DHARAMSHASTRA NATIONAL LAW UNIVERSITY

JABALPUR M.P. (482001)

(Semester -II)

(Batch 2023-2028)

Law of Contacts Project

Topic- Case Analysis of ‘Karnataka State Khadi and Village

Industries v/s Punjab National Bank

Submitted to – Submitted by-

Prof. Utkarsh Kumar Mishra Arambh Shankar
(Assistant Professor: Law) BALLB/022/23

Table of Contents –
 Facts of the case in brief
 Statutory Provisions of the Indian Contract Act 1872 in
relation to the Case
 Arguments of the Parties
 Question of Fact and Question of Law
 Judgment of the Court
 Reasoning of the judgment

Case – Karnataka State Village and Khadi Industries Board and
others (appellant)
v/s
Punjab National Bank and others (respondents)
Civil Appeal No. -8182/2013
(2014) 1 Supreme Court Cases 625
(Before Anil R. Dave and Dipak Mishra JJ.)

Facts of the Case in Brief

 Shiva Shakti Gramdyoga Sangha, Gulbarga applied for a loan of
Rs.1,00,000 in May 1987 for working capital in PCPI industry from
Punjab National Bank. The same was granted by the bank @ 4% interest
per annum.
 As per policies laid down by the Karnataka State Government, The
Karnataka State Village and Khadi Industries Board would provide aid to
the borrower in relation to the interest on the debt by the way of
subsidies, provided, that the repayment of the principal amount was duly
paid by the borrower.
 While agreeing to the terms of the loam, it was clearly laid down – if the
borrower defaults repayment of the principal amount, the Board would
not bear any liability towards the principle or interest amount. However,
the board was liable to surrender the moveable and immoveable assets of
the borrower in favor of the Bank which were in capacity of the board.
 The Shiv Shakti Gramdyoga Sangha defaulted the regular repayment of
the dues and as per agreement the board abstained from providing the
subsidy to the bank for interest payment. Several notices were issued by
the bank to the borrowing organization and the Board for repayment of
dues but no course of action was followed.
 The Punjab National Bank was after issuing several notices, compelled to
file a civil suit for recovery of dues at District Court – Gulbarga,
Karnataka. In the aforementioned suit, the Shiva Shakti Gramdyoga
Sangha, Gulbarga, its secretary and The Board were made parties. It was
 contended by the bank that the borrower as well as the board were
altogether liable to repay the debts along with the interest amount.
 The District Court at Gulbarga upheld the contentions of the plaintiffs
and a decree was made in favor of the plaintiffs which held the borrowers
and the Board to be jointly liable to repay the principal loan amount of
Rs.1,60,827 and the interest @12% thereof. The board was held liable as
the court found it to be a guarantor of the borrower. However, the Board
was held liable to pay only Rs.75,123 which was the recognized interest
amount as the Board had agreed to pay it on the behalf of the borrower.
 An appeal against the order of the lower court was made by the
defendants in the Karnataka High Court but the findings of the Lower
Court were upheld by the High Court.
 Appeal against the High Court’s order was made in the Supreme Court of
India by the Karnataka State Village and Khadi Industries. The apex court
thereby reversed the findings of the Karnataka High Court and held that
the Board was not liable to pay the interest amount as it was ‘Contingent
Guarantor’ of the borrower and was to stand as a guarantor only when the
Sangha made regular repayment of the principal amount. Due to Sangha’s
default in repayment, the board was not to be held liable to pay the
interest as it was already stated in the agreement between the Sangha and
the Bank. However, the court held that the board was liable to transfer the
moveable and immoveable assets of the Sangha in the favor of the Punjab
National Bank.

Statutory Provisions of the Indian Contract Act 1872 in relation to the

Case
Section 32 of Indian Contract Act – “Enforcement of Contracts Contingent
on an event happening- Contingent contracts to do or not to do anything if an
uncertain future event happens, cannot be enforced by law unless and until that event has
happened. —Contingent contracts to do or not to do anything if an uncertain future event
happens, cannot be enforced by law unless and until that event has happened. If the event
becomes impossible, such contracts become void. Illustrations
a. A makes a contract with B to buy B’s horse if A survives C. This contract cannot be
enforced by law unless and until C dies in A’s lifetime. (a) A makes a contract with B to
buy B’s horse if A survives C. This contract cannot be enforced by law unless and until C
dies in A’s lifetime."
b. A makes a contract with B to sell a horse to B at a specified price, if C, to whom the
horse has been offered, refuses to buy him. The contract cannot be enforced by law unless
and until C refuses to buy the horse. (b) A makes a contract with B to sell a horse to B at a
specified price, if C, to whom the horse has been offered, refuses to buy him. The contract
cannot be enforced by law unless and until C refuses to buy the horse."”
c. A contracts to pay B a sum of money when B marries C. C dies without being married to
B. The contract becomes void. (c) A contracts to pay B a sum of money when B marries C.
C dies without being married to B. The contract becomes void."

