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Taj Mahal Hotel v. United India Assurance Company Ltd. & Ors.
Citation: (2020) 2 SCC 224
Division bench of Supreme Court
Case number: CA 8611/2019
Relevant Sections: 148, 151, 152
Brief Facts: On the late night of 1/08/1998, a person handed over the keys to his car “Zen” to the valet of the Appellant Hotel. Later that night, 3 thieves who came to the hotel, cunningly tricked the security guard and obtained keys to the said Zen car and fled before the security could catch them. The car owner (who was the 2nd Respondent) had insured his car with the Respondent’s policy and hence the Respondent paid the value of the lost car back to the owner.
The car owner then executed a Power of Attorney and a letter of subrogation in favour of the Respondent and they jointly filed a suit before the State Consumer Disputes Redressal Commission seeking compensation for the value of the car and for deficiency of service. The State Commission dismissed the suit on the ground that the insurance company could not be a consumer. Consequently, an appeal was filed before the National Consumer Disputes Redressal Commission which decreed against the Appellant hotel by applying the rule of “Infra Hospitium”. The present matter before the Supreme Court is an appeal against the decision of the NCDRC.
1. Whether the respondent had locus standi to file a complaint as a subrogee
2. Whether the appellant hotel could be held liable under the laws of bailment
3. What is the degree of care to be exercised by a 5-Star Hotel
4. Whether a precluding clause issued by a bailee entitles an exception from infra hospitium
With regard to the first issue, the Court relied on the decision in Economic Transport Organisation v. Charan Spinning Mills (P) Ltd., 2010 4 SCC 114 to hold that an insurance company could possess the locus standi to present as a consumer if:
a. Filed by insurance company in the name of the assured and if the company is an attorney holder
b. The assured and company are both co-complainants
Since both the respondents had satisfied the same, the insurance company had locus standi to file the suit.
The judges restricted the discussion to the duty owed to the guests’ vehicles. The Court then delved into 2 approaches that could be adopted for this matter, namely:
a. The Common law rule of Infra Hospitium
b. Presumption against hotel unless they prove there was no gross negligence
The rule of Infra Hospitium was held to impose strict liability on innkeepers as and when a guest handed over the keys to the valet. This signified a relationship of bailment and the only exemptions that could be claimed by an innkeeper were that of: act of god, act of public enemy and fault of guest himself. However, it was recognized that the application of the rule was dwindling due to development and growth of hotels and tourism.
The second approach was widely accepted and used wherein it would be the duty of the hotel (bailee) to prove they had taken due care and had not acted negligently. In this regard, the Court overturned the application of “infra hospitium” as it was burdensome and viewed that the said principle had been used by the NCDRC for the first time. The second principle drew its roots from the common law case of Laird v. Eichold wherein an innkeeper is held prima facie liable for any loss and it places a burden of proof on him to show that he exercised strictest care and diligence.
The existence of bailment depended on the degree of control by the bailee. If a vehicle was purposefully handed over (via valet or otherwise), then the law of bailment would apply whereas if the guest was merely allowed to park his car, then the relationship would be that of a licensor-licensee. If a hotel collected a parking fee, that per se wouldn’t amount to delivered for some purpose under Section 148 of the Contract Act. Holding of a parking ticket shows an entitlement but not bailment.
It was established that the parking services provided by 5 star hotels was not truly free of charge but was instead accommodated through the exorbitant rates it charged. Herein, the relationship of bailment was said to have existed.
The Court averred to Sections 151 & 152 of the Act to establish the degree of care to be exercised by the Appellant. The charging of a higher price by the appellant hotel was held to have implied a greater degree of care. Section 151 is of such a nature that the standard of care is implied regardless of whether it was gratituour or for a fee.
In such an instance, the bailee is expected to take additional steps to ensure that the vehicle is not stolen or damaged.
In the present case, there was no evidence to prove that the hotel had taken extra steps to ensure safety of the car and away from the reach of others with mechanisms to identify real owners. Hence, the Appellants were negligent.
The parking ticket contained an “owner’s risk clause” that precluded the appellant hotel from all forms of liability in case of damage or theft. However, it was decided that even with a specific exclusion clause inserted, guests would be left without remedy if they were left to the mercy of these hotels. Section 151 would apply as the bare minimal standard and the precluding clause would operate only if Section 151 was fulfilled.
