Equivalent Citation: AIR2004Bom104, 2003(4)ALLMR112, II(2004)BC470, 2004(2)BomCR

290, 2004(1)CTLJ311(Bom), 2004(1)MhLj159citation image

IN THE HIGH COURT OF BOMBAY
Appeal No. 348 of 2003
Decided On: 11.06.2003
Appellants: Mukesh Gupta
Vs.
Respondent: Sicom Ltd.
Hon'ble Judges:
A.P. Shah and Dr. D.Y. Chandrachud, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: Janak Dwarkadas, Adv. and A. Kalyanramani,i/
b., Gagrat and Co.
For Respondents/Defendant: Shekhar Naphade, Adv.,i/b., Prakash Punjabi, Adv.
Subject: Contract
Catch Words
Mentioned IN
Acts/Rules/Orders:
Contract Act, 1872 - Section 135, Contract Act, 1872 - Section 137, Contract Act
, 1872 - Section 140, Contract Act, 1872 - Section 141; Code of Civil Procedure
(CPC) - Order 37 Rule 1(2)
Cases Referred:
State of Maharashtra and Anr. v. National Construction Company, Bombay and Anr.,
AIR 1996 SC 2367; Hindustan Construction Co. Ltd. v. State of Bihar and Anr., A
IR 1999 SC 3710; Union of India v. Pearl Hosiery Mills, AIR 1981 Punjab 281; Cen
tral Bank v. Ali Mohd., 1993 Mh.L.J. 1092; K.R Chitguppi & Co. v. Vinayak Kashin
ath Khadilkar, ILR (XLV) 157; Hodges v. Delhi and London Bank Ltd., 1900 27 IndApp 168; Citibank N.A. v. Juggilal Kamlapat Jute Mills Co. Ltd., AIR 1982 Delhi
487; T. Raju Setty v. Bank of Baroda, AIR 1992 Karnataka 108; A.R. Krishnaswamy
Iyer v. Travencore National Bank Ltd., AIR 1940 Madras 437; Central Bank of Indi
a v. Multi Block Private Ltd., AIR 1997 Bom. 109
Disposition:
Appeal dismissed
Case Note:
Contract - right to suit - Sections 128, 135 and 137 of Contract Act, 1872 and O
rder 37 Rule 1 (2) of Code of Civil Procedure, 1908 - appellant gave irrevocable
and personal guarantee to respondent of repayment of loan given by respondent t
o third party - respondent filed suit against appellant on default of payment appellant contended that institution of suit against him without instituting the
suit against third party is contrary to Sections 135 and 137 - suit could be in
stituted against appellant treating him as principal debtor - it is not necessar
y for respondent to sue principal debtor before instituting suit against guarant
or - appeal accordingly dismissed.

