CONTRACTS II 

Rights of finder of goods

Assignment submitted to the School Of Excellence in law in partial

fulfillment of the requirement for the degree of B.C.A.L.L.B(HONS.)

By

KARTHIKEYAN.G

HD18064

SHOOL OF EXCELLENCE IN LAW(SOEL)

THE TAMIL NADU DR.AMBEDKAR LAW UNIVERSITY

CHENNAI

MARCH-2019

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DECLARATION
I hereby declare that assignment entitled “Rights
of the finder of the goods” submitted by me for the partial
fulfillment of the internal process of the Semester exam ,is a
bonafide work done by me and to assure the same will not
be submitted for any other process of the Semester
examination.

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Index 

Sno  Topic  Pg no 

     

     

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TABLE OF CASES 

ELLESMERE BREWERY CO VS COOPER

ELLIS VS IMMANUEL

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KASHIBA VS SRIPAT

KELLAPAN NAMBIAR VS KUNCHIAMAN

ROUSE VS BRADFORD BANKING

STATE BANK OF INDIA VS INDEX PORT REGISTERED

STATE BANK OF INDIA VS SAKSARIA MILLS

STATE OF BIHAR VS SAKSARIA MILLS

 
 
 
 
 
Introduction:

A contract by which one party promises to save the other

from loss caused to him by the conduct of the promisor

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himself or by the conduct of any other person is called a

contract of indemnity. Suppose A contracts to indemnify B

against the consequences of any proceedings which C may

take against B in respect of a certain sum of Rs. 300/-. This is

contract of indemnity. It may be illustrated thus: Suppose A

enters B’s shop and says “If you will supply the goods to C, I

will see you paid.” Here A is giving a contract of indemnity to

B. A is the indemnifier and B is the indemnified.

A contract of guarantee is a contract to perform the promise

or discharge the liability of a third person in case of his

default. The person who gives the guarantee is called the

surety. The person in respect of whose default the guarantee

is given is called the principal debtor and the person to whom

the guarantee is given is called the creditor.

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A and B go to a shop. A says to the shop keeper “Let B have

the goods. I will see you paid”. The contract is one of

indemnity. If he says “If B does not pay you, I will pay you”. It
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is called guarantee.

Surety’s liability: 

Co-extensive​: According to sec 128 , the liability of the

surety is co-extensive with that of the principal debtor unless

it is otherwise provided by the contract. A guarantees to B

the payment of a bill of exchange by C, the acceptor. The bill

is dishonoured by C. A is liable not only for the amount of the

bill, but also the interest and charges that may be due on the

bill.

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AVATAR SINGH 3​rd​ EDITION

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The liability generally depends on the terms of the surety

contract.

A surety bond may create a personal liability as well as a

charge on the property as further security. Sometimes it may

only create a charge on the surety’s property without any

personal liability. The guarantee may be for a whole debt on

for a part of it. In the latter case, it may be for the whole debt

with a limit on his liability or for a limited amount of a

floating debt which may become due from time to time

between the creditor and the debtor.

If it is the former, the surety will not get the rights of

contribution and subrogation till he pays the whole amount

within his limit. In case of the latter, he gets the rights

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proportionately.

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 3
In ​Ellis vs. Immanuel , ​it was held that where there is a

floating balance and the guarantee is only of a portion

thereof, such a contract must be construed prima facie as

applicable to a part of the debt only.

In the words of ​Pollock and Mulla​, the creditor is not

bound to exhaust his remedy against the principal before

suing the surety and a suit may be maintained against the

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surety though the principal has not been sued .

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Chitty on contracts also gives the same opinion about the

surety’s liability.

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In ​State of Bihar vs. ​Damodar Prasad , the

Supreme Court held that the liability of the surety is not

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1876,1 ex.157
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Indian Contract Act 10​th​ ed 728
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24​th​ ed vol 2 p 1031
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AIR 1969 SC 297

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deferred until remedies against the principal debtors are

exhausted. However in the case of execution of a composite

decree against the principal guarantor and the mortgaged

property, the Supreme Court held that the creditor’s bank

should proceed against the mortgaged property: ​Union

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Bank Vs. Manku Narayana​.

