The learned Counsel for the appellant contended that there was no proper pleading on the plea since no particulars of the alleged misrepresentation were given and the case that his signature was obtained on the letter of guarantee by telling him that he was to identify the plaintiff was an afterthought. It is apparent that the defendant said in his written statement nothing more than that his signature was obtained on the letter of guarantee by misrepresentation. It is necessary under Order VI, Rule 4 of the Code of Civil Procedure that in all cases in which the party pleading relies on any misrepresentation, fraud, breach of trust, wilful default, or undue influence, and in all other cases in which particulars may be necessary beyond such as are exemplified in the forms aforesaid, particulars with dates and items if necessary shall be stated in the pleading.
1. This appeal by the original plaintiff is directed against the decree dismissing the claim in so far as it was made against the defendant No. 3 who is alleged to have been a guarantor for the payment of the loan advanced by the plaintiff to the defendant Nos. 1 and 2, a decree having been passed against the defendant Nos. 1 and 2 in the sum of Rs. 60,221.95 with interest at the rate of 17 percent per annum from 18th of March, 1980. The case of the plaintiff was that a loan of Rs. 37,000/- was advanced to the defendant Nos. 1 and 2 on August 29, 1977 for the purpose of purchasing one Tempo Matador Diesel Van to be utilized in their business and a cash credit limit upto Rs. 7,500/- was also granted. On August 29, 1977 the defendant Nos. 1 and 2 executed a promissory note and a hypothecation bond against the amount of Rs. 37.500/- paid in cash. The third defendant in consideration of the plaintiff having agreed to grant accommodation to the first and second defendants, executed a letter of guarantee on September 14, 1977 binding himself to the extent of Rs. 45,000/- and interest on such amount. Since no repayments were made the plaintiff claimed Rs. 60,221.95 together with interest at the rate of 17% per annum from March 1980. The defendant Nos. 1 and 2 did not appear and an ex parte decree was passed against them to the extent of the claim.
2. The third defendant denied that he had become a guarantor for the defendant Nos. 1 and 2 or that he was in any way concerned with the loan granted to them. He denied having executed a letter of guarantee on September 14, 1977. He contended he signed the letter of guarantee on account of misrepresentation and it could not be enforced against him as it was without any consideration.
3. The learned trial Judge accepted the third defendant's contentions and dismissed the suit.
4. The learned Counsel for the appellant contended that there was no proper pleading on the plea since no particulars of the alleged misrepresentation were given and the case that his signature was obtained on the letter of guarantee by telling him that he was to identify the plaintiff was an afterthought. It is apparent that the defendant said in his written statement nothing more than that his signature was obtained on the letter of guarantee by misrepresentation. It is necessary under Order VI, Rule 4 of the Code of Civil Procedure that in all cases in which the party pleading relies on any misrepresentation, fraud, breach of trust, wilful default, or undue influence, and in all other cases in which particulars may be necessary beyond such as are exemplified in the forms aforesaid, particulars with dates and items if necessary shall be stated in the pleading. The learned trial Judge did not notice this requirement of law while permitting evidence to be led at the trial. The third defendant stated firstly that he had never signed the bond in favour of the plaintiff but the second defendant Sharad Paranjape met him and told him that he wanted a man of his acquaintance in Panaji and that he should come to the Bank, When Sharad took him to the Manager of the Bank, the Manager only asked him if he knew Sharad and when he answered in the affirmative he was asked to put his signature on the writing which incidentally is the letter of guarantee on which the plaintiff relies. Admittedly the third defendant is the owner of three fishing trawlers purchased since 1964 and had obtained loan from the Fisheries Department as well as from the Syndicate Bank for the purpose and had to furnish a guarantee to the Bank. Though he stated that he did not know English it is difficult to believe that he would go to the Bank and sign a document only for the asking and without ascertaining even from the Manager what the document was about. D.W. 2 Prakash, a journalist, also spoke about the second defendant having told him that he was taking a loan from the Bank and that for his identification he was taking the third defendant to the Bank, It is difficult to believe in the interested version of these two witnesses in view of the positive evidence to the contrary by the Manager of the Bank Francis Heredia, P.W. 1. Francis stated that prior to the disbursement of the loan the third defendant told him in the Bank that he would sign the bond letter and at that time the second defendant was present. He denied that he misrepresented to the third defendant that his signature was being obtained for identifying the defendants. The learned trial Judge has overlooked that there is no proper pleading and the evidence which was adduced by the third defendant in support of the plea of misrepresentation was entirely untrustworthy. We find that the third defendant had not established that his signature was obtained on the letter of guarantee by misrepresentation. That document was proved by the Manager of the Bank Francis (P.W. 1) and in view of the evidence on record we have no doubt that the third defendant signed on the document fully knowing the contents thereof.
