Amrit Lal Goverdhan Lalan v. State Bank of Travancore and Ors.
1968 SCR (3) 724
(ss.133, 135, 139 and 141 of Indian Contract Act, Suretyship, Subrogation)
Respondents 3 to 6, as partners of Respondent 2 firm (R2), entered into an agreement with a Bank (R1) to open a cash credit account to the extent of Rs. 100,000 to be secured by goods to be pledged with the Bank. The agreement provided that the borrowers shall be responsible for the quantity and quality of goods pledged. The appellant (A) became surety for the borrowers w.r.t the account upto Rs.100,000 and allowed the Bank to recover, notwithstanding any other security the Bank may hold. The stock pledged was initially valued at about Rs. 99,991 but after verification shortage of goods to the value of Rs. 35,690 was found. It was alleged that R2-R6 must have taken away the goods. They were granted time to make up the deficit but they failed to do so. After adjusting the money realized on the sale of the goods pledged and other adjustments, a sum of Rs. 40,933.58 was found due to the Bank from R2-R6. The Bank filed a suit against them and A.
Trial Court: suit decreed.
High Court: decree confirmed
Contentions (Appellant, A)
- Certain entries in the account books of the Bank showed that the maximum limit of credit was reduced to Rs. 50,000 and again raised to Rs. 100,000 without consulting the appellant, therefore there was variation in the terms of the contract without the surety’s (appellant’s) consent and, under s. 133 of the Indian Contract Act the liability of the appellant was discharged.
- Under s. 135 of the Act, the conduct of the Bank in giving time to R2-R6 to make up the deficit in the quantity of goods absolved A of all liability.
- Under s. 141 of the Act, since a portion of the security was parted with or lost by the creditor without surety’s consent, the liability of A was discharged to the extent of the value of the security so lost.
- (w.r.t 1st contention of A) The entries in the books of account were mere internal instructions not legally binding on the respondents, and in view of the formal record in the original agreement and letter of guarantee, there could not have been a variation in the terms without a proper written agreement. Therefore, there was no variance in the terms of the contract and the provisions of s. 133 of the Act were not attracted.
- (w.r.t 2nd contention of A) The act of the Bank in giving time to the principal debtor to make up the quantity of goods pledged is not tantamount to giving of time to the principal debtor for making payment of the money, within the meaning of the section 135 and hence it is not attracted. What really constitutes a promise to give time within the meaning of s. 135 of the Act is the extension of the period at which, the principal debtor was by the original contract obliged to pay the creditor, by substituting a new and valid contract between them, or, whenever the taking of a new security from the principal debtor operates as giving time.
- (w.r.t 3rd contention of A) Under s. 140 of the Contract Act the surety is, 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. Under s. 141 of the Act the surety has a right to the securities held by the creditor at the date when he became surety. The shortage was brought about by the negligence of the Bank and to that extent it must be deemed to be a loss by the Bank of the security. Contention accepted.