Raja Bahadur Dhanraj Girji vs Raja P. Parthasarathy Rayanimvaru and others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 04/09/1962

Coram: Gajendragadkar

In the matter titled Raja Bahadur Dhanraj Girji versus Raja P. Parthasarathy Rayanimvaru and others, the Supreme Court delivered its judgment on 4 September 1962. The petition was filed by Raja Bahadur Dhanraj Girji and the respondents were Raja P. Parthasarathy Rayanimvaru together with additional parties. The question before the Court concerned a surety bond that had been executed in favour of the Court and the effect of a subsequent compromise decree on the liability of the surety. The Court observed that although section 135 of the Indian Contract Act, 1872 does not literally apply to a bond made out to the Court, the equitable principle underlying that provision must still be given effect. Under that principle a surety is entitled to be discharged when the creditor either calls upon the principal debtor for payment or when the surety pays the debt and then seeks recourse against the principal debtor. Consequently, the Court held that the discharge of a surety by a compromise in the judicial proceeding in which the bond was issued must be determined by the specific terms of the bond itself.

The Court explained that if the bond’s wording shows that the surety undertook the liability on the condition that the dispute would be resolved by a full trial on the merits, and not by an amicable settlement, then a compromise would discharge the surety. Conversely, if the bond indicates that the parties, including the surety, contemplated the possibility of an amicable settlement and the surety executed the bond with knowledge that he might be liable under a compromise decree, then the surety would not be discharged and would remain liable under that decree. The Court cited several authorities to illustrate these principles, including The Official Liquidators, The Travancore National & Quilon Bank Ltd. v. The Official Assignee of Madras (1 L.R. 1944 Mad. 708), Parvatibai v. Vinayak Balvant (1 L.R. 1938 Bom. 794), Mahomedalli Ibrahimji v. Laxmibai (1929 I.L.R. LIV Bom. II 8), Narsingh on v. Nirpat Singh (1932 I.L.R. XI Patna 590), Muhammad Yusaf v. Ram Gobinda Ojha (1927 1 L.R. LV Cal. 91), Haji Ahmed v. Maruti Ramji (1930 1 L.R. LV Bom. 97), Appunni Nair v. Isack Mackadan (1919 1 L.R. 43 Mad. 272) and Kanailal Mookerjee v. Kali Mohan Chatterjee (1 R. 1957 Cal. 645).

Applying these principles to the present case, the Court noted that the surety bond had been executed in favour of the Court, obligating the sureties to pay a specified sum on behalf of the respondent if the Court decreed such payment. The compromise decree that followed introduced complex provisions that allowed the appellant to take possession of certain properties as part of adjusting competing claims, granted time to both parties to fulfil their obligations, and included matters that were extraneous to the original judicial proceeding in which the bond was executed. After reviewing the terms of the bond and the nature of the compromise, the Court held that the sureties were discharged by the compromise decree.

In this case, the judgment of the Court was delivered by Gajendragadkar, J. After disposing of Civil Appeals Nos. 343 and 344 of 1959, the judge turned to Civil Appeal No. 345 of 1959, in which the appellant sought permission to proceed against the surety, respondents Nos. 2 and 3. The High Court had rejected this claim, basing its decision on the finding that the appellant himself was a defaulter and therefore could not enforce a remedy against the sureties. Since the present Court had reached a different conclusion on the question of default, it considered it necessary to examine whether the appellant was entitled to pursue his remedy against the surety. To determine that issue, the Court first examined the nature and extent of the liability undertaken by respondents Nos. 2 and 3 when they executed the surety bond.

The surety bond had been executed on 29 September 1935. Clause 5 of that bond, which was the relevant provision, required the sureties to covenant that if the order of the High Court in Civil Matter Appeal No. 362 of 1929 were reversed or varied by the Privy Council, and as a result respondent No. 1 became liable to pay any amount to the appellant in the Privy Council, the sureties would pay whatever sum became payable by that respondent. The clause further provided that if the sureties failed to pay, the amount would be realised in the manner specified therein. The bond had been executed in favour of the court.

The appellant contended that, following the decision of the Privy Council, the matter was remitted to the trial court for determination of the amount due to the appellant. He argued that during the pendency of the appeals pending in the Madras High Court against the trial court’s decision on the applications made in the remanded proceedings, a compromise decree was entered into between the appellant and respondent No. 1. Consequently, the appellant submitted that whatever amount was claimable by him under that compromise decree must trigger the operative portion of clause 5 of the surety bond.

