Raja Bahaduri Dhanraj Girji v. Raja P. Parthasarathy Rayanimvaru and Others.

Judgment

3 ·s.c.R. SUPREME COU.B.T REfORTS We accordingly allow the appeals, set aside the order of the Board of Revenue and remand the cases to it for decision in accordance with law. We further direct it to decide itself the contention raised by the respondents about their having acquired adivasi rights under the U.P. Zll.mindari Abolition and Reforms Act. In case the Boll.rd takes the view that for deciding the. said issue any finding of fact is necessary, it may call for the said finding from the Trial Court and, on rece1vmg it, proceed to deal with the ,appeals on the merits. In the circums~anoes of these cases, we direct that the parties on either side bear their own costs. Appeals allowed. RAJA BAHADURi DHANRAJ GIRJI RAJA P. PARTHASARATHY RAYANIMVARU AND OTHERS. (P. B. G.A.JENDR.A.GADKAR and K. a. D.A.s GUPTA, JJ.) Surety Bond-Executed in favour of Court-Compromise decree in the Jiroceeding, if effects a discharge-Equitable rule- _lndian Contract Act, 1872 (9 of 1872), ss. 135, 126.

Although s. 135 of the Indian Contract Act does not in terms apply to a surety bond executed in favour of the court, there can be no doubt that the equitable rule underlying that section must apply to it. The reason for the said rule which entitles the surety to a discharge is that he must be able at any time either to require the creditor to call upon the principal debtor to pay off his debt, or himself to pay the debt and seek his remedy against the principal de~tor. The question as to whether the liability of the surety is discharged by a compromise in the judicial proceeding in which the surety bond is. executed must depend on' the term, of the bond ~tsc:l'.. If the ter~s indicate ~hat the surety undertook the habihty on the basis. that the dispute should be Sham Karlik Si11gll Mathura Raghubar Day'l.I J. Septemb1(4. I Raja Bahed•ir qhaaraj (,,irji ·:

RajaP. f'arthasarathy Rayanimcaru [1963] decided on the merits by the court and not amicably settled, the compromise will effect a discharge of the_ surety. The Offici&l Liquiclators, The Travanwre National & Quifon Bank Ltd. v, . The OfficialAssignu of.MadrM I. L. R. . 1944: Mad. 708, Parvatibai v. Vinayak Balvant, I. L. R. 1938 Born. 794. Mahomtdalli lbrahimji v. Laxmibai, (1929) I. L. R. LIV B()m. 118, Nar~ngh Maliton \1. Nirpat Singh, (1932) · ·I. L. R. XI Patna p90 and Muhammad Yusafv. Ram Gobinda Ojha, ( 1927) I; L. R. L V Cal. 91, referred to. But if the term~ show that the parties and the surety contemplated that there might be an amicable settlement as. well, and the surety executed the bond knowin_g that he might be liable under the compromise decree, ther~ can be no discharge and the surety will be lia~Ie under the compromise decree. Hdji Ahmed v. Maruti Ram.ii, (1930) I. L. R. LV Born .. 97. AppunnJ Nair v. /sack Maclcadan, (1919) I. L. R. 43 Mad.

272 and Kannilal M oolcerjee v. Kali Mohan Chatterjee; A. I. R. 1957 Cal. 645, referred to. consequently, in. t'he present case whr:re the surety bond was executed in favour of court and by it the sureties undert qok to pay certain amount of money on behalf of the respon- · dent if decre«"d by the ~ourt and the compromise decree between the parties introduced complicated provisfons enabling the appellant to take possession of the properties in adjustment of rival claims, grante_d time, albeit. to both the parties, to disrharge their obligations thereunder and 'included matters extraneous to the judicial proceedings in which the surety bond was executed. Hild, that the sureties stood. discharged by the compromise decree. Crvn.. APPELL.ATE JtJIUSDICTION: CivH Appca]s NcEI. 343, 344 and E45 of 59. Appeals from tbe jud!(ment ar,d ord«r datEd Janua1y 12, 1950 of the l\1adJBs High Couz.t in A.,A. 0. Nos. 288 to 290 of 1946. AUadi ·Kuppuswamy, S. B. Jathar and K. R. Ohoud4uri, for the appellants. · .