5. On the second question the trial Court took the view that no consideration had passed at the time of the letter of guarantee on 14th September, 1977 and the provisions of Section 127 of the Contract Act could not be Invoked by the plaintiff in view of the decision in Ram Narain v. Lt. Col Hari Singh and Anr. AIR 1964 Raj. 77 wherein the learned Single Judge disagreeing with the view of the Division Bench in Gulam Husain Khan v. Faiyaz All Khan AIR 1940 Oudh 346 held that since no consideration qua the principal debtor had passed from the creditor at the time of execution of the document nor was anything done for his benefit on that day, the contract of guarantee was without consideration. Since there is a divergence of opinion on this question it is necessary to refer to the provisions of Sections 126 and 127 of the Contract Act. Under Section 126, 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. Under Section 127, 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.
6. The submission of Mrs. Agni, learned Counsel for the third defendant, was that "anything done or promise made" cannot be construed to mean that anything done or promise made had reference to something done in the past. i.e. prior to the contract of guarantee and can be deemed to be sufficient consideration for the surety for giving the guarantee. She relied on Illustration (c) to the section which is as follows:
A sells and delivers goods to B.C. afterwards, without consideration agrees to pay for them in default of B. The agreement is void.
A pointed reference was made to the sequence given in Illustration (c) and it was urged that a sale which had materialised earlier even resulting the delivery of goods, but price remaining unpaid, would be regarded as not forming the consideration for the subsequent contract of guarantee. Now the purpose of Illustrations as is pointed out in Aniruddha Mitra v. The Administrator General of Bengal and Ors. to illustrate the section. It is well settled that
just as Illustrations should not be read as extending the meaning of a section, they should also not be read as restricting its operation, especially so, when the effect would be to curtail a right which the plain words of the section would confer. There Their Lordships were dealing with the provisions of Sections 113, 114 and 115 of the Indian Succession Act. A similar view was taken in Shambhu Nath Mehra v. The State of Ajmer while considering the provisions of
Sections 106 and 101 of the Evidence Act and it was observed:
Section 106 is an exception to Section 101. The latter with its Illustration (a) lays down the general rule that in a criminal case the burden of proof is on the prosecution and Section 106 is certainly not intended to relieve it of that duty. On the contrary, it is designed to meet certain exceptional cases in which it would be impossible, or at any rate disproportionately difficult for the prosecution to establish facts which are 'especially' within the knowledge of the accused and which he could prove without difficulty or inconvenience. The word 'especially' stresses that. It means facts that are preeminently or exceptionally within his knowledge.
It was then obseryed:
We recognise that an Illustration does not exhaust the full content of the section which it illustrates but equally it can neither curtail nor expand its ambit; and if knowledge of certain facts is as much available to the prosecution, should It choose to exercise due diligence, as to the accused, the facts cannot be said to be 'especially' within the knowledge of the accused.
