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Case Comment: State Of Madhya Pradesh v/s Kaluram

Parties Involved
  • State Of Madhya Pradesh
  • Kaluram
Date Of Judgement:
  • 5th September, 1966
  • J.C. Shah
  • K.N. Wanchoo
  • R.S. Bachawat

Facts Of The Case
On July 20, 1954, the divisional forest officer of the Hosangabaad division held an auction to sell a fallen tree. Jagat Ram has been deemed the top bidder in the auction. It has been concluded that the forest produce was sold to him for Rs 12,100, or in four equal installments of Rs 3025 each. Once the bid is accepted, the first instalment is due immediately. A contract between Jagat Ram and the governor of Madhya Pradesh includes the following terms and conditions:
  • The contractor has the right to collect any forest produce in the contract area, whether it existed at the time of execution or later.
  • After providing the required certificate, the forest contractor can begin collecting the forest produce within one month.
  • The forest contractor must remove the forest produce from the contract area via the stated route.
  • The forest contract regulation applies to forest contractors. If they fail to pay due instalments, the forest department may restrict them from removing the felled tree.
Jagat Ram paid the first instalment on July 28, 1954. Nathuram and Kaluram acted as security for Jagat Ram, allowing the contract to be enforced against them if Jagat Ram failed to meet its obligations. Jagat Ram eradicated all forest produce.

The forest department sells it to him without payment for the remaining three payments. The forest department approached the Kaluram, the contract's surety, to recover the due amount. However, the surety claimed he is not liable because the forest officer lost security by allowing the Jagat Ram to remove the forest produce without paying the second instalment.

Issue Involved:
  1. Contentions:
    • By Kaluram:
      1. The forest authorities granted J time and did not take any actions as part of their responsibility to the guarantor, such as seizing and selling J's trees as soon as the second instalment was due. Because of S's inactivity, his subsequent remedy against J was hampered, and he was dismissed as surety.
      2. Since the creditor S lost or parted with the security without the surety's permission, the latter is dismissed to the amount of the value of the security lost or parted with under S.141 of the ICA.
    • State of Madhya Pradesh:
      1. J did not acquire ownership of the commodities until they were removed, hence Section 83 of the Forest Act did not apply to the products sold and so had no force.
      2. Inaction on the side of the forest authority does not imply giving up security.
  2. Legal Issue:
    Is the contract's surety, the Kaluram, responsible for paying the creditor the required amount?

Legal Perspective

Concept Of Surety Under Indian Law

Who is Surety:

A 'surety' is someone who accepts responsibility in the event that a 'principal debtor' fails to repay a loan received from a 'creditor.' According to Section 1261 of the Indian Contract Act of 1872, a person who provides a guarantee is referred to as a "surety" in a guarantee contract. The Indian Contract Act covers the complete duty of a surety from Section 1262 to Section 1473. Section 5(22)4 of the Insolvency Bankruptcy Code, 2016 defines "personal guarantor" as an individual who is the surety under a contract of guarantee to a corporate debtor.

Liabilities of Surety:

Section 128 of the ICA states that the surety's obligation is 'coextensive' with that of the primary debtor unless otherwise specified in the contract. If the major debtor's responsibility is decreased, such as by selling part of the debtor's assets, so is the surety's liability. In Narayan Singh vs. Chattar Singh5 (1973), it was determined that if the major debtor's responsibility is lowered, the surety's liability is reduced proportionally. A suretyship agreement is structured similarly to a standard contract. Consequently, these agreements must be devoid of force, improper influence, and distortion. As a result, the creditor has an obligation to confirm the fairness and free consent standards for the suretyship arrangement. A suretyship arrangement cannot constitute an unconscionable contract.

Discharge of Surety from Liability:

There are certain conditions under which surety can be discharged, they are as follows:
  • By revocation of the continuing guarantee by the surety (Section 130);
  • By surety's death (Section 131);
  • By variance in the terms of the contract (Section 133);
  • By release or discharge of principal debtor (Section 135);
  • By creditor's act or omission impairing surety's eventual remedy (Section 139).

Rights of Surety:

'Surety' cannot come forward just to return the loan money unless he has certain rights. We shall explore the rights that a surety has when a loan is paid. The equity rule must always be addressed in guarantee contracts. Before we move on to Section 140 of the Indian Contract Act, 1872, which deals with surety rights, let us first look at Section 130, which deals with bond revocation. This Section specifies that a surety may remove the ongoing assurance for future transactions by notifying the creditor. A surety has threefold rights that are against the principal debtor, the creditor, and the co-sureties:
  • Rights against Principal Debtor
  • Rights against Creditor
  • Rights against Co-Surety

Rights against Principal Debtor:
  • Right of Subrogation - When the principal debtor fails to pay an obligation and the surety pays the debt, the surety is liable for the same rights against the principal debtor as the creditor. In other words, the major debtor assumes the role of the creditor. (Section 140)[1]
  • Right of Indemnity against the principal debtor - If the major debtor fails to pay an obligation, the Surety must pay it off. The surety can reclaim the lawfully paid money under guarantee from the primary debt. Surety cannot reclaim improperly paid debts. (Section 145)[2]
Rights against Creditor: The surety is entitled to profit from whatever security that the creditor possesses at the moment the contract of suretyship is entered. If the creditor decides to recover debt from the surety instead of the primary debtor, the surety will have the same rights as the creditor, whether the surety knows of the existence of such a security or not. If the creditor loses the security without the surety's approval. The surety is discharged up to the amount of the security's value. Rights against Co-Surety:
  • Right of contribution against Co-Surety - Section 146[3] of the Indian Contract Act, talks about the condition where Co-Surety exist and where they are equally liable to divide the losses suffered by the principal debtor.
  • Co-Sureties bound in different sums - Section 147[4] describes the varying contribution amounts given by each surety. In such instances, each guarantor is obligated to pay equally as far as the scope of their individual commitments allows. If one of the cosureties is relieved from obligation, the remaining co-sureties may still be responsible.

Sections Involved In The Present Case

  • Section 139 of the Indian Contract Act, 1872.
  • Section 141 of the Indian Contract Act, 1872.
  • Section 82 of the Indian Forest Act, 1927.
  • Section 83 of the Indian Forest Act, 1972.

Explanation Of The Sections Involved:
  1. By creditor's act or omission impairing surety's eventual remedy:
    • Section 13910 incorporates the rule that when the act or omission on the part of the creditor is inconsistent with the interest of the surety, and the same results in impairing surety's eventual remedy against the principal debtor, the surety is discharged thereby.
    • Section 139 is as follows: 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 right of the surety, or omits to do an 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.
  2. By loss of the security by the creditor:
    • According to Section 14111, the surety is entitled to all the securities which the creditor has against the principal debtor at the time when the contract of suretyship is entered into. If the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.
    • For instance, the seller of the goods allows the buyer to take away the goods without insisting for the payment of the price for the same, the surety who guarantees the payment of the price by the buyer, is discharged from his liability.
    • It may be noted that if the creditor does not lose the securities but they are lost without his fault, the surety is not discharged thereby. For instance, when the hypothecated goods are lost without any fault of the creditor, that does not discharge the surety.
  3. Section 82[5] of the Indian Forest Act of 1927 states that any money payable to the government under the Act or any rule made under the Act, or on account of the price of any forest produce, or of expenses incurred in carrying out the Act regarding such produce, may be recovered if not paid when due, as if it were an arrears of land revenue.
  4. Section 83[6] of the Indian Forest Act of 1927 states that:
    1. When any such money is payable for or in respect of any forest produce, the amount shall be deemed to be the first charge on such products and such products may be taken into possession by a forest officer until such amount is paid.
    2. If such sum is not paid when due, the Forest Officer may sell such items at public auction, with the profits going first to discharge the amount.

Contentions Raised:
  1. Arguments From The Petitioner Side:
    The petitioner stated that under Section 14114 of the Indian Contract Act, 1872, if the creditor loses or disposes of the security, the surety is freed to that extent of the security's worth. The state had the authority under section 83 of the Forest Act to prohibit tree removal and sell them if the fee was not paid. However, after the second instalment was not paid, the state failed to prevent the contractor from removing the forest produce.

    Forest officials did not fulfil its obligation to the guarantee by promptly seizing and selling the trees when the second instalment was due, instead giving Jag tram time.

    According to section 141 of the Indian Contract Act, 1872, his last remedy against Jag tram was impeded since they had not completed the necessary formalities and confiscated the trees. Kaluram was relieved of his responsibilities as a surety.

    Kaluram requested an injunction to prohibit the State from pursuing recovery measures against him for forest dues.
  2. Arguments From The Respondent Side
    The defendant stated that Section 141 of the Indian Contract Act, 1872 does not state that forest authorities' inactivity is equivalent to giving up security. Therefore, the guarantor should not be relieved from liability.

Prior to Justice Shah's decision, the trial and high courts had already ruled in Kaluram's favour. Later, Madhya Pradesh filed a special leave plea with the Supreme Court. Before pronouncing the judgement, the court had viewed all aspects of the case.

After reviewing all of the rules, the judgement was issued on the following grounds:
The Supreme Court ruled that the phrase "security" in Section 141 refers to the creditor's rights over the property once the contract is enforced, rather than having a technical meaning. The security is entitled to payment of debt or performance for which he is liable, as well as the creditor's benefit against the primary debtor as a result of the transaction that gives birth to the right or responsibility. If the primary debtor fails to make payments to the creditor, the surety is responsible for putting the creditor in the same position as the principal debtor. If the creditor lost the security without the surety's permission, Section 141 discharges the surety's responsibility for the amount lost or divided.

Secondly, the court ruled that even if the contractor owns the forest produce area, the state government retains certain rights under the Forest Act, including:
  • If the outstanding balance is not paid, the remaining goods may be sold at auction.
  • The state can block the removal of items if the quantity exceeds the sum paid.
  • If the contractor fails to pay the due amount, the contract can be terminated and the products in the contract area taken possession of.
  • To check and examine the goods.
The forest authority failed to use their right to block the removal of commodities as security, allowing the Jagat Ram to do so even after the second instalment became due. The court ruled that the forest authority failed to issue the coupe certificate to Jagat Ram, allowing him to remove the items. As a result, they forfeited the security and the surety was relieved from obligation under section 141.

This case focuses on section 141[7] of the Indian Contract Act 1872, which stipulates that a surety can be discharged from duty if the creditor violates their rights. In this instance, the court determined that the creditor was negligent since he did not take any steps to prevent the Jagat Ram from removing forest produce while they had the right to do so under the Forest Act. As a result, they lost the security, and the surety is no longer held liable.

In the matter of Wulff and Billing vs Jay[8]. The defendant became a surety by pledging real and substantial security and credit to the plaintiff. If he fails to fulfil his duty as a surety and pays the debt, he is entitled to the benefit of that security. If creditors make it difficult for the surety to collect their losses through the principal's security, they will be discharged from their responsibility as surety.

The Supreme Court's decision is justified by section 141, which states that if the creditor is at fault for losing the security, surety liability is discharged. However, if the principal debtor is not at fault and the security is lost, the surety is not discharged from their liability. In this case, the forest authority was at fault for the loss of the security, making the decision valid.

So, this judgement is justifiable.

Similar Case Laws:
  1. Nirmal Singh Kukreja V. Suraj Gupta 17
    The plaintiff served as guarantee for the defendant son-in-law's private firm. The defendant had made major failures in debt payment to numerous financial institutions, therefore the plaintiff negotiated a one-time settlement with the Bank, the creditor. Accordingly, the plaintiff paid the sums requested in the litigation by the Bank. After discharging his responsibility to the creditor bank, the plaintiff filed a lawsuit against the defendant, seeking the amount he had paid to his creditors as well as interest at 18% per annum on those payments. The plaintiff was awarded the sum demanded, plus interest.
  2. M.R. Chakrapani V. Canara Bank 18
    In this case, the major debtor sold the property that was hypothecated to the bank. The surety immediately provided the bank with the details of the sale, but the bank took no action to trace and seize the property, nor did it take any action against the principal debtor by filing a complaint with the police or filing a case in a criminal court for property tracing and attachment, as well as recovering the debt. It was determined that the surety had been released due to the bank's inactivity.

    When a bank loses the security placed with it by the primary debtor owing to carelessness, the surety is freed from the loan made by the bank on the basis of security.
  3. Union Bank Of India, Bombay V. S.B. Mehta[9]
    When A, a primary debtor, took out a loan from a bank, he signed a demand promissory note, an agreement of hypothecation of commodities, and other documents in favour of the bank, and B stood as security for the loan. The bank sued A and B to collect the loan amount. It was determined that the commodities subject to the hypothecation had been disposed of by A (the major debtor) as a result of the plaintiff bank's inactivity and carelessness. As a result, B's right to prosecute against A had expired, and it was determined that B was dismissed as surety for the plaintiff bank.
Many businesses transactions benefit from the certainty provided by surety. Most of the time, the surety's rights emerge when he or she pays money after the primary debtor defaults. As previously stated, the surety's rights differ between the creditor, the major debtor, and the other co-sureties. The judiciary has a duty to protect the interests of a surety who has provided prompt assistance in a crisis or has contributed to the success of a commercial enterprise.

In this case, the judiciary protect the right of the surety by pointing out the default on the creditor side. It can be concluded from this case that the surety is not bound for the principal debtor liabilities if he/she is not at fault and it is the fault of the creditor, due to which he himself/herself bear consequences of their act.

In the present times, a lot of advancements have affected the process of law and judiciary but this case law and its concept has been applied and upheld to most of the cases revolving around the law of contract and specifically around the concept of Surety under Indian Contract Law.

  1. Law of Contract II with Indian Partnership Act and Sale of Goods Act by Dr. RK Bangia
  2. S140 of The Indian Contract Act, 1872.
  3. S145 of The Indian Contract Act, 1872.
  4. S146 of The Indian Contract Act, 1872.
  5. S147 of The Indian Contract Act, 1872.
  6. S82 of The Indian Forest Act, 1927.
  7. S83 of The Indian Forest Act, 1927.
  8. S141 of The Indian Contract Act, 1872.
  9. Wulff and Billing v. Jay, [1872] 7 Q.B. 756.
  10. Union Bank of India, Bombay v. S.B, Mehta 2014 SCC OnLine Bom 341.

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