Interpretation of Section 152: “the absence of any contract” indicates taking a higher standard of care and not to remiss liability. Hotels can print such clauses and save themselves from third party acts, inherent defects, force majeure events and contributory negligence. Nonetheless, negligence wouldn’t be safeguarded which was the case here. Hence, the appeal was dismissed.
2. Western Coalfields Ltd. and Anr. v. Rajesh s/o Nandlal Biyani
Citation: 2011 SCC OnLine Bom 1217, (2012) 1 Mah LJ 394, (2012) 1 BC 395
Single Judge Bench of Bombay High Court at Nagpur
Case number: A.A.O. No. 85 of 2011
Category: Contingent Contracts, Bank Guarantee
Relevant Sections: 126, 31, 32
Brief facts: The Appellant (Western Coalfields) had awarded a work of making a diversion to the respondent (Rajesh) for about 13.95 crores. As per requirements, the respondent furnished 2 bank guarantees amounting to about 2.25 crores. However, the respondent was able to complete only 40% of the work within the stipulated time period and work to the tune of 7.9 crores remained incomplete.
It later came to the knowledge of the appellant that fake bank guarantees of a scheduled bank had been furnished and imposed penal interest for the same. Nine months prior to the expiry of the guarantees, the appellant invoked the guarantees not due to non-completion of work but furnishing of fraudulent guarantees.
The respondent proved that the fake ones were supplied by the Power of Attorney Holder and upon knowledge the respondent himself had drawn new guarantees which was accepted by the appellant. Moreover, non-completion was caused due to hindrances raised by the Central and State Government was not the respondent’s fault. Consequently, the respondent obtained an injunction from the Trial Court barring the appellants from invoking the guarantee. This appeal is against that order of civil judge that barred the appellants from invoking bank guarantee.
1. Whether the bank guarantee was unconditional or contingent
2. Whether the respondent had locus standi to obtain injunction against invocation of guarantee
Specific to the facts of this case, the Preamble of the guarantee stated that it was unconditional and payable without any demur. Moreover, the Appellant was held to be the sole judge and his decision would be binding.
It was dictated that to understand whether the guarantees were conditional or unconditional, the terms would be extremely important. It is an independent contract between the bank and the beneficiary and invocation has to be strictly according to the terms of the guarantee. Bank guarantees have to be in unequivocal terms, unconditional and recite the amount would be paid without demur or objection and irrespective of any dispute.
The Court added that the mere fact that a bank guarantee referred to a principal agreement didn’t make it a conditional one until any clause of the original agreement had been made a part of the guarantee. If a contract of guarantee permitted the creditor to invoke upon the happening of an uncertain future event, the same would be a contingent contract. Till the happening of the said event, the contract would remain unenforceable and the beneficiary has no unfettered right to invoke the same.
The guarantee in the instant case could be invoked only on the application of a written demand of the exact amount sought caused by failure/negligence of the respondent. Thus, the guarantee was not unconditional but a contingent contract according to Section 31.
The terms stated in the Preamble were held to represent the relationship between the Appellant the Bank and not the appellant and the respondent. This essentially meant the Bank couldn’t raise any dispute as to compliance.
Since the appellant hadn’t invoked according to the manner laid down in the terms and for extraneous grounds not found in the terms of the agreement, his claim for invocation couldn’t be validated. Once it is held that the Bank Guarantees are conditional or contingent and enforceable only upon happening of certain events and that those events have not yet happened, the violation of the terms of the guarantee can be regarded as species of the same genus as fraud, which disentitles a beneficiary to enforce the Bank Guarantees
It was decided that by virtue of Section 126, the respondent would have locus standi as he was the principal debtor and the guarantees were furnished at his instance. Thus he would undoubtedly have locus standi.
In addition to the aforementioned issues, the Court acknowledged that the guarantees had been invoked 5 months after termination and was hence not bona fide but an afterthought. Such an act was seen as a case of forgiveness and no damages could be claimed as non-completion was caused by hindrances by the Government.
In conclusion, the Court ordered the respondent to submit Bank Guarantees with renewed validity one month before the expiry of the old ones.
Govt. of Andhra Pradesh & Ors. v. K. Brahnandam & Ors.
Citation: (2008) 5 SCC 241
Single judge bench of Supreme Court
Case number: CA 3043/2008
Relevant Section: 70
Brief Facts: The respondents are 7 school teachers in an upper primary elementary school. However, their selection and appointment was not in consonance to the rules laid down by the Government with regard to appointment procedure in the AP Education Act, 1982 and its Rules, 1993. The respondents claimed they performed to the satisfaction of the authorities but weren’t paid salaries. They then made a representation to the District Education Officer but he rejected it. The Appellant State claimed that the respondents had been appointed hurriedly and through a side door without following due process. Thus the State contested that it was not liable to pay salaries when the educational institution failed to observe selection procedure laid down in rules.