It is therefore clear that if the language of the text of Section 127 of Contract Act is clear and unambiguous, the sweep of the text cannot be curtailed by using Illustration (c) to impose a limitation on the expression "anything done or any promise made for the benefit of the principal debtor" that it should be done at the time of giving the guarantee. The language is wide enough to include anything that was done or a promise made before giving the guarantee and would not restrict the application of the section only what was contemporaneously done. In Kali Charan v. Abdul Rahman and Ors. AIR 1918 PC 226 where the provisions of Section 127 of the Contract Act directly fell for consideration, a registered agreement had been executed on 14th January. 1909 in which all the conditions of lease were entered and on 27th February, 1909 the surety after referring to that agreement undertook to stand surety in the sum of Rs. 18,000/-. It was contended by the sureties that the surety bond was without considerations that they were not sureties for the purchaser at the execution sale; and that the plaintiff did not enforce the conditions of the agreement on nonpayment of the first instalment. This was held to be an idle defence since there was ample consideration for the bond because anything done or any promise made for the benefit of the principal debtor may be sufficient consideration to a surety for giving a guarantee; and the liability of the sureties was for the performance by the defendant No. I of the conditions of the lease which were set out in the deed of agreement of the 14th January, 1909. It was urged that there the guarantee was being furnished pursuant to an earlier agreement, but that would make no difference so far as the role of the surety was concerned, because he had not been a party to the previous agreement and he was held to be bound only by virtue of the provisions of Section 127 of the Contract Act.
7. In M. Ghulam Husain Khan and Anr. v. M. Faiyaz Ali Khan and Anr. AIR 1940 Oudh 346 a Division Bench after noticing the observations in Kali Charan v. Abdul Rahman and Ors. AIR 1918 PC 226 held that the word "done" in Section 127 shows that past benefit to the principal debtor can 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 in view of the provisions of Section 127 of the Contract Act. This decision was sought to be distinguished in Ram Narain v. Lt. Col. Hari Singh and Anr. (supra) by referring to the Illustration (c) to Section 27, We have already referred to considerations which weighed with the learned Single Judge, namely, (i) the Illustration (c) to Section 127 and (ii) that in Kali Charan v. Abdul Rahman and Ors. (supra) the contract of guarantee came to be made in pursuance of a previous arrangement. None of these considerations would be sufficient to overlook the plain and natural meaning of the words in the text of Section 127. We are fortified in this respect by the view taken by Calcutta High Court in Jagadindra Nath Roy v. Chandra Nath (1904)31 Cal. 242 and reiterated in United Commercial Bank v. Prasun Bose and Anr. AIR 1978 NOC 171 where it was pointed out that when a Bank continues the existing account of its customer on executing an agreement of guarantee it is sufficient consideration for the contract of guarantee. In Paulo Varghese and Ors. v. Ittipe Abraham and Ors. AIR 1952 Travancore-Cochin 202 after a debt had been contracted the surety came forward and promised that he would see that the debtor discharged his obligations and it was held that this was an instance of promise which was not supported by consideration and for that reason could not be enforced in a Court of law. It is obvious that there the surety had not taken upon himself the personal liability of paying a debt and the provisions of Sections 126 and 127 could not be invoked because there was no contract of guarantee. There is nothing in this decision which will lend assistance to the third defendant.
8. The learned Counsel for the defendant No. 3 referred us to the letter of guarantee dated 14th of September, 1977 and commented that there is no evidence to show that any request had been made by the third defendant to the plaintiff to give credit or accommodation or grant of facilities by making or continuing advances to the defendant Nos. I and 2 because the monetary consideration for the promissory note as well as for the hypothecation agreement had passed on August 29, 1977, whereas the letter of guarantee was written about 15 days later. In our view this portion of the letter of guarantee would not be conclusive because the next sentence reads as follows:
I/We jointly and severally guarantee to the Bank the due payment and discharge two days after demanded of all present and future advances liabilities, bills and promissory notes whether made, incurred or discounted before or after the date hereof to or for the Principal either alone or jointly with any other person or persons and also of bills, promissory notes of guarantees held by the Bank bearing his signature or of all present and future indebtedness and liabilities of the Principal to the Bank from time to time in any manner together with all relative interest, commission and other Banking charges including legal charges and expenses.
According to the learned Counsel, this term cannot be construed as the guarantor taking upon himself even the past liabilities but we are afraid this is not what a plain reading of the document would indicate. The liability incurred by the third defendant was plenary and was not restricted to the liability arising on the date of the letter of guarantee or thereafter.
