Nandi v Golam Ehihar Choudhury,
AIR 1920 Cal 498 : 56 IC 539; Sunder Singh v Kishen Chand, (1899) Pun Rec No 1; Bur Singh v Kehru,
AIR 1938 Lah 732 .
1076 Chunduri Panakala Rao v Atmuri Venkata Sarvesam,

AIR 1936 Mad 342 ; Krishnasami Pattar v Gopalakrishna Reddiar, AIR 1927 Mad
421 : 99 IC 676.
1077 Bank of Baroda v Krishna Ballabh, AIR

1975 Raj 1 , at 5.

1975 Raj 1 , at 5.
Sanjay Kataria
Page 7 of 8
1079 Transfer of Property Act, 1882, sections 91 and 92.
1081 Mamata Ghosh v United lndl Bank Ltd.,

AIR 1987 Cal 280 : (1990) 69 COMP CASES 663 (injunction granted on facts).
1082 Pheku Ram Mali v Ganga Prasad, AIR

1938 All 206 : (1938) All LJ 223 : 174 IC 900. As to the right of a payer of a bill of exchange for the
honour of any party liable upon it, see Negotiable Instruments Act, 1881, section 114.
1083 English Mercantile Law Amendment Act, 1856 (19 & 20 Vict c 97,
section 5).
1084 Sass, ex p. National Provincial Bank of England Ltd. (Re),

(1896) 2 QB 12 , at 15; Darbari Lal v Mahbub Ali Mian, AIR 1927 All 538
: (1927) 49 All 640 : 101 IC 513 (he
becomes only a creditor of the principal-debtor for what he has paid); Carr Lazarus Phillips v Alfred Ernest Mitchell,
AIR 1930 Cal 17 .
1085 Brown Shipley & Co. Ltd. v Amalgamated Investment (Europe) BV, (1979) 1
Lloyd’s Rep 488.
1086 Lord Churchill, Manisty (Re) v Churchill, (1888)

39 ChD 174 , at 176 per North J; Morris v Ford Motor Co. Ltd., [1973] QB 792
per James LJ at 809 : (1973) 2 All ER 1084 , at 1097
(CA).
1087 Lamplugh Iron Ore Co. Ltd. (Re), [1927] 1

Ch 308 : (1926) All ER Rep 682 (rates); Lord
Churchill, Manisty (Re) v Churchill, (1888) 39 ChD 174 .
1088 Imperial Bank v London and St Katharine Docks Co.,

(1877) 5 ChD 195 .
1089 Siffken v Wray, (1805) 6 East 371.
1090 (1877) 5 ChD 195

.
1091 Beulah Park Estate, Sargood’s Claim (Re), (1872)

LR 15 Eq 43.

[1909] 2 Ch 401 : [1908–10] All ER Rep 510 ;
Sanjay Kataria
Page 8 of 8
Anderson-Berry, Harris (Re) v Griffith, [1928] Ch 290 :

[1927] All ER Rep 143 (CA); Tate v Crewdson, [1938] Ch 869
: [1938] 3 All ER 43 ; Watt v Mortlock,
[1964] Ch 84 : [1963] 1 All ER 388 ; Thomas v
Notts Inc Football Club Ltd., [1972] Ch 596 : [1972] 1
All ER 1176 .
1093 Lloyd v Dimmack, (1877) 7 ChD 398