The scope of liability of the surety under sec 128 was

discussed again by the Supreme Court in ​State Bank Of

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India Vs. Index Port Registered , which overruled

the decision in ​Union ​Bank Vs. Manku Narayana​. The

bank was held to be entitled to proceed in execution against

the guarantor without first being required to proceed against

the mortgaged property. If on principle, the guarantor can be

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AIR 1987 SC 1078
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AIR 1992 SC 1740

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sued even without suing the Principal debtor, there is no

reason even if the decretal amount is covered by the

mortgaged decree, to force the decree holder to proceed

against the guarantor. The liability of the surety is

coextensive with that of the principal debtor: ​State Bank

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Of India Vs. Saksaria Mills .

A favoured debtor:

A surety is a favoured debtor and can very well insist on a

rigorous adherence to the terms of the suretyship contract.

In the oft quoted words of Lord Selborne, “A surety is

undoubtedly and not unjustly an object of some favour both

at law and in equity. He is a person who is guaranteeing the

due discharge or performance of an obligation outstanding

against a third person. Therefore his position is taken into

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AIR 1986 SC 868

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account by law and equity and a surety bond is always strictly

construed in favour of surety. The surety shall be made liable

only to the extent precisely described by the terms of the

bond and shall never be called upon to perform any contract

other than that which he himself guaranteed. Any condition

precedent to the liability may be fulfilled before the surety

can be made liable. If he agrees to be only one of the several

co-sureties, he will not be under any liability unless the other

also execute the suretyship. So also if several persons have

agreed to become co-sureties for definite amounts and the

creditor allows the amounts to be altered by one guarantor

without the consent of the others. The contract will not be

binding.

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 10
In ​Ellesmere Brewery Co. vs. Cooper , a firm of

brewers employed C and required him to execute a bond

with sureties for faithful discharge of his duties. The bond

was drawn up with 4 sureties, N and E being liable to the

extent of £ 50 each, P and B to the extent of £ 25 each. P, B

and E all signed. But N who was the last to sign, added £ 25

only. The brewers accepted the bonds so signed. It was held

that all the guarantors were discharged for their liability and

that none of the guarantors were liable on the bond.

Moreover if the terms of the suretyship contract is varied

without the consent of the surety, the surety will be

exonerated from the liability.

Contingent:

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1896 1 QB 75

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The surety’s liability arises only on the default of the principal

debtor. Hence it is often said that a surety’s liability is

secondary, accessory, collateral and contingent. This doesn’t

mean the surety can insist that the creditor shall exhaust his

remedies against the principal debtor before resorting to the

surety unless there is a specific contract to that effect.

Not uberrimaefidei:

A suretyship is not a contract uberrimafidei, i.e one requiring

utmost good faith necessitating a full disclosure of all

material facts by the principal debtor or the creditor to the

surety before the contract is entered into. When guarantee is

given to a bank, there is no obligation on the bank to inform

the intending surety of matters affecting the credit of the

debtor or of any circumstances connected with the

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transaction but if it is in the nature of any insurance as in a

fidelity guarantee, all material particulars must be disclosed.

When original contract is void or voidable:

Sec 128 declares that the liability of the surety is coextensive

with that of the principal debtor. But it only deals with the
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quantum of the obligation. In ​Kashiba vs. Sripat , it

was held that it cannot be said that a surety can never be

made liable when the principal debtor cannot be held liable.

Therefore a surety is not discharged of his liability simply

because the contract between the principal debtor and

creditor was voidable at the option of the former and was so

avoided by him.

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1894 19 BOM 697

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But in ​kelappan Nambiyar vs. Kunhiaman ​the

Madras High Court held that major surety guaranteeing the

liability of a minor contractor cannot be sued by the creditor

as the minor’s agreement is void. There, a minor bid at a

curie conducted by the plaintiff and received the prize

amount giving the second defendant a surety. As the liability

of the minor was void, the question was whether the surety

could be made liable.

The general principle is stated in Chitty of Contracts thus: “A

contract of guarantee is collateral engagement either by way

of personal liability of by 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

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1956 2 MLJ 544

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party’s own act. It is therefore of the essence of the contract

that there shall be someone liable as a principal.”

According to English law, a company director guaranteeing

an agreement which is ultavires the company will be

personally liable. When the debtors discharged or reduced by

subsequent law, the surety’s liability would also be

discharged or reduced: ​Subramaniam vs.

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Narayanswamy.

Joint debtors and suretyship​: When one of two

joint debtors is in fact a surety for the other and this fact is

known to the creditor, the liability to the third person is not

affected thereby. Thus where 2 persons sign a joint

promissory note in favour of a bank for an advance made to

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AIR 1951 MAD 48 FB

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one of them but as between themselves, one of them is only

a surety for the other, the party is not concerned with the

second contract unless he was himself a party thereto. The

creditor can sue for realizing the amount. But when the third

party is aware of the position, he must not do anything to

prejudice the rights which the surety is entitled under law.

According to English law, in the given circumstances, the

person in the position of surety is entitled to all the rights of

the surety as against the creditor. In ​Rouse vs.

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Bradford Banking , ​the House of Lords held that a

creditor who gets notice of the fact of suretyship as between

persons who are so far as he is concerned, joint promisors is

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1894 AC 586

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under an obligation not to deal with the principal debtor to
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the prejudice of the surety.

DISCHARGE OF SURETY 

▪ By notice of revocation

▪ By death of surety

▪ By novation

▪ By variance in terms of contract

▪ By release or discharge of principal debtor

▪ By arrangement between principal debtor and creditor

▪ By impairing surety’s remedy

▪ By loss of security, and

▪ By invalidation of the contract

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KRISHNAN NAIR FIFTH EDITION

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1. Notice of revocation 

Ordinarily a guarantee cannot be revoked if the liability has

already been accrued. But Section 130 provides for

revocation of continuing guarantee. For example, if A has

stood surety for a Rs 5,00,000 home loan of B from a bank,

and the money has been disbursed, A cannot revoke the

guarantee, as the liability has accrued. Accordingly, where a

guarantee is a continuing one and extends to a series of

transactions, the surety as to future transactions may revoke

it, by giving notice to the creditor. However, the surety shall

remain liable for the acts already acted upon, i.e., prior to the

notice of revocation.

2. Death of Surety 

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In case of a continuing guarantee, the death of the surety, in

the absence of any contract to the contrary, discharges him

from liability as regards future transactions (i.e., transactions

after his death). In other words, the surety’s survivors or legal

representatives would not be liable unless expressly

mentioned in the contract.

3. Novation 

Novation, i.e., entering into a fresh contract, either between

the same parties or between other parties, constitutes

another mode of discharging a surety from the liability. If the

parties to a contract (of guarantee) agree to substitute it with

a new contract, the original contract need not be performed

and so the surety stands discharged with regard to the old

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contract. For the surety, too, a fresh contract would have to

be drafted.

4. Variance in terms of contract 

Any variance or alteration in the terms of the contract made

between the principal debtor and the creditor, without the

surety’s consent, discharges the surety as to the transactions

taking place subsequent to the variance.

The following are some of the examples in this regard.

Example 1

A becomes surety to C for payment of rent by B under a

lease. Afterwards B and C contract to hike the rent, without

informing A. A would hence, be discharged from his liability

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as a surety for accruing subsequent to the variance in terms

of the contract without his consent.

Example 2

C contracts to lend B Rs 5,000 on March 1. A guarantees

repayment. C pays Rs 5,000 to B on January 1, A is discharged

from his liability, as the contract has been varied for early

release of loan by the creditor.

5.  Release  or  discharge  of 

principal debtor 

The surety is discharged by any contract between the

creditor and the principal debtor, by which the principal

debtor is released, or by any act or omission of the creditor,

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the legal consequence of which is the discharge of the

principal debtor. The following example explains the point.

Example: A contracts with B to build a house for B for a fixed

price within a stipulated time, B supplying the necessary

timber. C guarantees A’s performance of the contract. B fails

to supply the timber. C is thus discharged from his surety.

6.  Arrangement  between 

principal debtor and creditor 

Where the creditor, without the consent of the surety arrives

at a settlement with the principal debtor, or promises to give

him more time, or promises not to sue him by a contract

between the creditor and the principal debtor, the surety is

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absolved from the liability, unless the surety assents to such

contract.

Where, however, a contract to give time to the principal

debtor is made by the creditor with a third person, and not

with the principal debtor, the surety is not discharged. For

instance, C, the holder of an overdue bill of exchange drawn

by A as surety for B, and accepted by B, contracts with M to

give time to B. A is not discharged.

7. Impairing surety’s remedy 

If the creditor commits any act, which is inconsistent with the

rights of the surety, or fails to perform any act that his duty

to the surety requires him to do, such that the eventual

remedy of the surety himself against the principal debtor is

impaired; the surety is discharged.

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The following are some of the illustrations in this regard.

Example 1

B contracts to build a ship for C for a given sum, to be paid in

installments as the work reaches certain stages. A becomes

surety to C for B’s due performance of the contract. C,

without the knowledge of A, prepays the last two

installments to B. A is discharged by the prepayment.