On the opposite side, counsel for the surety urged that the surety bond must be strictly construed and that it could be invoked only if the amount claimed by the appellant from respondent No. 1 resulted directly from the reversal or variation by the Privy Council of the orders that were under appeal before it. He further submitted that when the disputes between the appellant and respondent No. 1 were pending before the Madras High Court, the parties resolved those disputes by way of a compromise decree, and that decree operated as a discharge of the sureties’ liability. He relied on the equitable principles underlying section 135 of the Indian Contract Act to support this argument. Counsel for the appellant contested that position, arguing that section 135 was inapplicable to a surety bond executed in favour of the court and that the appellant’s remedy against the surety was not affected by the fact that the dispute between the appellant and respondent No. 1 had been amicably settled and terminated by a compromise decree. The Court noted that the appeal involved civil appeals numbered 243, 344 and 45 of 1959, arose from the judgment and order dated 12 January 1950 of the Madras High Court in Applications 288 to 290 of 1946, and that counsel for the appellants, counsel for respondent No. 2 (in Civil Appeal No. 345 of 1959), and counsel for respondents Nos. 3 to 8 (in Civil Appeals Nos. 343, 344 and 345 of 1959) had participated in the proceedings. The judgment was dated 4 September 1962.

In this matter, the counsel for the surety emphasized that the surety bond must be interpreted narrowly and that the bond could be invoked only if the sum claimed by the appellant from respondent No. 1 stemmed directly from the reversal or alteration of the orders under appeal by the Privy Council. The counsel further argued that while the appellant and respondent No. 1 were litigating before the Madras High Court, the parties reached a settlement and the resulting compromise decree should release the sureties from any liability. To support this contention, reliance was placed on the equitable principles that underlie section 135 of the Indian Contract Act. Opposing this view, the counsel for the appellant contended that section 135 does not apply to a surety bond that is executed in favour of a court. He maintained that the appellant’s right to enforce the bond against the surety remains intact notwithstanding that the dispute between the appellant and respondent No. 1 was amicably resolved through a compromise decree. This disagreement raised the pivotal question of whether the provisions of section 135 of the Indian Contract Act, or the equitable principles upon which it is founded, are applicable to surety bonds that are executed in favour of a court.

Section 135 of the Indian Contract Act stipulates that a contract between a creditor and a principal debtor, whereby the creditor agrees to a composition with the debtor, grants time, or refrains from suing the debtor, will discharge the surety unless the surety expressly assents to such arrangement. Consequently, a suretyship governed by section 135 becomes unenforceable if the creditor and debtor compromise the debt without the surety’s consent. However, the counsel for the appellant argued that this provision cannot be applied to a bond executed in favour of a court because such a guarantee does not fall within the ambit of section 126 of the Contract Act, which requires the presence of a surety, a principal debtor, and a creditor. In a court‑issued bond, the guarantee is given to the court rather than to a specific creditor, and the court alone possesses the discretion to enforce the bond. Therefore, it is clear that the literal provisions of section 135 cannot be invoked against a court bond. Nonetheless, the equitable principles that underlie section 135 are still relevant. For example, if the holder of a decree extends time to the judgment debtor and promises not to pursue remedies during that period, there is no justification for denying the discharge of the surety, even when the bond is made out to the court. The rationale behind this equitable rule is that the surety must be able to demand that the creditor call upon the principal debtor to satisfy the debt or that the surety himself pays the debt and then seeks recourse against the principal debtor. When the creditor binds himself not to claim the debt, the surety’s right is materially affected, and thus any extension of time granted without the surety’s consent entitles the surety to discharge.