Respondents filed a petition before the Andhra Pradesh High Court which was decreed in their favour. An appeal by the State to a division bench upheld the earlier decree. Hence, this appeal came into being.
Issue: Whether government was liable to pay salaries to school teachers when the educational institution hadn’t followed the prescribed procedure
Ratio: The right to claim salary arises under a contract.
Liability to pay salary could be imposed on the state for recognized schools only when statutory rules were complied with. Herein, there was no legal relation between the State and Respondents but only between respondents and the educational institution.
The respondents couldn’t avail the benefits of Article 14 & 16 for regularization since they rendered services satisfactorily for 8 years on the ratio that only irregularity could be normalized and an illegality couldn’t be ratified.
However, the respondents were entitled to claim salaries from the educational institution alone regardless of the existence of a valid contract by virtue of Section 70. Herein, the principles of quasi contract arose out of the relationship between the parties. The state was not a party as the appointment was illegal and thus the educational institution was even barred from claiming reimbursement.
Mahanagar Telephone Nigam Limited v. Tata Communications Limited
Citation: (2019) 5 SCC 341
Division Bench of Supreme Court
Case number: CA 1766/2019
Category: Quasi Contract, Damages for breach
Relevant Sections: 70, 73, 74
Brief Facts: Appellant had made a purchase order with the respondent. The Purchase Order contained a clause that mandated physical connectivity for bandwidth had to be done within 2 months and the respondent was to provide last-mile connectivity to the appellant. However, the respondent failed to do so and court lacked reliable material to assess damages concerning savings made by the respondent by not complying with the clause. A clause in the purchase order stated that liquidated damages to a maximum of 12% p.a. could be imposed whereas the Appellant unilaterally imposed rentals at their own rate over the fibre to the tune of 1.1 crores. According to the contract, the maximum permissible claim could only be 25 lakhs whereas quantum meruit had been the basis for claim.
1. When parties are governed by a contract whether a claim in quantum meruit under Section 70 would be permissible.
Section 70 falls under Chapter V pertaining to certain relations resembling those created by contract. Compensation quantum meruit is awarded for work or services rendered when the price is not fixed by the terms of a contract.
Section 73 made it evidently clear that damages arising from breach of contract was dealt with differently as compared to damages resulting from obligations resembling those created by a contract. A claim for damages for a quasi-contract would be dealt under the 3rd para of Section 73.
Herein, it would be Section 74 that would apply that deals with damages for breach of contract when penalty has been stipulated. Since a clause stipulated liquidated damages, a higher figure could not be claimed as quantum meruit. Thus, the appellant had no right to charge or claim a higher award than that stipulated in the contract. Hence, the appellant had to refund the additional amount charged after deducting 12% which came to the tune of 25 lakhs.
Principal Commissioner of Income Tax v. NRA Iron and Steel Pvt. Ltd.
Citation: (2019) 10 SCC 206.
Case number: CA 2463/2019
The matter was an appeal against a decision of the Supreme Court as the applicant company wasn’t served with a notice of the Special Leave Petition at the registered office. This resulted in the impugned award being passed ex-parte and the company has thus sought for a de novo hearing. It was found that an affidavit was filed by the revenue department containing a dasti service and an acknowledgement receipt from the company’s Chartered Accountant Mr. Sanjeev Narayan.
The Chartered Accountant claimed that he had received service from the Income Tax Department but hadn’t inspected on a bona fide belief that they were Income Tax Returns documents. The Company submitted that the Accountant was the authorized representative of the company and represented them in all cases. The Department further produced a Power of Attorney in favour of the CA and 3 other representatives of the company and claimed that he had ample time to inform the company about the proceedings.
1. Whether a Power of Attorney would imply agency between the Company and the CA.
An agent would most certainly include a Power of Attorney Holder. Thus, a Power of Attorney holder could be served with the notice of proceedings so as to bind the company.
Company couldn’t claim that a service couldn’t be given to the CA as according to Section 2(35) of the Income Tax Act, 1961 emphasized that a principal officer would include a manager or agent of the authority.
Herein, ample time was given to appear, matter was even adjourned but there was no appearance. The company’s claim that there was a bona fide belief of IT Returns wasn’t credible and couldn’t be given any value.