Example 2

C lends money to B on the security of a joint and several

promissory note made in C’s favour by B, and by A as surety

for B, together with a bill of sale of B’s furniture, which gives

power to C to sell the furniture. Owing to his (C’s) misconduct

and wilful negligence, only a small price is realized. A is

discharged from liability on the note.

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Example 3

A puts N as an apprentice to B, and gives a guarantee to B for

N’s fidelity. B, on his part, promises that he will, at least once

a month, see N deposit the cash collected by him on B’s

behalf. B, however, fails to check up the books as promised,

and M embezzles. A is not liable to B on his guarantee.

8. Loss of security 

If the creditor loses, or without the consent of the surety,

parts with such security, the surety is discharged to the

extent of the value of the security. It is immaterial whether

the surety was or is aware of such security or not. For

instance, C advances to B, his tenant, Rs 2,000 on the

guarantee of A. C has also a further security for Rs 2,000 by a

mortgage of B’s furniture. C, however cancels the mortgage.

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B becomes insolvent and C sues A on his guarantee. A is

discharged from liability to the amount of the value of the

furniture.

9. Invalidation of the contract 

A surety is also discharged upon invalidation of the contract

(i.e., between the creditor and the surety). A contract of

guarantee is invalid in the following circumstances.

Guarantee obtained by misrepresentation​: Any guarantee,

which has been obtained by means of misrepresentation

made by the creditor, or with his knowledge or assent,

concerning a material part of the transaction is invalid.

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Guarantee obtained by concealment​: Any guarantee, which

the creditor has obtained by means of keeping silence as to

the material circumstances, is invalid.

Default on Part of co-surety​: Where a person gives a

guarantee upon a contract that the creditor shall not act

upon it until another person has joined in it as co-surety, the

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guarantee is not valid if that other person does not join

Rights of Surety  

Rights of Surety can be classified into three groups, as

follows;

1. Rights against Principal debtor.

2. Rights against Creditor.

 
3. Rights against Co-Sureties.

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RK BANGIA 7​TH​ EDITION

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Rights against Principal Debtor 

● ​ hen ever creditor comes to

Right to give Notice: W

surety, for the purpose of seeking payment, surety can

give a notice to principal debtor to settle the debt.

● Rights of Sub-rogation: ​Sub rogation is a process

where rights will get shifted from one person to the

other. If surety makes payment to creditor, surety gets

all rights of creditor by sub-rogation and from then

onwards surety can behave like a creditor.

● Right of Indemnity: ​Principal of indemnity operates

between principal debtor and surety where principal

debtor becomes implied indemnifier and surety

becomes implied indemnity holder. Therefore, surety

can make principal debtor answerable for all sufferings.

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 ● Right to get Securities: ​In case where surety makes

payment to creditor, surety has right to get the

securities given by principal debtor to creditor.

● Right to ask for Relief: From the date of guarantee,

besides creditor, surety also can bring pressure on

principal debtor in connection with settlement of debt.

Rights against Creditor 

● Right to get Securities: If Surety makes payment to

creditor, surety can get all securities into his possession

from creditor.

● Right to ask for Set-off: ​Surety can give advice to

creditor to sell away the security and to utilize the

amount thus realized for set off.

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● Rights of Sub-rogation: ​When ever surety makes

payment to creditor, creditor foregoes or looses all of

his rights in his capacity as creditor and those rights will

be attained by surety.

● Right to advice to Sue Principal Debtor: ​Surety

has right to give advice to creditor to proceed legally

against principal debtor for the purpose of recovering

the amount.

● Right to insist on Termination of Services: ​In

case where guarantee is with regard to conduct of an

employee, surety can insist on termination of services of

employee. Here employees status is equal to that of

creditor and employee’s status is equal to that of

principal debtor.

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Rights against Co-Sureties 

● Right to ask for Contribution​: Surety can ask his

co-sureties to contribute the amount when principal

debtor comes across default. If they have given

guarantee for equal amounts, they have to contribute

equally. In case where guarantee is given for in equal

amounts, the mode of contribution differs from England

law to Indian law. As per England law contribution is to

be made in the ratio of guarantee amounts. But as per

Indian law the deficit amount is to be distributed to all

sureties equally and every surety will contribute share of

deficit or guarantee amount which ever is less.

● Right to claim Share in Securities​: When

co-Sureties make payment to creditor, they get

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 securities from creditors procession. Then every surety
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can claim his share in those securities.

CONCLUSION 

There are liabilities to the SURETY,at the sametime it can be

discharged.there are various rights available to him aswell

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RK BANGIA 7​TH​ EDITION

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