1931 (9) TMI 10 - HC - Indian Laws

Court sets aside decree against sureties for substantial contract variation. Sureties not liable for new contract terms.

The court set aside the decree against the sureties (defendants Nos. 2 and 3) and allowed the appeal with costs. It held that the substantial variation in ... Variation of contract discharging surety - Surety's consent to alteration of the principal contract - Continuing guarantee versus single and indivisible transaction - Construction of Section 133 of the Indian Contract Act - Admissibility of subsequent agreement and account entries as collateral evidence - Forbearance (mere delay) not amounting to extension of time discharging surety - Creditor parting with security and Section 141 (extent of discharge)Admissibility of subsequent agreement and account entries as collateral evidence - Admissibility in evidence of Exhibit 93 (the subsequent agreement/receipt) and Exhibit 124 (account entries) to prove a variance in the original contract. - HELD THAT: - The document dated May 14, 1922 (Exhibit 93), though called a receipt, in substance recorded an agreement between the mortgagor and the mortgagees to alter the original contract of October 17, 1921, by reducing the amount advanced and removing one property from the security. Such a document evidencing a substituted contract is admissible in evidence for the collateral purpose of proving that a substituted contract was made. Independently, the plaintiffs' account entry (Exhibit 124) is a clear admission of the change and is admissible. The plaint itself also admits that only Rs. 1,00,000 was advanced and only three properties were secured, supporting the finding that a change was made on May 14, 1922. [Paras 8]Exhibit 93 is admissible to prove that the original contract was varied on May 14, 1922, and Exhibit 124 is admissible as an admission of that change.Variation of contract discharging surety - Surety's consent to alteration of the principal contract - Continuing guarantee versus single and indivisible transaction - Effect of the May 14, 1922 variation (conversion of mortgage of four properties for Rs.1,25,000 into mortgage of three properties for Rs.1,00,000) on the liability of the sureties. - HELD THAT: - The original transaction was a single, indivisible contract whereby the plaintiffs were to advance funds to enable redemption of four properties and take a first mortgage as security. The parties substituted a new contract reducing the advance and excluding the Vadaj property without consulting the sureties. The law applicable (common-law principle accepted by the Court) is that a substantial alteration of the principal contract made without the surety's consent discharges the surety; the surety is the sole judge whether to accept the altered burden. Section 133 of the Indian Contract Act was examined and held inapplicable because it contemplates continuing guarantees or a series of transactions, whereas the present transaction was single and indivisible. Section 141 likewise did not cover the facts because the case was not one where the creditor, after having obtained the security, parted with a part of it; here the original terms were never carried out and the contract itself was varied. [Paras 11, 12, 14, 16, 19]The variation effected on May 14, 1922 was a substantial alteration of the original contract made without the sureties' consent and discharged the appellants (the sureties) from their liability under the surety bond.Construction of Section 133 of the Indian Contract Act - Whether Section 133 of the Indian Contract Act operates to preserve the sureties' liability despite the variance. - HELD THAT: - Section 133 addresses variances in continuing guarantees or contracts likely to result in a series of transactions (a continuing guarantee as defined in Section 129). The Court found the present arrangement to be a single, indivisible contract, not a continuing guarantee; therefore Section 133's protection for creditors in relation to subsequent transactions does not apply. The authorities and illustrations show Section 133 contemplates a different class of case and does not displace the common-law rule that a material alteration without the surety's consent discharges the surety in single-transaction guarantees. [Paras 11, 13, 16]Section 133 is not applicable to the facts; it does not prevent discharge of the sureties resulting from the unconsented substantial variation.Forbearance (mere delay) not amounting to extension of time discharging surety - Whether delay, or alleged agreement to give time (extension), discharged the sureties. - HELD THAT: - The lower Court's finding that there was no agreement to give time but only forbearance by the mortgagees was upheld. The correspondence (including Exhibit 44) did not establish an agreement by the plaintiffs to extend time that would discharge the sureties. Mere forbearance or delay in instituting suit, without an agreement operating as an extension of time, does not discharge a surety. [Paras 3, 6, 17]No extension of time was