Section 33 of Indian Contract Act- Enforcement of contracts contingent on

an event not happening. —"Contingent contracts to do or not to do anything if an
uncertain future event does not happen, can be enforced when the happening of that event
becomes impossible, and not before. —Contingent contracts to do or not to do anything if
an uncertain future event does not happen, can be enforced when the happening of that
event becomes impossible, and not before." Illustration A agrees to pay B a sum of money
if a certain ship does not return. The ship is sunk. The contract can be enforced when the
ship sinks. A agrees to pay B a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks." Enforcement of contracts
contingent on an event not happening. —Contingent contracts to do or not to do anything
if an uncertain future event does not happen, can be enforced when the happening of that
event becomes impossible, and not before. —Contingent contracts to do or not to do
anything if an uncertain future event does not happen, can be enforced when the
happening of that event becomes impossible, and not before." Illustration A agrees to pay
B a sum of money if a certain ship does not return. The ship is sunk. The contract can be
enforced when the ship sinks. A agrees to pay B a sum of money if a certain ship does not
return. The ship is sunk. The contract can be enforced when the ship sinks.“”

Section 128 of Indian Contract Act- 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."
“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 guarantee 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."”

Arguments of Parties
 Arguments of Punjab National Bank
The board along with the Sangh (borrower) was liable to repay the loan and
interest amount as well as submit the first charge of assets in favour of bank as
it had granted the loan to the Sangha on the guarantee of the board that the
interest amount would be borne by the Board itself. Punjab National Bank
would not have sanctioned the loan if the board did not stand as a guarantor for
the Sangha.

 Arguments of The Karnataka State Village and Khadi Industries

Board
It was clearly stated under the provisions of Karnataka government policies that
the interest on loans given to borrowers would only be borne by the State when
there was no default in the repayment of the principal amount. Clearly, the
Sangha defaulted the repayment of the loan in 1977-78. Hence the Karnataka
State Government was not liable to pay the interest amount by way of
incentives. The bank argued that it only stood as a ‘Contingent Guarantor’ of
the Sangha which implied that it only stood as a guarantor when the borrower
fulfilled certain criteria [i.e. regular repayment of borrowed amount without any
defaults] . It was only liable to hand over the first charge of the moveable and
immoveable assets
The bank also stated that it had not insisted upon providing loan to the
borrower. It had only mentioned that if the bank rejects the loan request of the
Sangha, the same maybe communicated to the Board by means of letter,
mentioning the reason for rejecting such loan request.

Question of Fact
Whether the Board is liable to pay the interest amount of Rs.75,123 as due
to the Punjab National Bank?

Question of Law
Whether Contingent Guarantor acts as a General Guarantor in case of
failure to fulfil the conditions precedent to conditions of Contingent
Guarantor

Judgment of the court(s)

  The honourable lower court at Gulbarga held that the Board was liable to
pay the interest amount as it stood as a guarantor of the Sangha before the
Bank. The Board was also liable to. The civil judge’s court did not
observe the concept of ‘Contingent Guarantor’ as under Section -32 and
33 of the Indian Contract Act 1872.
 The honourable Karnataka High Court upheld the findings of the District
Court and stated that the guarantor of the Sangha i.e. The Board was
ordered by the aforesaid court to pay the interest amount due, by way of
subsidy and handover the first charge of assets in favour of the bank.
 Being aggrieved by Karnataka High Court’s judgment, appeal bearing no.
8182/2013 was filed in the Supreme Court of India. The apex court
thereby reversed the findings of the Karnataka High Court and held that
the Board was not liable to pay the interest amount as it was ‘Contingent
Guarantor’ of the borrower and was to stand as a guarantor only when the
Sangha made regular repayment of the principal amount. Due to Sangha’s
default in repayment, the board was not to be held liable to pay the
interest as it was already stated in the agreement between the Sangha and
the Bank. However, the court held that the board was liable to transfer the
moveable and immoveable assets of the Sangha in the favor of the Punjab
National Bank.

Reasoning behind Supreme Court’s Judgment:

The apex court stated that the Karnataka State Village and Khadi Board could
not interpreted as just a guarantor of the Sangha. The Board acted as per the
policies of the Karnataka State Government. It was pre-determined that the
Sangha was to carry on regular non-defaulted repayment of the loan taken by
them. Such stating of doing something or abstaining from doing something
cleared that the Board was under impression of happening of some pre specified
condition to stand as a guarantor towards the interest amount.
Hence, taking the contract under the purview of Section 32 of the Indian
Contract Act , the Board was provided an exemption from the liabilities of a
creditor as stated under section 128 of the Act .
The apex court also criticised the lower courts for ignoring the fact that pre
specified conditions were laid by the Board and hence the factor of Contingent
Guarantor was applicable in the discussed case.

BIBLIOGRAPHY AND REFERENCES-

 http://www-scconline-com.dnlulib.remotlog.com/
https://indiankanoon.org/
https://ibclaw.in/category/bare-acts/bare-act-indian-contract-act-1872/