9. We turn now to the observations in State of Maharashtra v. Dr. M.N. Kaul (dead) by his legal representatives to the
effect that whether a guarantee is enforceable or not depends upon the terms under which the guarantor bound himself. To this there are some exceptions. In case of ambiguity when all other rules of construction fail the Courts interpret the guarantee contra proferentem, that is, against the guarantor or use the recitals to control the meaning of the operative part where that is possible. But whatever the mode employed, the cardinal rule is that the guarantor must not be made liable beyond the terms of his engagement. It is difficult to see how These observations can be of assistance to the third defendant because as we have indicated the liability of the guarantor under the letter of guarantee here would arise also in respect of the liability incurred in the past by the principal debtor and there cannot be any escape from this position however we may read the letter of guarantee. Reliance was also placed on the observations in Ramchandra B. Loyalka v. Shapurji N. Bhownagree AIR 1940 Bom. 31 that since the contract of guarantee involves three parties, the creditor, the surety and the principal debtor, there must be a contract, first of all, between the principal debtor and the creditor. That lays the foundation for the whole transaction. Then there must' be a contract between the surety and the creditor by which the surety guarantees the debt, and no doubt the consideration for that contract may move either from the creditor or from the principal debtor or both. 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. Unless that element is present, it is impossible to work out the rights and liabilities of the surety under the Contract Act. From the document placed before us it is obvious that here though the contracts were made on two occasions, obviously, by the letter of guarantee, the guarantor took upon himself to discharge the liability of the principal debtor and even the evidence of the third defendant shows that he went to the Bank at the request of the second defendant. It is therefore clear that the requirements of three parties in the contract are fulfilled in the present case and the third defendant will be bound by the contract.
10. At one stage it was urged on behalf of the appellant that the concession regarding payment by instalments flowed from the offer made by the principal debtors to offer a surety. However, a careful reading of the deed of hypothecation and the pro-note does not support this contention. The term regarding payment by instalments did not depend for its operation on furnishing the surety and it is obvious that the concession to make payment by instalments could not have been recalled in view of the clear terms of the contract merely because a surety was not furnished. However, on a plain reading of the document placed before us we find having regard to the provisions of Section 127 of the Contract Act, that there was consideration for the contract of guarantee by what the principal debtor had done viz by his having received the benefit of a term loan and cash credit facility. There is no substance therefore in the contention that the letter of guarantee was without consideration or that it was brought about by misrepresentation and that it would not be binding on the third defendant. The letter of guarantee binds the third defendant to pay any amount not exceeding Rs. 45,000/- and interest and it would therefore follow that the entire claim as made by the appellant can be pressed against the third defendant.
11. The last point raised on behalf of the third defendant is that in spite of the amendment to the written statement incorporating paragraph 8 that. the plaintiff failed to avail of the opportunity of recovering the loan amount and by gross negligence lost the security in terms of the hypothecation and/ or charge of the vehicle No. GDS-3488 and therefore the third defendant was liable to be discharged of his liability even otherwise, no issue was framed by the trial Court and the third defendant had no opportunity to adduce evidence on this point. Shri Rebello for the appellant urged that under Clause (6) of the letter of guarantee this right had been waived by the third respondent. Firstly, the question of gross negligence and allowing the security to be lost would be a question of fact on which an issue ought to have been framed so that evidence could be led on the point and if it is a question of waiver which again would be a question of fact it should have been raised before the Court below. Since these two points were not considered by the trial Court though they were material, all that we can do is to send the case back to the trial Court for framing proper issues on these two points and deciding those issues after giving the parties an opportunity to adduce evidence.
12. In the result we allow the Appeal, set aside the decree of dismissal of the claim as against the third defendant and direct the trial Court to frame proper issues on the last point raised on behalf of the third defendant and after giving an opportunity to the parties to adduce evidence, record his findings and dispose of the suit in accordance with law. None of the points which have been decided in this Appeal shall be re-agitated before the trial Court. Since the third defendant had not asked the trial Court at the proper stage to frame an issue on the point nor was an attempt made to lead evidence on that point, we direct the third defendant to pay the costs of this Appeal to the appellant and bear his own. The parties are directed to appear before the trial Court on 15th of June, 1991.
