Ramchandra B. Loyalka v. Shapurji N. Bhownagree
(1940) 42 BOMLR 550
(Section 124, 126 and 145 of Indian Contract Act, Difference between Indemnity and Guarantee)
The plaintiff (P) was a sub-broker employed by the defendant broker (D) on 50% commission. P introduced 6 constituents and became answerable to the broker for them. The constituents defaulted which resulted in loss of Rs.16000. P asked for amount due under his brokerage from D and agreed to make good Rs.16000. D thereafter sued the constituents and compromised his claim as against some of them by receiving amounts much smaller than what was due from them and claimed the unrecovered amount. P sued to take accounts of the dealings between himself and D, and as to the compromises arrived at by D with some of the constituents, alleging D had settled the claims as against those constituents for lesser amounts without P’s (guarantor) consent. Therefore P was discharged from his obligation to pay the debts of those constituents.
ISSUE: Whether contract of Guarantee or Indemnity
- P was a guarantor and D making a settlement without his (surety) had discharged him.
- By the compromise made by D without P’s consent, with three of the constituents, his remedies against those three parties are lost.
- It was a contract of indemnity because there was no specific amount which the plaintiff had stood surety for and the requirement that, there should be three parties for guarantee was absent. The deal was only between P & D.
- The defendant was within his rights to negotiate and recover the best amounts he could and there was no allegation of any mala-fide or wrong-doing in arriving at these settlements with the defaulting customers.
Trial Court: Contract of guarantee, favoured P
High Court (Bombay)
- (w.r.t 1st contention of D Trial court verdict) The contract fell within the terms of the definition of indemnity under S. 124. The promisor is agreeing to save the promisee from loss occasioned by the conduct of the constituents introduced. A contract of guarantee involves three parties- the creditor, the surety and the principal debtor (S.126). There must be a contract, first of all, between the principal debtor and the creditor and between the surety and the creditor. But if those are the only contracts, the case is one of indemnity. 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. S.145 provides that in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. This is not possible unless the principal debtor is privy to the contract of surety-ship.
- P was anyway liable to pay under the second agreement by which he expressly agreed to be liable for the amounts mentioned in the document and hence D was entitled to the unrecovered amount.
- There must be a third contract by which the principal debtor agrees to satisfy the claim of the surety. If the surety satisfies the claim of the creditor without such contract, the action of the surety would be voluntary, and the debtor may repudiate all liability for the payment made by the surety, on the ground that he had never requested the surety to make any payment.
- (w.r.t 2nd contention of P & D) D’s contention accepted. The second agreement completely defeats P’s claim. P’s rights, if any, come into existence only when he makes the payment and not before. Under the circumstances of the case consent(in law) is not consequential.