Section 129 - Continuing guarantee

Kapurthala Estate v. Sheo Shankar

Kapurthala estate is the creditor – transferred a property on lease to Anandi ben – rent
guaranteed by Sheo Shankar upto 2472 in case of default
1936 – provided guarantee
1937 – anandi ben died
Certain amount was due – Bamchand is the PD now – default in lease – kaputhala estate filed
a suit against Bamchand – Bamchand approached Sheo Shankar – SS gave a notice of
revocation that
 I’ll not pay the arrears
 When AB died it led to the discharge of PD under Section 213 sub sec 1 clause 3 of
UP Tenancy Act - these kinds of transactions are not heritable so the moment AB
died, the liability was also waived off and can’t be transferred
HC observed that when the transaction did commence, the act was not in place and hence act
doesn’t apply to the contract of lease and the act enforced at the time was OUDH RENT ACT
and not UP Tenancy ACT which didn’t restrict liability to pass upon legal heirs.
ACC. TO UP TENANCY ACT
1. Primary liability is discharged
2. Going forward he’ll not be liable
ACC. TO OUTH RENT ACT (LAW IN FORCE BEFORE UP TENANCY ACT)
 No restriction of heritable
HC: what is the meaning of transaction under 129?
Whether it will discharge the surety at the point of lease or after whole transaction
Looking at the nature of the transaction
 Lease deed as the whole
 Broken down into several transactions (each series of transactions is one transaction)
For it to be continuing guarantee: each transaction (not as a definite engagement within one
transaction) needs to be it is to be clarified before the surety whether he want to stay or not ?
Contention by creditor : - relied on Hassan Ali vs. Walliullah
Allahabad HC (from notebook)

SECTION 130
This can be done by sending notice of revocation to creditor, liability of surety stops from the
date of notice.
Bill of exchange – the one to whom money is owed is the issuer/drawer of BOE against
drawee (drawn against him). Eventually has to pay it back to creditor. – BOE is drawn on the
request of the surety
 Not a indefinite series, contract should be made every month
 Surety will only liable – when monthly BOE is issued
IILUSTRATION A SECTION 13, based on Common Law Rule – Afford vs. Davis
Rule (from notebook)

SECTION 131
 When the death of the surety – it’s discharged from liability of future transactions.
Notice of death should be given.
 Estate/property of is liquidated
 Subject only contract to the contrary - mere death is not suffice
 Diff. b/w English and Indian Law.
English law says it is sufficient to give notice of death or will.
Indian law – detailed explanation about his liability
 Cases as to the death of the surety: -
Eng law: - Beckett and co. vs. Addyman
Indian law: - Durgapriya Chaudhary vs. Durgapoda Roy
SECTION 128 – the liability of the surety is co-extentsive with that of the PD unless it is
otherwise provided by the contract.
SECTION 135 – A contract between the creditor and the principal debtor, by which the
creditor makes a composition with, or promises to give time to, or not to sue, the principal
debtor, discharges the surety, unless the surety assents to such contract.
SECTION 133
1. Any variance, made without the surety’s consent, in the terms of the contract between the
PD and the creditor, discharges the surety as to transactions subsequent to the variance.
Principle (from notebook)
2. Case - Holme v. Brunskill
Holme – landlord
Brunskill – surety
Land given on lease had to pay rent and make sure that sheep graze on the land – if
grazing not done in a proper way then the surety will pay certain amount. Plaintiff and
tenant make a change to the contract. The P and tenant make a change in contract and
reduce the area of grazing – sheep died – lesser liability on PD – default in his
performance – LL field a suit against D. D said variance in contract and his assent not
taken
 Court said any and every variance doesn’t entitle surety to discharge. Material variance
includes:
 Substantial change
 Prejudicial
If prima facie estd then court can get into the ques and can give relief

