State of Madhya Pradesh v. Kaluram
1967 SCR (1) 266
(Suretyship, Section 139 and 141 of Indian Contract Act, Subrogation)
At an auction for sale of felled trees, Jagatram (J) was awarded the sale, on payment of a security and subsequent payment of installments. He executed a contract in favour of the Governor of M.P. which specified, (among other terms), that the contractor had to furnish a coupe boundary certificate which concerned the area from which contractor was allowed to take away the trees. Nathuram and Kaluram (K), the defendants, stood sureties for J. J removed the entire quantity of the trees, paid the first installment but failed to pay the rest. State of M.P(S) claimed for recovery. K filed an action against the S claiming that he was not liable to pay the arrears of forest dues recoverable from J.
- The forest authorities gave time to J and didn’t take any steps as part of their duty towards the surety i.e. did not seize and sell the trees of J as soon as the second installment had fallen due. Because of the inaction on the part of S, his eventual remedy against J was impaired and therefore he stood discharged as surety.
- Since, the creditor S had lost or had parted with the security without the consent of the surety, the latter is, discharged to the extent of the value of the security lost or parted with under S.141 of ICA.
- The property in the goods had not passed to J till they were removed, and on that account s. 83 of the Forest Act did not attach to the goods sold, has therefore no force.
- Mere inaction on the part of the forest authorities does not amount to parting with the security.
Trial Court: Accepted K’s contentions and decreed in his favour.
High Court (MP): Confirmed the decree of the Trial Court
SUPREME COURT (SHAH J.)
- (w.r.t K’s 2nd contention) S had a charge over the goods sold as well as the right to remain in possession till full payment of the installments. When the goods were completely removed by J that security was lost and to the extent of the value of the security lost the surety stood discharged. Since S parted with the goods before receiving due payments s.83(2) can’t be enforced.
- (w.r.t 1st contention of K & S) As soon as the contract was entered into and the coupe boundary certificate was produced, the property in the goods passed to J and s.83 was attracted. The Divisional Forest Officer had authority to stop removal of those goods until the amount was paid. They however allowed J to remove the goods sold and thereafter were paid.
- (w.r.t 2nd contention of S) The terms of the statute do not apply only to cases in which by positive action on the part of the creditor the security is parted with. Even if the security is lost by the creditor, the surety is discharged.
- Kaluram stood discharged from all liability to pay.
Scope of S.141 of Indian Contract Act: The expression “security” in s. 141is 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
 “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 consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.”
 S.83(1)When any such money is payable for or in respect of any forest-produce, the amount thereof shall be deemed to be a first charge on such produce, and such produce may be taken possession of by a Forest-officer until such amount has been paid.
(2) If such amount is not paid when due, the Forest Officer may sell such produce, by public auction, and the proceeds of the sale shall be applied first in discharging such amount.