"until there is a principal debtor, there can be no suretyship. Nor can a man guarantee anyone else?s debt unless there is a debt of some other person to be guaranteed.?-- Lord Selborne. In tandem with Lord Selbourne, Lord Willes also said that ?(or) if his liability is made the foundation of a contract between the plaintiff and defendant, and that liability fails, the promise is void." The law of contract gives you, as foundation, that a person was taken to be liable, and that the surety-ship was a surety-ship in respect of that liability. Take away that liability, the foundation of the principal contract the contract of surety-ship would fail.?
In every contract of guarantee the guiding principle is that ?the liability of surety is co-extensive with that of the principal debtor? because ?such contract is an undertaking to the creditor that the principal debtor will perform his principal obligations? and if he fails the surety will perform the obligations.
This means that as a general rule, the surety?s liability is no greater and no less than that of the principal, in terms of amount, time of payment and the conditions under which the principal is liable.
However, it is to be noted that that above principle is not immutable. The parties are free in certain respects to have limitations on the surety?s liability.
Therefore, the entire focus of this paper is about the most important question of law as given below.
?whether a surety is liable notwithstanding that the principal debtor, who was a minor, may not be liable on the main contract with the creditor?
Position in India:
The earliest case regarding ?the liability of a surety when principal debtor was minor not liable on the main contract with the creditor? was brought before the Bombay High Court.
The facts were that a minor, Ms.Lashmibai, Principal Debtor (Defendant-1), a minor, took a loan of some amount on a bond executed by her in favor of Sri Kashiba, the Creditor (the Appellant-Plaintiff). Mr.Shripat, and his son Mr.Ramachandra, Respondents-Defendant-2&3, were the sureties.
Plaintiff sued all the defendants.
Lords Farran and Candy, accepting that Lakshmi ?was a minor under the Indian Majority Act, 1875 at the time when she entered into the contract?, held that ?the suit against her was properly dismissed?.
But the sureties were held liable whether the promise of the principal debtor is void or voidable.
Their Lordships came to the above decision after quoting the passage in Chitty on Contracts :
?(But) the rule that a party cannot be liable on a contract of guarantee unless the principal is also liable, is in some cases true in form or words rather in substance. Thus, in the case of a guarantee to answer for the price of the goods, not necessaries, to be sold to an infant or other person incompetent to contract, there is not doubt that the party guaranteeing, though professedly contracting only in the character of a surety, would be responsible, for either he could not urge the incapacity of the supposed principal, or he might by construction of law be himself treated as the principal.?
Then speaking about the legal principle in Sec.128, Lord Farran declared that the Section ?only explains about the quantum of a surety?s obligation? when the terms of the contract do not limit as they often do, but ?neither has any reference to the nature of the obligation of the principal?.
Lord Farran also gave an interesting example: ?It is like the case of a person who to appease the anger of a child, requests another to lend a guinea to the child to play with and promises, if the child loses or does not give back the coin, to make it good to the lender. The promise in such circumstances is clearly that of a principal and not of a surety and the situation is not altered by its being called a guarantee.?
Lord Farran took the decision in Duncomb V. Tickridge as the authority for the position that ?where an infant is placed at school by parent or guardian it is, implied that the credit is given to the parent and not to the infant?.
But The Madras High Court differed from the Bombay High Court.
In Edevan K. Nambiar V. Modakal K Raman and another Another, The Petitioner ?Defendant-2, acting as surety for Principal Debtor (defendant-1), who was a minor, filed this revision petition when he was made liable to pay an amount to K Raman, the Creditor (Respondents-Plaintiff) when the minor did not repay the chit amount in a chit fund business.
After a thorough review of all the important English and Indian decisions on the scope and extent of ?co-extensive principle? though on different set of facts from Kashiba case, Lord Justice Rajagopala Ayyangar, who wrote the main ruling with agreement from Justice Rajagopalan, held that ?the surety is not liable to the creditor on the basis of ?co-extensive principle of surety?s liability with that of the principal debtor as given sec.128 of the Indian Contract Act, 1872? because the principal debtor himself is not liable as he was a minor?.
Lord Rajagopala Ayyangar aptly referred to the definition given by Pothier, quoted in De Colyar in his book on ?Law of Guarantees and Of Principal and Surety? which is as follows:
?As the obligations of the sureties is according to our definition an obligation accessory to that of a principal debtor, it follows that it is of the essence of the obligation that there should be a valid obligation of a principal debtor: consequently, if the principal is not obliged, neither is the surety as there can be no accessory without a principal obligation.?
