Internal Continuous Evaluation :Special Contract

Semester:II
(BBA.LL.B.)
NAME ANANYA CHOUDHARY
PRN NO. 20010224158

DIVISION C
BATCH 2020-25

Q2-

INTRODUCTION

This question is based on the landmark case of “Bank of Bihar v.

Damodar Prasad and Another” (EXTENT/NATURE OF SURETY’S
LIABILITY)

Under Indian contract act, 1872 Section 128 deals with Surety’s liability:

SECTION 128- Surety’s 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.

The reading and intentions of section 128 suggest the provision that the
surety’s liability is coextensive with that of the principal debtor means
that his liability is exactly the same as that of the principal debtor. It
means that on a default having been made by the principal debtor the
creditors can recover from the surety all what he could have recovered
from the principal debtor.

The term ‘co-extensive’ implies that the surety is liable for the whole of
the amount for which the debtor is liable and he is liable for no more, it
depends on the amount of the principal debt.

ISSUE

1. Whether the Bank is bound to exhaust his remedy against the principal
debtor (Mr. A) before suing the surety (Mr.B) for the recoverable
amount ?

2. Whether Bank was right in calling the surety to pay off the debts of
the Principal-Debtor?
RULE
SECTION 128 OF INDIAN CONTRACT ACT, 1872

ANALYSIS

In the landmark case of  “Bank of Bihar v. Damodar Prasad and

Another” a major decision about no requirement to exhaust remedies
against Principal Debtor was made.

Caselaw 1
FACTS
The plaintiff bank had lent certain amount to defendant no.1 (Damodar
Prasad) on account of guarantee given by defendant no.2 (Paras Nath
Sinha). Later, neither the principal debtor (defendant no.1) nor the surety
(defendant no.2), despite repeated demands by the plaintiff repaid the
amount and interest thereto. 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.

A suit was filed by the plaintiff bank claiming the total amount. The trial
court passed a decree in its favour but directed "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" which gave rise
to an appeal before the Patna High Court by the plaintiff challenging the
direction as against s.128 of the Indian Contract Act, 1872. However,
same was dismissed.

ISSUE
Whether the creditor is bound to exhaust his remedy against the principal
debtor before suing the surety for the recoverable amount and can the
court pronounce upon such a condition in its decree?

HELD
The court strengthened the provision under section 128 of the Indian
Contract Act, 1872 and reiterated the principle that the liability of surety
is co-extensive and not in alternative with that of the principal debtor
once the debtor makes a default in repayment of the debt amount to the
creditor. The surety cannot dictate the creditor upon the exhaustion of his
alternative remedies before approaching the surety. But once the surety
has discharged his liability and paid the sum, he enters in the shoes of the
creditor and can demand the amount from the debtor as u/s 140 of the
Indian Contract Act, 1872.
Caselaw 2
The same was reaffirmed in State Bank of India v. Indexport
Registered the Hon’ble Supreme Court held that surety cannot insist that
the creditor should first exhaust his remedies against the principal debtor.
the decree holder bank can execute the decree against the guarantor
without proceeding against the principal borrower. Guarantor’s liability is
co- extensive with that of the principal debtor.

Now, in the given hypothetical case,

Mr. A in order to start a retail business of Clothes and Apparels
approaches XYZ Bank for the loan worth Rs. 50 lakhs. Bank agrees to
sanction a loan to Mr. A at a condition that, Mr. A has to give a
security and provide a guarantor for the said loan amount, which he
does and secures a loan making Mr. B a guarantee of Rs. 40 lakhs to the
Bank a security of gold ornaments worth Rs. 10 lakhs.

Mr. A suffered a huge loss in the business and consequently was not able
to repay the loan amount. XYZ Bank called upon Mr. B to repay
the loan amount which he subsequently refused to pay and contended
that as the primary liability to repay the loan is that of Mr. A, so bank
should first call upon Mr. A to repay the loan amount and if he fails, he
will repay the amount. Now since according to section 128 it is evident
that the fundamental principle regarding a surety’s liability is that it is co-
extensive with that of a Principal-Debtor. This means that unless there is
a contrary agreement in the contract, the creditor has the freedom to sue
either the principal debtor or surety or both.

Therefore asking XYZ bank to exhaust his remedies against the principal
debtor that is Mr.A first and only then move against the surety, Mr.
B,would defeat the purpose of the guarantee. And hence XYZ bank is right
in calling the surety, Mr.B, to pay off the debts of the Principal-Debtor,
Mr.A.