; Hughes-Hallett v Indian Mammoth Gold Mines Co., (1882) 22 ChD 561
; Bradford v Gammon, [1925] Ch 132 :
[1924] All ER Rep 766 ; Morrison v Barking Chemicals Co. Ltd., [1919] 2 Ch 325
.
1094 Duncan Fox & Co. v North and South Wales Bank,
[1880] 6 App Cas 1 per Lord Blackburn at 18 : (1874-80) All ER Rep 1406
(HL).
End of Document
Sanjay Kataria
[s 141] Surety’s right to benefit of creditor’s securities.—
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.
Illustrations
(a) C, advanced to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the
2,000 rupees by a mortgage of B’s furniture. C cancels the mortgage. B becomes insolvent and C sues A
on his guarantee. A is discharged from liability to the amount of value of the furniture.
(b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance
from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge of
A, withdraws the execution. A is discharged.
(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C
obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not
discharged.
The surety is entitled to benefit of every security, which the creditor had against the principal-debtor at
the time the contract of guarantee was made, whether the surety knew or not of the existence of these
securities. The surety is discharged, if the creditor loses any such security, or parts with it without the
Sanjay Kataria
Page 2 of 16
consent of the surety. He is discharged to the extent of the value of the security.
[s 141.2] Surety’s Right to Securities
Section 141 embodies the general rule of equity expounded by Sir Samuel Romilly as counsel and
accepted by the Court of Chancery in Craythorne v Swinburne.1095 It incorporates the rule of English law
relating to the discharge, from liability, of a surety when the creditor parts with or loses the security held
by him.1096 However, the section limits the surety’s right to securities held by the creditor at the date of his
becoming surety, and has modified the English rule under which the surety is entitled to the securities
given to the creditor, both before and after the contract of guarantee.1097
Section 141 applies to a situation where the principal-debtor offers more than one security, one of them
being the personal guarantee of the surety. Even if the surety of the personal guarantee is not aware of any
other security offered by the principal-debtor, yet once the rights of the surety against the principal-debtor
are impaired by an action or inaction implying negligence in the form of lack of supervision undertaken in
the contract, the surety should be discharged under the combined operation of sections 141 and 139.
When the pledged goods were lost by bank’s negligence, the surety would be discharged because the
pledged goods if sold at the then market price would have satisfied the bank’s claim.1098
Joint promisors are not sureties under section 126; hence section 141 has no application if one of the two
joint promisors pay the entire debt.1099
[s 141.3] Security
In State of Madhya Pradesh v Kaluram,1100 Shah J observed:
...The expression “security” in section 141 is not used in any technical sense; it includes all rights which the creditor 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 section 141, discharged to the extent of the value of the security lost or parted
with.
Sanjay Kataria
Page 3 of 16
The rule is not confined to securities in any technical sense.
[s 141.4] Creditor not Bound to Insist on Security
A creditor is not bound to insist upon any particular kind of security from the principal-debtor. It is only
when he takes some security from the principal-debtor that the surety can claim a right to the benefit of
that security.1101 However, if the creditor takes security from the principal-debtor, it is his duty to see that
that security remains enforceable against the principal-debtor, and if any formalities are required by law, in
connection with that security, it is his duty to see that such formalities are observed. However, more than
this, the creditor is not under obligation to do.1102
[s 141.5] Payment by Surety Not Necessary
Payment by the surety of the guaranteed debt, or performance of the duty guaranteed, is not a requisite
for the benefit contemplated under this section, or to entitle the surety to the discharge.1103 It is not a case
of subrogation but a case where the surety is entitled to a discharge of his liability pro tanto, the value of the
security discharged in proportion to the extent of the value of security which the creditor has lost or
which, without the consent of the guarantor he has parted with.
Where payment has been made by the guarantor, there is no need to resort to section 141. While section
140 relates to the enforcement of liability under the security available to a creditor, section 141 deals with
the protection of a guarantor and reduction of his liability in proportion to the security lost or parted with
by the creditor without the guarantor’s consent.
[s 141.6] Securities Held by Creditor when the Contract of Suretyship is Entered into
It will be seen that the present section, by limiting the surety’s right to securities held by the creditor at the
date of his becoming surety, has adopted a view which was still not wholly abandoned under English law
when the Act was framed,1104 but which has for a good many years been treated as untenable. Earlier
editors of this book opine that this was not deliberate policy, but merely that the codification of equity
was somewhat out of date. The law in India is, however, as stated in illustration (c).1105
Sanjay Kataria
Page 4 of 16
It has been held that this section does not enable the creditor to withhold from the surety, any security
actually held by him at the time when the debt is paid by the surety. This section merely gives the creditor
the right to surrender a security, not held by him at the time of the contract, provided he exercises that
right before payment by the surety.1106
Where the surety becomes a surety for one of the several debts owed by the debtor to the creditor, who
holds different securities for different debts, the surety is entitled to the benefit of that security for the
debt which the surety is liable for; the creditor losing other securities does not discharge the surety. The
surety is not entitled to the credit with the bank in the cash-credit account, it being a separate account.1107
However, where the loan advanced to a company was secured against goods of the debtor company,
under terms of the guarantee, would be sold from time-to-time, and their sale proceeds brought adjusted
towards the debt due, and the account of the debtor was a continuing one, it was held that the surety
could not claim any benefit to any security available before the date they became surety, and considering
the peculiar nature of the security (goods sold from time-to-time and adjusted in accounts), the value of
the goods available as security at the time the directors resigned should be taken into account, for the
purposes of adjusting the guarantor’s liability. The expression “when the contract of suretyship is entered
into”, it was held, meant that the surety could not claim the benefit of security available before the
date.1108 When the liability of the directors of the principal debtor company as guarantors stood frozen on
the date of their resignation, they were not entitled to the benefit of the creditor’s securities arising after
the said date.1109
[s 141.7] Loses or Parts with
The words “if the creditor loses security” refer to deliberate action by the creditor, and not a mere
fortuitous situation beyond the control of the creditor. The liability of the guarantor is a strict liability and
even if the principal debtor is discharged from liability, unless such discharge is through the act of the
creditor without the consent of the surety/guarantor, the creditor’s right of action against the surety is
preserved.1110 The Supreme Court further pointed out “the expression “creditor loses” cannot mean and
imply an involuntary act but by reason of an act which is attributable to the creditor.
It being immaterial, whether the loss is due to a positive act on the part of the creditor, or his inaction.1111
Thus, where a successful bidder at an auction of forest, felled trees, and was allowed to remove the trees
without making payment, the sureties for payment of the price stood discharged thereby, as the security
was lost by the creditor.1112
Failure, by the creditor, to preserve the security given by the surety and to enforce his right under it,
Sanjay Kataria
Page 5 of 16
would discharge the surety.1113 Where the creditor had lost goods of a certain value, the surety was
discharged from liability to the extent of the value of such goods.1114 Where the surety alleged that the
goods hypothecated with the bank were lost, and the goods were not in existence at the time of filing of
the suit by the creditor against the surety, the suit, as against the surety, was liable to be dismissed.1115
Where the creditor was not responsible for the loss of hypothecated goods, the surety is not
discharged.1116 It has been held that where the goods of the principal-debtor are hypothecated, and are not
in possession of the hypothecate bank, there is no question of the bank losing or parting with the same;
hence, the surety is not entitled to invoke section 141 for his benefit.1117 One reason for this is that the
surety is in a position to pay off the debt to the creditor, and exercise the rights which the creditor could
have exercised and which were available to him under section 140.1118
The creditor can decide when to proceed against the security given by the principal debtor.1119 A mere
passive inactivity 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 paying the debt and becoming subrogated to the rights of the
creditor.1120 A surety is not discharged merely because the creditor failed to take possession of
hypothecated goods.1121 In 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.1122
Where the plaintiff creditor, a mortgagee, had enforced his right by getting a part of the mortgaged
machinery and plant sold, he could not be said to have lost or parted with its right in respect of the
security. The plaintiff creditor, by the act, had not impaired in any way the remedy of the defendant-surety
against the principal-debtor.1123
After acceptance of a bill of exchange, the primary liability is of the acceptor, the drawer being liable only
as a surety. It is necessary for the creditor to preserve the security, whether it is an actionable claim, or
whether it is pledge-mortgage or a negotiable instrument. Thus, where the creditor failed to preserve the
bills of exchange due to negligence or inaction by not instituting any proceeding against the acceptor till
the expiry of the period of limitation, the right available to the drawer to proceed against the acceptor was
irrevocably lost, and consequently the liability of the surety to pay the amount also stands discharged.1124
This section does not apply where the loss of security is due to act of God or enemies of the state or due
to unavoidable accident;1125 nor where the creditor and the debtor agree between themselves to vary their
original contract by reducing the amount to be advanced and the number of properties to be given as
security, there being no parting with security in such a case.1126 In Firm Ayili Mallappa Sanna v Parasetti
Sidramappa,1127 the plaintiff mortgagee filed a suit on a mortgage bond against the mortgagor and the
surety, and stated in the plaint that he had “given up only the mortgage right and filed the suit as on the
simple bond”. It was held that, notwithstanding the statement in the plaint, the surety was not discharged,
because the plaintiff could still sue under Order XXXIV, rule 14 of the Code of Civil Procedure for sale, or
Sanjay Kataria
Page 6 of 16
could assign the mortgage right to the surety, or preclude the surety from enforcing the mortgage right
because of the provisions of section 141.1128
A creditor has been held to have parted with the security for instance, where he failed to register the
charge over the hypothecated vehicle in the registration record of the vehicle with the Regional Transport
Office;1129 where the creditor, having a guarantee for payment of decree, allowed the release of
attachment.1130
The creditor cannot be said to have lost or parted with security to discharge the surety where the secured
property is sold under the terms of the compromise decree; this is rather the enforcement of the creditor’s
right to realise the loan by selling the property;1131 nor is the surety discharged where the creditor has
failed to register the charge over the secured property under the Companies Act, 1956,1132 nor where the
principal debtor company is nationalised.1133
[s 141.8] Burden of Proof
The circumstances of discharge must be proved by the surety, viz. that goods are lost by a voluntary act of
the creditor.1134 Where goods are pledged, the burden of proof lies on the creditor to show that the goods
were damaged or destroyed by causes other than any act or omission of the creditor; viz, that the receiver
of goods appointed by the Court had mismanaged or that the goods were damaged or destroyed by
natural causes.1135
[s 141.9] Sections 140 and 141
Under section 140, a guarantor becomes entitled to the rights of the creditor upon making payment or
performing the guaranteed duty; such rights include the right of enforcing all the securities held by the
creditor, whether the securities were taken before or after the contract of suretyship.1136 However, under
section 141, the payment or the performance of the duty is not a condition precedent for getting the
benefit;1137 and the discharge is to the extent of those securities lost which were held at the time of the
contract of suretyship.
Section 140 applies where the surety has paid off the guaranteed liability, when he would be subrogated to
the creditor’s position, and entitled in his own right, therefore, to enforce the securities available to the
creditor. Section 141 on the other hand, is designed to protect the surety against the creditor’s act of
losing, or without the surety’s consent, parting with the security. Illustration (a) to section 141 shows that
the payment by the surety is not a requisite for the benefit contemplated by that section; it is not a case of
Sanjay Kataria
Page 7 of 16
subrogation, but a case where the surety is entitled to a discharge of his liability pro tanto the value of the
security discharged or lost by the creditor.1138
Under section 140, a surety is invested with the rights of the creditor as against the principal-debtor upon
payment or performance of all that he is liable for. The last words in italics are not repeated in the present
section. The Contract Act does not lay down at what point of time the surety is entitled to have the
creditor’s securities made over to him wholly or in part, whether it is when the debt of the creditor is paid
off, or when the surety pays the amount of his guarantee. The point arose in Goverdhandoss Gokuldas Tejpal
v Bank of Bengal,1139 where it was held that surety was not entitled to the benefit of a portion of the
creditor’s securities until the whole of the debt due to the creditor was paid off. Farran J., in rejecting the
surety’s claim said:
It seems to me to be a strange doctrine that a creditor not fully secured by a mortgage who obtains the benefit of a surety for part of his
mortgage debt in order to further secure himself by that very act is deprived of portion of the security the inadequacy of which was a
reason for demanding the surety; or that a person advancing say Rs. 10000/- on a mortgage which is valued only at Rs. 5000/- and has
Rs. 5000/- of his advance guaranteed by a surety, is only in reality secured to the extent of Rs. 7500/- by reason of the surety’s right to
claim the benefit of half the mortgage security on paying his half of the debt. To hold so would, I think, defeat the intention of the
parties to such a transaction. A principle of equity is seldom adopted which has that effect. If such were the result of section 141 of the
Contract Act, I should expect to find the wording of section 140 repeated in section 141. The striking difference in the language of the
two sections is a strong argument against the plaintiff’s contention.
In Parvateneni Bhushayya v Pothuri Suryanarayana,1140 X owed three distinct debts to a bank. B. was surety for
debt 1, H for debt 2, and K. for debt 3. The bank later demanded security from X, who executed a
mortgage to the bank to secure the three debts. Subsequently, the bank brought three suits to recover the
debts and obtain decrees. The bank, for a consideration less than the balance due to them, assigned the
decree for debt 3, and also the mortgage to H. B obtained, from the Court, a declaration that he was
entitled to share in the mortgage in proportion to the amount he had paid, the Court holding that as each
debt was discharged a right to a proportionate part of the security passed to the surety making the
payment. The Madras High Court, while approving the decision of the Bombay High Court above1141 on
the ground that the surety’s guarantee did not relate to the secured part of the debt,1142 refused to accept
the opinion of Farran J. that the surety’s claim against the securities arises only when the creditor’s claim
has been satisfied. Farran J. was dealing with a case where only section 141 had been pleaded, whereas the
Madras Court had to consider the combined effect of sections 140 and 141. In the Madras case, unlike the
Bombay case, the security was given after the contract of suretyship. The Court held, however, that
section 140 applied to such a security, as noted above. The surety had guaranteed only part of a debt, and
had discharged his part. The Court decided that he was entitled, as against a subsequent assignee of the
creditor, to a proportionate share in security held by the creditor at the time the surety discharged his
liability, even though the creditor was still not fully paid. Although the Madras High Court doubted the
view of Farran J, it made no attempt to deal with his argument on the equities noted above. Further, the
solution in the Madras case appears inequitable. The Court considers that any other view would enable a
creditor to make an appropriation to the detriment of surety who had already paid. However, it is
submitted that if the creditor has negligently sold the security to H at less than its market value, the surety
Sanjay Kataria
Page 8 of 16
is pro tanto released.1143 If, on the other hand, H had paid the full market value, it is inequitable that he
should be called upon to share it with B. Further, the very basis of the surety’s right to securities rests
upon the obligation of the principal-debtor to indemnify the surety. It would be strange if the surety could
use these rights to hamper the creditor in recovering his debt.1144 It is submitted that the creditor’s right to
hold securities until the whole debt has been paid is paramount to any claim of the surety, whether based
upon section 140 or section 141.
The Law Commission of India agreed with the view expressed by the editors of this book, and
recommended amendment to the section.1145
[s 141.10] Extent of Discharge
Where the creditor loses any security given to him by the principal-debtor, the surety is discharged to the
extent of the value of the security.1146 The value of the security means its value at the time it was given to
the creditor. This means that if the value of the security is less than the liability undertaken by the surety,
then the surety must be held to be discharged to the extent of the value of the security, and that he will
still be required to discharge the liability which exceeds the value of the security. However, if the value of
the security given is far in excess of the liability, the surety must be held to be discharged wholly.1147
Where a creditor sued the principal-debtor and the surety on a mortgage bond and in his plaint formally
relinquished his claim against part of the mortgaged property which was worth the amount guaranteed by
the surety, it was held that the surety was discharged.1148 When the sureties executed the surety bond, the
judgment debtor owned some machinery which had been attached in the execution of the decree. It was
subsequently sold for Rs. 4, 200/- by an auction sale. The contention that by the sale of the machinery the
whole of the bond was discharged cannot be supported on the basis of Section 141 of the Contract Act
because of the words “the surety is discharged to the extent of the value of the security”, which is lost.
The surety took liability for the payment of Rs. 12.000/- and the executing court held that the decree-
holders are entitled to execute the decree against them to the extent of Rs. 7800/-1149
[s 141.11] Waiver or Contracting out
It has been held that the parties to a contract can contract out of the right of the surety under section
141;1150 and such an agreement is not against public policy.1151 Thus, where the surety had agreed in the
surety bond not to claim the benefit under section 141, the stipulation could not be resiled from.1152
[s 141.12] Position under English Law and other Jurisdictions:
Sanjay Kataria
Page 9 of 16
The principle has been stated in the English law as follows:
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, or ought to have had, them in his full possession 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.1153
The surety, in effect, bargains that the securities which the creditor takes shall be for him, if and when he shall be called upon to make
any payment,1154 or if a settlement of account is otherwise required, e.g., if the surety brings a redemption suit in respect of a security
given by him.1155 The creditor, however, is not bound to use extraordinary, or, it would seem, any, diligence about preserving or
retaining a security which is in fact worthless.1156
The basis of the rule has been stated:1157
I take it to be, because as between the principal and surety, the principal is under an obligation to indemnify the surety; and it is, as I
conceive, from this obligation that the right of the surety to the benefit of securities held by the creditor is derived.
A surety is entitled to the benefit of the principal-debtor’s set-off against the creditor, if it arises out of the
same transaction; this follows from the surety’s right to be indemnified by his principal, combined with
the equitable maxim of avoiding circuity of action.1158
On payment of the guaranteed debt or performance of the guaranteed duty in full,1159 the surety is entitled
to have assigned to him all securities held by the creditor in respect of the debt or duty. If securities to
which the surety is entitled are not voluntarily given up to him by the creditor, he may bring an action to
compel delivery.1160
However, where the guarantee is for a limited sum only, the surety has, on payment of that sum, all the
rights of the creditor in respect of that amount. He is, thus, entitled to share in any security held by the
creditor for the whole debt,1161 even if that security was given without his knowledge; and to secure a
Sanjay Kataria
Page 10 of 16
further debt in addition to that for which he became guarantor;1162 but he is not entitled to the benefit of a
security given by the principal-debtor to the creditor, without the guarantor’s knowledge, at a different
time and for another part of the debt to which his guarantee does not extend.1163
A creditor can be said to have parted with the security when, by reason of what he has done, he cannot
give him the securities in exactly the same condition as they formerly stood in his hands;1164 where the
creditor has put it out of his power to hand over to the surety the means of recouping himself by the
security given by the principal-debtor.1165
In Buckeridge v Mercantile Credits Ltd.,1166 the directors of a company and their associates guaranteed a loan
to the company, which was secured by mortgage over land and a debenture creating a floating charge over
all the company’s assets. The company committed default, and the creditor demanded the payment from
the company and the sureties, indicating that it would exercise powers under the mortgage. Neither the
company, nor the sureties paid up. Instead of selling the mortgaged property, the creditor appointed a
receiver and manager for the hotel, under the powers in the debenture. There was no provision for
appointment of a receiver and manager, in the mortgage. The receiver conducted business at a loss. He
also took a loan from the creditor for running the business. Then he sold the land and business, and paid
the receipts to the creditor minus the amounts paid by him to the preferential creditors, the trading loss,
expenses of sale, and his professional fees. The creditor applied the amount received, first to the loan
given to the receiver, and the balance towards the loan of the company, and sued the company and the
sureties for the outstanding amount of principal and interest for the loan. The sureties contested their
liability to pay the receiver’s professional fees, or the debts, obligations or losses that he had incurred. It
was held that the sureties were entitled to credit only for the net balance accounted for by the receiver less
the amount of the advances made to him by the creditor and interest thereon. The creditor had to give
credit only for the amount it received from the receiver; the trading losses and fees reduced the sum
available for payment, in partial satisfaction of the company’s debt.
1095 Craythorne v Swinburne, (1803–13) All ER

Rep 181 ; quoted in Amrit Lal Goverdhan Lalan v State Bank of Travancore, AIR
1968 SC 1432 : (1968) 3 SCR 724 and
Industrial Finance Corpn of India Ltd. v Cannanore Spinning & Weaving Mills Ltd., AIR 2002 SC 1841
: (2002) 5 SCC 54 .
1096 Wulff v Jay, (1872) LR 7

QB 756; State of Madhya Pradesh v Kaluram, AIR 1967 SC 1105
: (1967) 1 SCR 266 , at 273 : (1967)
SCJ 823 .

AIR 1968 SC 1432 : (1968) 3 SCR 724 .
Sanjay Kataria
Page 11 of 16

AIR 1980 SC 1528 , at 1531.
1099 RMMST Vyravan Chettiar v Official Assignee,

AIR 1933 Mad 39 : (1933) 55 Mad 949 : 139 IC 562.
1100 State of Madhya Pradesh v Kaluram, AIR

1967 SC 1105 : (1967) 1 SCR 266 , at 273 :
(1967) SCJ 823 at 827; Rees v Berrington, (1795) 2 Ves 540; referred to in
Amrit Lal Goverdhan Lalan v State Bank of Travancare, AIR 1968 SC 1432 :
(1968) 3 SCR 724 ; quoting Wulff v Jay, (1872)
LR 7 QB 756; P Janakiram Chetty v Punjab National Bank Ltd., AIR 1968 Mys 56
.
1101 Canbank Financial Services Ltd v SFL Industries Ltd,

2016 SCC Online Del 6253
1102 Bank of India Ltd. v Rustom Fakirji Cowasjee,

AIR 1955 Bom 419 : (1955) 57 BOMLR 850 .
1103 J Harigopal Agarwal State Bank of India, AIR

1976 Mad 211 : (1976) 1 Mad LJ 250.

, at 676 per Blackburn J (point thought doubtful); Pearl v Deacon, (1857) 1 De G&J 461 : 116 RR 89, 53 ER 328.

AIR 1949 Mad 194 .