A. V. Viswanatha Sastri, V. Vedantachari and T. Satyariarayana, for .respondent No·. 2 (in C.' A. No. 345 of 59.) ··-t . .L 1 3 S.C.R. T. V. R. Tatachari, for respondents Nos; 3 to 6 (in C. A. Nos. 343 and 344' of 59) and respondents Nos. 5 to 8 (in C. A. No. 345· of 195Q.) 1962. September 4. The Judgment of the Co_urt was delivered by 19112 . ltaja Bahadur L hanraj _Girji lfoja P • . Ptrtha1aratl1> Royanim~aru GAJENDRAGADKAR, J.-[ After disposing of Gajendragadkar .T. Civil Appeals Nos. 343 and 344 of 1959, his Lordship proceeded as follows.] That takes us to Civil Appeal No. 345 of 1959 in which the appellant wauts liberty to procee~ againat the surety, respondents Nos. 2 and 3. This · claim has been rejected by both the High Court. But the decision· of the High Court proceeds on the basis that the appellant was himself a defaulter and so, he could not be permitted to enforce his ·remedy against tho sureties.

Since on the question of default, we have come to a ·contrary. conclusion, it becomes necessary to examine whether the appel· lant is entitled to se~k his remedy against the surety. In determining this'question, it is necessary first to enquire into the nature and extent -of the liability undertaken by respondents Nos. 2 and 3 in executing the surety bond. The surety bond was executed on the 2~th Sept-. 1935. Clause 5 of the surety bond which is relevant provides that the sureties covenant that if the order of the High Court in C. M.A. No. 362/1929 be reversed or varied by the Privy Council and as a result of the said variation or reversal respondent No. l becomes liable to pay by way of restitution any amount to the said appellant in the Privy Council, the sureties would pay whatever sum may become payable by the said respondent and that if they failed therein, then any sum payable shall be realised in the manner specified in the said clause.

This bond was ' executed in the favour of the court. 19~2 Raja BallaUu,. DhanraJ Qbji Raja P. Parthasarath.1 Ra,Yanimvaru Gajendraga!-kar J. SUPREME COURT-REPORTS [1963] The appellant contends that. as a resq.lt of . the decision of the Privy Council, the matter was remitted to the trial Court for ascertaining the amount due to the appellant and it was during the pendency of the appeals which were pending in the Madras High Court against the deci8ion of the trial Court on the applications made by the respective parties in the remanded proceedings that the compromise decree was passed between the appellant and respondent No. l and so whatever is claimable by the appellant by virtue of .the said comprpmise decree must. attract the operat.ive portion of clause 5 of the surety bond. On the other hand,. Mr. Sastri for the surety agrees that the surety bond must be strictly construed and it is only if the amount claimed by appellant from respondent No. l can be said to be the result of the reversal or variation by the Privy_ Council of the orders under appeal before it that the surety bond can be proceeded against.

Mr. Sastri urges that when disputes were pending be- . tween the appellant and respondent No. l before the Madras High Court, the parties compromised the disputes and the compromise decree which followed acts as a discharge of the liability of the sureties. In support of this argumerit, i·eliance is placed on 'the · equitable principles under lying section 135 of the Indian Contract Act. Mr. Kuppuswamy contests this position and urges that S. J 35 is inapplicable to. a surety bond executed in favour of a court and he argues that appellant's remedy against the snrety is not affected by the fact that the dispute between the appellant and respondent No. 1 was amicably settled and terminated in a. compromise decree. This controversy raises the question as to whether s. 135 of the Indian Contract Act or principles underlying it apply to surety. bol)ds executed in favour of the court.

