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Contracts II
Case Commentary
R. Lilavati
v.
Bank of Baroda








-Harshit Pande
2013/BA LLB/017


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Contents
Facts of the case ......................................................................................................................... 3
Issues framed by the court ......................................................................................................... 4
Issues overlooked by the court ................................................................................................... 5
Decision of the court .................................................................................................................. 6
Reasons for the decision ............................................................................................................ 7
Analysis of the decision of the court.......................................................................................... 9
Whether the case was a departure from earlier precedents ...................................................... 10




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Facts of the case
R Lilavati filed a revision petition with the High Court of Karnataka against the decision of
the I Additional Small Causes Judge, Bangalore City. The facts of the case presented in the
Court of Additional Small Causes Judge are such that the Bank of Baroda (hereinafter
referred to as the plaintiff) granted credit facility to defendants 1, 2 and 3 in the name of their
firm (defendant 1). The following transactions took place-
1. Loan of Rs. 12000.
2. Cash credit to the limit of Rs. 25000.
A suit was filed by the plaintiff for Rs. 8644-08 after certain specific amount paid by the
defendants was deducted.
Defendant 4 was the surety for both the loans, and as per condition 4 of the surety bond, the
surety waived her rights under Sections 133, 134, 135, 139, and 141 of the Indian Contract
Act. Further, in paragraph 4 of the surety bond, the surety delegated (for all the purposes of
this claim) the power to the Principal debtor to give consent on her behalf. Any consent so
given by the Principal would have been deemed to have been given by the surety and shall
bind the surety in all respects as if the same had been expressly given by the surety in writing.
Defendant 4 contested the case in the High Court of Karnataka. Listed below are R Lilawatis
contentions-
1. That since the plaintiff allowed the hypothecated properties to be lost, her liability as
a surety stood discharged. [To be noted that there was nothing to show that the
plaintiff had a role in the loss of the hypothecated properties.]
2. That the acknowledgement given by defendants 1-3 to keep their debts alive did not
bind her as she had not signed it.
The trial court negatived all the contentions of defendant 4 and decreed the suit, against
which the revision petition has been filed.



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Issues framed by the court

There were two major issues framed by the court in the case-
Issue 1: Whether failure of creditor to realize debt from hypothecated security would
discharge surety?
1. Sub-issue 1: Whether or not the parties could absolve themselves from the operation
of section 141 of the Indian Contract Act?
2. Sub-issue 2: Whether or not the surety stood discharged of her liabilities?
Issue 2: Whether acknowledgement of liability given by Principal would be binding on
surety, as to save limitation even as against surety?



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Issues overlooked by the court
1. Whether waiving the rights and liabilities arising out of the Indian Contract Act is a
complete extinguishment of or a blanket on such rights and liabilities?
The court did not rule on whether such a waiver is a blanket on the rights and liabilities
arising out of the Indian Contract Act or under what exceptional circumstances can
statutory provisions claim superiority over a general agreement between persons.


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Decision of the court
Issue 1: Whether failure of creditor to realize debt from hypothecated security would
discharge surety?
Considering the fact that the surety herself is a party to the bond, it was held that the surety
was not to be discharged from her liability on failure of the creditor to realize debt from the
hypothecated security. The surety bond, in not unclear terms, disentitled the surety from any
of the rights conferred on sureties by Sections 133, 134, 135, 139 and 141 of the Contract
Act. The liability of a surety is co-extensive with that of the principal debtor.
1
The parties
have got a right to contract out of rights and liabilities mentioned in the contract act. It was
held that since the surety had waived her right under section 141 of the Indian Contract Act,
she was bound by the clause under which she waived her right and could not contend that the
clause was invalid and unenforceable. Disregarding the fact that the hypothecated property
was lost (due to no seeming fault of the plaintiff bank) though property might have been lost,
still she is liable in law in view of said contract entered into between her and plaintiff-bank.
That the liability of the surety did not stand discharged. That the parties can contract out of
the rights and liabilities laid down in S. 141 of the Contract Act.
Issue 2: Whether acknowledgement of liability given by Principal would be binding on
surety, as to save limitation even as against surety?
Since the surety had specifically empowered the principal to give consent on behalf of the
surety, in respect of all the matters concerning the debt, the acknowledgement of liability
given by the principal was binding on the surety. The court held that though she might not
have been personally a party to the acknowledgement of debt, she on account of constituting
defendants 1 to 3 as her agents, was to be bound in law by the acknowledgment given by
defendants 1 to 3. Her contention that since she was not a signee to the acknowledgement, it
will not be binding on her, was rejected by the court based on her delegation of the authority
to the principals to act on her behalf. Further surety bond maintained that the guarantee was a
continuing guarantee. Hence, the question of limitation against surety does not arise.