AIR 1944 Mad 195 : (1944) Mad 340. See section 140 and section 141 for more details.

1975 Raj 1 , at 5; State of Madhya Pradesh v Kaluram, AIR 1967 SC 1105
: (1967) 1 SCR 266 :
(1967) SCJ 823 .

1976 Mad 211 at 213 : (1976) 1 Mad LJ 250.
1109 State Bank of India v Madras Bolts & Nuts (P) Ltd., 1998 93 COMP CASES
103 SC : (1998) 8 SCC 433 .
Ltd., AIR 2002 SC 1841 : (2002) 5 SCC 54
(the discharge of principal debtor by a Nationalisation Act not being through an act of creditor does not
discharge the surety).
Sanjay Kataria
Page 12 of 16

1967 SC 1105 : (1967) 1 SCR 266 :
(1967) SCJ 823 .

1967 SC 1105 : (1967) 1 SCR 266 ; Bank of
Baroda v Krishna Ballabh, AIR 1975 Raj 1 , at 5.
1113 M Ramnarain Pvt. Ltd. v State Trading Corpn. of India Ltd.,

AIR 1988 Bom 45 .
1114 Amrit Lal Goverdhan Lalan v State Bank of Travancare,

AIR 1968 SC 1432 : (1968) 3 SCR 724 .
1115 Union Bank of India v Suresh Bhailal Mehta, AIR

1997 Guj 48 : (1997) 1 GLR 260 .
1116 R Lilavati v Bank of Baroda, AIR 1987 Kant 2

; Susheel Kumar Gupta v Punjab and Sind Bank, AIR 2006 Uttaranchal 26 : I
(2007) BC 353 .
1117 Bank of India v Yogeshwar Kant Wadhera, AIR

1987 P&H 176 , at 179; overruling State Bank of India v Quality Bread Factory, Batala,
AIR 1983 P&H 244 ; Vasireddi Seetharamaiah v Srirama Motor Finance Corpn., AIR
1977 AP 164 ; Karnataka Bank Ltd. v Gajanan Shankararao Kulkarni, AIR
1977 Kant 14 .
1118 Vasireddi Seetharamaiah v Srirama Motor Finance Corpn.,

AIR 1977 AP 164 .
1119 Ibrahim Abdul Latif Shaikh v Corporation Bank,

AIR 2003 Kant 98 : 2003 (2) ARBLR 564 Kar : ILR 2002 KAR 5386
.
1120 Supra, AIR 1977 Kant 14

; Ibrahim Abdul Latif Shaikh v Corporation Bank, AIR 2003 Kant 98
: 2003 (2) ARBLR 564 Kar : ILR 2002 KAR 5386 .
1121 Jammu and Kashmir Bank Ltd. v Choudhary Parkash Chand,

AIR 2006 J&K 11 : II (2006) BC 8
: 2005 (2) JKJ 291.
1122 Karnataka Bank Ltd. v Gajanan Shankararao Kulkarni,

AIR 1977 Kant 14 ; R Lilavati v Bank of Baroda, AIR 1987 Kant 2
, at 4.

AIR 1982 Del 487 , at 501 : 1984 56 COMP CASES 509 Delhi.
Sanjay Kataria
Page 13 of 16
1124 M Ramnarain Pvt. Ltd. v State Trading Corpn. of India Ltd.,

AIR 1988 Bom 45 , at 59.
1125 Krishnan Talwar v Hindustan Commercial Bank Ltd.,

AIR 1957 P&H 310 .

1932 Bom 168 : (1932) 56 Bom 101 : (1932) 34 Bom LR 167
.
1127 Firm Ayili Mallappa Sanna v Parasetti Sidramappa,

AIR 1937 Mad 501 : (1937) 1 Mad LJ 469 : 169 IC 679.
1128 Firm Ayili Mallappa Sanna v Parasetti Sidramappa,

AIR 1937 Mad 501 : (1937) 1 Mad LJ 469 : 169 IC 679.
1129 Jose lnacio Lourence v Syndicate Bank, (1989)

65 Com Cas 698 : 1988 Bank J 509 (Bom).
1130 Ram Prasad v Gordhan, AIR 1934 All 616

.
1131 AIR 1982 Del 487

.
1132 MM Meyyappa Chettiar v Jayanthi Films (Madurai) Pvt. Ltd.,

AIR 1964 Mad 134 .
Ltd., AIR 2002 SC 1841 : (2002) 5 SCC 54 (s 141 does not apply); Makhan
Lal Harnarain v Karamchand Thaper & Bros Pvt Ltd., AIR 2004 Jhar 143 .
1134 Mahendrabhai Kantilal Dave v Manekchowk Coop Bank Ltd.,

AIR 2007 Guj 188 (hypothecated goods).
1135 Punjab National Bank v Lakshmi Industrial and Trading Company Pvt Ltd.,
AIR 2001 All 28 .

AIR 1944 Mad 195 : (1944) Mad 340.
1137 Section 140 above under heading: “Sections 140 and 141”.
Sanjay Kataria
Page 14 of 16

1976 Mad 211 : (1976) 1 Mad LJ 250.
1139 Goverdhandoss Gokuldas Tejpal v Bank of Bengal,

(1891–92) ILR 15 –16 Bom 33.

AIR 1944 Mad 195 : (1944) Mad 340.
1141 Goverdhandoss Gokuldas Tejpal v Bank of Bengal,

(1891–92) ILR 15 –16 Bom 33.
1142 Wade v Coope, (1827) 2 Sim 155, 57 ER 747.
1143 Indian Contract Act, 1872, section 139, illustration (b). Pearl v Deacon, (1857) 1
De G&J 461 : 116 RR 89 : 53 ER 328; section 139, illust. (b).
1144 Supra, (1890) 15 Bom 48 at 63; Goverdhandoss Gokuldas Tejpal v Bank of

Bengal, (1891–92) ILR 15 –16 Bom 33.
1145 The 13th Report of the Law Commission of India 1958, para 111,
recommended amending the section to read as follows (proposed amendment in italics):
“141. Surety’s right to benefit of creditor’s securities.—If the debt or liability owed by the principal-debtor to
the creditor has been paid or discharged in full, the surety is entitled to the benefit of every security which the creditor has against the principal-
debtor, whether such security was or was not in existence at the time when the contract of surety-ship was entered into, and whether such security was received by
the creditor before, contemporaneously with or after the contract of surety-ship was entered into, and 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.”

AIR 1980 SC 1528 ; Punjab National Bank v Lakshmi Indl. and Trading Co. Pvt. Ltd.,
AIR 2001 All 28 .
1147 P Janakiram Chetty v Punjab National Bank Ltd.,

AIR 1968 Mys 56 .
1148 Narayan v Ganesh, (1870) 7 BHC AC 118.
1149 Mohan Lal v Bhanwar Lal, 1969 WLN 247

.
1150 R Lilavati v Bank of Baroda, AIR 1987 Kant 2

; Anil Kumur v Central Bank of India, AIR 1997 HP 5
.
Sanjay Kataria
Page 15 of 16

AIR 1982 Del 487 ; T Raju Shetty v Bank of Baroda, AIR 1992 Kant 108
; Central Bank of India v Multi Block Pvt. Ltd., AIR 1997 Bom 109
.
1152 AIR 1987 Kant 2

, at 4.
1153 Notes to Rees v Berrington, (1795) 2 Ves 540 as approved by Hannen J

Wulff v Jay, (1872) LR 7 QB 756 at 764; as to the last point
Pledge v Buss, (1860) Johns 663.
1154 Forbes v Jackson, (1882) 19 ChD 615

: (1881–85) All ER Rep 863 per Hall VC at
619.
1155 Dixon v Steel, (1901) 2 Ch 602

(surety, who not been called on for payment, entitled to be credited in account with proceeds of security given
by principal-debtor).
1156 Rainbow v Juggins, (1880) 5 QBD 138

(a policy on the debtor’s life which had lapsed due to non-payment of premiums).
1157 Yonge v Raynell, (1852) 9 Hare 809 per Turner VC at 818–19; quoted with
approval in Goverdhandoss Gokuldas Tejpal v Bank of Bengal, (1890) 15 Bom 48 at 63.
1158 Bechervaise v Lewis, (1872) LR 7

CP 372.
1159 Ewart v Latta, (1865) 4 Macq 983 (HL); Howe, ex p. Brett (Re), [1871] 6 Ch
App 838 : (1861–73) All ER Rep Ext 1305 .
[1880] 6 App Cas 1 per Lord Selborne at 12, [1874–80] All ER Rep 1406
(HL); Heyman v Dubois, (1871) LR 13 Eq 158; Aldrich v
Cooper, [1803–13] All ER Rep 51 : (1803) 8 Ves 382.
1161 Goodwin v Gray, (1874) 22 WR 312

.
1162 Scott v Knox, (1838) 2 Jo Ex Ir 778; Berridge v Berridge,

(1890) 44 ChD 168 ; Lake v Brutton, (1856) 8 De G M & G 440.
1164 Rees v Berrington, (1795) 2 Ves 540; as approved by Hannen J Wulff v Jay,
(1872) LR 7 QB 756, at 764.
Sanjay Kataria
Page 16 of 16
1165 Wulff v Jay supra.
1166 Buckeridge v Mercantile Credits Ltd., (1980–81) 147 CLR 654 (High Court of
Australia).
End of Document
Sanjay Kataria
[s 143] Guarantee obtained by concealment, invalid.—
Any guarantee which the creditor has obtained by means of keeping silence as to a material circumstance,
is invalid.
Illustrations
(a) A engages B as clerk to collect money for him. B fails to account for some of his receipts, and A in
consequence calls upon him to furnish security for his duly accounting. C gives his guarantee for B’s duly
accounting. A does not acquaint C with B’s previous conduct. B afterwards makes default. The guarantee
is invalid.
(b) A guarantees to C payment for iron to be supplied by him to B to the amount of 2,000 tons. B and C
have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be
applied in liquidation of an old debt. This agreement is concealed from A. A is not liable as a surety.
[s 143.1] Introduction: Sections 142 and 143
The sections provide that a guarantee is invalid if it has been obtained by means of:
(i) misrepresentation concerning a material part of the transaction made:
Sanjay Kataria
Page 2 of 13
(a) by the creditor; or