JUDGMENT
A.P. SHAH, J.
1. This Appeal is preferred against the judgment and decree dated 4-12-2002 pass
ed by Deshmukh, J. in Summons for Judgment No. 466 of 2000 in Summary Suit No. 2
805 of 1999.
2. The appellant is defendant and respondent is plaintiff-SICOM. respondent had
entered into an Agreement dated 10-1-1995 with Lloyd Finance Ltd., hereinafter r
eferred to as the "company". Under that contract an amount of Rs. 10 crores was
advanced as a loan to the company. It was repayable in two installments of Rs. 5
crores each commencing at the end of two years from the date of distribution of
the said loan. The loan was disbursed on 10-1-1995. Accordingly, the said loan
was repayable in two equal installments of Rs. 5 crores each, on 5-1-1997 and 51-1998. The company paid first installment i.e. Rs. 5 crores on the due date. Ho
wever, the company committed default in payment of second installment. One of th
e terms of the agreement between the respondent and the company was that the app
ellant gives an irrevocable and personal guarantee to the respondent guaranteein
g repayment of the said loan. The guarantee agreement was accordingly executed b
etween the appellant and the respondent on 10-1-1995. The company as a security
has pledged its share with the respondent. According to the respondent, as defau
lt has been committed by the company, the amount has become recoverable as per t
he agreement and hence the summary suit has been filed by the respondent against
the appellant. In reply to the Summons for Judgment taken out by the respondent
, the appellant has inter alia contended (i) that the suit is bad for non-joinde
r of the necessary party i.e. the company; (ii) that since the respondent has no
t instituted any suit against the company, present suit cannot be maintained by
the respondents; (iii) that respondent has not enforced its security and has als
o not called for additional security to which it was entitled under the agreemen
t between the respondent and the company, present suit is therefore not maintain
able; (iv) that the loan is secured by pledging shares, therefore, the present s
ummary suit is not maintainable; and (v) that charging of additional interest is
charging penal interest and, therefore, the summary suit is not maintainable. T
he learned single Judge has held that various defences raised by the appellant h
ave no substance and have been raised to avoid the liability to pay huge amounts
which are due to a public sector undertaking by the appellant. Consequently the
learned single Judge has decreed the suit in terms of prayer Clauses (a) and (e
) of the suit.
3. Mr. Dwarkadas, learned counsel appearing for the appellant has not seriously
pressed the first defence that the suit is bad for non-joinder of necessary part
y i.e. the company. It is obvious that the respondent gets an independent cause
of action in view of the contract of guarantee against the appellant, and theref
ore, the company is not necessary party. This is the settled legal position in v
iew of the decisions of the Supreme Court in State of Maharashtra and Anr. v. Na
tional Construction Company, Bombay and Anr., MANU/SC/0597/1996MANU/SC/0597/1996
: [1996]1SCR293 and Hindustan Construction Co. Ltd. v. State of Bihar and Anr.,
MANU/SC/0654/1999MANU/SC/0654/1999 : AIR1999SC3710 , where the Supreme Court ha
s in terms held that the contract of guarantee is a contract independent of the
underlying contract and so far as the rights between the creditor and the guaran
tor are concerned, they are governed by the contract of guarantee and the plaint
iff gets an independent cause of action against the guarantor.
4. Mr. Dwarkadas submitted that clauses in the contract of guarantee, which perm
itted institution of a suit against the appellant without instituting the suit a
gainst the company are contrary to the provisions of Sections 135 and 137 of the
Contract Act. Mr. Dwarkadas further submitted that by virtue of Clause 2(o) of
the contract of guarantee shares of the company were pledged with the respondent

and it was provided that value of such shares shall be subject to review every
quarter and the company shall make good any devaluation in security as a result
of fall in market value of the said shares. The submission of Mr. Dwarkadas is t
hat the respondent did not take any steps to value the shares quarterly as a res
ult the value of the shares has come down and, therefore, to that extent the app
ellant is discharged of the liability. The submission is that the respondent wou
ld be entitled to the security if he pays him and he will be entitled to enforce
that security against the company and the respondent by not taking timely steps
in preserving that security and to that extent the appellant is discharged. The
learned counsel further submitted that under the contract between the company a
nd the respondent, the respondent was entitled to call for additional security.
However, no steps have been taken by the respondent in that behalf and, therefor
e, the appellant is discharged of its liability to that extent in view of provis
ions of Sections 140 and 141 of the Contract Act. The learned counsel urged that
the provisions of Sections 133, 135, 140 and 141 of the Contract Act are not su
bject to the contract to the contrary between the parties to the contract. The p
rovisions contained in the said sections are in unqualified terms. He placed rel
iance on the decision of the Punjab High Court in Union of India v. Pearl Hosier
y Mills, AIR 1981 P&H 281, In any event the learned counsel urged that the statu
tory right of surety under the provisions of the Contract Act could not be affec
ted by consent given in advance to variance in the terms of the contract. He pla
ced reliance on the decision of Wahane J in Central Bank v. Ali Mohd., MANU/MH/1
001/1992MANU/MH/1001/1992 : 1993 Mh.L.J. 1092 where the learned Judge held that
surety's consent to variance must be at the time of act and the consent has to b
e simultaneously with novation. Mr. Dwarkadas also placed reliance on the decisi
on of the division bench of this Court in K.R Chitguppi & Co v. Vinayak Kashinat
h Khadilkar, ILR 65 157.
5. Before adverting to the submissions of the learned counsel for the appellant,
it would be useful to refer to the relevant clauses of the contract between the
parties. Clauses 5, 8, 9 and 14 of the contract are material and are reproduced
hereinbelow :
"5. Irrevocable and shall be enforceable against the Guarantor notwithstanding t
hat the securities or any of them specified under the said security document sha
ll at the time when the proceedings are taken against the guarantor hereunder be
outstanding or unrealized.
8. The Guarantor hereby agrees that in order to give effect to the Guarantee her
ein contained SICOM shall be entitled to act as if the guarantor was and is the
principal debtor to SICOM for all payments and covenants guaranteed by them as a
foresaid to SICOM and that will not be necessary for SICOM to sue the company be
fore suing the Guarantor for the amount due under the said security document.
9. The Guarantee herein contained shall be enforceable against the Guarantor not
withstanding that no action of any kind has been taken by SICOM against the comp
any and an intimation in writing sent to the company and/or the Guarantor by SIC
OM that a default or breach has occurred shall be treated as final and conclusiv
e proof as to the facts stated therein.
14. The guarantor further declares that this guarantee shall not in any event be
affected by reason of SICOM obtaining any other/further securities from the com
pany nor would it be affected by reason of SICOM failing to recover and/or reali
ze any of the securities".
6. A perusal of the clauses 8 and 9 shows that the suit could be instituted agai
nst the appellant treating him as principal debtor and it is not necessary for t
he respondent to sue the principal debtor before instituting the suit against th
e guarantor and the guarantee given by the appellant is enforceable against him
notwithstanding the fact that no action has been taken by the respondent against