3. Observation of lord justice cotton (from notebook)

4. Section 133 illustration suggests any kind of change not necessarily material or substantial
5. If not material – no discharge
Case – Aniruddhan v. Thomas Bank Ltd.
 Sankaran – loan an overdraft under the bank
 Surety – aniruddhan (app)
 Liability – 25000
 PD and the creditor – lowered the cap onto 20000
 App consent not taken
 Bank approached Aniruddhan – remission w/o my consent
 So discharge under section 133 (no qualifier, If change, surety discharged)
 Minority judge – strictly 133 – allow discharge
 J. JL Kapoor – facts diff, no aspect of variation as PD was acting as agent of surety
 PD had letter of guarantee. If PD agrees, surety also considered as same. Surety was
bound by PD will not be treated as surety
 Justice J L Kapoor relied on the principle from Halsbury’s Laws of England which
stated that even if the alteration is made by a stranger without the knowledge of the
promisee, the promisor is discharged if the contract is in the possession of the
promisee or his agent. But if the contract is altered by a stranger, when the contract
was in the custody of the promisor or his agent, then the promisor shall not be
discharged. If a surety entrusts a letter of guarantee to the principal debtor and the
principal debtor makes an alteration without the assent of the surety, then the surety is
liable because it is due to the act of the surety that the letter of guarantee remains with
the principal debtor. What the principal debtor did will estopp the surety from
pleading want of authority. Justice Kapoor concluded that while altering the
document, Sankaran was acting as the agent of the appellant. Hence the appellant was
estopped from claiming discharge under Section 133.
 In a concurring but separate opinion, Justice Hidayatullah relied on the observations
of Lord Westbury in Blest v. Brown, 1862 and Holme v. Brunskill, to conclude that
the alteration in question was not material because the amount was merely reduced by
the co-executant. The nature of the document was unchanged. Additionally, Justice
Hidayatullah agreed with the observations of Justice Kapoor where it was held that
Sankaran had acted under the authority of the appellant. Therefore the appellant was
not discharged.
SECTION 134
The surety is discharged by any contract between the creditor and the principal debtor, by
which the principal debtor is released, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.
ILLUSTRATIONS ?a

SECTION 137
 If it is a forbearance to sue, it does not amt to discharge
 PD may have been discharged but not the surety
 Enforceability is substantive here – section 2(h)
 No procedural enforceability – 137 will take over
CASE – Mahanth Singh v. U Ba Yi
 4 trustees for a Pagoda who were managing the place - decided to carry on some
construction
 trustees contracted with the appellant (building contractor) - charges to be paid by the
trustees was guaranteed by the respondent (surety) to extent of 26000 rupees
 defaulted – filed a suit against the trustees
 old trustees were dead and 8 new trustees were appointed in place of them
 court: past liability of trustees was personal in nature and new trustees couldn’t be
held liable for the same
 appellant wanted to replace/substitution the new trustees with the legal heirs of the old
trustees
 court: violation of order 1 of rule 10 of CPC(old cpc, currently order 6 rule 17) and
plaintiff cannot be allowed to change his mind in the middle of the proceedings.
 HC: new trustees cannot be made liable because of the liabilities incurred by the old
trustees
 appellate bench of High Court: surety’s liability is co-extensive as of debtor, the old
trustees were no longer present or are discharged, surety’s liability is also discharged -
basic principle under Section 134.
 Another point – court: time stipulated by the limitation period, as far as the old
trustees are concerned, was exhausted for maintaining the suit.
 Two procedural problems for bringing original trustees back to the suit:
1) You cannot change your mind mid-trial
2) Limitation period barred
 privy council: It is not Order 1 rule 10 of the old CPC but Order 23 of rule 1 which
should be considered. Since the limitation period has expired the court has to use its
discretion to allow a fresh suit when the plaintiff is trying to rectify the problems
 Whether this invokes the application of section 134? Court rejected the argument and
observed that sec 134 has to be read with Section 137 which implies that if there is a
forbearance to sue or any circumstance under which creditor can’t enforce his rights
against debtor doesn’t discharge surety of his liability. Until and unless you have a
specific clause in the contract which discharges the surety, it cannot be done so.
Applying to the present case, surety is still liable for the amount guaranteed as the
liability of debtor is not discharged per se but only unenforced.
 Note for second exception - the madras HC observed in Annadana Jadaya Goundar v.
Konammal
 that if a creditor agrees to discharge the principal debtor,
 it would be a breach of the agreement for the creditor to pursue his remedy against
the surety
 because the surety would then enforce his remedy against the principal debtor and
 thus the creditor’s agreement to discharge would be rendered inoperative. But if
the agreement to discharge contains a reservation of rights against the surety, the
agreement cannot operate as an absolute release for the obvious reason that the
principal debtor has notice that the creditor’s remedies against the surety are
preserved and the surety’s right of recourse against him is not extinguished.