(b) with his knowledge and assent;
(ii) of keeping silent as to material circumstances.
[s 143.2] Guarantee not a Contract Uberrima Fidei
In a contract of insurance, the person seeking insurance has the means of knowledge of the risk, which
the insurer does not possess; and such an insured place the risk to the insurer as a business transaction. In
a contract of guarantee, “the creditor does not, as a rule, go to the surety, explain the risk, and ask the
surety to undertake it.”1167 Either the surety knows the risk, being acquainted with the principal-debtor, or
as between the creditor and surety, it is assumed that the surety would ascertain the nature and extent of
the risk.
[s 143.3] Misrepresentation by the Creditor
This section provides that any guarantee which the creditor has obtained by means of keeping silence as
to a material circumstance is invalid. The reference to the creditor is to the person in whose favour the
guarantee is given. The said provisions thus invalidate a guarantee only on misrepresentation or silence as
to the material circumstance by the creditor and not of the principal debtor.1168
[s 143.4] Misrepresentation with Creditor’s Knowledge or Assent
A guarantee caused by the misrepresentation may be invalid if the misrepresentation has been effected by
a third party with the creditor’s knowledge or assent. Courts have held that it is open to a surety to give up
his rights, as conferred by sections 133, 135, 142, 143 and 144 as long as such agreement is not opposed
to public policy and not opposed to section 23 of the Contract Act1169 An objection based on this section
is not purely legal. It is a mixed question of fact and law.79
A creditor will be vicariously liable for the acts of his agents acting within the scope of their authority.1170
[s 143.5] Guarantee Obtained by Keeping Silence as to Material Circumstances
Sanjay Kataria
Page 3 of 13
To avoid a guarantee under this section, it must be proved not only that there was silence as to a material
circumstance, but that the guarantee was obtained by means of such silence.1171 The expression “keeping
silence”, clearly implies intentional concealment as distinguished from mere non-disclosure. Such
withholding must be fraudulent, which necessarily must be the case when a material circumstance is
intentionally concealed.1172
The section invalidates a guarantee obtained by wilful silence as distinguished from mere non-disclosure.
The language of these two sections 142 and 143 does not indicate whether the sections go beyond the
English authorities. Section 143 might be read so as to impose on the creditor an unqualified duty of
giving the surety full information of all material facts. However, the words “obtained by means of keeping
silence,” coupled with the fact that the illustrations are both taken, with no substantial change, from
English decisions,1173 appear to limit the operation of the section to cases of wilful concealment which in
fact amounts to a misrepresentation of what the surety is undertaking. Mere non-communication of
circumstances affecting the situation of the parties, material for the surety to be acquainted with and
within the knowledge of the person obtaining a surety bond, is undue concealment, though not wilful or
intentional, or with a view to any advantage to himself. The Law Commission of India recommended an
amendment to the section to bring it in conformity with this section.1174
There is a difference between fiduciary guarantees, viz. guarantees for fidelity of employees, assurances
upon ships and lives etc., on the one hand, and guarantees by persons in favour of banks on the other. In
the former case, there may be a duty to disclose all material facts; but there is no such duty on a bank to
disclose the indebtedness of the person guaranteed, at the date of the guarantee. It is for the surety to
inform himself of such matters. However, where wrong information is given when asked for, the
suretyship would be vitiated.1175 The surety is not entitled to receive, without inquiry from the party to
whom he is to give the guarantee, a full disclosure of all circumstances of the dealings between the
principal and the party. If he wants to know any particular matter, he must make it the subject of a distinct
inquiry.1176
[s 143.5.1] Material Circumstances
In Balkrishna YN Kirtikar v Bank of Bengal,1177 A became surety to a bank for B’s conduct as khajanchi,
whose duties were to examine, verify, and guarantee all native signatures or documents for money. Before
his appointment as khajanchi, B. had held the office of an ordinary clerk in the bank, and it was arranged
between B. and the bank that he should continue to fill that office also, A was held liable as a surety even
though the bank did not acquaint A with this part of the agreement. Also, in this case, after B. assumed
the office of khajanchi, the bank discovered that B. had failed to notice that the names of certain bills
discounted with them were forged, but they did not report this to A, and allowed B. to continue. It was
held that A was still liable as the contract of guarantee could not be said to have been founded upon
assumption of B’s infallibility.1178 However, in Co-op. Commission Shop Ltd. v Udham Singh,1179 C was
Sanjay Kataria
Page 4 of 13
appointed manager of a society in 1929. From 1929-31, C’s conduct, if dishonest, would have justified his
dismissal. The society considered that C’s conduct entitled them to ask him for further security. D, who
furnished the additional security, was not informed of C’s past conduct. On C making defalcations, it was
held that D was not liable. In another case, X purchased an abkari farm from the Government, subject to
his furnishing the required security for the due fulfilment of the conditions of the lease. X failed to
furnish the security, and the farm was resold at his risk and on his account at a loss of Rs. 4000/-, for
which he became liable. X purchased the farm at a resale, and Y stood surety for the performance of the
conditions of the lease. Y was not informed by the Government of X’s liability of Rs. 4000/-. Y was liable
as surety, the guarantee not extending to the liability for Rs. 4000/-.1180
[s 143.5.2] Guarantees for Fidelity
A contract for guarantee for the honesty of a servant who is already in the employment and has been
guilty of acts of dishonesty is invalid, if the employer says nothing about them and allows the surety to
enter into the contract in ignorance of the true state of affairs. The past conduct of the servant is not only
a material, but a vital circumstance, and a contract induced by the silence is invalid.1181 The exact terms of
a guarantee are the primary determinants of the scope and liability of the guarantor in each individual
case.1182
[s 143.6] Position under English Law and other jurisdictions
English law is settled that contracts of guarantee are not amongst those requiring uberrima fides on the part
of the creditor towards the surety.1183 However, the courts regard surety contracts as different from
normal commercial contracts, and although a surety is expected to inform himself about the risks he is
undertaking in favour of the creditor, the creditor is required to disclose to the surety any unusual feature
of the contract between the creditor and the debtor or between the creditor and other creditors of the
debtor, which makes it materially different in a potentially disadvantageous respect from what the surety
might naturally expect.1184 The creditor is bound to disclose unusual circumstances which the surety would
not commonly expect and even this obligation does not apply to a beneficiary under a demand
guarantee.1185 Like any other contract, it is liable to be avoided if induced by material misrepresentation of
an existing fact, even if made innocently.1186 Misrepresentation may consist of direct assertion of a fact
which is not a fact1187 or may consist of statements by the creditor which tell only such part of the truth,
as is likely to mislead;1188 or a statement made by the creditor believing it to be true, but later discovered to
be untrue, or later becoming untrue to his knowledge.1189
Thus, where a surety guarantees an agent’s existing and future liabilities in account with his employer, and
the agent is in fact already indebted to the employer for more than the full amount of the guarantee, and
the statements made about his position are calculated to mislead, though not false in terms, this is
evidence of material misrepresentation on the creditor’s part.1190
Sanjay Kataria
Page 5 of 13
Partial disclosure of facts may itself amount to misrepresentation. “Very little said which ought not to
have been said, and very little not said which ought to have been said, would be sufficient to prevent the
contract being valid.”1191
Once a bank undertakes the task of explaining the nature and effect of the transaction, then its failure to
do so adequately may entail its liability in damages.1192
The guarantee may, be affected by the misrepresentation by the principal-debtor, or a third party on the
grounds of:
(i) agency; and

(ii) notice.1193
Thus, if the wrong doing principal-debtor or other third party is acting as agent for the creditor in
obtaining the guarantee, the guarantee so obtained may be set aside as against the creditor.1194 However, in
many cases, the creditor may have required the principal-debtor to find a surety; in such cases the
principal-debtor will be acting on his own account, and not for the creditor in seeking to procure the
support of a guarantor.1195
If the creditor has actual or constructive notice at the time of execution of a guarantee that the guarantee
has been procured by the exercise of misrepresentation, the guarantee cannot be enforced.1196 In the
context of a guarantee given by a wife, of her matrimonial home for the business debts of her husband in
Barclays Bank plc v O’ Brien,1197 it was stated:
a wife who has been induced to stand as a surety for her husband’s debts by his undue influence, misrepresentation or some other legal
wrong has an equity as against him to set aside that transaction. Under the ordinary principles of equity, her right to set aside that
transaction will be enforceable against third parties (e.g. against a creditor) if either the husband was acting as the third party’s agent or
the third party had actual or constructive notice of the facts giving rise to her equity.
A creditor would be put to constructive notice where the creditor knew of certain facts which put him on
inquiry as to the possible existence of the rights of the other and he failed to make such inquiry, or take
Sanjay Kataria
Page 6 of 13
such other steps as were reasonable to verify whether such earlier right did not exist. The creditor will be
put on inquiry that the surety has been subjected to misrepresentation by the principal-debtor, for
instance, where the surety is the wife1198 or cohabitee1199 of the principal-debtor, or is a junior employee of
the principal-debtor,1200 or the guarantee has been given by elderly parents dependent on their young son,
a man of business.1201 The creditor is then bound to take reasonable steps to satisfy itself that the surety
undertook the obligations under the guarantee freely, and with knowledge of the true facts.1202 This
requirement of constructive notice is wide, because even mere failure to make proper inquiries can fix the
creditor with notice of the surety’s rights. It has been suggested that instead the Courts should recognise a
limited duty of explanation and advice on creditors as to the risks incidental to the contract to a limited
class of non-commercial would be sureties, including not the duty to disclose facts material to the surety’s
risk, but an explanation of the nature of the transaction and advisability of taking independent advice.1203
Where a bank failed to disclose, to a surety, of a company’s loan that the advances which had been
requested by the company’s principal were to be utilised by another company controlled by the same
principal but competing with the company guaranteed, the guarantee was unenforceable on the ground of
non-disclosure.1204
The requirement of materiality may be applied less strictly in cases of gratuitous guarantee.1205
Generally, a bank is not obliged to disclose to the surety matters affecting the credit of the customer.1206
In fact, in doing so, it would be committing a breach of the duty of confidence, which it owes to its
customer.
There is no special obligation upon a person to whom another person is about to give a guarantee, to
explain the meaning or effect of the guarantee;1207 howsoever large the creditor banking institution, and
whether the proposed surety is another bank;1208 but its practice guidelines or internal rules may require it
to do so. A bank is also not under a duty to advise the guarantor, unless asked by him, on the financial
wisdom of the transaction, or to recommend taking of legal advice.1209 However, if the creditor does give
any explanation or advice to the surety, it must be sufficiently accurate and complete so as not to be
misleading:1210
The circumstances in which the creditor must make disclosure to the proposed surety1211 are:
(i) where the surety has asked specific questions to the creditor;1212
(ii) where the bank misleads the surety by volunteering only part of the truth;1213
Sanjay Kataria
Page 7 of 13
(iii) where the surety makes a statement in the creditor’s presence that demonstrates that he entirely
misunderstands the principal-debtor’s position;1214 and
(iv) where there is anything that might not naturally be expected to take place between the principal-
debtor and the creditor.1215
The principles governing the extent to which a creditor is bound to make disclosure to a surety were
stated in Hamilton v Watson,1216 where Lord Campbell held that unless questions were particularly put by
the surety, a creditor taking a guarantee was not bound to make disclosure of material facts.1217
Thus, a bank which takes a guarantee “is only bound to disclose to the intending surety anything which
has taken place between the bank and the principal-debtor ‘which was not naturally to be expected”, or as
it was put by Pollock MR, in Lloyds Bank Ltd. v Harrison:1218
the necessity for disclosure only goes to the extent of requiring it where there are some unusual features in the particular case relating to
the particular account which is to be guaranteed.1219
The reason why a creditor is bound to reveal to an intending surety anything in the transaction between
himself and the debtor which the surety would expect not to exist is that a failure to make disclosure in
those circumstances would amount to an implied representation that the thing does not exist.1220 The
creditor must disclose to an intending surety whether there is a contract between the debtor and the
creditor, to the effect that the debtor’s position is to be different from that which the guarantor might
naturally expect.1221 A creditor is, for instance, bound to disclose that part of the advance to be secured by
the guarantee was to be applied to repay a pre-existing debt.1222
A surety, who guarantees a customer’s account with a bank, will not expect that the account has not been
overdrawn, or, that the bank is satisfied with the customer’s credit, for, the probable reason why the bank
requires the guarantee is that the customer has been overdrawing his account, and wishes to do so again,
and that the bank is not satisfied with his credit.1223
The nature of a fidelity guarantee gives rise to a duty of more extensive disclosure than is required in the
case of a guarantee for payment of debt.1224 He must disclose to the surety any acts of dishonesty by the
employee of which he has notice, even if such acts occur after the execution of the bond. The duty of
disclosure is limited to cases of unusual features of the transaction, and not to the unusual features of the
risk.1225
Sanjay Kataria
Page 8 of 13
It would be commercially unreal to suggest that a bank has a duty to reveal to a surety all the facts within
its knowledge which relate to the transactions and financial position of a customer in any case where those
transactions are out of the ordinary. The obligation is to reveal anything in the transaction between the
banker and the customer which has the effect that the position of the customer is different from that
which the surety would naturally expect, particularly if it affects the nature and degree of the surety’s
responsibility.1226
It is not every disclosure that a surety can require. The creditor’s description of the transaction to be
undertaken, if it makes no mention of any such circumstance, implies a representation that there is
none.1227 Accordingly, the creditor is not bound to tell the surety that the intended guarantee is to be a
substitution for a former one, given by someone else.1228 Where the solvency of a surety for a debt is
guaranteed in turn, the terms of the loan, as between the creditor and the original-debtor are not material
for the latter guarantor’s risk, and non-disclosure of these terms is no defence to an action on his
guarantee.1229 Thus, the creditor is under no duty to disclose the fact that the principal-debtor was already
overdrawn.1230 the fact that the principal-debtor is in the habit of overdrawing,1231 the extent of the
overdraft or borrowing,1232 the fact that the creditor bank has dishonoured cheques drawn by the
principal-debtor,1233 the fact that the creditor is suspicious that the principal-debtor has been defrauding
him,1234 the fact that the creditor intends to lend a further substantial sum on the faith of the guarantee,1235
or the fact that the guarantee is required because another guarantor wishes to retire.1236
Two persons had jointly guaranteed the debt of a company to its creditor. The creditor knew that one of
the sureties had no assets, but this was not disclosed to the other surety. It was held that the creditor owed
no duty to the co-surety to disclose information about the financial worth of the other.1237
1167 Anson’s Law of Contract, 29th Edn, 2010, at 338.
1168 National Small Industries Corp. Ltd v Myson Electronics Pvt. Ltd., decided on 29
August 2016 (Delhi HC).