CONCLUSION

Thus, in the above-mentioned case, the surety(Mr.B) cannot dictate the

creditor(XYZ bank) upon the exhaustion of his alternative remedies before
approaching the surety because as mentioned in section 128 OF INDIAN
CONTRACT ACT, 1872 The liability of the guarantor is co-extensive with
that of the principal debtor and the guarantor will be liable to the extent
as the principal debtor will be.
INTRODUCTION

A.
This situation is a classic example of contract of indemnity whereby one
party promises to indemnify the other due to losses arising due to the
conduct of the promisor or any other third party

Under Indian contract act, 1872 Section 73 and 73 deals with-

Section 73: When a contract has been broken, the party who suffers by
such breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby,
which naturally arose in the usual course of things from such breach, or
which the parties knew, when they made the contract, to be likely to
result from the breach of it

Section 74: Compensation for breach of contract where penalty

stipulated for.—1 [When a contract has been broken, if a sum is named in
the contract as the amount to be paid in case of such breach, or if the
contract contains any other stipulation by way of penalty, the party
complaining of the breach is entitled, whether or not actual damage or
loss is proved to have been caused thereby, to receive from the party
who has broken the contract reasonable compensation not exceeding the
amount so named or, as the case may be, the penalty stipulated for

ANALYSIS
A)
Indemnity can be claimed for losses arising out of the action of the third
party to a contract indemnity as well as the right of promisor are defined
under the section 124 and the section 125 of the Indian contract act
whereby damages can only be claimed for loss arising out of the actions
of the parties upon breach of contract
Damages is typically of a financial nature. In contrast, Indemnity is a
form of exemption or immunity from liabilities incurred by another. It is
not limited to financial liabilities.
• in an action for the recovery of a debt, the plaintiff only needs to
establish that the event triggering the obligation to pay the sum sought
has occurred. In an action for damages for breach of contract, it is up to
the plaintiff to establish that both a breach of contract has occurred and
that the damages being claimed have, in fact, been suffered, which may
require expert evidence to be adduced; and
• in an action for damages for breach of contract, the plaintiff will not
be able to recover loss to the extent that it has not taken reasonable
steps to mitigate its loss. It will also not be able to recover loss that the
law considers to be too remote. These rules of mitigation and remoteness
do not apply to an action for the recovery of a debt.

B.

Section 124 and section 125 are the relevant sections here for part b

section 124: when one party promises to save the other from losses
caused to him by the conduct by the defendant or the promisor himself or
by conduct of any other person is called contract of indemnity
section 125 rights of indemnity holder when sued: the promise in a
contract of indemnity acting within scope of his authority is entitled to
recover from the promisor
any damages which he may be compelled to pay in any suit in respect of
any matter to which the promise of indemnity applies
the case laws relevant here

Earlier under the English as well as the Indian Law, the general principle
was that in order to be indemnified one must be indemnified. 1.e., the
indemnity holder must first bear the loss and then only call Indemnifier to
for the reimbursements of the loss but with time this principle has lost its
value as it defeats the whole purpose of a contract of indemnity.
Nevertheless, the discretion is still with the courts as under the Indian
Contract Act, 1872 there is no specific provision providing for the
commencement of liability of the indemnifier. There have been varied
opinions of different High Courts on as to

when the liability of the indemnifier arises. The High Courts of

Calcutta, Allahabad, Madras, d Patna have shown their concurrence to the
principle that states that the 'Liability of the Indemnifier arises as soon as
the liability comes into the picture or as soon as the indemnity holder
becomes liable to pay the sum due to a third party.

The facts over here where Company A has entered into a contract with
Company B for the supply of 100 kgs of Industrial appliances for a
consideration of Rs. 5 Crores. As per the terms of the contract the
defaulting party had to 10% as damages. It was further mentioned that if
any losses occurred due to the conduct of the either of the parties, the

defaulting party will indemnify the suffering party. As per the terms of the
contract, the loss must be in course of business. Here Mr. C, a contractor
had suffered loss due to the conduct of Company B and the Company thus
immediately called Company A to indemnify them for the losses to be
payable to the Contractor, C, claiming that Company A is in a position of
indemnifier as per the terms of the contract. Company A claimed that
Company B has not suffered any actual loss, and Company A is not
entitled to indemnify Company B.

In the case law of ganjanan moreshawr v moreshwar parelkar the court of

equity has held become absolute the he was entitled to get the
indemnified to pay off his claim or pay into court sufficient money which
would constitute a fund which would constitute a fund for paying off the
claim wherever it was made .
The court held that in a contract of indemnity the party indemnified might
not be in a position to pay off the claim thus arisen therefore if the
indemnity holder is required to pay he might not be in a position to pay
off the claim and thus will not be required to pay off the claim first and
then avail indemnity this would defeat the entire purpose of contract of
indemnity under whose new criteria the indemnity holder should never be
called upon to pay the amount

CONCLUSION
We have concluded and discussed the differences between contract of
indemnity and breach of contract moreover we can also conclude that
contract of indemnity has more benefits as compared to breach of
contract

In the second analysis we have concluded that the indemnity of the

indemnifier arises when the liability becomes absolute and not when
indemnity holder has paid off the claim this was reinterred by further
explanation of the caselaw of gajana moreshwar v poreshwar parelkar