GENERAL GROUNDS FOR SURETY

SECTION 135
Bharat Nidhi v. Bhagwadas Mehra
It is the clearest and the most evident equity not to carry on any transaction without
the privity of him who must necessarily have a concern in any transaction with the
principal debtor. You cannot keep him bound and transact his affairs without
consulting him. Its effect is to alter prejudicially his position by tying the creditor’s
hands from receiving payment and the guarantor from suing the principal debtor. One
more reason is that it would be a fraud on the principal debtor if the creditor, after
making such an arrangement was able to sue the surety because the surety could then
claim from the principal debtor in breach of the agreement to give time.
Amrit Lal Govardhan Lalan vs State Bank of Travancore & Ors
Facts: Respondent no 3,4,5,6 borrowed rupees one lakh from Travancore Forward Bank
limited (SBT) and as a security they pledged kept some goods. Additionally, there was a
surety. As a part of the contract, it weas stated that the security could be substituted provided
they were adequate. There was a default by respondents to the extent of 73,000. Deposits
adjusted, eventual amount came to 40,000. SBT tried to get amount from goods pledged.
They observed that there was a shortfall of 35690, it was not matching up to the valuation of
SBT. They wanted PD to supplement these goods and gave him time for the same. Amrit lal
comes to know of this & invokes application of 135.
Held: Court pulled up a clause which stated that “The borrowers shall be responsible for the
value, quantity and the quality of the goods pledged. The borrowers further declare and agree
that the goods pledged with the bank have not been actually weighed or valued. In order to
verify the quantity or quality of the goods, the bank is at liberty to weigh or value the goods
by an authorized officer. If on the weighment & valuation, the goods pledged are found to be
less than the weight or value shown by the borrowers, the borrower undertakes to make up
the deficit on demand.” Court says 135 only talks about those situations where PD agrees
upon a separate agreement with Creditor. In this case, surety was aware of the
correspondence between PD & Creditor regarding shortfall of money and ways to realise it. It
was specified in the main agreement itself. There was no substitution of the old agreement.
The SC observed that giving time to the borrowers to make up the quantity of security does
not amount to giving time under section 135. What really constitutes giving of time is the
extension of the period at which the PD was obliged to pay the creditor, by substituting a new
and valid contract between the PD & the creditor to which the surety does not assent.

INGREDIENTS OF 139 – ACT/OMISSION OF CREDITOR

Impart surety to act against PD(remedies) : - subrogation
So surety is discharged
SECTION 139: Discharge of surety by creditor’s act or omission impairing surety’s
eventual remedy.—If the creditor does any act which is inconsistent with the rights of the
surety, or omits to do any act which his duty to the surety requires him to do, and the eventual
remedy of the surety himself against the principal debtor is thereby impaired, the surety is
discharged.
141 – extention of 139
 Talks about specific situation
 Duty under 139 and 141 to protect security so surety can claim subrogation under 140
 139 underlying principle: - “It is the substance of Section 139 that it is the duty of the
person who has secured the guarantee to do every act necessary for the protection of
the rights of the surety. For example, where the liability of the surety guaranteeing the
payment by the judgement debtor of the amount of the decree by instalments was
made expressly dependent on the execution of the decree by the decree holder on the
occurrence of a single default, the decree holder owed a duty under the terms of the
guarantee to seek execution according to its terms. Also, if the creditor takes any
security from the principal debtor, it is his duty to see that the security remains
enforceable against the principal debtor. If any formalities are required by the law in
connection with that security, it is his duty to see that such formalities are observed.
The creditor is not required to do anything more than this.”