108 , Corporation Bank v Mohandas Baliga, (1993) 1Kar LJ 308.
1170 For more details, see Indian Contract Act, 1872, section 238.
1171 Per Cur in Secy of State for India v Nilamekam Pillai,

(1883) ILR 6 Mad 406, at 408.
Sanjay Kataria
Page 9 of 13
1172 Balkrishna VN Kirtikar v Bank of Bengal, (1891)

ILR 15 Bom 585, at 591 per Sargent CJ.
1173 Illustration (i) is drawn from Railton v Matthews, (1844) 10 Cl & Fin 934 :
59 RR 308; followed later in London General Omnibus Co. Ltd. v Holloway, [1912] 2 KB 72
: [1911–13] All ER Rep 518 (CA); Illust (ii) is drawn from Pidcock v Bishop,
(1825) 3 B&C 605 : 27 RR 430.
1174 The 13th Report of the Law Commission of India 1958, para 114
recommending and substituting the words “by wilful silence” for the existing words “by means of keeping silence”.
1175 Imperial Bank of India v VP Avanasi Chettiar,

AIR 1930 Mad 874 ; AR Krishnaswami Ayyar v Travancore National Bank Ltd., AIR
1940 Mad 437 : (1940) Mad 757.
1176 Supra, AIR 1930 Mad 874

.
1177 Balkrishna YN Kirtikar v Bank of Bengal,

(1891) ILR 15 Bom 585.
1178 Balkrishna YN Kirtikar v Bank of Bengal,

(1891) ILR 15 Bom 585.
1179 Co-op. Commission Shop Ltd. v Udham Singh,

AIR 1944 Lah 424 ; London General Omnibus Co. Ltd. v Holloway,
[1912] 2 KB 72 : [1911–13] All ER Rep 518
.
1180 Secretary of State for India v Nilamekam Pillai,

(1883) ILR 6 Mad 406, at 410.
1181 Co-operative Commission Shop Ltd. v Udham Singh,

AIR 1944 Lah 424 .

AIR 1955 Cal 217 .
1183 Hamilton v Watson, (1845) 12 Cl & Fin 109 per Lord Campbell at 118–19
(HL); Davies v London and Provincial Marine Insurance Co., (1878) 8 ChD 469
per Fry J at 475; London General Omnibus Co. Ltd. v Holloway, [1912] 2 KB 72 per
Farwell LJ at 81 and per Kennedy LJ at 85–86, [1911–13] All ER Rep 518 (CA).
1184 Anson’s Law of Contract, 30th Edn, p 363.
1185 Treitel: The Law of Contract, 14th Edn, p 487.
Sanjay Kataria
Page 10 of 13
1186 Jean MacKenzie v Royal Bank of Canada, (1934)

AC 468 , at 475.
1187 Foster v Mackinnon, (1869) LR 4

CP 704 : (1861–73) All ER Rep Ext 1913 ; Lewis v Clay,
[1897] 67 LJQB 224 , (1895–99) All ER Rep Ext
1738 .
1188 Lee v Jones, (1864) 17 CBNS 482

, at 498 per Shee J.; Willis v Willis, (1850) 17 Sim 218.
1189 Davies v London and Provincial Marine Insurance Co.,

(1878) 8 ChD 469 , at 475 per Fry J.
1190 Lee v Jones, (1864) 17 CBNS 482

(minority dissented on facts, holding that it was the debtor’s business to inform the sureties of his financial
condition, and theirs to inquire of him rather than of his employers); Goodwin v National Bank of Australasia Ltd.,
(1968) 117 CLR 173 .

(1878) 8 ChD 469 , at 475 per Fry J.
1192 Perry v Midland Bank plc., (1987) FLR 237

; Cornish v Midland Bank plc., (1985) 3 All ER 513 , at 522.
1193 Barclays Bank plc v O’Brien, (1994) 1

AC 180 : (1993) 4 All ER 417
(HL); CIBC Mortgages plc v Pitt, (1993) 4 All ER 433
(HL); Bank of Credit and Commerce Intl SA v Aboody, [1990] 1 QB 923
at 971–72 : [1992] 4 All ER 955
at 979 (CA).
1194 Barclays Bank plc v O’Brien, (1994) 1 AC 180

: (1993) 4 All ER 417 , at 427 per Lord Browne-
Wilkinson (HL).

: (1993) 4 All ER 417 , at 427 per Lord Browne-
Wilkinson (HL).
1196 Supra, [1994] 1 AC 180

: [1993] 4 All ER 417 (HL); CIBC Mortgages plc v Pitt,
[1993] 4 All ER 433 (HL); Kempson v Ashbee, [1874] 10 Ch App 15 per James LJ at 21;
Bainbrigge v Browne, (1881) 18 ChD 188 ; Bank of Credit and Commerce Intl SA v
Aboody, [1990] 1 QB 923 at 973 : [1992] 4 All ER
955 at 980 (CA). Barclays Bank plc v O’Brien, (1994) 1 AC 180
: (1993) 4 All ER 417 (HL); CIBC Mortgages plc v Pitt,
(1993) 4 All ER 433 (HL).
Sanjay Kataria
Page 11 of 13
1197 Barclays Bank plc v O’ Brien, (1994) 1 AC 180

, at 195 per Lord Winkinson : (1993) 4 All ER 417
, at 428–429 (HL).

: (1993) 4 All ER 417 (HL).

: (1993) 4 All ER 417 (HL) at 431 (HL).
1200 Credit Llyonnais Bank Nederland NV v Burch,

(1997) 1 All ER 144 .
1201 Commercial Bank of Australia Ltd. v Amadio,

(1983) 151 CLR 447 (High Court of Australia); Avon Finance Co. Ltd. v Bridger, (1985) 2
All ER 281 .

: (1993) 4 All ER 417 (HL); Royal Bank of Scotland v
Etridge (No 2), (2001) UKHL 44 .
1203 Chitty on Contracts, 28th Edn, vol 2, at 1314, paras 44–031. For a fuller
discussion of guarantees given by wives for debts of husband, and similar guarantees, see section 16 above under heading: “Undue
Influence and Third Parties” and section 18 above under heading “Misrepresentation and Third Parties”.
1204 Toronto Dominion Bank v Rooke and Rodenbush, (1983) 49 BCLR 168 (Court
of Appeal of British Columbia).

(1878) 8 ChD 469 ; Bank of New South Wales v Rogers, (1941) 65 CLR 42
(High Court of Australia).
1206 Wythes v Labouchere, (1859) 3 De G&J 593 at 609 : 44 ER 1397 at 1404;

National Provincial Bank of England Ltd. v Glanusk, [1913] 3 KB 335 :
[1911–13] All ER Rep 810 (no duty of disclosure even when the customer has been suspected of
fraud).
1207 Small v Currie, (1854) 2 Drew 102 per Kindersley VC at 114–15.
1208 Barclays Bank plc v Khaira, (1992) 1 WLR 623

.
1209 Supra, [1992] 1 WLR 623

.
1210 Cornish v Midland Bank plc., (1985) 3 All ER

513 (CA).
Sanjay Kataria
Page 12 of 13
1212 Hamilton v Watson, (1845) 12 Cl&Fin 109 (HL); Royal Bank of Scotland v
Greenshields, 1914 SC 259 ; Westminster Bank Ltd. v Cond,
(1940) 46 Com Cas 60 .
1213 Royal Bank of Scotland v Greenshields,

1914 SC 259 .
1214 Royal Bank of Scotland v Greenshields, supra.
1215 Royal Bank of Scotland v Greenshields, (1845) 12 Cl & Fin 109 per Lord
Campbell at 119 (HL); National Provincial Bank of England Ltd. v Glanusk, [1913] 3 KB 335
per Horridge J at 338 : [1911–13] All ER Rep 810
; Cooper v National Provincial Bank Ltd., [1946] KB 1
per Lawrence LJ at 6–7 : [1945] 2 All ER 641 at 644.
1216 Hamilton v Watson, (1845) 12 Cl & Fin 109 : 8 ER 1339; not following the
obiter dictum of Kerr LJ in Cornish v Midland Bank plc., [1985] 3 All ER 513
at 522–23 (CA).
1217 Supra, (1845) 12 Cl & Fin 109 per Lord Campbell at 119, 8 ER 1339.
1218 Lloyds Bank Ltd. v Harrison, (1925), unreported; cited in Paget’s Law of
Banking, 7th Edn, 1966, at 583.
1219 Goodwin v National Bank of Australasia Ltd.,

(1968) 117 CLR 173 , at 175; Commercial Bank of Australia Ltd. v Amadio,
(1983) 151 CLR 447 , at 454–457 (High Court of Australia).
1220 Lee v Jones, (1864) 17 CBNS 482

at 503–04, 506 : 144 ER 194 at 202–04; London General Omnibus Co. Ltd. v Holloway,
[1912] 2 KB 72 at pp 77, 79, 87–88 : (1911–13) All ER Rep 518
.
1221 Hamilton v Watson supra; London General Omnibus Co. Ltd. v Holloway,
[1912] 2 KB 72 : [1911–13] All ER Rep 518
(CA); National Provincial Bank of England Ltd. v Glanusk, [1913] 3 KB 335
per Horridge J at 338 : [1911–13] All ER Rep 810 ; supra
1914 SC 259 ; Commercial Bank of Australia Ltd. v Amadio, (1983) 151 CLR
447 per Gibbs CJ at 447 (High Court of Australia).
1222 Stone v Compton, (1838) 5 Bing NC 142 : [1835–

42] All ER Rep 659 ; Illustration (b) to this section.
1223 Commercial Bank of Australia Ltd. v Amadio,

(1983) 151 CLR 447 , at 455 (High Court of Australia).
Sanjay Kataria
Page 13 of 13
1224 Railton v Matthews, (1844) 10 Cl & Fin 934 : 59 RR 308 (HL); as explained
in London General Omnibus Co. Ltd. v Holloway, [1912] 2 KB 72 at 79–80 :
[1911–13] All ER Rep 518 (CA); Phillips v Foxall (1872)
LR 7 QB 666.
1225 Credit Lyonnais Bank Nederland v Export Credit Guarantee Department, (1996) 1
Lloyd’s Rep 200.
1226 Supra, (1983) 151 CLR 447

at 457 (High Court of Australia); Commercial Bank of Australia Ltd. v Amadio, (1983) 151 CLR
447 , at 457 (High Court of Australia).
1227 Lee v Jones, (1864) 17 CBNS 482

per Blackburn J.
1228 North British Insurance Co. v Lloyd, (1854) 10 Exch 523, 102 RR 686.
1229 Seaton v Burnand, [1900] AC 135

: (1900–03) All ER Rep Ext 1663 .
1230 Cooper v National Provincial Bank Ltd., [1946]

KB 1 : (1945) 2 All ER 641 ; but see Commercial
Bank of Australia Ltd. v Amadio, (1983) 151 CLR 447 , at 455, 463 (High
Court of Australia).
1231 [1912] 2 KB 72
per Farwell J at 83, [1911–13] All ER Rep 518 (CA).
1232 London General Omnibus Co. Ltd. v Holloway; National Provincial Bank of
England Ltd. v Glanusk, [1913] 3 KB 335 : [1911–
13] All ER Rep 810 .
1233 National Provincial Bank of England Ltd. v Glanusk, supra.
1234 [1913] 3 KB 335

per Horridge J at 339 : [1911–13] All ER Rep 810 .
1235 Westminster Bank Ltd. v Cond, (1940) 46 Com

Cas 60 .
1236 North British Insurance Co. v Lloyd, (1854) 10 Exch 523 : 102 RR 686.
1237 Behan v Obelon Proprietary Ltd., (1984–85) 157 CLR 326.
End of Document
Sanjay Kataria
[s 144] Guarantee on contract that creditor shall not act on it until co-surety joins.—
Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another
person has joined in it as co-surety, the guarantee is not valid if that other person does not join.
If a person has given a guarantee on condition that it shall not be effective until another person has joined
as co-surety, the guarantee is not valid if another person does not join as surety. A contract contemplated
under this section can be oral, written, and contemporaneous or anterior to the surety bond in point of
time or it may even be incorporated in the surety bond itself. Therefore, it is even possible and
permissible in law to infer such an agreement or understanding either from the proved facts or from the
conduct of the parties. Section 144 of the Contract Act incorporates verily English Common Law
Principles of Equity. Under both the laws an understanding between the creditor and the surety is
necessary, that another person would also execute the bond as co-surety or else he would be relieved of
the liability as surety.1238
A guarantee drawn up, intended to be signed by several persons, but signed by one surety, was binding on
the surety who signed it, unless he could show that he was to be liable only if the other surety or sureties
signed. It may be presumed that a party who has executed a bond did not intend to be bound unless the
other person mentioned also executed it when the contract is in the nature of a guarantee.1239 A surety
who entered into the obligation upon the understanding and faith that another person would also enter
into it...has a right in equity to be relieved on the ground that the instrument has not been executed by the
intended co-surety.1240 Whether such a contract is to be inferred from the transaction is (apart from the
Sanjay Kataria
Page 2 of 2
construction of any written document) a question of fact. The rule will not be extended to cases of joint
and several obligations where the transaction is not really a guarantee, but a primary undertaking.1241
Where a guarantee intended to be a joint guarantee, contains forged signatures of the intended guarantors,
it would not be binding on the person who has properly signed it, even if the other party was unaware of
the forgery.1242
1238 Jayakunvar Manilal Shah v Syndicate Bank, ILR

1992 KAR 1053 : 1992 (2) KarLJ 583 .
1239 Manem Ayyanna v Pulavarti Veerabhadram, AIR

1926 Mad 62 .
1240 Evans v Brembridge, (1856) 8 DMG 100 per Turner LJ at 109 :

[1843–60] All ER Rep 170 .
1241 Ex p Harding, Smith, Fleming & Co. (Re), (1879)

12 ChD 557 .
1242 James Graham & Co. (Timber) Ltd. v Southgate Sands,

(1985) 2 All ER 344 .
End of Document
Sanjay Kataria
[s 145] Implied promise to indemnify surety.—
In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety,
and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under
the guarantee, but no sums which he had paid wrongfully.
Illustrations
(a) B is indebted to C and A is surety for the debt. C demands payment from A, and on his refusal sues
him for the amount. A defends the suit, having reasonable grounds for doing so, but he is compelled to
pay the amount of the debt with costs. He can recover from B the amount paid by him for costs, as well
as the principal debt.
(b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B upon A
to secure the amount. C, the holder of the bill, demands payment of it from A, and, on A’s refusal to pay,
sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay
the amount of the bill and costs. He can recover from B the amount of the bill, but not the sum paid for
costs, as there was no real ground for defending the action.
(c) A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied by C to B. C supplies
to B rice to a less amount than 2,000 rupees, but obtains from A payment of the sum of 2,000 rupees in
respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.
The surety is entitled to an indemnity from the principal-debtor, and to recover any sum he has paid
Sanjay Kataria
Page 2 of 10
rightfully under the guarantee.
The proposition “that, as soon as his obligation to pay becomes absolute (a surety) has a right in equity to
be exonerated by his principal” is a very fundamental principle and furnishes the reason for the other
more specific rules in the Contract Act. In turn, it depends on the more extensive principle laid down in
section 69. Apart from section 140 of Contract Act, a surety has a right, under this section, to be
indemnified by the debtor, and the surety’s rights under this section are not limited to the rights of the
creditor against the debtor, but would include the interest on the sums paid by the surety and the costs.1243
The liability of the principal-debtor to indemnify the surety after the surety has paid the amount to the
creditor under the guarantee is not affected by the discharge of the principal-debtor, by the creditor.1244
Thus, where after the decree against the principal-debtor and a surety, the principal-debtor applied to a
Debt Conciliation Board, which discharged him from the debt on the failure of the decree-holder to
prove his debt, the surety was not discharged; and upon payment under the decree, provisions such as
section 145 operated, and the surety was entitled to be reimbursed by the principal-debtor.1245
A subsequent suit by the surety, against the principal-debtor, is not barred by constructive res judicata,1246 as
in a creditor’s suit for recovery of his debt against the principal-debtor and surety, and there is no conflict
of interest between these two. A surety can recover by filing a suit against the principal debtor the amount
deducted by the creditor bank from the surety’s fixed deposit towards the amount due from principal
debtor.1247
In TAI Pharma v Wockhardt Ltd.,1248 the defendants had accepted the bills of exchange drawn by the
plaintiffs, payable to the plaintiffs’ bankers or to their orders. The plaintiffs having paid and discharged
dues of the bankers under the above bills of exchange were held entitled to recover the amount from the
defendants as per statutory provisions contained in section 145 of the Indian Contract Act.
[s 145.3] Rightfully Paid
The expression “rightfully paid” includes “not only coin, but also property, of whatever kind, which is
parted with in lieu of money, but not the mere incurring of a pecuniary obligation of1249 the creditor in
lieu or discharge of the debt owing to him.”1250 The giving, therefore, by the surety of a promissory note
jointly with a third party as his surety, though accepted by the creditor as payment of the debt and not as a
mere collateral security therefore, cannot be treated as payment as between the surety and the principal-
debtor.1251 The reason is that, the principal-debtor being bound to indemnify the surety, the cause of
Sanjay Kataria
Page 3 of 10
action cannot be merely procuring by the surety of the principal-debtor’s exoneration, from liability to the
creditor, but must also include the surety himself damnified;1252 and the surety cannot be said to be
damnified, unless the payment is actually made.
[s 145.3.1] Meaning of “Pays”
Payment, giving a right of action to surety must be a payment of money or money’s worth, and would not
include cases where the surety has given a promissory note,1253 or a bond1254 to the creditor for the
payment, or has acknowledged the liability.1255
[s 145.3.2] Payment of Debt Barred by Limitation
There are conflicting opinions on the question whether a surety paying debt, which is barred by limitation,
can be said to have paid “rightfully” within the meaning of this section.1256 One view is that the surety is
liable to pay at the suit of the creditor even though a suit against the debtor may be barred;1257 and in these
circumstances, it would seem impossible to say that payment by the surety is anything but rightful. The
rights given to the surety, by section 145, arise from the discharge of his own liability to the creditor and
not from the liability of the debtor.1258 However, it has also been held that the payment of a barred debt is
not a “rightful” payment;1259 especially, if it has been made when the remedy against both the principal-
debtor and the surety had become time-barred.1260
The Law Commission of India accepted the view that a surety paying a debt time-barred against the
principal-debtor can be said to have paid it “rightfully”, because the rights of the creditor arise, not from
the liability of the debtor, but from the discharge of his own liability; and it recommended adding an
Explanation to that effect.1261
[s 145.3.3] Payment under a Decree
A surety is entitled to indemnity, for example, for the amount paid to the decree-holder, where the suit
was jointly decreed ex parte against the principal-debtor and on contest against the surety, the surety
satisfied the decree, and the ex parte decree was set aside;1262 where the mortgage suit was dismissed against
the principal-debtor, but money decree passed against the surety;1263 where the suit against the principal-
debtor was dismissed for non-service of summons, but decreed against the surety.1264
Sanjay Kataria
Page 4 of 10
[s 145.4] Express Indemnity
Where the principal-debtor has conferred indemnity on the surety by express contract, the precise extent
of that indemnity will be determined by the contract.
[s 145.5] No Application to Forfeited Bail Bonds
Where a bail bond is forfeited, the surety cannot recover from the person bailed, on the grounds of public
policy;1265 nor a surety for appearance, where the sum under his surety-bond has been forfeited.1266
However, a person giving security for the payment of the decretal amount and who has paid it is entitled
after default made by the judgment-debtor, to a decree for the decretal amount against the original
judgment-debtor.1267
[s 145.6] Extent of Indemnity
The Law Commission of India opined that a surety was entitled to recover special damages beyond the
sum he has actually been compelled to pay, and that his right under the section was not merely a right to
stand in the shoes of the creditor.1268
[s 145.7] Time Factor
In Sripatrao Sadashiv Upre v Shankarrao Sarnaik,1269 the surety brought a suit against the principal-debtor for
recovery of moneys payable to the creditor. There was no payment before the institution of suit, but the
surety paid the creditor during the proceedings. He was entitled to indemnity from the principal-debtor.
Until the actual payment is made by the surety, no debt is due to him from the debtor. Thus, a surety
executing a bond in favour of the creditor undertaking to pay in the future is not entitled to indemnity
from the principal-debtor; 1270nor where the surety has executed a promissory note for the amount of
debt.1271 However, execution of a mortgage by the surety for satisfying the decree amounted to
payment.1272
But it has also been held that a surety may be indemnified in appropriate case before actual payment by
Sanjay Kataria
Page 5 of 10
anticipatory action.1273 A suit for indemnity was maintainable even if no actual payment was made, but the
surety had become liable in praesenti.1274 In the absence of a provision in the statute, restricting the claim of
a surety against the principal-debtor, to cases where the surety has already paid the amount, the Court
would be at liberty to apply the principle of the English decisions, holding that as soon as the obligation
to pay becomes absolute, a surety has a right in equity to be exonerated by his principal.1275
[s 145.8] Rights under a Contract of Indemnity
Where a person becomes a surety without the knowledge and consent of the principal-debtor, the only
rights, which he acquires, are those given by sections 140 and 141, and not those given by this section.1276
[s 145.9] Position under English Law and other jurisdictions
A surety will be considered to have paid the debt or performed the guaranteed duty, not only on actual
payment, but also where for instance, his goods are taken in execution,1277 or he has paid money to
prevent execution against him,1278 or the creditor has exercised a set off possessed by him against the
surety.1279 The right of the surety to indemnity is an incident of the guarantee,1280 and the principal-debtor
will be liable without the necessity of any further request for all sums subsequently paid by the surety
under the guarantee as money paid to the use of the principal-debtor.1281
A person, who mortgages his property to secure the debt of another, stands in the relation of guarantor
towards the person whose debt is thus secured, and is entitled to indemnity from the principal-debtor,1282
even where the principal-debtor is one co-owner.1283
The guarantor’s right to indemnification is a right to be reimbursed—the amount which he has actually
paid for the principal-debtor—with interest,1284 because, he is entitled to full indemnification from the
principal-debtor. If the guarantor has sustained damage beyond the principal and interest which he has
been compelled to pay under his guarantee, he is entitled to recover that damage as well.1285 On his death,
the amount expended in respect of the guarantee is a debt due to his estate.
On the one hand, the surety’s only claim is to be fully indemnified. He cannot compound the debt for
which he is liable, and then proceed as if he stood in the creditor’s place for the full amount. “Where a
surety gets rid of and discharges an obligation at a less sum than its full amount, he cannot, as against his
principal, make himself a creditor for the whole amount, but can only claim, as against his principal, what
he has actually paid in discharge of the common obligation.”1286
Sanjay Kataria
Page 6 of 10
A guarantor may recover, from the principal-debtor, the costs of defending an action brought against him
by the creditor:
(i) if he undertook the defence with the debtor’s authority;1287 or

(ii) reasonably defended the proceedings in the debtor’s interests;1288 or
(iii) the costs were for some reason unavoidably incurred;1289 but not if he has incurred costs solely for
his own benefit.1290
Further, it has long been settled under the English law that “surety is entitled to come’ to the Court ‘to
compel the principal-debtor to pay what is due from him”, provided that an ascertained debt is actually
due; and the relief is not limited, as at one time supposed, to cases where the creditor has refused to sue
the principal-debtor,1291 nor need the creditor even have demanded the sum from the principal-debtor.1292
Unless the terms of the guarantee provide otherwise, the surety is entitled to claim relief from the
principal-debtor immediately, as often as he pays anything under his guarantee as it falls due,1293 and is not
required to pay the whole debt due from the principal-debtor before compelling reimbursement.1294
A right to a general indemnity does not arise until the person entitled to the indemnity is required to pay
the principal claim which is ascertained; from which date the limitation will begin to run.1295
1243 Anand Singh v Collector of Bijnor, AIR 1932 All 610

.
1244 Nellore Co-op. Urban Bank Ltd. v Akili Mallikorjunayya,

AIR 1948 Mad 252 .
1245 AIR 1948 Mad 252

, following, a Debtor, Debtor (Re) v Petitioning Creditor and Official Receiver, [1913] 3 KB 11
: (1911–13) All ER Rep 659 .
1246 Ram Sagar Singh v Yogendra Narain Pd Singh,

AIR 1975 Pat 239 .
Sanjay Kataria
Page 7 of 10
1247 Bishwakarma Furniture Workshop v Santanu Sarkar,

AIR 2006 Jhar 89 :I (2007) BC 282 :
2006 (2) JCR 87 Jhr.
1248 TAI Pharma v Wockhardt Ltd., 2017(2) ABR 311

: 2017 (1)Bom CR 826 .
1249 Sic “to the creditor” is clearly intended.
1250 Supra, (1903) 26 Mad 322 per Bhashyam Ayyangar J at 328.
1251 Putti Narayanamurthi Aiyar v Marimuthu Pillai,

(1902) ILR 26 Mad 322 per Bhashyam Ayyangar J at 328; Muthuswamy v K Kayamboo Konar,
AIR 1936 Rang 235 : (1936) 14 Rang 511 : 163 IC 668.
1252 Supra, (1903) 26 Mad 322 at 326.
1253 Jawala Singh v Raj Kaur, AIR 1930

Lah 812 ; Barclay v Gooch, (1797) 2 Esp 571; Rodgers v Maw, (1846) 15 M&W 444; M’Kenna v Harnett,
(1849) 13 ILR 206 ; Taylor v Higgins, (1802) 3 East 169; Maxwell v Jameson, (1818)
2 B&Ald 51; but see Roberts, ex p Allen & Cazenove (Re), (1858) 3 De G & J 447.
1254 Muthuswamy v K Kayamboo Konar,

