DR.

RAM MANOHAR LOHIYA,NATIONAL

LAW UNIVERSITY,

LUCKNOW

2017-18

FINAL DRAFT CONTRACT II

TOPIC- BANK OF BIHAR v. DAMODAR PRASAD

CLASS: B.A.LL.B (HONS), 3rd SEMESTER

SUBMITTED TO: SUBMITTED BY:

 ACKNOWLEDGMENT

First of all, I would like to thank my teacher of the subject LAW OF CONTRACT, Ms.
Visalakshi , for providing every bit of help and also showing the way in which to proceed and
how to go about the project. I would also like to thank my parents, friends and others who
helped me immensely at every step and gave every possible bit of help that I needed in
preparing the project and making it look presentable in a good way. I would also like to thank
the library staff of RMLNLU who provided me with books that I needed in making and
preparing the project and other pieces of information and help that was required. At last I would
like to sincerely thank God who gave me the much needed strength and power to go ahead with
the project and make it in a presentable way.

GAURAV
Contents

INTRODUCTION

CASE DETAILS

FACTS

LEGAL ISSUES INVOLVED

CRITICAL ANALYSIS

LIBALITY FOR SURETY

CONCLUSION
INTRODUCTION

In the case of Bank of Bihar v. Damodhar Prasad1 The defendant guaranteed a banks loan.
A default having taken place, the defendant was sued. The trial court decreed that the bank
shall enforce the guarantee in question only after having exhausted its remedies against the
principal debtor. The Patna High Court confirmed the decree. But the Supreme Court over
ruled it.. provisions mainly involved are section 128 and 140 of ICA, 18722 and
s.151 of cpc 1908.3
Section 128 of ICA 1872 talks about suretys liability which states the liability of the surety is
co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
The surety may, however, by an agreement place a limit upon his liability .

Illustration

A guarantees B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured
by C. A is liable not only for the amount of the bill but also for any interest and charges which
may have become due on it.
The first principle governing suretys liability is that it is co-extensive with that of the principal
debtor . The only illustration appended to the section says that if the payment of a loan bond is
guaranteed ,the surety is liable not only for amount of the loan ,but also for any interest and
charges which may have become due on it.

A partial recognition of Section 144 of ICA ,1872 which says :

Where a person gives a guarantee upon a contract that creditor shall not act upon until another
person has joined in it as co-surety , te guarantee is not valid if that other person does not join.
Proceeding against surety without exhausting remedies against debtor is enculcated in Bank
of Bihar v Damodar Prasad , where the liability is otherwise unconditional , the court cannot
of its own introduce a condition into it. This was pointed out by Supreme Court in the following
case.

1
AIR 1969 sc 297
2
Indian Contract Act , Bare Act 1872
3
Code of civil procedure 1908
CASE DETAILS

Bank Of Bihar Ltd vs Damodar Prasad & Anr on 8 August, 1968

Equivalent citations: 1969 AIR 297, 1969 SCR (1) 620

Bench: Bachawat, R.S.

PETITIONER: BANK OF BIHAR LTD.

Vs.
RESPONDENT: DAMODAR PRASAD & ANR.

DATE OF JUDGMENT: 08/08/1968

FACTS
The appellant-creditor lent moneys to the first respondent on the guarantee of the second
respondent., The appellant filed a suit against the respondents for recovery of the amount due.
and the suit was decreed. While passing the decree, the Trial Court directed that the appellant
would not be at liberty to enforce the decree against the second respondent until he had
exhausted his remedies against the first respondent. The appellant challenged this direction.
The High Court dismissed the appeal. In appeal on certificate, this Court :

HELD: The direction must be set aside. In the absence of some special equity the surety has
no right to restrain execution against him until the creditor has exhausted his remedies against
the principal. For making an order under O.XX r. 11 (1 ) of C.P.C. the court must give specific
reasons. The direction postponing payment of the amount decreed must be clear and specific.
The injunction upon the creditor not to proceed against the surety until the creditor has
exhausted his remedies against the principal was of the vaguest character. It was not stated how
and when the creditor would exhaust his remedies against the principal.