1
Section 128, Indian Contract Act


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Reasons for the decision
The court decided that since the surety absolved herself of the rights of suretyship provided in
the Indian Contract Act under the surety bond, it is not open to her now to contend that the
said clause is either bad at law or is not enforceable. Reliance here was placed upon a
division bench judgement of the Karnataka High Court, Karnataka Bank Ltd. v. Gajanan
Shankararao Kulkarni
2
, where it was held "The sureties could not appeal to the provisions of
S. 141 which in the facts and circumstances of the case was not attracted. A mere passive
inactivity or passive negligence on the part of the creditor by failing to realise the debt from
the collateral security is not sufficient in itself, to discharge the surety, for the reason that the
surety can himself avoid consequences of such passivity by himself paying the debt and
becoming subrogated to the rights of the creditor. In the absence of a contract to the contrary,
the creditor is under no obligation of active diligence for the protection of the surety, so long
as the surety himself remains inactive. Thus tested, the inaction on the part of the creditor-
Bank would not, of itself, mitigate sureties liability." It was held that the surety could have
assured her security by paying the amount due to the creditor and consequently subrogating
the rights of a creditor.
3
It is not the creditors duty to actively take care of the suretys
interest and passivity on the part of the surety must be paid for by the surety and not by the
creditor. Also, the evidence did not disclose that the creditor had any role in loss of the
property.
The court acceded that the Contract Act has created rights and liabilities. But, it also held
that the parties have a right to contract out of the rights and liabilities mentioned in the
contract, i.e. the parties can waive their rights and liabilities arising out of the Contract Act in
favour of a different set of rights and liabilities as mutually agreed upon. In this case,
alternative rights and liabilities have been created by the surety bond. The court held that
s128 of the Contract Act, which makes the liability of the surety coextensive with the liability
of the principal debtor, gives the parties the right to contract out of the rights and liabilities.
Therefore, merely because we do not find words notwithstanding anything contained to the
contrary etc., in S. 141, it does not follow that the parties cannot contract out of the rights and
liabilities laid down in S. 141 of the Contract Act. In this case defendant 4 has agreed that she
will not claim the benefit given to her under S. 141 of the Contract Act. She herself is a party,

2
Karnataka High Court, Karnataka Bank Ltd. v. Gajanan Shankararao Kulkarni, AIR 1977 Kant 14
3
Section 140, ICA


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to that surety bond. Therefore it is not open to her now to contend that the said clause is either
bad at law or is not enforceable.
Furthermore, in the surety bond, the surety undertook that for the purpose of the claim the
Principal is empowered to give consent on her behalf and any consent given by the Principal
shall be deemed to have been given by her and shall bind her in all respects as if the same had
been expressly given by her in writing. This automatically means that the surety designated
the principal as her agent and will be liable for any act of the agent with regard to the claim.
That the principal decided to keep the debt alive without the knowledge of the surety is of no
consequence when it comes to the suretys consent to the same, because the surety had
authorized the principal to act on her behalf. The surety bond held that the surety will be
deemed to have consented to the act of the principal with respect to the claim.



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Analysis of the decision of the court
The courts decision was in consonance with the decision of the precedents (Karnataka Bank,
Dorothy v William). The surety bond waived the rights arising out of the sections 133, 134,
135, 139, and 141. The precedence of mutual agreement over statutory provisions signifies
the flexibility of the contract law to suit the changing needs of business and commerce. The
agency constituted as a result of the surety bond further signifies the importance of mutual
agreement.
The law gives freedom to the individual to contract and be bound by such terms and
conditions as may be conducive for a commercial transaction to take place. It is for this
reason that statutory rights may be waived in favour of rights more suitable to the particular
business. The law protects both the surety and the creditor. By giving surety the right to
reduce the amount payable on loss of a collateral security, the suretys interests are protected,
given the condition that the creditor was negligent with the hypothecated property. Also, the
law seeks to be benevolent to the creditor in a way that if a hypothecated property is lost due
to no fault of the creditor, the surety be held liable for his passivity, because the surety had an
option to pay the amount due and subrogate the rights of a creditor. The law, hence, tends to
not unduly disadvantage any one party by giving both parties the option to exercise diligence
in order to protect their own interests.
The question of limitation does not arise in a continuing guarantee, and in this case, since the
debt was kept alive with the consent of the surety, the surety could not be discharged from
her liabilities. The paragraph 4 of surety bond was clear enough to make the principal debtor
an agent of the surety, and since the agent was a signee of the instrument to keep the debt
alive, so was the surety by virtue of the agency.
Any contrary decision would have led to the negation of the spirit of contract law, which
essentially bases itself on the relationship between people rather than strict statutory
provisions. The rights and liabilities that arise out of such mutual agreements are flexible and
suit the needs of a business better than the rights and liabilities arising out of the Indian
Contract Act.