the company. Insofar as the submission of discharge of surety under Sections 14

0 and 141 is concerned, by clauses 5 and 14 the appellant has waived his right u
nder the above referred provisions of the Contract Act and it is not open for th
e appellant to rely upon these provisions, even assuming that the respondent has
failed to call for proper additional security and as also failed to preserve th
e securities. The submission of Mr. Dwarkadas that these sections are not subjec
t to the contract to the contrary to the contract between the parties, is withou
t any merit. The contract itself created rights and liabilities between the part
ies. The parties have got right to contract out of the rights and liabilities me
ntioned in the Contract Act and that is envisaged by Section 128 of the contract
. It is true that we do not find the words "notwithstanding anything contained i
n" the contract to the contrary etc in Sections 133 to 140 but therefore it does
not follow that the parties cannot contract out of the rights and liabilities l
aid down under Section 141 of the Contract Act. The issue is concluded by the de
cision of Privy Council in Hodges v. Delhi and London Rank Ltd., 1900 27 IA 168
where it has been held that rights conferred on the surety under the Contract Ac
t could be waived by specific agreement in a deed of guarantee. In that case the
appellants therein in becoming sureties to the respondent covenanted that thoug
h as respect the principal debtor they should be considered as sureties only, ye
t as regards the Bank they should "be considered as principal debtors", so as no
t to be exonerated from liability by any dealing between the Bank and principal
debtor which would otherwise have that effect. It was held that the appellant be
came liable as principal debtor to the Bank immediately on default of principal
debtor and were not discharged by reason of time having been given to him.
7. In the case of Citibank N.A. v. Juggilal Kamlapat Jute Mills Co. Ltd., MANU/D
E/0004/1982MANU/DE/0004/1982 : AIR1982Delhi487 differing from the view expressed
in Pearl Hosiery Mills case it has been held that it was not necessary for the
Legislature to provide words "in the absence of any contract" in Section 133 or
Section 135 or Section 141, because section themselves speak of consent of the s
urety regarding variance in the terms of the contract between the principal debt
or and the creditor, composition with the principal debtor etc. It has been furt
her held that in the absence of words "without the surety's consent" the words "
in the absence of any contract to the contrary" would have been surplus. Therefo
re following the decision of the Privy Council in Hodges v. Delhi and London Ban
k Ltd. it has been held that the rights conferred on the surety under Sections 1
33, 135 or 141 of the Act could be waived by specific agreement in a deed of gua
rantee and as a matter of fact such an agreement would amount to consent within
the meaning of the aforesaid sections of the Act. This decision has been followe
d in T. Raju Setty v. Bank of Baroda, MANU/KA/0013/1992MANU/KA/0013/1992 : AIR19
92Kant108 and similar is the view taken by the Madras High Court in A.R. Krishna
swamy Iyer v. Travencore National Bank Ltd., MANU/TN/0259/1939MANU/TN/0259/1939
: AIR 1940 Mad 437. A learned single Judge of this Court (Rane J.) has categoric
ally held in Central Bank of India v. Multi Block Private Ltd., MANU/MH/0015/199
7MANU/MH/0015/1997 : AIR1997Bom109 that clauses in the guarantee bond waiving th
e rights under Chapter VIII of the Contract Act and other clauses for securing l
oan advanced cannot be said to be violative of the public policy or tainted with
immorality. On the other hand the public policy should be that one should not a
llow to defeat the debt of the creditor.
8. In view of the decision of the Privy Council in Hodges v. Delhi and London Ba
nk Ltd. it is not possible to accept the view expressed by the learned Judges of
the Punjab High Court in Pearl Hosiery Mills case. In any event that was a case
in which without consent of the surety variations were made in the terms of the
original contract. Therefore in view of Section 133 of the Act it was held that
the surety stood discharged. Therefore it was not a case in which the point in
question was considered. The decision by Wahane J. in the case of Central Bank v
. Ali Mohd. that the surety's consent to variation has to be simultaneously with
novation does not lay down the correct law. With respect to the learned Judge t
he view expressed by him runs counter to the decision of the Privy Council in Ho