It is the duty of the surety to pay the decretal amount. On such payment he will be subrogated
to the rights of the creditor under s. 140 of the Indian Contract Act. and he may then recover
the amount from the principal. The very object of the guarantee is defeated if the creditor is
asked to postpone his remedies against the surety. In the present case the creditor is banking
company. A guarantee is a collateral security usually taken by a banker. The security will
become useless if his rights against the surety can be so easily cut down. The impugned
direction cannot be justified under O.XX r. 11 (1). Assuming that apart from O.XX r. 11(1) the
Court had the inherent power under s. 151 to direct postponement of the execution of the
decree, the ends of justice did not require such postponement.

ACT:

order 20 rule 11(1) and section 151 of the code of civil procedure

SECTION (128.) of THE INDIAN CONTRACT ACT,1872

SECTION 140 IN THE INDIAN CONTRACT ACT, 1872

LEGAL PROVISION INVOLVED

Section 128 in The Indian Contract Act, 1872

128. Suretys liability.The liability of the surety is co-extensive with that of the principal
debtor, unless it is otherwise provided by the contract. The liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise provided by the contract."
Illustration A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and
charges which may have become due on it. A guarantees to B the payment of a bill of
exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the
amount of the bill, but also for any interest and charges which may have become due on it.

Section 140 in The Indian Contract Act, 1872

140.Rights of surety on payment or performance. Where aguaranteed debt has become due,
or default of the principal debtor toperform a guaranteed duty has taken place, the surety,
upon payment orperformance of all that he is liable for, is invested with all therights which
the creditor had against the principal debtor

LEGAL ISSUES INVOLVED

Code of Civil Procedure, (5 of 1908) O. XX r. 11(1)- Direction to creditor to enforce

decree against surety after exhausting remedies against principal-If justified.

CRITICAL ANALYSIS

To sum up, the principal that a creditor is not obliged to sue or exhaust his remedies
against the principal debtor before proceeding against the surety is well established
The principal is however not applicable where a decree is a mortgage decree

The observations made are based on the Supreme Court decisions in the matter of Bank of
Bihar Vs Damodar Prasad11 and union Bank of India Vs Manku Narayana4
. Both the decisions
relate to execution of decrees against the guarantor without exhausting the remedy against the
principal debtor. But with difference that in later case the loan was secured by
mortgage and the decree was a mortgage decree. So in presence of mortgage, the decree
holder was obliged to proceed against the mortgaged property first. It is debatable whether
the ratio can be extended to other form of securities available to creditor like pledge, lien,
hypothecation etc. In brief whether a secured creditor can keep the securities intact and
proceed in execution against the guarantor. However law laid down in Manku Narayan case
is distinguished, differed and not followed.

Law laid down by the Honble Supreme Court in Damodar Prasad case still holds good as

4
AIR 1987 SC 1078
precedent on the subject.

. It is now suggested that under order 20 rule 11(1) and section 151 of the code of civil
procedure the Court passing the decree had the power to impose the condition that the
judgment-creditor would not be at liberty to enforce the decree against the surety until the
creditor has exhausted his remedies against the principal. order 20 rule 11(1) provides that
where and insofar as a decree is for the payment of money, the Court may for any sufficient
reason at the time of passing the decree order that payment of the amount decreed shall be
postponed or shall be made by instalments, with or without interest, notwithstanding anything
contained in the contract under which the money is payable. For making an order under order
20 rule 11(1) the court must give sufficient reasons. The direction postponing payment of the
amount decreed must be clear and specific. The injunction upon the creditor not to proceed
against the surety until the creditor has exhausted his remedies against the principal is of the
vaguest character. It is not stated how and when the creditor would exhaust his remedies against
the principal. Is the creditor to ask for imprisonment of the principal? Is he bound to discover
at his peril all the properties of the principal and sell them; and if he cannot, does he lose his
remedy against the surety? Has he to file an insolvency petition against the principal? The trial
court gave no reasons for this extraordinary direction. The Court rejected the prayer of the
principal debtor for payment of the decretal amount in instalments as there was no evidence to
show that he could not pay the decretal amount in one lump sum. It is, therefore, said that the
principal was solvent. But the solvency of the principal is not a sufficient ground for restraining
execution of the decree against the surety. It is the duty of the surety to pay the decretal amount.
On such payment he will be subrogated to the rights of the creditor under section 140 of the
indian contract act, and he may then recover the amount from the principal. The very object of
the guarantee is defeated if the creditor is asked to postpone his remedies against the surety. In
the present case the creditor is a banking company. A guarantee is a collateral security usually
taken by a banker. The security will become useless if his rights against the surety can be so
easily cut down. The impugned direction cannot be justified under order 20 rule 11(1).
Assuring that apart from order 20 rule 11(1) the Court had the inherent power under Section
151 to direct postponement of execution of the decree, the ends of justice did not require such
postponement.
Liability for surety