Virender Khullar v. American Consolidation Services Ltd. & Ors.
Citation: (2016) 15 SCC 308
Case number: CA 4861/2012
Relevant Section: 230
Brief Facts: Appellant wished to sell men’s wear to the 3rd Respondent (Zip Code Inc.) and had entrusted consignments with the 1st Respondent. The 1st respondent later handed over the consignments to the carrier (4th Respondent). Cargo receipts were made to the order of the 2nd Respondent (Bank) in order to ensure receipt of payment from the international buyer. However, the appellant didn’t receive payment even after it reached the destination. A suit was filed against the 1st respondent alone though he had merely received goods on behalf of the buyer.
The bailment agreed showed that after the 1st respondent handed over goods to the carrier, the responsibility would be that of the carrier alone. Additionally, the appellant had made no payment to the respondent for the said consignment. The respondent claimed that he was merely a forwarder and not a carrier and hence prayed exemption from Section 230.
The process was to be such that the 1st respondent was to intimate the buyer once the goods arrived at the destination. Consequently, the buyer would have to inform the bank and pay for the goods and only then would the goods be released by the bank to the buyer. In this case, the bank wasn’t informed about the arrival of goods and had no knowledge.
Suits were filed before the NCDRC and the impugned judgement that resulted in this appeal was caused by the fact that the NCDRC had held only the consignee liable and had exempted others.
1. Whether the respondent was to be held liable for the acts of its principal.
An agent can in no way be held liable for the acts of the principal. Section 230 of the ICA, 1872 exempts an agent from being personally liable to execute a contract entered into between its principal and the appellant.
The respondent had expressly stated it was merely an agent of the 3rd respondent. This agent’s liability was further excluded as the cargo slips held that the respondent agent would not be liable for the consignee’s failure.
The carrier couldn’t be held liable as it fulfilled its duty of shipping to destination and there existed no contract between the appellant and the 4th defendant (carrier). Moreover, the bank could not be held liable as it never received the payment from the consignees. Thus, the liability was held to be that of the 3rd respondent alone who was named in the cargo slips in the consignee and had collected goods without paying money.
Government of Goa v. Goa Urban Co-operative Bank Ltd. & Ors.
Citation: 2010 SCC OnLine Bom 1653, (2011) 2 Mah LJ 37, (2011) 3 Bom CR 382
Division Bench of Bombay High Court at Panaji-Goa.
Case number: FA 201/2006
Relevant Section: 237
Brief Facts: Appellant wished to raise a loan for 9.5 crores and appointed the 3rd Respondent (RBI) as its manager. Subsequently, the Appellant and RBI appointed certain branches of the 2nd Respondent (SBI) as their agent to collect deposits for loan.
The 1st Respondent applied for the allotment of the entire amount at the Treasury Branch of SBI. The said branch was to inform RBI by the evening of May 17, 1993 but informed only on the next day. Due to this delay, RBI made allotment to another party on the 17th and the application made by the respondent couldn’t be considered by RBI.
The deposited amount was finally transferred by the Treasury Branch to the 1st Respondent after a period of 53 days without any interest. The respondent hence filed a suit before the Trial Court which decreed the appellant to pay interest as it was the beneficiary. However, no liability was imposed on SBI. The present matter was an appeal against that decision.
1. Whether state could be held liable for negligence of SBI
2. Whether SBI can be held jointly/severally liable with the State.
If a Principal is the one who has selected the Agent and has delegated performance of acts to the Agent, the Principal should bear the risk. Though Principal hadn’t asked the Agent to act negligently, he can’t escape liability for the same.
RBI was appointed as the Manager for the loan and thus RBI was an Agent to the appellant state. SBI (2nd respondent) which had been appointed by both the State and RBI was thus either an agent to the state or a sub-agent of RBI.
There was negligence on part of SBI who was an agent and thus the Principal would be liable for negligence on part of the agent during the course of employment.
A clause in the agreement stated that refund would be made as soon as possible which was held to imply a period of 7 days. The Respondent was refunded after a period of 53 days without any interest though he had applied within the prescribed time limit with full amount. Thus, the State was liable for the loss suffered by Respondent and the order of the Trial Court was upheld
State contested that the liability should not only be for it, but joint and several upon the State and SBI. Principal held vicariously liable for negligence of Agent whereas Agent still holds the primary liability. Nonetheless, an agent could not be exonerated of his liability and left scot free.Thus, the court held the State and SBI jointly and severally liable
Kailash Nath Associates v. Delhi Development Authority & Anr.
