SPECIAL CONTRACTS

Bank of Bihar Ltd. v Damodar Prasad & others

A BRIEF ANALYSIS

Submitted by
Shreya Ghosh Dastidar
Division B, BA LLB, PRN – 16010323154,
Semester III, Batch 2016-21

Symbiosis Law School, Hyderabad

Symbiosis International University, Pune

In
July, 2017

Under the guidance of

our respected faculty member
Prof. Priya Jain

Symbiosis Law School, Hyderabad

Symbiosis International University, Pune
 CERTIFICATE

This project titled Bank of Bihar Ltd. v Damodar Prasad – a brief analysis
submitted to Symbiosis Law School, Hyderabad for Special Contracts I as part
of my internal assessment is based on my original work and has not been
submitted elsewhere for award of any degree.

The material borrowed from other sources and incorporated into the research
project has been duly acknowledged.

I understand that I myself would be held responsible and accountable for

plagiarism, if any, detected later on.

Signature of the Candidate

Date: 24th July, 2017
 ACKNOWLEDGEMENT

I would like to express my gratitude towards our respected professor of Special

Contracts I – Prof Priya Jain who conducted many classes for us to know about
the basic concepts of this subject and also helped us to learn about the practical
details and my institution, Symbiosis Law School, Hyderabad for their ardent
support and guidance.
I would also like to acknowledge all the sources I have referred which has
helped me to complete this project on. Their constructive guidance and
criticism helped me in completing this task.

Signature of the candidate

Date: 24th July, 2017
 TABLE OF CONTENTS

1. INTRODUCTION…………………………………………………..........

2. SUMMERY OF FACTS OF THE CASE……………………………….

3. ISSUES RAISED…………………………………………………………

4. STATUTES REFERRED………………………………………………..

5. STATUTES DISCUSSED……………………………………………….

6. COURT OBSERVED……………………………………………………

7. JUDGEMENT……………………………………………………………

8. ANALYSIS OF THE JUDGEMENT…………………………………..

9. CONCLUSION…………………………………………………………..

10. BIBLIOGRAPHY……………………………………………………….
 INTRODUCTION
Guarantees have been prevalent in India from ancient times. During the feudal period, there
are instances where the kings/Feudal lords have made individuals captive for non-payment of
debt, indemnity and/or otherwise. Prevalence of Guarantees is seen throughout the historical
periods. Before passing of the Indian Contract Act, 1872, the position of India can be
understood from the prevalence of laws in presidential towns, provincial towns and other areas
governed by Maharajas, Nawabs etc. For presidency towns of Calcutta, Madras & Bombay,
the English common law and statute law relating to contracts were introduced as conducive to
Indian conditions but same led to many inconveniences. The statute of 1781 and that of 1797
were applied to supersede English law in its application to Hindus and Mohammadas but the
inconveniences continued with the result the Indian Contract Bill was introduced in Legislature
which received its assent on 25th April, 1872. The referred Act has a separate chapter covering
the Indemnity and Guarantee. The Guarantee under the Act is defined as:

 Section 126 of the Indian Contract Act, 1872 talks about ‘Contract of Guarantee’,
‘Surety’, ‘principal Debtor’ and ‘Creditor’
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 ‘the
principal debtor ‘and the person to whom the guarantee is given is called the ‘creditor’. A
guarantee may be either oral or written.”

Most of the laws world over contains provisions for Guarantor and his liability though in
phraseology / terminology the definition varies but in essence it meets the security aspect for
credit. In some situations, it is considered as collateral promise to answer for debt while in
others the liability of guarantor is joint and several coextensive with the principal debtor.

Liability of guarantor is same as that of surety subject to guarantee contract. Law on the subject
is provided in Section 128 of the Indian Contract Act, 1872, which says: “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 guarantor deliberated upon hereinbefore can stand discharge under
different situations whether fully or partially like the discharge by variance in terms of contract,
release or discharge of principal debtor, besides when the creditor compounds with, gives time
to, or agrees not to sue, principal debtor or where the creditor's act or omission impairs surety's
remedy. To prevent the guarantor from getting discharge from the liability, the creditor adopts
a contractual clause in guarantee whereby the guarantor is deprived of his statutory right what
is termed as waiver of right /contracting out. In the context, help is taken from section 1 saving
clause read with particular section concerning discharge. It is seen that most of the sections
dealing with discharge of guarantor are not specific with respect to contracting out. The
‘contracting out’ provisions demand review so as to prevent interference in statutory right of
guarantor by dominant party by adopting standard form of contract, more so, when the relevant
sections related to guarantee and discharge are silent about the contracting out. Never the less
there are exceptions to the law of discharge provided by the Act itself, namely.