dges v. Delhi and London Bank Ltd. Reliance placed by Mr. Dwarkadas on the divis
ion bench decision in K. R. Chitguppi Company's case is totally misconceived. In
fact that judgment supports the case of the respondent than the appellant. This
is clear from the following observations:
"... I do not say that a surety can never anticipate the nature of a future vari
ation and give his consent in anticipation of such variation. But it seems to me
that in the present case there is neither a general nor a specific consent to t
he variation in the terms of the sub-agency. I am therefore of opinion that the
lower appellate Court was right in holding that in virtue of the provisions of S
ection 133 the defendant No. 2 was absolved from liability".
9. Insofar as the present case is concerned, it is clear from the terms of the c
ontract between the parties that the appellant had clearly waived benefits that
were available to him under the above referred provisions of the contract and, t
herefore it is not permissible for the appellant to contend that the surety stoo
d discharged in view of the alleged failure of the respondent to take timely ste
ps to preserve the security or to call for the additional security.
10. The next defence raised on behalf of the appellant is that because of the se
curity given by the company the present suit is not maintainable as a summary su
it. This submission is not well founded. It is clear from clauses in the contrac
t of guarantee that once default is committed by the principal debtor, suit coul
d be instituted against the guarantor treating him to be a principal debtor. The
refore in terms of the agreement this suit has been filed treating the appellant
, as the principal debtor and thus the suit cannot be said to be suit on guarant
ee for the purpose of Sub-rule (2) of Rule 1 of Order 37 of the Civil Procedure
Code. The present suit is entirely based on the written contract between the par
ties, and therefore, the suit is maintainable as a summary suit under the provis
ions of Order 37 of the Civil Procedure Code.
11. Last defence raised on behalf of the appellant that charging of additional i
nterest amounts to charging of penal interest is required to be stated only to b
e rejected. Under clause 6 of the agreement interest is to be charged at the rat
e of 17.5% per annum. In case of default, from the date of default additional in
terest at the rate of 2.5% on the total amount of default was chargeable during
the period of default. Clause 5 of the agreement provides that in case of defaul
t additional interest becomes payable and the additional interest charged at the
rate of 2.5% p.a. on the total amount in default during the period of such defa
ult. It is therefore not possible to accept the contention that the respondent w
as charging penal interest.
We therefore dismiss the appeal and confirm the decree passed by the trial Court
with costs.
On the request of the learned counsel appearing for the appellant, this order is
stayed for 8 weeks.