Citation: (2015) 4 SCC 136
Case number: CA 193/2015
Category: Performance of contract, damages for breach
Relevant Section: 63, 73, 74
Brief Facts: The appellant was the highest bidder at the respondent’s public auction and deposited 25% of the amount payable as earnest money. The appellant was asked to deposit the remaining 75% in the next 5 months. However, due to industrial recession, the appellant sought for 2 extensions that were duly granted by the respondent. However, it was 1982 and there was an industrial recession and KNA made representations for extension. Post this, there was no further communication for a period of 43 months despite repeated letters by the appellants.
In 1987, the respondent wrote a letter to the appellant seeking consent for the payment of the remaining 75% but added that it didn’t create any commitment. In 1990, the appellant filed a suit as 2 other allottees had already paid the price and been given the land. Pursuant to this, the respondent terminated the appellant’s allotment by citing failure to deposit the balance amount and forfeited the earnest money. The respondent then re-auctioned the plot for a much greater sum while additionally claiming damages for breach from the appellant.
1. Whether time for performance could be extended
2. Whether the forfeiture by the respondent was valid
Under Section 63 unlike 62, promise can dispense or remit wholly or in part as well as extend the time for performance.
Three months was the initial time frame stipulated by the agreement but the conduct of the respondent was such that it kept granting extensions. Herein, the respondent was the promise and the appellant was the promisor. Thus, the respondent being the promise could unilaterally extend the time for performance in accordance with Section 63 and the same was done for the benefit of the appellant. Hence the extension was valid and it removed the element of time being the essence.
An act of forfeiture has to be in consonance with the terms of the contract and can be subject to the test of Article 14.
The contract stipulated that forfeiture would be permitted only in cases of default, breach, non-compliance or misrepresentation. The appellant hadn’t breached any terms as the respondent himself had extended the time for performance. Moreover, the appellant was ready and willing to perform his part of the contract as evident from the communication made even after 43 months. Hence, since there was no breach of terms, fraud or misrepresentation, the respondent couldn’t have forfeited the amount. Additionally, allowing the respondent to appropriate the earnest money to the tune of 78 lakhs was held arbitrary as there was no loss suffered and the respondent had in fact made a profit of 8 crores by re-auctioning.
Decision regarding Section 74:
If damage or loss is not suffered, the law does not provide for a windfall. The Court held that the said section cut across rules of English common law by enacting a uniform principle for all amounts payable in case of breach, whether in the form of penalty or otherwise.
A plain reading of Section 74 states that it deals with awarding damages for damage or loss caused by breach. Thus, for a party to claim the benefit of Section 74, actual damage is a sine qua non.
Additionally, the court will only award reasonable compensation and a penalty that does not exceed the terms stipulated in the contract. Fixing of reasonable compensation will further be based on the principles laid down under Section 73. They interpreted the term “whether or not actual damage or loss is proved to have been caused thereby” to merely mean that, liquidated damages named in the contract based on a genuine estimate could be awarded, if it was impossible or difficult to prove damage or loss.
However, no loss was suffered by the respondent and thus the benefit of this section couldn’t be claimed.
Anuradha Samir Vennangot v. Mohandas Samir Vennangot
Citation: (2015) 16 SCC 596
Division Bench of Supreme Court
Case number: TP(C) 702/2015
Category: Undue influence, Contract to do something someone is bound to do
Relevant Section: 16
Brief facts: The parties in the matter were a Hindu couple who sought a divorce by mutual consent under the Hindu Marriage Act, 1956. They resided in different states and hence by this petition, sought to transfer the matter pending before a Family Court from Bombay to Hyderabad.
The respondent husband initially sought divorce on alleged grounds of cruelty. Owing to a Supreme Court Mediation Centre for Amicable Settlement, the petitioner wife agreed to divorce by mutual consent whereby the respondent husband would pay a sum of Rs. 12.5 lakhs as alimony for the past and future.
However, the said application contained the fact that the petitioner wife was suffering from a life threatening disease and urgently required funds for medical treatment. The said disease would require about 6-8 cycles of medical care and chemotherapy costing 50000 each.
Whether the court could pass a decree of divorce wherein the wife is in dire need of money and the same is the consideration to dissolve the marriage.
The fact that the wife agreed to divorce due to urgent needs of funds couldn’t be ruled out. The disease compelled the petitioner to agree to divorce by mutual consent. The Court viewed the agreement as nothing but a settlement to dissolve marriage.
Sec. 23 of the HMA, 1956 states that it is the duty of the court to ensure that such consent was not obtained by fraud, force or undue influence. This was linked to Sec. 16 of the ICA, 1872- consent free when not obtained by undue influence. Undue Influence arises when the relation between the parties is such that one of the parties is in the position to dominate the will of the other.
Took into account the doctrine of pre-existing duty. If a party is already under a pre-existing duty, then no consideration is to be given for the modification of contract. Such a contract is therefore voidable. Performance of something one is already bound to do either by general law or specific obligation is not a good consideration for a promise. It is not a legal burden on the promisor, instead relieves the duty.
On applying the said principle to this case, it was decided that it was the duty of husband to take care of health and safety of wife. Primary duty of husband to facilitate treatment for wife. In present case, the court analyzed that the husband was promising to do something which he was already bound to do and thus is not valid consideration.
The husband was asked to pay Rs. 5 lakhs immediately for her treatment while allowing the petition for transfer. The Family court was asked to hear the matter afresh thereafter.
State Bank of India & Anr. v. Mula Sahakari Sakhar Karkhana Ltd.
Citation: (2006) 6 SCC 293
Case number: CA 2801/2006
Category: Guarantee, Indemnity, interpretation of contracts
Brief Facts: The respondent was a co-operative society that owned a sugar factory. In order to make use of the remaining bagasse, they decided to install a paper plant and entered into an agreement with M/s Pentagon Engineering Pvt. Ltd. As per agreed terms, the appellant furnished a bank guarantee in favour of Pentagon.
SBI then furnished the bank guarantee that covered 10% retention amount. Disputes arose later on and the respondent terminated the contract with Pentagon with both of them claiming damages against the other. It was at this stage that the bank guarantees were invoked by the respondent but the appellant refused to accept the same as it contested that no loss or damage had been suffered by the respondent and the bank guarantee was a contract of indemnity. A decision of the High Court ordered the appellant to pay the 10% amount at 14% interest against which this appeal arose.
1. Whether based on surrounding circumstances, the bank guarantee was a contract of guarantee or indemnity
A document is to be construed only with the terms it was formed with and nothing more should be added or removed. Surrounding circumstances are relevant for construction only if there exists any ambiguity.
Contracts of guarantee are usually absolute and unconditional. If the bank guarantee were a contract of guarantee, it would have mentioned “unequivocal condition” “or claim without any delay or demur”. However, the phrasings in this contract weren’t the same and the document expressly mentioned that it was a contract of indemnity and that the bank would indemnify subject to the occurrence of a specified event.
While dealing with the claim of the respondent that all the documents had to be construed their entirety in order to interpret that the document was one of guarantee, the court opined that other documents may be considered if they formed a part of the subject-matter of the contract. Nonetheless, the contract between the respondent and Pentagon didn’t contain any clause requiring the company to furnish a bank guarantee nor did the document mention any particular clause of the contract.
Thus, the decision of the High Court was struck down.
Industrial Investment Bank of India Limited v. Biswanath Jhunjhunwala
Citation: (2009) 9 SCC 478
Case number: CA 4613/2000
Brief Facts: The Appellant sanctioned a short-term working capital loan in favour of a company. The loan was signed by the Respondent who was the company’s director. On the same day, the respondent executed a demand promissory note on behalf of the company in favour of the appellant. The respondent also executed a deed of personal guarantee in favour of the said loan.
The company made multiple defaults thereafter. The appellant issued a demand notice recalling entire loan of 5.4 crore along with 17% interest and 2.1% damages while charging the respondent under Section 138 of the Negotiable Instruments Act.
The Appellant sought to realise the mortgaged assets of the company while additionally pressing the respondent on the basis of his personal guarantee. After a series of proceedings before tribunals and courts, a High Court granted stay against the appellants. This caused the appellant bank to file the present appeal.
1. Whether the liability of a principal debtor and guarantor is co-extensive or alternative
The liability of a principal debtor and guarantor is co-extensive. This was based on the understanding that the very purpose of guarantee would be defeated if the creditor was asked to postpone his remedies against surety.
In this instant matter, the appellant was continuing actions against both the borrower company and the guarantor in different courts. Struck down the High Court’s verdict as it was a crystallized principle of law that the liability would be co-extensive and not alternative.
H.R. Basavaraj (Dead) & Anr. v. Canara Bank & Ors.