agreed; mere forbearance did not discharge the sureties.Creditor parting with security and Section 141 (extent of discharge) - Whether the plaintiffs' alleged failure to realise rents under the rent-note or other negligence in enforcing security discharged the sureties to the extent of any damage. - HELD THAT: - The rent-note related to interest and not to the actual rental value; defendant No. 1 paid an amount towards interest that covered the year's interest. The suit was filed shortly after expiry of the second year. There was no evidence of actionable negligence by the mortgagees in realising rents or enforcing security that would have increased the sureties' liability or discharged them to any extent. [Paras 18]The plea of negligence in realising rents fails; the sureties are not discharged on this ground.Final Conclusion: The substituted agreement of May 14, 1922 converting the intended mortgage of four properties for Rs.1,25,000 into a mortgage of three properties for Rs.1,00,000 was admissibly proved and constituted a substantial variation of the original single, indivisible contract made without the sureties' consent; accordingly the sureties were discharged. There was no binding extension of time and no actionable negligence in recovering rents; the decree against the sureties is set aside and the appeal is allowed with costs. Issues Involved:1. Liability of sureties due to variation in the original contract.2. Admissibility of Exhibit 93 in evidence.3. Effect of the variation on the sureties' liability.4. Impact of the alleged extension of time on the sureties' liability.5. Negligence in realizing rent and its impact on sureties' liability.Issue-wise Detailed Analysis:1. Liability of Sureties Due to Variation in the Original Contract:The plaintiffs sued to recover Rs. 1,14,000 based on a mortgage-bond dated October 17, 1921, and a surety bond dated October 24, 1921. A decree was granted against defendant No. 1, and against the sureties, defendants Nos. 2 and 3, except for Rs. 5,875 plus interest. The sureties contended they were not liable due to a substantial variation in the original contract between the plaintiffs and defendant No. 1 without their consent and because time was given to the principal debtor without their consent. The lower court held that the document evidencing the new contract, Exhibit 93, could not be admitted in evidence, and thus, there was no variation discharging the sureties. However, the sum of Rs. 5,875 paid to defendant No. 1 was considered a variation of the original contract, discharging the sureties to that extent.2. Admissibility of Exhibit 93 in Evidence:The learned Subordinate Judge held that Exhibit 93 was inadmissible without registration and did not affect the mortgage deed of October 17, 1921. However, it was argued that Exhibit 93 was admissible for a collateral purpose, i.e., to show that a substituted contract was arrived at on May 14, 1922. The court accepted this argument, stating that Exhibit 93 and the entries in Exhibit 124 (plaintiffs' accounts) were admissible to prove the change in the original transaction. The plaint itself showed that the transaction carried out was not the same as the one entered into on October 17, 1921.3. Effect of the Variation on the Sureties' Liability:The court held that the change in the contract was material and made without the sureties' consent, absolving them from liability. The original contract intended to redeem four properties with Rs. 1,25,000, but only three properties were redeemed with Rs. 1,00,000. The court emphasized that the sureties should judge whether to consent to the new contract. The substantial variation in the contract without the sureties' consent discharged them from their liability under the surety bond. The court cited several cases to support this principle, including Smith v. Wood and Holme v. Brunskill.4. Impact of the Alleged Extension of Time on the Sureties' Liability:The court found no agreement to give time, only forbearance by the mortgagees, which did not discharge the sureties. The plaintiffs' delay in filing the suit was due to forbearance, not an agreement to extend time.5. Negligence in Realizing Rent and Its Impact on Sureties' Liability:The appellants argued that the mortgagees' failure to realize rent increased their liability. The court dismissed this argument, stating that the rent-note was for interest on the loan, not the property's rental value. Defendant No. 1 paid Rs. 10,000 towards interest, covering the year's interest, and the suit was filed within a few months after the second year.Conclusion:The decree against the appellants (defendants Nos. 2 and 3) was set aside, and the appeal was allowed with costs. The court held that the substantial variation in the original contract without the sureties' consent discharged them from liability. The contract was single and indivisible, not a series of transactions, and the sureties were not bound by the new contract. The alleged extension of time and negligence in realizing rent did not affect the sureties' liability.