The decree passed against the petitioner was cancelled.
In A.V. Varadarajulu V. K.V.Tavasi Naidu , being the first decision under review by Lord Justice Rajagopala Ayyangar, the facts were that on closing down of a lorry business carried on in partnership between K.V.Tavasi Naidu, the creditor (Respondents-Plaintiff) and Mr. X, the principal debtor, it was agreed in a contract that Mr.X had to pay an amount to Tavasi Naidu in a final settlement of accounts between the partners. When the principal debtor did not pay this amount, a suit was filed against A.V. Varadarajulu and others who were sureties (Appellatns-Defendants-1 to 4).
A single judge of the Madras High Court held that Appellatns-Defendants-1 to 4, as sureties, were held liable to pay an amount to Respondents-Plaintiff despite the fact that partnership in contravention of The Motor Vehicles Act, 1939.
The Division Bench clearly held that the partnership agreement between the Respondent and Defendant-2 was illegal and void ab nitio and therefore the cause of action cannot be enforced as it arose out of settlement of an illegal business.
Therefore, Lord Justices Ramakrishna and Kunhamed Kutti held that as per ?coextensive principle under Sec.128 of The Act, the surety is also not liable when the principal debtor is not liable on the ground that the contract of partnership is illegal and no debt is payable by debtor?.
Next, in Sri TikkiLal V. Komalchand, the Creditor-cum-Buyer (Plaintiff-Respondent) sued TikkiLal, the surety (Defendant 2?Appellant), for recovery of Rs.687 already paid to defendant-1 (Principal Debtor), who was a minor on the date of execution of sale deed in favor of plaintiff.? Later when it was found that the seller was a minor and the sale being void, recovery of the amount paid to the minor was sought from the surety.
On the main issue regarding the surety?s liability towards the creditor, Hon?ble Justice Puranik held that ?notwithstanding the fact that the main contract between the principal debtor and the creditor void, appellant must compensate the plaintiffs as he made a false representation that principal debtor was a major and also agreed to compensate the plaintiff if there is any defect in the contract?.
Justice Puranick?s ruling was given ?not on the basis of the co-extensive principle? but on ?the false representation given by surety to the creditor about Principal Debtor?.
The above analysis becomes clear, as Plaintiff, not sure about the success of the above submission, made another attempt to fix liability on the surety.
He brought forward a very interesting argument that ?raising money on Sale of a house by a minor for making arrangements for his marriage comes within the category of necessaries within Sec. 68 of The Indian Contract Act, 1872 thereby making the contract valid and binding so as to fix liability on the surety also?.
Rejecting the above contention Hon?ble Justice Puranik held that ?spending the amount paid to a minor on the sale of his house even for making arrangements for the purpose of his marriage does not come within term of necessaries under Sec.68 thereby resulting in the sale being void wherein the minor need not refund the amount to the buyer and consequently the surety is also not liable to the buyer?.
The facts before the Punjab High Court were that a person entered into a surety bond guaranteeing the appearance of an accused before a magistrate. But it was held to be an illegal arrest.
Following the decision in Shripat, Lord Martineu held that the liability of the surety was in effect that of a principal debtor and the fact that the bond executed by the accused was held unenforceable did not affect the primary obligation.
Next, in Subramania Chettiar, when the principal debt was brought down by separate legislation?, Lord Pachapakesa Ayyar applied ?the co-extensive principle? and declared that ?a surety cannot be held liable for a large amount than the principal debtor? (as scaled down by legislature) by overruling an earlier decision given by the same High Court in 1942, but relying on another decision given in Nagpuir High Court.
After review of two decisions given above by The Madras High Court, Lord Rajagopala Ayyangar accepted that Lord Pachapakesa Ayyar had given the correct legal position.
Next, In Manju V. Shivappa, acting Chief Justice Batchelor and Justice Kemp, in separate but concurrent rulings, held that ?a surety, the father of the present appellant, cannot recover the amount from the principal debtor, i.e., the respondents in the present appeal, as it was a voluntary, but not a legally, paid amount to the creditor, since the principal debt had become a time-barred debt on which principal debtor is not liable and consequently no contract of guarantee can stand by virtue of Sec. 128 of the Act under which the word ?liability? is to be interpreted to be ?enforceable at law?.