Citation: (2010) 12 SCC 458
Case number: CA 233/2003
Category: Quasi Contract, Novation, Continuing Guarantee, Waiver of rights
Relevant Section: 62, 70, 129
Brief Facts: A trust by the name of Lokashikshana Trust (LST) that was involved in the publication of a daily newspaper and some periodicals transferred its property and publication rights to another company. The transferee company then transferred all the rights and liabilities to yet another company. The purpose for such transfers were to protect the business of LST that was undergoing losses.
The respondent sanctioned a loan in favour of the most recent company managing LST’s property and the same was secured by book debts and hypothecation provided by the appellant and other office bearers of the company who even executed a demand note. The appellants even executed an agreement of guarantee for the sum of Rs. 13 lakhs, extendable to a maximum of Rs. 30 lakhs. The bank later initiated proceedings against the appellants for the recovery of loan amount and in ultimatum, an Administrator was appointed as the receiver and was vested with control over the Trist’s property.
The issue pertained to three loans taken by 3 different entities for the management of the Trust.
1. Whether app and his legal representatives were liable to pay the amount for the agreement that was in the form of a continuing guarantee.
2. Whether the parties’ conduct amounted to novation
3. Whether the trust who benefited from the transactions could be estopped from denying liability.
The agreement between the appellant and the bank was that of a continuing guarantee dealt under Section 129 of the Contracts Act. Thus, the guarantee would continue across all future transactions unless expressly disclaimed by the appellant in a written statement (Section 130). However, the deed was such; between guarantor and borrower, the guarantor was merely a surety. However, between the bank and the guarantor, he would be the principal debtor with coextensive liability. Thus, the court held that the appellant had waived his rights conferred under Chapter VIII of the Act.
The Court applied the following principle: In case of waiver of rights by guarantor, there can be no waiver of liability in exercise of these rights.
It is an established principle of law that one has the right to waive the benefits of law provided it is for sole benefit of individual in private capacity and doesn’t affect public rights or policies. Herein, since the appellant hadn’t revoked his continuing guarantee despite newer agreements for loans, the liability stood fastened on the appellant and his legal representatives.
In order for any substitution, novation or alteration to the terms of an agreement, consent of both the parties is mandated by Section 62.
In the present case, the court held that depositing of an amount by a 3rd party towards liquidation of an outstanding amount would not by itself result in novation. App then tried to claim there was alteration as bank had appointed court receiver to deal with hypothecated property. Alteration under 62 would require both parties to voluntarily agree. The bank had no agreement at all and the property fell into the receiver’s hands due to a court order.
Since the board of trustees were competent to take a loan, the administrator appointed by the state took a loan that was deemed on behalf of the trust, the trust being the beneficiary in both the instances would be liable to pay by virtue of Section 70. However, LST’s liability was limited to that of its hypothecated property.
Estoppel is a principle applicable when one person induces another or intentionally causes the other to believe something is true and to act upon such belief as to change his/her position. In such a case, the former is estopped from going back to the word given.
All the transactions entered into since the very beginning were for the benefit of the Trust. The trust had in turn ratified the transactions and benefitted from the same. Thus, the trust being the sole beneficiary was not only liable to pay but also estopped from denying liability.
Central Bank of India v. Virudhunagar Steel Rolling Mills Limited & Ors.
Citation: (2015) 16 SCC 207
Case number: CA 3654/2006
Category: Guarantee, Interpretation of contracts, Contra proferentem
Brief Facts: The 1st respondent received various credit facilities from the appellate bank. The company provided security to the bank in the form of movables as well as raw materials. The loan was subsequently secured by Respondents 2-4 who were Directors of the company by means of a continuing guarantee.
The bank later filed a suit to recover about 4 lakhs. In the meanwhile, another creditor initiated recovery proceedings and recovered his dues from the auctioning the respondent company’s property. A trial Court by its verdict held the respondent company liable while absolving the directors from their guarantee on account of the dues having accrued prior to the execution of the guarantee.
1. Whether a continuing guarantee could be invoked for dues that arose prior to the execution of the guarantee.
The Appellants filed this appeal against that absolving as they contended that the guarantees made no mention as to any specific or liquidated amounts and thus past dues could be recovered from them.
The court read the document of the agreement and found that the directors hadn’t undertaken liability for any previous transactions and had expressly capped theirs at 12 lakhs. However, there was no such agreement or assumption of liability. The rule of Contra Profrentem was applied as there was a doubt in the contract. This principle established that in case of any doubt, the terms would be read against the person that drafted it.
However, this judgement emphasized on the fact that it didn’t mean a guarantor couldn’t be fastened with liability for past transactions. It would be subject to the terms of the agreement and the rule of contra proferentem would arise in case of ambiguities.
Hence, the verdict of the Trial Court absolving the Directos was upheld as the subject matter of the loans herein arose before the execution of the deeds.
The Managing Director, Kerala State Film Development Corporation v. Smt. Chandrakumari
Citation: (2016) 3 KLT 306
Division Bench of Kerala HC
Case number: A.S. no. 846/1998
Relevant Sections: 167
Brief Facts: There was a deliverance of film negatives of the movie “Father Damien” by the respondent to the appellant in this matter. However, the appellant failed to deliver the “goods” back to the respondent or her husband after fulfilling the purpose of development to make the film fit for exhibition. Nonetheless, there was no evidence on record to show that the bailor had taken any steps to recover the goods bailed and mitigate loss. A suit was hence filed to recover damages due to losses caused by the delay in release.
1. Whether a bailee could be held liable to pay damages when the good bailed was taken away by an authority of law and the bailor had not taken any steps to mitigate any loss.
The Court took into account section 161 of the Contracts Act to ascertain the ingredients loss, destruction or deterioration of goods bailed.
The following were laid down as ingredients for liability under 161-
1. Fault of bailee
2. Goods not returned, delivered or tendered at proper time
3. Goods put to loss, destruction or deterioration
A bailor would have to establish the co-existence of all the 3 ingredients and failure to establish any one would be fatal.
The court recorded that possession of goods was lost in the execution of a valid decree and by no fault of its own. In Jugilal Kamlapat Oil Mills v. Union of India AIR 1976 SC 227 it was held that a bailee was excused from returning subject matter of bailment if subject matter was taken away by authority of law.
However, the respondent had not taken any steps as such to ensure delivery. There were claims raised as to issues of video piracy caused by 4-year delay but there was nothing on record to show that the bailor had taken any steps to recover the goods.
Such a step would have mitigated the damages claimed which was essential to determine loss. Nonetheless, the inaction on part of the bailor unjustifiably saddled the burden of loss on the respondent and hence no compensation was awarded.
Mary v. State of Kerala & Ors.
Citation: (2014) 14 SCC 272
Case number: CA 9466/2003
Category: Frustration, Statutory Contracts
Relevant Sections: 56
Brief Facts: Mary was a successful bidder at an auction and obtained the privilege to vend arrack (liquor). In pursuance to the terms of the tender, she deposited 30% of the total sum. However, the residents in that area opposed to the opening of any Abkari (liquor) shops due to religious reasons. Mary understood that it was impossible to run a shop there. Thus, she addressed this issue to those concerned and asked them not to confirm the sale and requested for rescinding while seeking for the 30% deposit. Despite this request, she was asked to enter into a permanent agreement and asked to deposit the balance amount with 18% interest. The appellant’s failure to pay resulted in the forfeiture of the security amount to the tune of 7 lakhs.
The present matter is an appeal against a Division Bench verdict which held that the state was justified in forfeiting the amount due to the parties being regulated by statutory provisions.
1. Whether appellant could invoke Doctrine of Frustration or would the rules of the statutory contract apply or in other words, will a statutory contract destroy all incidents of an ordinary contract under ICA, 1872.
2. Whether Doctrine of Fairness and Reasonableness could be invoked for statutory contracts
Section 56 that deals with Doctrine of Frustration would come into play in ordinary contracts when the question as to position of parties after an agreement becomes invalid is silent. However, in cases of statutory contract where a party takes absolute liability, cannot be exempted from liability
The Court upheld that the appellant had no oblique motive of her own. A plain reading of Section 56 due to the impossibility of performance implied that forfeiture would ideally be illegal. However, the said contract was governed by statutory rules, namely, Kerala Abkari Shops (Disposal in Auction) Rules, 2014.
The position in the case was one in which the consequence for non-performance of contract was provided in the statutory contract itself.
In cases where consequences of non-performance have already been provided in the statutory contract, one cannot take shelter behind section 56. The statutory rules made it evident that forfeiture was guaranteed.
A contract made under a statute or rules involve a licensee undertaking to abide by the terms and conditions and thus cannot invoke the doctrine of fairness and reasonableness.
Appellant tried to raise the doctrine of fairness and reasonableness against certain rules that gave an unequal bargaining power. The intention was to subsequently