SUMMERY OF FACTS OF THE CASE

The plaintiff Bank lent money to defendant No. 1 Damodar Prasad on the guarantee of
defendant No. 2 Paras Nath Sinha. On the date of the suit Damodar Prasad was indebted to the
plaintiff for Rs. 11723.56 nP on account of principal and Rs. 2769.37 nP on account of interest.
In spite of demands neither he nor the guarantor paid the dues. The plaintiff filed a suit against
them in the Court of the Subordinate Judge, 1st Court, Patna, claiming a decree for the amount
due. The Trial Court decreed the suit against both the defendants. While passing the decree,
the Trial Court directed that the “plaintiff bank shall be at liberty to enforce its dues in question
against defendant No. 2 only after having exhausted its remedies against defendant No. 1”. The
plaintiff filed an appeal challenging the legality and propriety of this direction. The High Court
dismissed the appeal. The plaintiff has filed the present appeal after obtaining a certificate.

ISSUES RAISED
The main issue raised in this case, is-
Whether the plaintiff bank shall be at liberty to enforce its dues in question against defendant
No. 2 only after having exhausted its remedies against defendant No. 1?
 STATUTES REFERRED

1. Code of Civil Procedure, 1908, Order 20 Rule 11(1)

2. Code of Civil Procedure, 1908, Section 151
3. Indian Contract Act, 1872, Section 128
4. Indian Contract Act, 1872, Section 140

STATUTES DISCUSSED

CIVIL PROCEDURE CODE, 1908 – Order 20, Rule 11:–

Direction to creditor to enforce decree against surety after exhausting
remedies against principal-If justified.
5.

In the instant case such directions held to be not required for the ends of justice. The solvency
of the principal is not 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, 1872,
and he may then recover the amount from the principal. The very object of the guarantee is
defeated if 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).
Assuming that part 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.

CODE OF CIVIL PROCEDURE, 1908, Section 151:--

Saving of the inherent powers of Court
It is now suggested that under Section 151 of the Code of Civil Procedure along with Order
XX rule 11 (1) of the Indian Constitution, 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.
INDIAN CONTRACT ACT, 1872, Section 128:
Surety’s liability (Postponement of liability till the remedy against
Principal Debtor existed)
The liability of the surety is co-extensive with that of the principal debtor, unless it is
otherwise provided by the contract. Directions to the effect of permissibility, must be on the
basis of reasons. In the instant case, such directions held to be not required for the ends of
justice.

INDIAN CONTRACT ACT, 1872, Section 140:--

Execution of decree against surety
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.

COURT OBSERVATIONS

The guarantee bond in favor of the plaintiff bank is dated June 15, 1951. The surety agreed to
pay and satisfy the liabilities of the principal debtor up to Rs. 12000 and interest thereon two
days after demand. The bond provided that the plaintiff would be at liberty to enforce and to
recover upon the guarantee notwithstanding any other guarantee, security or remedy which the
Bank might hold or be entitled to in respect of the amount secured.

The demand for payment of the liability of the principal debtor was the only condition or the
enforcement of the bond. That condition was fulfilled. Neither the principal debtor nor the
surety discharged the admitted liability of the principal debtor in spite of demands. Under
Section 128 of the Indian Contract Act, save as provided in the contract, the liability of the
surety is coextensive with that of that of the principal debtor. The surety became thus liable to
pay the entire amount. His liability was immediate. It was not deferred until the creditor
exhausted his remedies against the principal debtor.

Before payment the surety has no right to dictate terms to the creditor and ask him to pursue
his remedies against the principal in the first instance. As Lord Eldon observed in Wright v
Simpson, “But the surety is a guarantee; and it is his business to see whether the principal pays,
and not that of creditor.” In the absence of some special equity the surety has no right to restrain
an action against him by the creditor on the ground that the principal is solvent or that the
creditor may have relief against the principal in some other proceedings.