Print Page
Bombay High Court
Union Bank Of India vs Avinash P. Bhonsle on 24 April, 1991
Bench: E D Silva, M Deshpande
1. This appeal by the original plaintiff is directed against the decree dismissing the claim in so far as it was made against the defendant No. 3 who is alleged to have been a guarantor for the payment of the loan advanced by the plaintiff to the defendant Nos. 1 and 2, a decree having been passed against the defendant Nos. 1 and 2 in the sum of Rs. 60,221.95 with interest at the rate of 17 percent per annum from 18th of March, 1980. The case of the plaintiff was that a loan of Rs. 37,000/- was advanced to the defendant Nos. 1 and 2 on August 29, 1977 for the purpose of purchasing one Tempo Matador Diesel Van to be utilized in their business and a cash credit limit upto Rs. 7,500/- was also granted. On August 29, 1977 the defendant Nos. 1 and 2 executed a promissory note and a hypothecation bond against the amount of Rs. 37.500/- paid in cash. The third defendant in consideration of the plaintiff having agreed to grant accommodation to the first and second defendants, executed a letter of guarantee on September 14, 1977 binding himself to the extent of Rs. 45,000/- and interest on such amount. Since no repayments were made the plaintiff claimed Rs. 60,221.95 together with interest at the rate of 17% per annum from March 1980. The defendant Nos. 1 and 2 did not appear and an ex parte decree was passed against them to the extent of the claim.
2. The third defendant denied that he had become a guarantor for the defendant Nos. 1 and 2 or that he was in any way concerned with the loan granted to them. He denied having executed a letter of guarantee on September 14, 1977. He contended he signed the letter of guarantee on account of misrepresentation and it could not be enforced against him as it was without any consideration.
3. The learned trial Judge accepted the third defendant's contentions and dismissed the suit.
4. The learned Counsel for the appellant contended that there was no proper pleading on the plea since no particulars of the alleged misrepresentation were given and the case that his signature was obtained on the letter of guarantee by telling him that he was to identify the plaintiff was an afterthought. It is apparent that the defendant said in his written statement nothing more than that his signature was obtained on the letter of guarantee by misrepresentation. It is necessary under Order VI, Rule 4 of the Code of Civil Procedure that in all cases in which the party pleading relies on any misrepresentation, fraud, breach of trust, wilful default, or undue influence, and in all other cases in which particulars may be necessary beyond such as are exemplified in the forms aforesaid, particulars with dates and items if necessary shall be stated in the pleading. The learned trial Judge did not notice this requirement of law while permitting evidence to be led at the trial. The third defendant stated firstly that he had never signed the bond in favour of the plaintiff but the second defendant Sharad Paranjape met him and told him that he wanted a man of his acquaintance in Panaji and that he should come to the Bank, When Sharad took him to the Manager of the Bank, the Manager only asked him if he knew Sharad and when he answered in the affirmative he was asked to put his signature on the writing which incidentally is the letter of guarantee on which the plaintiff relies. Admittedly the third defendant is the owner of three fishing trawlers purchased since 1964 and had obtained loan from the Fisheries Department as well as from the Syndicate Bank for the purpose and had to furnish a guarantee to the Bank. Though he stated that he did not know English it is difficult to believe that he would go to the Bank and sign a document only for the asking and without ascertaining even from the Manager what the document was about. D.W. 2 Prakash, a journalist, also spoke about the second defendant having told him that he was taking a loan from the Bank and that for his identification he was taking the third defendant to the Bank, It is difficult to believe in the interested version of these two witnesses in view of the positive evidence to the contrary by the Manager of the Bank Francis Heredia, P.W. 1. Francis stated that prior to the disbursement of the loan the third defendant told him in the Bank that he would sign the bond letter and at that time the second defendant was present. He denied that he misrepresented to the third defendant that his signature was being obtained for identifying the defendants. The learned trial Judge has overlooked that there is no proper pleading and the evidence which was adduced by the third defendant in support of the plea of misrepresentation was entirely untrustworthy. We find that the third defendant had not established that his signature was obtained on the letter of guarantee by misrepresentation. That document was proved by the Manager of the Bank Francis (P.W. 1) and in view of the evidence on record we have no doubt that the third defendant signed on the document fully knowing the contents thereof.