In this case the Court explained that a surety must always be able, at any time, to require the creditor either to call upon the principal debtor to pay the debt or, alternatively, to allow the surety himself to pay the debt and then pursue his remedy against the principal debtor. When the creditor has bound himself not to claim the debt from the principal debtor, that restriction materially affects the surety’s rights; therefore, whenever the creditor grants time to the debtor without the surety’s consent, the surety may claim discharge. This equitable principle applies with equal force to a surety bond that falls within section 126 of the Contract Act and to a surety bond executed in favour of the court. Accordingly the Court found no justification for the argument that the equitable principles underlying section 135 of the Contract Act should be excluded from surety bonds executed in favour of the court. The Court held that to determine whether liability under such a surety bond is discharged because a compromise decree was passed in the judicial proceedings that gave rise to the bond, the terms of the bond itself must always be examined. The enquiry must ascertain whether, at the time the surety executed the bond, he contemplated that the dispute between the debtor and the creditor might be settled by compromise, or whether he contemplated that the dispute would be decided on its merits by the court and not be amicably settled by the parties. If the language of the bond indicates that the surety undertook liability on the basis that the dispute would be decided by the court and would not be resolved by agreement, then a compromise of the dispute would discharge the surety’s liability. The Court referred to the authorities in The Official Liquidators, The Travancore National & Quilon Bank Ltd. v. The Official Assignee of Madras, Parvatibai v. Vinayak Balvant, Mahomedalli Ibrahimji v. Laxmibai, Narsingh Mahton v. Nirpat Singh and Muhammad Yusaf v. Ram Gobinda Ojha in support of this view. Conversely, if the terms of the bond show that the parties, including the surety, contemplated the possibility of an amicable settlement and that the surety executed the bond knowing his liability could arise even under a compromise decree, then the passing of such a decree would not entitle him to claim discharge. The Court cited Haji Ahmed v. Maruti Ramji, Appunni Nair v. Isack Mackadan and Kanailal Mookerjee v. Kali Mohan Chatterjee for this proposition. Thus the decisive issue is always one of construing the surety bond to decide whether a compromise decree discharges the surety. Turning to the bond passed by respondents Nos. 2 and 3 in the present case, the Court observed that it is impossible

The court could not accept the proposition that, when the surety bond was executed, the sureties had contemplated that the parties would resolve their dispute amicably in the manner later adopted. At the time the bond was executed, the controversy between the parties consisted solely of a monetary claim whose determination would have resulted in an order directing one party to pay a specified sum to the other. The compromise decree subsequently introduced complex provisions governing the satisfaction of the appellant’s claim against respondent No. 1. By virtue of that decree the appellant would have been entitled to take possession of the suit properties, and in doing so the competing claims of both parties would have been adjusted. The court was satisfied that the material terms contained in clause 5 of the surety bond could not be said to become applicable when the parties elected to settle their dispute pursuant to the compromise agreement. Moreover, the compromise agreement accorded respondent No. 1 a period of time before the decree became enforceable; consequently the decree was not immediately executable upon its passage. In substance, the decree granted a period within which both parties were to fulfill their respective obligations under the compromise, and this temporal element further supports the conclusion that the liability of respondents Nos. 2 and 3 under the surety bond was discharged by the compromise decree.

Another relevant consideration was that among the matters settled by the parties was respondent No. 1’s claim for damages, based on the appellant’s creation of occupancy rights in favour of third parties over properties held by the appellant as mortgagee. That claim lay outside the scope of the proceedings contemplated and permitted by the order of the Privy Council, yet it was nonetheless resolved by the compromise decree. Thus, a matter that was strictly unrelated to the judicial proceedings in which the surety bond had been executed was incorporated into the final settlement by the parties. Accordingly, although the appellant succeeded in showing that he was not a defaulter, he could not pursue a remedy against the sureties, respondents Nos. 2 and 3. Counsel for the appellant attempted to argue that respondents Nos. 2 and 3 should not have been permitted to raise this issue before the High Court because they had not raised it in the trial court. The court found no merit in that argument. While it is true that the respondents did not raise the contention at the trial stage, that omission may be explained by the parties’ focus at that time on determining who was the defaulter. When the appeal was argued before the High Court, the respondents specifically urged the point, and the High Court considered it. Therefore, the argument that the issue was purely factual and should have been raised earlier was not accepted.

In this case the dispute centred on identifying the party who was the defaulter. When the appeals were presented before the High Court, respondent No 2 expressly raised the issue of the alleged defaulter, and the High Court gave the matter consideration. Counsel for the appellant, Mr Kuppuswamy, cleverly argued that the question was not a pure question of law and therefore should not have been permitted to be introduced for the first time on appeal. His contention was that, had the point been advanced in the trial court, the appellant could have demonstrated that respondents Nos 2 and 3 had consented to the compromise agreement that the appellant had concluded with respondent No 1. The Court observed that this line of argument appeared to be an after‑thought. It further noted that if the appellant’s case truly rested on the proposition that respondents Nos 2 and 3 were not discharged by the compromise decree because they were parties who had consented to the compromise, then the appellant should have articulated that position before the High Court. In that circumstance the High Court either would have required a factual finding on the issue or would have denied respondents Nos 2 and 3 permission to raise it. Accordingly, the Court held that Civil Appeal No 345 of 1959 could not succeed. The appeal was dismissed and costs were awarded against the appellant.