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Whether the case was a departure from earlier precedents

The case relied on four precedents only, namely-
Karnataka Bank Limited v Gajanan Shankararao Kulkarni and Another- The High
Court of Karnataka relied heavily on a previous decision of a division bench of the same
court The Karnataka Bank Ltd. v Gajanan Shankararao Kulkarni and Anr.
4
By virtue of being
a decision of the division bench, this case was binding on the Lilavati case. The essence of
the judgement has been taken from American Jurisprudence Vol. 50 page 978, paragraph
114- While the authorities appear to be in entire agreement on the proposition that a surety is
discharged, at least to the extent of the value of the security lost, where the creditor, without
the surety's consent, affirmatively releases collateral security, there seems to be some
difference opinion where a loss is claimed to have occurred through the inactivity of the
creditor. The general rule, however, is that in the absence of an express agreement to use
diligence, or a special request to act, or such peculiar circumstances as to render prompt
action of the creditor an absolute duty, mere inaction or passive negligence on the part of the
creditor in failing to take steps to secure the collection of his debt from collateral security
given to him by the principal debtor is not sufficient of itself to discharge or release a surety
from his obligation to pay the debt. The reason for this rule is that a surety is amply protected
against the inaction or passive neglect of the creditor by virtue of the fact that if he desires to
expedite payment, he may himself pay the debt, acquire all the securities held by the creditor,
and become subrogated to all the rights of the creditor. Considering that the Lilavati case
held very identical principles, the case was not a departure from the Karnataka Bank case. If
the surety wanted to protect herself, she could have paid the amount due to the creditor and
acquired the rights of the creditor.
5

Mahendrakumar Chandulal v Central Bank of I ndia
6
was a Gujarat High Court case used
by the counsel for R Lilavati. In the case, s151 of the Contract Act was interpreted and it was
stated that the bailee cannot contract out of the minimum liability imposed under the said
section. The rationale behind using this judgement was to analogously prove that the rights
and liabilities under s141 too cannot be waived even when there was an agreement to the
contrary. The Karnataka High Court, though, did not accept this rationale stating that the

4
The Karnataka Bank Ltd. v Gajanan Shankararao Kulkarni and Anr., AIR 1977 Kant 14
5
Section 140, Indian Contract Act.
6
Mahendrakumar Chandulal v Central Bank of India, 1984 AIR(NOC) 113


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liabilities and rights created under Chapter VIII (of which s 141 is a constituent) are entirely
different from the rights and liabilities in Chapter IX of the Contract Act and that there is
nothing in Chapter IX to indicate that the parties could contract out of the legal rights and
liabilities. This case was not relied on, because the concerned section was a part of chapter
VIII and the defendant 4 had herself, by signing the surety bond, waived her rights under the
same section.
Dorothy Valentine Burnard v William Douglas Lysnar
7
was a Privy Council case regarding
the principal debtor becoming an agent of the surety. As the case mentions, Further, an
arrangement made on behalf of surety by an agent in that behalf previously authorized or
whose purported authority was afterwards ratified was as binding upon surety as if in first
instance arrangement had been made by himself and none less because surety's representative
in arrangement with creditor was, as here, principal debtor himself. The ratio decidendi of
the case was "An arrangement made on behalf of surety by an agent in that behalf previously
authorized or whose purported authority is afterwards ratified is as binding upon surety as if
in first instance arrangement." This judgement of the Privy Council was relied on.
Margaret Lalita Samuel v I ndo Commercial Bank Limite
8
that the question of limitation
does not apply in a continuing guarantee agreement was held in this case. The Karnataka
High Court said that since the surety bond is one of a continuing guarantee, the question of
limitation will not arise.
The case, all in all, was not a significant departure from the precedents. Since no such
unsettled question in law arose, the principles laid down in the precedents were followed. The
case did not deviate from the decision of the same high courts division bench judgement, and
had a substantial question in law arisen, the case would have been heard by a larger bench of
the same high court.

7
Dorothy Valentine Burnard v William Douglas Lysnar, 1929 AIR (PC) 273
8
Margaret Lalita Samuel v Indo Commercial Bank Limited, AIR 1979 SC 102