5. On the second question the trial Court took the view that no consideration had passed at the time of the letter of guarantee on 14th September, 1977 and the provisions of Section 127 of the Contract Act could not be Invoked by the plaintiff in view of the decision in Ram Narain v. Lt. Col Hari Singh and Anr. AIR 1964 Raj. 77 wherein the learned Single Judge disagreeing with the view of the Division Bench in Gulam Husain Khan v. Faiyaz All Khan AIR 1940 Oudh 346 held that since no consideration qua the principal debtor had passed from the creditor at the time of execution of the document nor was anything done for his benefit on that day, the contract of guarantee was without consideration. Since there is a divergence of opinion on this question it is necessary to refer to the provisions of Sections 126 and 127 of the Contract Act. Under Section 126, 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. Under Section 127, 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.
6. The submission of Mrs. Agni, learned Counsel for the third defendant, was that "anything done or promise made" cannot be construed to mean that anything done or promise made had reference to something done in the past. i.e. prior to the contract of guarantee and can be deemed to be sufficient consideration for the surety for giving the guarantee. She relied on Illustration (c) to the section which is as follows:
A sells and delivers goods to B.C. afterwards, without consideration agrees to pay for them in default of B. The agreement is void.
A pointed reference was made to the sequence given in Illustration (c) and it was urged that a sale which had materialised earlier even resulting the delivery of goods, but price remaining unpaid, would be regarded as not forming the consideration for the subsequent contract of guarantee. Now the purpose of Illustrations as is pointed out in Aniruddha Mitra v. The Administrator General of Bengal and Ors. to illustrate the section. It is well settled that
just as Illustrations should not be read as extending the meaning of a section, they should also not be read as restricting its operation, especially so, when the effect would be to curtail a right which the plain words of the section would confer. There Their Lordships were dealing with the provisions of Sections 113, 114 and 115 of the Indian Succession Act. A similar view was taken in Shambhu Nath Mehra v. The State of Ajmer while considering the provisions of
Sections 106 and 101 of the Evidence Act and it was observed:
Section 106 is an exception to Section 101. The latter with its Illustration (a) lays down the general rule that in a criminal case the burden of proof is on the prosecution and Section 106 is certainly not intended to relieve it of that duty. On the contrary, it is designed to meet certain exceptional cases in which it would be impossible, or at any rate disproportionately difficult for the prosecution to establish facts which are 'especially' within the knowledge of the accused and which he could prove without difficulty or inconvenience. The word 'especially' stresses that. It means facts that are preeminently or exceptionally within his knowledge.
It was then obseryed:
We recognise that an Illustration does not exhaust the full content of the section which it illustrates but equally it can neither curtail nor expand its ambit; and if knowledge of certain facts is as much available to the prosecution, should It choose to exercise due diligence, as to the accused, the facts cannot be said to be 'especially' within the knowledge of the accused.