AIR 1936 Rang 235 : (1936) 14 Rang 511 : 163 IC 668; Maxwell v Jameson, (1818) 2 B & Ald 51; Taylor
v Higgins, (1802) 3 East 169.
1255 Kanahai Missir v Sukananan, (1937) 14 Rang 594,

AIR 1937 Rang 72 : 168 IC 815.
1256 Raghavendra Gururao Naik v Mahipat Krishna Shollapur,

AIR 1925 Bom 244 : (1924) 49 Bom 202 : 86 IC 883 (payment rightful if made within time
to keep alive liability).
1257 Section 134 above under heading: “Omission to Sue the Principal-debtor
Within Limitation”.
1258 Anand Singh v Collector of Bijnor,

AIR 1932 All 610 : (1932) All LJ 868.
1259 Tarachand Lakhmichand Chuhan v Gopal Lachiramkumar,

AIR 1959 MP 297 ; supra, AIR 1930 Lah 812
(payment of debt by surety after suit filed for recovery).
1260 Supra, AIR 1959 MP 297

.
Sanjay Kataria
Page 8 of 10
recommended adding explanation to the section:
“Explanation 2.—Payment by a surety of a debt barred as against the principal debtor by limitation, is a
payment made “rightfully” within the meaning of this section.”
1262 Nur Samand Khan v Fajja, AIR 1924

Lah 657 .
1263 Maroti v Hussain Miya, AIR 1925

Ngp 392 .
1264 Kanahai Missir v Sukananan, AIR 1937

Rang 72 : (1937) 14 Rang 594 : 168 IC 815.
1265 Meherulla v Sariatulla, AIR 1930 Cal 596

.
1266 Bhana Mal v Bharti Mal-Bansi Dhar, AIR

1932 Lah 23 .
1267 Bur Singh v Labhu Ram, AIR 1930 Lah 399

.
1268 The 13th Report of the Law Commission of India, 1958, para 118,
recommended the adding of an explanation to this section:
“Explanation 1.—The right of the surety to indemnity under this section shall not be deemed to prejudice
his right to recover damages in appropriate cases.”
1269 Sripatrao Sadashiv Upre v Shankarrao Sarnaik,

AIR 1930 Bom 331 : 32 Bom LR 207 : 127 IC 330.
1270 Muthuswamy v K Kayamboo Konar, AIR

1936 Rang 235 : (1936) 14 Rang 511 : 163 IC 668.
1271 Jawala Singh v Raj Kaur, AIR 1930 Lah 812

.
1272 Mathura v Chotu, AIR 1920 Ngp 265

.
1273 SK Mohideen Batcha Sahib v KA Sheik Dawood Sahib,

AIR 1926 Mad 1035 (suit against surety and principal-debtors by endorsee of a promissory note given
by surety to the creditor bank as collateral security).
Sanjay Kataria
Page 9 of 10
1274 Sripatrao Sadashiv Upre v Shankarrao Sarnaik,

AIR 1930 Bom 331 : 32 Bom LR 207 : 127 IC 330.
1275 Supra, AIR 1930 Bom 331

: 32 Bom LR 207 : 127 IC 330; relying on Bechervaise v Lewis, (1872) LR 7
CP 372; Ascherson v Tredegar Dry Dock and Wharf Co. Ltd., [1909] 2 Ch 401
: [1908–10] All ER Rep 510 , and British Union and National Insurance Co. v
Rawson, [1916] 2 Ch 476 : [1916–17] All ER Rep 293
(CA).

AIR 1917 Mad 83 : (1916) 39 Mad 965 : 33 IC 508.
1277 Rodgers v Maw, (1846) 15 M&W 444.
1278 Edmunds v Wallingford, (1885) 14 QBD

811 (CA); Exall v Partridge, (1775–1802) All ER Rep 341
, (1799) 8 Term Rep 308.
[1880] 6 App Cas 1 : [1874–80] All ER Rep 1406
(HL); a Debtor (Re), (No 627 of 1936) [1937] Ch 156 at 166 :
[1937] 1 All ER 1 at 10 (CA); Anson v Anson, [1953] 1 QB 636
: [1953] 1 All ER 867 .
1281 Fox, Walker & Co., ex p Bishop (Re), (1880)

15 ChD 400 (CA); Exall v Partridge, [1775–1802] All ER Rep 341
: (1799) 8 Term Rep 308; Pitt v Purssord, (1841) 8 M&W 538; Warrington v Furbor, (1807) 8 East 242 :
[1803–13] All ER Rep 292 ; Davies v Humphreys, (1840) 6 M&W 153 :
[1835–42] All ER Rep 101 ; Pownal v Ferrand, (1827) 6 B&C 439; Leigh v Dickeson,
(1884) 15 QBD 60 : [1881–85] All ER Rep 1099
(CA).
1282 Lee v Rook, (1730) Mos 318; Evelyn v Evelyn, (1731) 2 P Wms 659 at 663 :
(1558–1774) All ER Rep 490 (HL), on appeal (1733) 6 Bro Parl Cas
114.
1283 a Debtor (Re), (No 24 of 1971), ex p Marley v Trustee of the Property of the
Debtor, (1976) 2 All ER 1010 : [1976] 1 WLR 952
; Pittortou (a bankrupt), ex p Trustee of the Property of the Bankrupt (Re), (1985) 1
All ER 285 : [1985] 1 WLR 58 .
1284 Fox, Walker & Co. ex p Bishop (Re), (1880)

15 ChD 400 (CA).
1285 Badeley v Consolidated Bank, (1886) 34 ChD 536

, at 556 per Stirling J at 556; [1886–90] All ER Rep Ext 1493
: 38 ChD 238 (CA) affirmed.
Sanjay Kataria
Page 10 of 10
1286 Reed v Norris, (1837) 2 Mys & Cr 361, at 375 per Lord Cottenham at 375 :
45 RR 88 at 94.
1287 Garrard v Cottrell, (1847) 10

QB 679 .
1288 South v Bloxam, (1865) 2 Hem & M 457; Baxendale v London, Chatham
and Dover Rly Co., (1874) LR 10 Exch 35, at 44.
1289 Gomba Holdings (UK) Ltd. v Minories Finance Ltd. (No. 2),
[1993] Ch 171 : (1992) 4 All ER 588
(CA).
1290 International Contract Co., Hughes’ Claim (Re),

(1872) LR 13 Eq 623 per Wickens VC at 624–25.

[1909] 2 Ch 401 , 406 : (1908-10) All ER Rep 510 .
1292 Tate v Crewdson, (1938) 3 All ER 43

.
1293 Davies v Humphreys, (1840) 6 M&W 153 : [1835–

42] All ER Rep 101 ; Taylor v Mills, (1777) 2 Cowp 525; Paul v Jones, (1787) 1 Term Rep 599; Ware v Horwood,
(1807) 14 Ves 28.
1294 Davies v Humphreys, (1840) 6 M&W 153 : [1835–

42] All ER Rep 101 ; Taylor v Mills, (1777) 2 Cowp 525; Paul v Jones, (1787) 1 Term Rep 599; Ware v Horwood,
(1807) 14 Ves 28.
1295 R&H Green and Silley Weir Ltd. v British Rlys Board,
[1985] 1 All ER 237 : [1985] 1 WLR 570 ; Telfair
Shipping Corpn. v Inersea Carriers SA, The Caroline p, (1985) 1 All ER 243 :
[1985] 1 WLR 553 ; National House-Building Council v Fraser,
[1983] 1 All ER 1090 .
End of Document
Sanjay Kataria
[s 146] Co-sureties liable to contribute equally.—
Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and
whether under the same or different contracts, and whether with or without the knowledge of each other,
the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay
each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.
Illustrations
(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, B
and C are liable, as between themselves, to pay 1,000 rupees each.
(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A,
B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to
the extent of one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees,
B 250 rupees, and C 500 rupees.
Where a debt or duty is guaranteed by two or more persons, and one of them pays more than his share of
that debt, or performs the duty, he is entitled to compel contribution from the other or others, whether
they are bound jointly or severally, or under the same contract or different contracts, and whether he
knew or did not know at the time of making the guarantee that he is a co-surety with others.
Sanjay Kataria
Page 2 of 8
In the case of Ram Pershad Singh v Neerbhoy Singh1296 Phear J, quoting Baron Parke (afterwards Lords
Wensleydale), said:
when one surety has paid any part of the debt, he shall have a right to call on his co-surety or co-sureties to bear a proportion of the
burden, or, when he has paid more than his share, he shall have a right to be reimbursed whatever he has paid beyond it. The claim
certainly has its foundation in the clearest principles of natural justice; for, as all are equally bound, and are equally relieved, it seems but
just that in such a case all should contribute in proportion towards a benefit obtained by all.
The principle, which was propounded in a case between co-sureties, applies equally to all other cases of
joint liability including a mortgage on several parcels of land.1297 The right of contribution rests upon the
principle that a fund, which is equally liable with another to pay the debt, shall not escape because the
creditor has been paid out of that other fund alone. The same rule has been enacted in section 82 of the
Transfer of Property Act, 1882, which provides that when several properties are mortgaged to secure one
debt, such properties are, in the absence of a contract to the contrary, liable to contribute rateably to the
debt secured by the mortgage.
Co-sureties need not be bound under the same contract, the right to contribution being independent of
any agreement for that purpose.1298 Under English law, the right to contribution is not founded on
contract, but is the result of a general equity arising at the inception of the contract of guarantee on the
ground of equality of burden and benefit.1299
[s 146.3] Right of Contribution
If there is more than one surety, liability has to be shared equally unless the contract provides
otherwise.1300 However, such legal issues are to be raised before the concerned tribunal for adjudication of
factual controversies and not before the High Court1301
The right of contribution will not arise under section 146 when the jural relationship between the
Government and the bank is that of a mortgagee-mortgagor and it is not a case of personal liability of a
surety in relation to the principal debtor vis-à-vis the creditor under a contract.1302
Sanjay Kataria
Page 3 of 8
Section 146 of the Contract Act envisages a situation where two or more persons are sureties for the same
debt or duty either jointly or severally and whether under the same or different contracts, with or without
the knowledge of each other. What is important is that there must be two sureties for the same debt or
duty.1303 When claiming contribution, the guarantor must give credit for all that he has received from the
principal-debtor,1304 or by means of a counter-security given by way of indemnity
A sub-guarantor, that is to say a person standing guarantee for a principal guarantor, is not liable for
contribution at the instance of a principal guarantor.1305 There is no right of contribution against a person
who agreed to become surety on condition that another person would sign as a co-surety, if that condition
has not been fulfilled.1306
If the creditor calls upon one of the co-sureties to pay the principal debt or any part of it, that surety has a
right, on principles of equity, to call upon his co-sureties for contribution.1307
However, “surety has no claim against his co-sureties until he has paid more than his share of the debt to
the principal-creditor;”1308 for only then does it become certain that there is ultimately any case for
contribution at all. However, a judgment against the surety at the suit of the creditor for the full amount
of the guarantee (or an equivalent process, such as the allowance of a claim for the sum in the
administration of the surety’s estate) will have the same effect as payment for this purpose, and entitle the
surety or his representatives to a declaration of the right to contribution; it seems that this is a matter of
purely equitable jurisdiction.1309
[s 146.4] When does the Right Arise
A surety’s right to contribution from his co-sureties may arise before he has made payment under his
guarantee.1310 His right to contribution from the co-sureties, after payment, does not arise until he has
paid more than his total proportion or share of the common liability.1311 A payment made by a surety,
even before he is called upon by the creditor to pay, is not treated as a voluntary payment, and entitles
him to claim contribution from the other co-sureties.1312 In order to recover contribution, he need not
show that he abstained from paying the creditor until the creditor compelled him to pay.1313
In Mahoney v McManus,1314 two directors of a company gave guarantees to some of a company’s creditors.
The creditors demanded payments, and the company was unable to pay. One of the surety directors gave
funds to the company to enable it to pay the creditors, on terms that the company would pay him interest
on this amount of advance. The company used this money to pay the creditors. The director claimed
contribution from the other director for this amount. It was held that the amount was paid to the
Sanjay Kataria
Page 4 of 8
company not as a loan, but as payment under the guarantee; and hence the director was entitled to
contribution from the other director. It did not matter that the surety had paid the amount to the
principal-debtor for the purpose of payment to the creditor, and not directly to the creditor. It was held in
the said case:
... The operation of...the principle [of contribution] should not be defeated by too technical an approach to the question whether a
surety has paid the creditor, when he has supplied moneys to the principal-debtor for the purpose of making such payment.1315
Where a co-surety, not acting officiously or voluntarily, paid an ascertained and guaranteed liability of the
debtor, he was entitled to a contribution from his co-surety, even though the creditor had not made a
formal written demand as required by the guarantee. Such requirement of demand was not a pre-
condition for liability under the guarantee, but a procedural or evidentiary requirement included for the
benefit of the surety alone, and could, therefore, be waived by him.1316
[s 146.5] Mode of Contribution
If the co-sureties run accounts together, a surety may, as a general rule, set-off any moneys owing against a
claim for contribution by his co-surety.1317 However, if the creditor’s claim against the sureties is secured
by a charge, then the sureties’ subrogated claim to contribution is also secured, and not subjected to set-
off.1318
Where claiming contribution, the guarantor must give credit for all that he has received from the
principal-debtor,1319 or by means of a counter-security given by way of indemnity.1320
A guarantor, who has made payment of more than his due proportion of the common liability, is entitled
to have assigned to him all the creditor’s rights and securities, irrespective of whether satisfied, for the
purpose of obtaining contribution, including securities received by the creditor from co-guarantors.1321 He
may recover contribution by means of those securities.1322 Thus, all the co-sureties are entitled to share in
the benefit of any security or indemnity which anyone of them has obtained from the principal-debtors
and this, whether they knew of it.1323 The surety bringing in, under this rule, what he receives from his
security may resort again to that security for the liability to which he remains subject, and the co-sureties
may again claim the benefit of participation and so on until the co-sureties have been fully reimbursed or
the counter-security exhausted.1324
Sanjay Kataria
Page 5 of 8
[s 146.6] Sureties for Several Debts
It must, of course, be determined by the circumstances of each case whether there is an indivisible
principal debt or several debts. There is no right of contribution between persons who become sureties
not for the same debt, but by distinct and separate obligations for different portions of a debt.1325 Nor is
there any such right between an ultimate surety for payment of a debt and a person who, though a surety
as between himself and the principal-debtor, has authorised the creditor to treat him as a principal. Where
B. joined with A in a mortgage of A’s property to Z, and agreed to be considered, as regards Z, as a
principal-debtor for the whole, though as between A and himself he was a surety, and the debt was
insured with M, who knew the terms of B’s engagement, in the name of Z, M undertaking to pay the debt
on notice that Z’s power of sale had become exercisable, it held that M was a guarantor to Z, against the
default of both A and B, and was not a co-surety with B.1326 An express contract between Z and M that M
was to be a surety “for”, but not “with” B, by way of “collateral security,” would have the same effect.1327
[s 146.7] Express Contract of Contribution
The right of contribution may be excluded or modified by express contract. If a third party guarantees a
bill of exchange for the benefit of a bank which discounts it, the normal understanding will be that the
surety guarantees that the payment will be made by one or other of the parties to the bill who are liable on
it. It will not be the normal understanding that the surety intends to place himself on a level with the
drawer. Thus, where bills were guaranteed and, on default by the acceptor, were paid by the drawer, it was
held that the drawer had no claim for contribution against the surety.1328
1296 HC at Fort William in Bengal, (1873) 11 Beng LR 76.
1297 Ibn Hasan v Brij Bhukhan Saran, (1904) 1 All LJ 148 (FB).
1298 Wolmershausen v Gullick, [1893] 2 Ch 523