Position in England:
Then coming to the rulings in England, Justice Pickford, in Wauthier V. Wilson, held that ?a father, who gave a promissory note as surety for the debt taken by his son, was held liable on the note to the creditor although the debt was void under the Infants Relief Act, 1874? (Known as ?The IR Act?) by declaring that the principle laid down in Yokshire Railway Wagon Company V. Maclure is of ?universal application to all contracts of guarantees?.
In Yorskshire Railway Company, no doubt The Court of Appeal too, declared that the directors of a company were liable as sureties but not on the reasons given by Lord Kay in the Lower Court.
In The Court of Appeal, Lord Justice Jessel, Master of Rolls, Lords Lindley and Holker in their separate but concurrent opinions ?did not find it necessary to examine the applicability of doctrine of ultra-vires since Cornwall Company entered into a genuine valid contract of sale with the Appellant company--but not an ultra-vires loan transaction made to appear a genuine contract in excess of the borrowing powers of the company as declared by Lord Kay--to raise an amount in the ordinary course of business binding on both the company and the directors to make them liable as guarantors?.
Consequently, Justice Pickford?s decision given on the strength of Justice Kay also falls to the ground.
Therefore, in another case Justice Oliver declined to follow Justice Pickford but relied on the decision of the House of Lords in Swan V. Bank of Scotland in an appeal from Scottish Law.
Lord Oliver held that ?an overdraft facility given by a Coutts Bank to an infant Mr.Brown being absolutely void under the IR Act, the two defendants, as sureties, also are not liable under the guarantee?.
Releasing the surety from liability, Justice Oliver observed:
?can the grantor of an infant?s overdraft with a bank be made liable to the pay the bank? Apart from Authority, it would certainly seem to be strange if a contract to make good the debt default or miscarriage of another???????could be binding, where by statute the loan guaranteed is in terms absolutely void. ????..how, in those circumstances can an omission by an infant to pay what is made void by statute be described as either a debt, a default or a miscarriage??
Justice Oliver also pointed out that decision given by Lord Pickford was challenged in the Court of Appeal.
The Court of Appeal, with Justice Farwell, Lord Warrington on the Bench, held ?the father liable on the promissory note executed by him?, not on the reasons given by Lord Pickford, but on different grounds when the Court unanimously declared that ?on the plain facts the father had executed not a guarantee but an indemnity, and was personally liable without any question of guarantee arising.?
In a polite and elegant language Justice Farwell said that ?this is an appeal from the decision of Justice Pickford and I should have been sorry if the court had felt itself bound to reverse that judgment.?
Justice Oliver, in an equally elegant language explained the above paragraph of Justice Farwell, as follows:
?That was a very delicate and well earned compliment to a very great judge but there it is. The implication of that is: ?If we had not come to the conclusion that this was an indemnity and not a guarantee we should have had to reverse the very Lord Pickford.?
Lord Warrington also said: ?If the contract of the father was a contract of guarantee it was a contract to guarantee a debt which was no contract at all?.
It is very interesting to observe that Lord Justice Lawrence, in a quite opposite decision, held that ?notwithstanding the fact that the company as principal debtor was not liable on an ultra-vires contract as it was not binding on the company?, the directors, as sureties, were held liable on the contract? relying on the decision given by Lord Kay by pointing out the Court of Appeal did not express any dissent on Lord Kay though overruled his decision.
In Stadium Finance Company Ltd. V. Helm a minor hired a motor car under hire purchase agreement from a finance company which was also signed by his mother.
The Court of Appeal held that she was surety for him, not an indemnifier, and therefore, when minor was not liable under the principal contract, she was also not liable under the guarantee.
However, the Court of Appeal in another case expressed doubts about the decision in Brown Lekey that ?a surety is not liable for void debts of a minor? and this issue appears not free from doubts.
By way analogy and in comparison with contracts with minors, coming to the contracts declared void under other legislation like The Insolvency Act, 1986, Lord Lightman was asked to settle ?the position of a surety when the main contract was rendered void under Sec. 127? of this Act.
Justice Lighrtman held that ?a term in the guarantee which declared that the surety?s liability will not be affected by any legal limitation, bar or restriction, disability or incapacity or want of borrowing powers of the principal debtor did not cover a situation where the principal obligation was validly incurred but subsequently retrospectively invalidated?.
His Lordship also emphatically held that ?the clearest language is required to impose on a guarantor liabilities of the principal debtor in case where statute had decreed the liability of the principal debtor shall be void.?
By way of analogy with reference to illegal transactions, in Heald V. O? Connor, the defendant some shares in a company from the plaintiffs with a loan given by the plaintiffs. This loan is secured by the issue of debentures creating a floating charge on the assets of the company and also endorsed with a personal guarantee of the defendants.
In an action on the guarantee, the defendant argued that ?since the main contract was illegal and unenforceable as it had involved the provision by the company of financial assistance in breach of Sec. 54 of The UK Companies Act. 1948, he was not liable.
Justice Fisher gave leave to defend on the basis that ?the guarantee was a contract to pay what principal money was due under the debenture and if the debenture was void then no money could be due under it, and so nothing would be due under the guarantee.?
Latest position in England:
In England, after the repeal of the The Infants Relief Act, 1874, Sec. 2 of the newly brought The Minors Contracts Act, 1987 (known as MC Act) declares that ?a guarantee given by a surety is not unenforceable only for the reason that the guarantee was given in a contract by a minor and it is unenforceable against the minor but there are, as far my research, no reported decisions on this point.
This section is as follows:
(a) a guarantee is given in respect of an obligation of a party to a contract made after the commencement of this Act, and
(b) the obligation is unenforceable against him (or he repudiates the contract) because he was a minor when the contract was made,
the guarantee shall not for that reason alone be unenforceable against the guarantor.
There was a suggestion in the Law Commission report in England that surety can have this right of recovery only where the minor could have been sued by the original creditor under the old common law rules applicable to the minors? contracts.
It is not clear whether the MC Act had repealed Justice Oliver?s ruling in Browne-Lekey case.
Australian and New Zealand Courts followed Justice Oliver.
Justice Puranik?s decision in Nagpur High Court cannot be an authority for the legal rule that ?a surety is liable notwithstanding that the principal debtor is not liable? since that decision turned mainly ?on the false representation made by surety about the age of the minor in inducing the creditor to enter into sale transaction? in fixing liability on the surety.
Generally it is the creditor who may practice fraud on the surety to induce him to give the guarantee but not surety but here in this case it is surety who does so.
That was the reason for Justice Puranik to come to his decision.
Under sec. 142 of The Act, the surety can avoid the contract ?when a creditor makes any misrepresentation, either by himself or with his knowledge or assent as to any material fact relating to the contract of guarantee? and ?the age of the principal debtor is naturally a material fact?.
Both in Yorskshire Railway Company and Wauthier rulings the Court of Appeal had not found it necessary to examine the correctness of the principle ?whether a surety is liable notwithstanding that principal debtor is not liable on the main contract with creditor was void? since the Court had reached the final decision not on the above principle.
It is also not clear whether the surety has a right to recover the amount paid to the creditor from the minor under the ?doctrine of subrogation? since it amounts to indirectly making the minor liable towards surety but not towards creditor which may appear to be legally and logically absurd under the given circumstances notwithstanding the provision in Sec.140 of The Act read with Sec.145 declaring that ?surety can recover all the money rightfully paid to the creditor but not wrongfully from the principal debtor?.
One line of opinion is that generally the surety who makes a payment under a mistake of fact or of law is entitled to rights of subrogation since he has made the payment in performance of a legal duty.
In Manju, the Division Bench did not allow the surety to invoke the right of subrogation, when he paid a time barred debt on which the principal is not legally liable and consequently surety is also not liable on the basis of co-extensive principle.
Is surety right in payment of an amount, which the principal debtor was not liable to pay as he was a minor is also a very debatable point.
It is interesting to note that in the later Edition of ?Chitty on Contracts? the decision given by Lord Oliver was incorporated as follows:
?The general nature of a contract of guarantee is sufficiently simple. It is a collateral engagement either by way of personal liability or a charge on property or by both to answer for the debt, default, or miscarriage of another as distinguished from an original and direct engagement for the party?s own act. It is therefore of the essence of this contract that there should be some one liable as principal.?
We have to wait for a decision from the Supreme Court.
In view of the unsettled position can we bring forward similar legislation as incorporated in The Minors Contracts Act, 1967 is a highly debatable and controversial point.