In a recent decision the Supreme Court has restated the law relating to the extent and proportion
of liability of a guarantor/surety. Referring to a wide array of decisions on the issue, the
Supreme Court reiterated the legal position that the liability of the surety/guarantor is co-
extensive with the principal debtor, unless it is otherwise provided by the contract and that a
creditor is not bound to exhaust his remedy against the principal debtor before suing the
surety/guarantor.

In Bank of Bihar Ltd. v. Damodar Prasad & Another (1969) 1 SCR 620 ... the court referred to
a judgment in Lachhman Joharimal v. Bapu Khandu 5and Tukaram Khandoji (1869) 6
Bombay High Court Reports 241, in which the Division Bench of the Bombay High Court held
as under:
"The court is of opinion that a creditor is not bound to exhaust his remedy against the principal
debtor before suing the surety and that when a decree is obtained against a surety, it may be
enforced in the same manner as a decree for any other debt."
This Court, while approving the said judgment, observed that, the very object of the guarantee
is defeated if the creditor is asked to postpone his remedies against the surety. In the present
case the creditor is a banking company. A guarantee is a collateral security usually taken by a
banker. The security will become useless if his rights against the surety can be so easily cut
down.
20. In State Bank of India v. M/s. Indexport Registered 6(supra), this Court held that the
decree holder bank can execute the decree against the guarantor without proceeding against the
principal borrower. Guarantors liability is coextensive with that of the principal debtor. In that
case, this court further observed that, the execution of the money decree is not made
dependent on first applying for execution of the mortgage decree. The choice is left entirely
with the decree holder. The question arises, whether a decree which is framed as a composite
decree as a matter of law, must be executed against the mortgage property first or can a money
decree, which covers whole or part of the decretal amount covering mortgage decree can be
executed earlier. There is nothing in law which provides such a composite decree to be

5
AIR 1992 SC 1740
6
AIR 1992 SC 1740
first executed only against the principal debtor. The court further observed that the liability of
the surety is co-extensive with the principal debtor, unless it is otherwise provided by
the contract.
21. The term co-extensive has been defined in the celebrated book of Polock & Mulla on
Indian Contract and Specific Relief Act, Tenth Edition, at page 728 as under:
Co-extensive. - Surety's liability is co-extensive with that of the principal debtor.
A surety's liability to pay the debt is not removed by reason of the creditor's omission to sure the
principal debtor. The creditor is not bound to exhaust his remedy against the principal
before suing the surety, and a suit may be maintained against the surely though the principal
has not been sued.
22. In Chitty on Contracts, 24th Edition, Volume 2 at page 1031 paragraph 4831 it is stated as
under, Conditions precedent to liability of surety.- Prima facie the surety may be proceeded
against without demand against him, and without first proceeding against the principal debtor.
23. In Halsbury's Laws of England, Fourth Edition,Vol. 20, paragraph 159 at page 87 it has
been observed that "it is not necessary for the creditor, before proceeding against the surety, to
request the principal debtor to pay, or to sue him, although solvent, unless this is expressly
stipulated for.
24. A Division Bench of the Bombay High Court in Jagannath Ganeshram Agarwala v.
Shivnarayan Bhagirath and Ors7. held that the liability of the surety is co-extensive, but is not
in the alternative. Both the principal debtor and the surety are liable at the same time to the
creditors.
25. A Division Bench of the High Court of Karnataka, in The Hukumchand Insurance Co.
Ltd. v. The Bank of Baroda & Others 8 had an occasion to consider the question of liability of
the surety vis-a-vis the principal debtor. The court held as under:-
The question as to the liability of the surety, its extent and the manner of its enforcement have
to be decided on first principles as to the nature and incidents of suretyship. The liability of a
principal debtor and the liability of a surety which is coextensive with that of the former are
really separate liabilities, although arising out of the same transaction. Notwithstanding the fact
that they may stem from the same transaction, the two liabilities are distinct. The liability of
the surety does not also, in all cases, arise simultaneously.
26. The case of the respondent has never been that the liability of the guarantor is only

7
AIR 1940 Bombay 247
8
AIR 1977 Kant 204
contingent and if remedies against the principal debtor failed to satisfy the dues of the decree
holder, then only the bank can proceed against the guarantor.
30. The legal position as crystallized by a series of cases of this court is clear that the liability
of the guarantor and principle debtors are co-extensive and not in alternative. When we
examine the impugned judgment in the light of the consistent position of law, then the obvious
conclusion has to be that the High Court under its power of superintendence under Article 227
of the Constitution of India was not justified to stay further proceedings in O.A. 156 of 1997.

CONCLUSION

This will become clear if a particular line can be quoted from the case Bank of Bihar
Ltd. Vs. Damodar Prasad and Another [1969] 1 SCR 620:-
It is the right of the decree-holder to proceed with it in a way he likes..
Hence, section 128 comes to the rescue of creditors in case of defaulters and provides
them with the complete discretion to execute a suit either against the principal debtor or
against a surety or realize it by selling the security. It has been left at the complete will
of the creditor. Therefore, the surety cannot allege that the creditor should proceed
against the security first and then the surety if the security value is found to be
inadequate jointly or severally
An analysis of Section 128 of the Indian Contract Act and the cases of Bank of Bihar
Ltd. Vs. Damodar Prasad and Another [1969] 1 SCR 620 that the law gives the creditor the
discretion or freedom in case of the principal debtors default to pay back the debt how he
wishes to recover the amount. Under Section 128 of the Act, a suretys liability
is co-extensive with that of the principal debtors that is to the same extent as that of the
latter and also immediate once the default has taken place. In such circumstances, the
guarantor cannot take the defence that the creditor must proceed against utilizing the
deposited security to recover the debt first since it exists and discharge the surety from
having to pay instead. The precedents also suggest that since a suretys liability is now
immediate owing to default by the principal debtor, the creditor shall himself decide
whether he wants to recover the debt by selling the security or by making the surety pay
for it. Section 128 also states that it shall not be illegal if the creditor chooses to sue
only the surety and not the principal debtor for recovery of its debt. He is allowed to do
so under the able ambit of law.

This will become clear if a particular line can be quoted from the case Bank of Bihar
Ltd. Vs. Damodar Prasad and Another [1969] 1 SCR 620:-
It is the right of the decree-holder to proceed with it in a way he likes..
Hence, section 128 comes to the rescue of creditors in case of defaulters and provides
them with the complete discretion to execute a suit either against the principal debtor or
against a surety or realize it by selling the security. It has been left at the complete will
of the creditor. Therefore, the surety cannot allege that the creditor should proceed
against the security first and then the surety if the security value is found to be
inadequate jointly or severally
Bibliography
LAW OF CONTRACT BY AVATAR SINGH

PRINCIPLES OF ENGLISH LAW CONTRACT BY A.G. GUEST

ONLINE SOURCES

https://indiankanoon.org/doc/743049/
http://jajharkhand.in/wp/wp.content/judicial_updates_files/02_Contract/02_Vicarous_Liabi
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https://www.casemine.com/judgement/in/5609ab52e4b014971140c378