SECTION 140: -
 Subrogation – once the surety was performed obligation, surety becomes invested
with all the rights of the creditor against that PD
 Is as a matter of right. Not has to be provided expressly through a contract. Given by
law.
 Sec 139- read with Sec 140 and 141 Sec 141 talks about a very specific kind of
situation
 Note: According to Halsbury’s laws of England, a surety is entitled to every remedy
which the creditor has against the principal debtor to enforce the security and all
means of payment form stand in the place of a creditor, not only through the medium
of contract but even by means of securities entered into without the knowledge of the
surety, having a right to have those securities transferred to him though there was no
 stipulation for that and to avail itself of all those securities against the debtor. This
right of surety stands not upon a contract but upon a principle of natural justice. The
word invested dispenses with the requirement of assignment of rights by the creditor.
The debtor is automatically invested with the rights of the creditor since there is no
requirement of an express stipulation with regard to the same.
 According to Mulla, the surety’s right to the creditor’s security arises because it is
inequitable for a creditor to not avail himself of the securities for the guaranteed debt
and throw the whole liability on the surety. The word invested dispenses with the
requirement of assignment of ryts by creditor
 Subrogation is automatic

Sec 140 doesnt provide any restrictions as to against who the rights of the surety can be
availed. Chunduri Panakala Rao v. Aturi Venkata Sarvesham
Facts: First contract between D1 & D2 on 18th January 1913 who had borrowed money from
a bank and they had provided security as well i.e., personal & joint property. Second contract
1924 in November between D2 & bank. D2 borrowed an additional sum of money 3000 from
the bank and the plaintiff was the surety for this contract, amount to be paid 3732. Plaintiff
filed a suit of recovery after default by D2 and plaintiff paid money as surety. D2 said that it
will impair his ability to pay back to the bank in first contract if Plaintiff is given the security.
Court said it does not matter. Security should be present when the suretyship is entered in
into. Right of subrogation of surety is very much absolute.
Observations- The Madras HC observed that it is a settled law that a surety who has paid the
debt of his principal is subrogated to all the remedies and the rights which the creditor has not
only against the principal debtor but against the others and to all the securities and rights of
action generally which the creditor had in respect of the debt. It is immaterial that when the
surety entered into the obligation, he was unaware of the existence of the said rights and
securities. In the current case, though the transaction where the plaintiff became a surety was
with respect to defendant 2, still so far as the bank is concerned it must be deemed to be a
joint transaction of defendant 1 and 2. The plaintiff therefore became subrogated to the right
of action against defendant 1 as well.
Joint undertaking They undertook that they are not going to alienate any of the property as
long as they were indebted. It was implicit that they could be future advances where both
would be involved while they were indebted to the bank
Distinction between Section 140 and Section 141 “When a surety has paid all the debts, he
was liable for, he is under section 140 entitled to demand all the securities held by the
creditor at the time of the payment whether they had been received simultaneously with the
loan or not. Section 141 signifies that the surety cannot complain if the creditor loses or parts
with the security obtained by him after the contract of surety was entered into. Section 141
does not enable the creditor to withhold from the surety any security actually held by him at
the time when the debt is paid to detract him [surety] from the rights of the creditor under
section 140. Section 140 applies where the surety has paid off the guaranteed liability, when
he would be subrogated to the position of the creditor and entitled in his own right to enforce
the securities available to the creditor. Section 141 on the other hand is designed to protect
the surety against the creditor's act of losing or parting with the security without the surety's
consent.
(Under 141, rights can’t be extended to future securities
But English law is very wide. Amit of subrogation is also extended.)