It is therefore clear that if the language of the text of Section 127 of Contract Act is clear and unambiguous, the sweep of the text cannot be curtailed by using Illustration (c) to impose a limitation on the expression "anything done or any promise made for the benefit of the principal debtor" that it should be done at the time of giving the guarantee. The language is wide enough to include anything that was done or a promise made before giving the guarantee and would not restrict the application of the section only what was contemporaneously done. In Kali Charan v. Abdul Rahman and Ors. AIR 1918 PC 226 where the provisions of Section 127 of the Contract Act directly fell for consideration, a registered agreement had been executed on 14th January. 1909 in which all the conditions of lease were entered and on 27th February, 1909 the surety after referring to that agreement undertook to stand surety in the sum of Rs. 18,000/-. It was contended by the sureties that the surety bond was without considerations that they were not sureties for the purchaser at the execution sale; and that the plaintiff did not enforce the conditions of the agreement on nonpayment of the first instalment. This was held to be an idle defence since there was ample consideration for the bond because anything done or any promise made for the benefit of the principal debtor may be sufficient consideration to a surety for giving a guarantee; and the liability of the sureties was for the performance by the defendant No. I of the conditions of the lease which were set out in the deed of agreement of the 14th January, 1909. It was urged that there the guarantee was being furnished pursuant to an earlier agreement, but that would make no difference so far as the role of the surety was concerned, because he had not been a party to the previous agreement and he was held to be bound only by virtue of the provisions of Section 127 of the Contract Act.
7. In M. Ghulam Husain Khan and Anr. v. M. Faiyaz Ali Khan and Anr. AIR 1940 Oudh 346 a Division Bench after noticing the observations in Kali Charan v. Abdul Rahman and Ors. AIR 1918 PC 226 held that the word "done" in Section 127 shows that past benefit to the principal debtor can 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 in view of the provisions of Section 127 of the Contract Act. This decision was sought to be distinguished in Ram Narain v. Lt. Col. Hari Singh and Anr. (supra) by referring to the Illustration (c) to Section 27, We have already referred to considerations which weighed with the learned Single Judge, namely, (i) the Illustration (c) to Section 127 and (ii) that in Kali Charan v. Abdul Rahman and Ors. (supra) the contract of guarantee came to be made in pursuance of a previous arrangement. None of these considerations would be sufficient to overlook the plain and natural meaning of the words in the text of Section 127. We are fortified in this respect by the view taken by Calcutta High Court in Jagadindra Nath Roy v. Chandra Nath (1904)31 Cal. 242 and reiterated in United Commercial Bank v. Prasun Bose and Anr. AIR 1978 NOC 171 where it was pointed out that when a Bank continues the existing account of its customer on executing an agreement of guarantee it is sufficient consideration for the contract of guarantee. In Paulo Varghese and Ors. v. Ittipe Abraham and Ors. AIR 1952 Travancore-Cochin 202 after a debt had been contracted the surety came forward and promised that he would see that the debtor discharged his obligations and it was held that this was an instance of promise which was not supported by consideration and for that reason could not be enforced in a Court of law. It is obvious that there the surety had not taken upon himself the personal liability of paying a debt and the provisions of Sections 126 and 127 could not be invoked because there was no contract of guarantee. There is nothing in this decision which will lend assistance to the third defendant.
8. The learned Counsel for the defendant No. 3 referred us to the letter of guarantee dated 14th of September, 1977 and commented that there is no evidence to show that any request had been made by the third defendant to the plaintiff to give credit or accommodation or grant of facilities by making or continuing advances to the defendant Nos. I and 2 because the monetary consideration for the promissory note as well as for the hypothecation agreement had passed on August 29, 1977, whereas the letter of guarantee was written about 15 days later. In our view this portion of the letter of guarantee would not be conclusive because the next sentence reads as follows:
I/We jointly and severally guarantee to the Bank the due payment and discharge two days after demanded of all present and future advances liabilities, bills and promissory notes whether made, incurred or discounted before or after the date hereof to or for the Principal either alone or jointly with any other person or persons and also of bills, promissory notes of guarantees held by the Bank bearing his signature or of all present and future indebtedness and liabilities of the Principal to the Bank from time to time in any manner together with all relative interest, commission and other Banking charges including legal charges and expenses.
According to the learned Counsel, this term cannot be construed as the guarantor taking upon himself even the past liabilities but we are afraid this is not what a plain reading of the document would indicate. The liability incurred by the third defendant was plenary and was not restricted to the liability arising on the date of the letter of guarantee or thereafter.