Likewise where the creditor has obtained a decree against the surety and the principal, the
surety has no right to restrain execution against him until the creditor has exhausted his
remedies against the principal. In Lachhman Joharimal v. Bapu Khandu, (1869) 6 Bom HCR
241, the judge of the court of Small CAUSES, Ahmednagar, solicited the opinion of the
Bombay High Court on the subject of the liability of sureties. The creditors having obtained
decrees in two suits in the Court of Small Causes against the principals and sureties, presented
applications for the imprisonment of the sureties before levying execution against the
principals. The judge stated that the practice of his court had been to restrain a judgment
creditor from recovering from a surety until he had exhausted his remedy against the principal
but in his view the surety should be liable to imprisonment while the principal was at large.
Couch C.J. and Melvill J. agreed with this opinion and observed:-

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, R. 11 (1) provides that “where and in
so far 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 installments, 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. Order 20, R. 11 (1)
provides that “where and in so far as s decree is for the payment of money, the court 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 installments, with or without interest.
Notwithstanding anything contained in the contract under which the money is payable. “For
making an order under Order 20, R. 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 as 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 loose his remedy against the surety? Has he to file an insolvency
petition against the principal? The Trial Court gave no reasons for this extra-ordinary direction.
The Court rejected the prayer of the principal debtor for payment of 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, R. 11 (1). Assuming that apart from Order 20, R.
11 (1) the Court had the inherent power under Section 151 to direct postponement of the
execution of the of the decree, the ends of justice did not require such postponement.

JUDGEMENT
The Judgment of the Court was delivered by Bachawat, J. The plaintiff Bank lent moneys to
defendant No. 1 Damodar Prasad on the guarantee of defendant No. 2 Paras Nath Sinha. On
the date of the suit Damodar Prasad was indebted to the plaintiff for Rs. 11,723.56 nP on
account of principal and Rs. 2,769.37 nP on account of interest. In spite of demands neither
he nor the guarantor paid the dues. The plaintiff filed a suit against them in the Court of the
Subordinate Judge, 1st Court, Patna, claiming a decree for the amount due. The Trial Court
decreed the suit against both the defendants. While passing the decree, the Trial Court
directed that the "plaintiff bank shall be at liberty to enforce its dues in question against
defendant No. 2 only after having exhausted its remedies against defendant No. 1". The
plaintiff filed an appeal challenging the legality and propriety of this direction. The High
Court dismissed the appeal. The plaintiff has filed the present appeal after obtaining a
certificate. The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The
surety agreed to pay and satisfy the liabilities of the principal debtor up to Rs. 12,000/- and
interest thereon two days after demand. The bond provided that the plaintiff would be at
liberty to enforce and to recover upon the guarantee notwithstanding any other guarantee
security or remedy which the Bank might hold or be entitled to in respect of the amount
secured. The demand for payment of the liability of the principal debtor was the only
condition for the enforcement of the bond. That condition was fulfilled. Neither the principal
debtor nor the surety discharged the admitted liability of the principal debtor in spite of
demands. Under sec. 128 of the Indian Contract Act, save as provided in the contract, the
liability of the surety is coextensive with that of the principal debtor. The surety became thus
liable to pay the entire amount. His liability was immediate. It was not deferred until the
creditor exhausted his remedies against the principal debtor.
Before payment the surety has no right to dictate terms to the creditor and ask him to pursue
his remedies against the principal in the first instance. As Lord Eldon observed in Wright V.
Simpson. "But the surety is a guarantee; and it is his business to see whether the principal
pays, and not that of the creditor." In the absence of some special equity the surety has no
fight to restrain an action against him by the creditor on the ground that the principal is solvent
or that the creditor may have relief against the principal in some other proceedings.
In this case, the Court referred to a judgement in Lachhman Johari mal v. Bapu Khandu
and Tukaram Khandoji 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.”
In the result, the appeal is allowed, the direction of the courts below that the “plaintiff-bank
shall be at liberty to enforce its dues in question against defendant No. 2 only after having
exhausted its remedies against defendant No. 1” is set aside. The respondent Dr. Paras Nath
Sinha shall pay to the appellant costs in this Court and in the High Court.

CRITICAL ANALYSIS
The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The surety agreed
to pay and satisfy the liabilities of the principal debtor upo Rs. 12,000/- and interest thereon
two days after demand. The bond provided that the plaintiff would be at liberty to enforce
and to recover upon the guarantee notwithstanding any other guarantee security or remedy
which the Bank might hold or be entitled to in respect of the amount secured. The demand for
payment of the liability of the principal debtor was the only condition for the enforcement of
the bond. That condition was fulfilled. Neither the principal debtor nor the surety discharged
the admitted liability of the principal debtor in spite of demands. Under sec. 128 of the Indian
Contract Act, save as provided in the contract, the liability of the surety is coextensive with
that of the principal debtor. The surety became thus liable to pay the entire amount. His
liability was immediate. It was not deferred until the creditor exhausted his remedies against
the principal debtor.

Before payment the surety has no right to dictate terms to the creditor and ask him to pursue
his remedies against the principal in the first instance.

“But the surety is a guarantee; and it is his business to see whether the principal pays, and
not that of the creditor.”
In the absence of some special equity the surety has no fight to restrain an action against him
by the creditor on the ground that the principal is solvent or that the creditor may have relief
against the principal in some other proceedings. Likewise, where the creditor has obtained a
decree against the surety and the principal, the surety has no right to restrain execution
against him until the creditor has exhausted his remedies against the principal. In Lachhman
Joharirmal V. Bapu Khandu and Surety Tukaram Khandoji, the judge of the Court of Small
Causes, Ahmedabad, solicited the opinion of the 13Bombay High Court on the subject of the
liability of sureties. The creditors having obtained decrees in two suits in the Court of Small
Causes against the principals and sureties presented applications for the, imprisonment of the
sureties before levying execution against the principals. The judge stated that the practice of
his court had been to restrain a judgment creditor from recovering from a surety until he had
exhausted his remedy against the principal but in his view the surety should be liable to
imprisonment while the principal was at large. Couch, C.J. and Melvell, J. agreed with this
opinion and observed:

“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.”
It is now suggested that under Order XX r. 11 (1 ) and sec. 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 XX r. 11 ( 1 ) provides that

“where and in so far 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 O. XX r. 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 (1) (1869) 4 Bom. High
Court Reports. 241. 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
sec. 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 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 execution of the decree, the ends of justice did
not require such postponement. In the result, the appeal is allowed, the direction of the court
below that the “plaintiff-bank shall be at liberty to enforce its dues in question against
defendant No. 2 only after having exhausted its remedies against defendant No. 1″ is set
aside. The respondent shall pay to the appellant costs in this Court and in the High Court.

CONCLUSION
The deliberations herein before have dealt with the guarantees obtained by the creditors to
secure the repayments and the circumstances under which the guarantor stands relieved from
his liability, besides, the remedy of guarantor against the principal debtor. The different
types of guarantees have been dealt and in detail emphasis is made on the guarantee to
discharge the liability of third person in case of his default. The guarantors in practice are
seen either serious in helping the debtor to avail loan like promotors, directors and also those
having stake in loan transaction. But there are casual guarantors also having no interest in
transaction between debtor & creditor. This neglected aspect concerning guarantee need to be
attended especially in the context of ‘may’ appearing in section 127 of the Indian contract
Act, 1872. The requirement for obtaining guarantees have been dispensed in some loan
schemes. Can dispensation to a limited extent be extended to some other situations especially
where sufficient collaterals are provided as security for availing the credit facility and/ or
where credit is for attaining social objectives, economic development and/or eradication of
poverty in the interest of nation as a whole. The law at present is loaded in favour of creditor.
He can proceed against principal debtor and guarantor jointly and has option to proceed
separately. For enforceability there is need for incorporating specific and unambiguous
Article in limitation law instead relying on provisions read with judicial decisions. The
‘contracting out’ provisions demand review so as to prevent interference in statutory right of
guarantor by dominant party except under few definite circumstances, beside, to avoid
dichotomy between two referred sections pertaining to continuing guarantee. In short time
has come to relook some of the aspects dealt hereinbefore so as to bring clarity on one side
and to protect the statutory rights of guarantor on the other, besides, to ponder over the
position of casual guarantors.
The guarantor of a loan is liable to pay it if the debtor fails to clear it, the Supreme Court has
ruled, while maintaining that financial institutions too cannot act like property dealers in
recovering the debts. A bench of justices also said the guarantor cannot insist that the creditor
must first exhaust all remedies against the principal debtor before recovering the debts from
the surety holders. "There can be no dispute to the settled legal proposition that in view of the
provisions of Section 128 of the Indian Contract Act, 1872, the liability of the guarantor / surety
is co-extensive with that of the debtor. Therefore, the creditor has a right to obtain a decree
against the surety and the principal debtor.
 BIBLIOGRAPHY

1. SCC Online: http://www.scconline.com/

2. Manupatra: http://www.manupatrafast.com/ipAccess.aspx
3. Indiakanoon : www.indiankanoon.com