: (1891–94) All ER Rep 740 .
1300 Ram Kishun v State of UP, AIR 2012 SC 2288

: (2012) 11 SCC 511 .
Sanjay Kataria
Page 6 of 8
1301 Krushna Chandra Mallick v Chief General Manager, State Bank of India,
AIR 2009 Orissa 99 .
1302 VO Vakkan & sons v George, (2010) 3 Ker LT

831 .
1303 KSIIDC v SBI, 2004 (4) KarLJ 266

: 2005 (1)RCR (Civil) 337 .
1304 Muthusami Naidu v Rayalu Naidu, AIR

1924 Mad 848 .
1305 Denton’s Estate, Licences Insurance Corpn and Guarantee Fund Ltd. (Re) v Denton,
[1904] 2 Ch 178 (CA); Scholefield Goodman & Sons Ltd. v Zyngier,
(1986) AC 562 : (1985) 3 All ER 105
(PC).
1307 Ibn Hasan v Brijbhukan Saran, (1904) ILR 26

All 407, at 418; Wolmershausen v Gullick, [1893] 2 Ch 523
: [1891–94] All ER Rep 740 .
1308 Snowdon, ex p Snowdon (Re), (1881) 17 ChD 44

, at 48 per Brett J; following Davies v Humphreys, (1840) 6 M&W 153 :
[1835–42] All ER Rep 101 .
1309 Wolmershausen v Gullick, [1893] 2 Ch 523

: (1891–94) All ER Rep 740 .
1310 [1893] 2 Ch 523

: (1891–94) All ER Rep 740 , Craythorne v Swinburne, (1807) 14 Ves
160 at 164 : [1803–13] All ER Rep 181 ; Snowdon, ex p Snowdon (Re),
(1881) 17 ChD 44 at 47 (CA).
1311 Ex p Gifford, (1802) 6 Ves 805, [1775–

1802] All ER Rep 558 ; Davies v Humphreys, (1840) 6 M&W 153 : [1835–
42] All ER Rep 101 ; Snowdon, ex p Snowdon (Re), (1881) 17 ChD 44
, at 47 (CA); Gardner v Brooke, [1897] 2 IR 6 (CA).
1312 Pitt v Purssord, (1841) 8 M&W 538; Davies v Humphreys, (1840) 6 M&W 153
: (1835–42) All ER Rep 101 ; Leigh v Dickeson, (1884)
15 QBD 60 at 64 : (1881–85) All ER Rep 1099
(CA).
1313 Pitt v Purssord, (1841) 8 M&W 538.
Sanjay Kataria
Page 7 of 8
1314 Mahoney v McManus, (1981) 180 CLR 370

(High Court of Australia).
1315 Mahoney v McManus, (1981) 180

CLR 370 (High Court of Australia) per Gibbs CJ at 378.
1316 Stimpson v Smith, (1999) 2 All ER 833

.
1318 Chitty on Contracts, 28th Edn, p 1354, paras 44–111.
1319 Muthusami Naidu v Rayalu Naidu, AIR

1924 Mad 848 .
1320 Ellesmere Brewery Co. v Cooper, (1895–99) All ER

Rep 1121 .
(1874–80) All ER Rep 1406 (HL).
1322 Parker, Morgen (Re) v Hill, (1894) 3 Ch 400

(CA).
1323 Steel v Dixon, (1881–85) All Er Rep 729

.
1324 Berridge v Berridge, (1890) 44 ChD 168

.
1325 Cooper v Twynam, (1823) Turn & R 426 : 24 RR 89.
1326 Denton’s Estate, Licences Insurance Corpn. and Guarantee Fund Ltd. (Re) v
Denton, (1904) 2 Ch 178 (CA); applying the distinction in Craythorne v Swinburne,
(1807) 14 Ves 160 : [1803–13] All ER Rep 181 .
1327 Supra, (1807) 14 Ves 160 : [1803–13] All ER

Rep 181 .
1328 Chitty on Contracts, 28th Edn, p 1353, paras 44–106; Scholefield Goodman &
Sons Ltd. v Zyngier, (1986) AC 562 : (1985) 3 All ER
105 (PC).
Sanjay Kataria
Page 8 of 8
End of Document
Sanjay Kataria
[s 147] Liability of co-sureties bound in different sums.—
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective
obligations permit.
Illustrations
(a) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in
the penalty of 10,000 rupees, B in that of 20,000 rupees, C is that of 40,000 rupees, conditioned for D’s
duly accounting to E. D makes default to the extent of 30,000 rupees, A, B and C are each liable to pay
10,000 rupees.
(b) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in
the penalty of 10,000 rupees, B in that of 20,000 rupees, C that of 40,000 rupees, conditioned for D’s duly
accounting to E. D makes default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B
and C 15,000 rupees each.
(c) A, B. and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in
the penalty of 10,000 rupees, B in that of 20,000 rupees, C that of 40,000 rupees, conditioned for D’s duly
accounting to E. D makes default to the extent of 70,000 rupees, A, B and C have to pay each the full
penalty of his bond.
If the co-sureties are bound in different sums, they are liable to pay equally as far as their agreed obligation
Sanjay Kataria
Page 2 of 2
permits.
[s 147.2] Co-Sureties in Different Sums
This section is in the nature of a proviso to the preceding section. When co-sureties give guarantee for
different amounts under a contract they are bound to contribute equally up to the maximum of their
liability. The illustrations make it clear that subject to the limit fixed by the guarantee of co-sureties, they
are to contribute equally and not proportionately to the liability undertaken.
Under the English law, where the sureties are not equally liable, they shall contribute proportionately to
the amount for which, each is liable; and where they are bound by separate deeds and in unequal amounts,
no one of them can be called upon to contribute beyond the sum for which he is liable under his own
particular deed.1329
End of Document
Sanjay Kataria

Indemnity - Pullock and Mullah PDF

Uploaded by

Copyright:

Available Formats

Indemnity - Pullock and Mullah PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Indemnity - Pullock and Mullah PDF

Uploaded by

Copyright:

Available Formats

User Name: Sanjay Kataria

Date and Time: 17 August 2020 13:58:00 IST

1. [s 124] “Contract of indemnity” defined.—

The Indian Contract Act, 1872

CHAPTER VIII Of Indemnity and Guarantee

[s 124] “Contract of indemnity” defined.—

[s 124.2.1] Nature of Contract of Indemnity

[s 124.2.2] Indemnity and Absolute Obligations

[s 124.2.3] Indemnity and Damages

[s 124.2.4] Indemnity and Guarantee

[s 124.2.5] Indemnity and Insurance

[s 124.2.6] Implied Contract of Indemnity

[s 124.3] Contract of Indemnity under this Section

[s 124.3.1] Indemnity otherwise than under contract

[s 124.3.2] Indemnity for Acts done at another’s request

[s 124.3.3] Indemnity under Statutes

(i) in the ordinary and proper conduct of the business; and

[s 124.4] Commencement and Extent of Liability

[s 124.4.1] Commencement subject to condition

[s 124.4.2] Extent of Liability

[s 124.5] Conduct of the Promisor

[s 124.6] Conduct of “any other person”

[s 124.7] Interpretation of an Indemnity Clause: Some Instances

[s 124.8] Illustrative Cases

[s 124.9] Assignability and Heritability

[s 124.10] Procedure and Limitation

[s 124.11] Position under English Law and other Jurisdictions

1 See under heading: ‘Indemnity under Statutes’.

3 Sumitomo Heavy Industries Ltd. v ONGC, AIR

4 State of Orissa v United India Insurance Co., Ltd.,

5 HP Financial Corpn. v Pawna, (2015) 5

AIR 2014 SC 961 : (2015) 5 SCC 518

6 Jet Airways (India) Limited v Sahara Airlines Limited,

8 Tarachand Ghanshyamdas v Commr. of Income Tax,

9 Komu Kutti v Kumara Menon, AIR 1919

10 An undertaking to pay off the mortgage.

11 Keshwar Sao v Guni Singh, AIR 1938

12 Komu Kutti v Kumara Menon, AIR 1919

13 Tilak Ram v Surat Singh, AIR 1938

14 Ranganath v Pachusao, AIR 1935

15 Mangladha Ram v Ganda Mal, AIR 1929

16 Krihnaswami Iyer v Thathia Raghavian Chetty,

17 Krishnaswami Iyer v Thathia Raghaviah Chetty,

18 Supra, AIR 1938 Rang 359

20 See also section 126 below: “Guarantee and Indemnity”.

21 Ramchandra B Loyalka v Shapurji N Bhownagree,

22 Jagannath Bakhsh Singh v Chandra Bhukan Singh,

23 Ramchandra B Loyalka v Shapurji N Bhownagree,

24 KV Periyamianna Marakkayar and Sons v Banians and Co.,

27 Mahabir Prasad v Siri Narayan, AIR 1918

28 Radha Kunwar v Ram Narain, AIR 1952

29 Municipal Committee Buldhana v Vishnu Damodhar Bhalerao,

30 Bank of New India v G Govinda Prabhu,

31 Ramchandra B Loyalka v Shapurji N Bhownagree,

32 State Bank of India v Mula Sahakari Sakhar Karkhana Ltd.,

33 United India Insurance Co. Ltd. v Kantika Colour Lab.,

34 Supra, (1915) 31 TLR 572

36 British India General Insurance Co. Ltd. (Re),

37 State of Orissa v United India Insurance Co. Ltd.,