Section 135 provides that a contract between the creditor and the principal debtor, by which the creditor makes 3 s.c.R. 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. There can thus be no doubt that contract of suretyship · to . which s. 135 applies would be unenforceable if the debt in question is compromised between the debtor and the creditor ·without the aRsent of the surety. But this provi:iion in terms can.not apply ·to a surtity who has executed a bond in favour of the court, because such a contract of guarantee of suretyship doefl not fall within the scope of a. 126 of the Contract Act. · A ontract of guarantee . under the said section postulcates the existence of the surety, the principal debtor and the creditor, and thh1 requirement is not satisfied n the case of a bond executed in favour of the conirt.

Such a bond is given to the court and not to the creditor and it is in the discretion of the ·court to enforc the bond or not. Therefore, there cannot' be any doubt that in terms, the provisions of s. 135 cannot apply to a court bond. · It is also clear that the equitable principfos underlying the provisions of s. 135 apply to such a bond. If, for instance, the decree-holder gives tinie. to the j~dgment-debtor and promises not to seek his . remedy against him during that period, there is no reason why the extension of time granted by the creditor to the debtor should not discharge the surety even where the surety bond is executed in favour of the court. T'ie reas1n for the equitable rule which entitle'! the surety to a discharge in such circumstances is that tbe surety should be \Jobie at any time to require the creditor to c'l.11 upon the principal debtor to pay off his debt or himself pay off the debt and seek his remedy against the principal debtor.

If the creditor has bound himself not to claim the debt from his principal debtor, that materially affects the right 1962. Raja Babadur l,har.raj Girji Raja P. Prrthafar:athy Royanimv ... ru Gajendragadkar J, Raja Bah.adur Dhanra; Gi1ji RafaP. Parthasaratl)y RayanimMru <Jaj1ndragadkar J. [1963] . of the surety and so, whenever time is granted ti) the debtor by the creditor without the consent of the surety, the surety can claim discharge. This equitable principle would apply as much to a surety bond to which s. 126 of the Contract Act applies as to a surety bond executed in favour of the court. Therefore, we see no justificatiop for the argument that even the equitable principles underlying the .provisions of s. 135 of the contract Aot should not apply to surety bonds executed in favour of the court.

In determining the question as to whether · liability under suoh a surety bond is discharged by reason of the fact that a compromise decree had been passed in the judioial proceedings in which the surety bond cam13 to 'be executed, it will always be necessary to examine the terms of the bond itself. Did. the surety contemplate when he executed the bond that the dispute pending between the debtor and the creditor may lie compromised, or did he contemplate that· the dispute would, and must be settled by the court and not compromised· by the parties? If the terms of the bond indicate that the surety undertook the liability on the b;i.sis that the disp11te would be ·decided on the merits by the court in invitium and would not be amicably settled, then the compromise of the dispute would discharge the liability of the surety (vide The Official Liquidators, The Travancore National & Quilon Bank Ltd. v. The Official Assignee of Madras, (1) Parvatibai v. Vinayak Balvant (');

M ahomedalli Ibrahimji v. Laxmibai; ( '); NarsiTIJ}h Muhton v. Nirpat Singh(') and Muhammad Yusaf v. Ram Gobinda Ojha. (.') If, on the other hand, from the term.a of the bond it appears that it was within the contemplation of the parties including the surety (I) l.L.R, !944 Mad .. 708. (2) l.L.R.1918 Born. 794. (3) (1929) l.L.R. LIV BO!ll· 118. (4) (i932) I.L.R. XlPa!liaS90. (S) 11927) I.L.R. LV Cal. 91, 3 S.C.R. . that the dispute may be amioably settled and the surety exeouted 'the bond knowing that his liability may arise even under the compromise decree, then · the passim~ of the compromise decree will not entitle him to claim discharge vide H aji A~med v. MaruJ,i . Ramji; (e) Appunnz' Naz'r v. !sack Mackadan, (7) and • K anaz'lal Mookerjee v. Kali Mohan Chatterjee (8). The question would thus always be one of construing the surety bond in order to decide whether .a compromise decree discharges the surety or not. Turning to the bond passAd by respondents Nos. 2 and 3 in the present case, it .is impossible to hold that it was within the contemplation of the suretifl8 when they executed the bond that thfl parties would amicably settle their dispute in the manner they have done.