9. We turn now to the observations in State of Maharashtra v. Dr. M.N. Kaul (dead) by his legal representatives to the
effect that whether a guarantee is enforceable or not depends upon the terms under which the guarantor bound himself. To this there are some exceptions. In case of ambiguity when all other rules of construction fail the Courts interpret the guarantee contra proferentem, that is, against the guarantor or use the recitals to control the meaning of the operative part where that is possible. But whatever the mode employed, the cardinal rule is that the guarantor must not be made liable beyond the terms of his engagement. It is difficult to see how These observations can be of assistance to the third defendant because as we have indicated the liability of the guarantor under the letter of guarantee here would arise also in respect of the liability incurred in the past by the principal debtor and there cannot be any escape from this position however we may read the letter of guarantee. Reliance was also placed on the observations in Ramchandra B. Loyalka v. Shapurji N. Bhownagree AIR 1940 Bom. 31 that since the contract of guarantee involves three parties, the creditor, the surety and the principal debtor, there must be a contract, first of all, between the principal debtor and the creditor. That lays the foundation for the whole transaction. Then there must' be a contract between the surety and the creditor by which the surety guarantees the debt, and no doubt the consideration for that contract may move either from the creditor or from the principal debtor or both. 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. Unless that element is present, it is impossible to work out the rights and liabilities of the surety under the Contract Act. From the document placed before us it is obvious that here though the contracts were made on two occasions, obviously, by the letter of guarantee, the guarantor took upon himself to discharge the liability of the principal debtor and even the evidence of the third defendant shows that he went to the Bank at the request of the second defendant. It is therefore clear that the requirements of three parties in the contract are fulfilled in the present case and the third defendant will be bound by the contract.
10. At one stage it was urged on behalf of the appellant that the concession regarding payment by instalments flowed from the offer made by the principal debtors to offer a surety. However, a careful reading of the deed of hypothecation and the pro-note does not support this contention. The term regarding payment by instalments did not depend for its operation on furnishing the surety and it is obvious that the concession to make payment by instalments could not have been recalled in view of the clear terms of the contract merely because a surety was not furnished. However, on a plain reading of the document placed before us we find having regard to the provisions of Section 127 of the Contract Act, that there was consideration for the contract of guarantee by what the principal debtor had done viz by his having received the benefit of a term loan and cash credit facility. There is no substance therefore in the contention that the letter of guarantee was without consideration or that it was brought about by misrepresentation and that it would not be binding on the third defendant. The letter of guarantee binds the third defendant to pay any amount not exceeding Rs. 45,000/- and interest and it would therefore follow that the entire claim as made by the appellant can be pressed against the third defendant.
11. The last point raised on behalf of the third defendant is that in spite of the amendment to the written statement incorporating paragraph 8 that. the plaintiff failed to avail of the opportunity of recovering the loan amount and by gross negligence lost the security in terms of the hypothecation and/ or charge of the vehicle No. GDS-3488 and therefore the third defendant was liable to be discharged of his liability even otherwise, no issue was framed by the trial Court and the third defendant had no opportunity to adduce evidence on this point. Shri Rebello for the appellant urged that under Clause (6) of the letter of guarantee this right had been waived by the third respondent. Firstly, the question of gross negligence and allowing the security to be lost would be a question of fact on which an issue ought to have been framed so that evidence could be led on the point and if it is a question of waiver which again would be a question of fact it should have been raised before the Court below. Since these two points were not considered by the trial Court though they were material, all that we can do is to send the case back to the trial Court for framing proper issues on these two points and deciding those issues after giving the parties an opportunity to adduce evidence.
12. In the result we allow the Appeal, set aside the decree of dismissal of the claim as against the third defendant and direct the trial Court to frame proper issues on the last point raised on behalf of the third defendant and after giving an opportunity to the parties to adduce evidence, record his findings and dispose of the suit in accordance with law. None of the points which have been decided in this Appeal shall be re-agitated before the trial Court. Since the third defendant had not asked the trial Court at the proper stage to frame an issue on the point nor was an attempt made to lead evidence on that point, we direct the third defendant to pay the costs of this Appeal to the appellant and bear his own. The parties are directed to appear before the trial Court on 15th of June, 1991.
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