At the time whfln the surety bond was executed; the dism1te pending between the parties was the money dispute t,he decision of which would have ended in an order directing one party to pay anotheF a certain specified amount. The compromise decree· has in.troduced complicated provisions for the. satisfaction of th.e appellant's claim against · respondent No. · 1. Under the compromise decree, the appeJ.litnt would have been entitled to take possession of the properties in suit and' in that process, rival claimR of bot.h the parties would have beAn adjuste<l. We· are satisfied that the material terms in clause 5 of the surety bond could not be said to be attracted when tlie parties. chose to scittle their dispute in accordance with the terms of the compromise agreement. Besides, it is clear that the coi:noromise agr11ement gave time to responcient No. l and the decree was, therefore, not executable immediately after it was· passed.

In substance, by the decree, time was grant.ad though it is trmi that time was granted to both the parties to disoharg11 their respective obligations under (I!) (1930) I..J:..R. LV F.om 97. . (71 (1919) I.L.R. 43 ,Mad.1?2: (8) A.J.R, 1957 Cal 645. 191JS Raja Bah•1fir Dhan¥aj I -ir;i Ra3a.P: • Parthasarathy Rayan imoaru Gajendragadkar J. Raja Bahadur Dhanraj Girji Raja P. Parihasarathy liaya1,iinvaru <JaJendraga~kar J. . 928 SUPREME COORT REPORTS [1963] the compromise. That is another reason . why we think the liability of respondents No. 2 and 3 under the surety bond is discharged as a result of the compromise decree. There is yet another consideration which is relevant in dealing with this point. It is common ground that amongst the disputes which were settled between the parties was included.the claim made by respondent No. 1 for damages on account of the fact that the appellant bad created occupancy rights in favour of strangers in respect of the properties which were in bis possession as a mortgagee.

This claim is plainly outsid" the proceedings contemplated and permitted by the order passed by the Privy Council, and yet this dispute has been settled by the compromise decree which means that a matter which was strictly not germ.an·e to: the judicial proceedings in which the surety bond was executed bas been introduced by the parties i'n their final settlement. Therefore, we are satisfied that though· the appellant succeeds in showing that he was not & defaulter, be cannot seek his remedy against the surety, re~pondents·Nos. 2 and 3, An attempt was made by. Mr. Kuppuswamy to suggest that respondents Nos. 2 and 3 should not hav.e been allowed to raise this point before the High Court, because no such point had been taken by them in the trial Court. We do not think there is any substance in this argument. It is true that respondents No. 2 and 3 did not ta\'e any such contention in the trial Court, but that may be because parties had then concentrated on the issue as to who was the defaulter.

But when the appeals were argued before the High Court, this point was specifically urged by respondent No. 2 and it has been considered by the High Court. No doubt Mr. Ku P"swamy ingeniously suggested that this was nut a pure question of law and so, the High Court should not have allowed it to be raised for the first time in appeal. The argument is that if the point had been raised in the Court of first instance, t,he appellant would have shown that respondents Nos. 2 and 3 had consented to the compromise agreement between the appellant and respondent No. 1. -This is clearly an afterthought. If the appellant's case was that respondents Nos. 2 and 3 were not dis· charged by the compromise decree because they were consenting parties to the compromise agreement, they shoµld nave stated so before the High Court and the High Court would then have either called for a fineling on that issue or would have refused permission to respondents Nos. 2 and a to raise that point.

The result is, Civil Appeal No. 345 <>f 1959 fails and is dismissed with costs. Appeal dismissed. 19/JB Raia Bahalur Dhanraj Girj v •. RajaP. Par thasar. IA' Rayanimva1_u Gaj1dnragadkar J;: