Thursday, 21 November 2013
Section 172 in The Indian Contract Act, 1872
172. " Pledge"" pawnor", and" pawnee" defined.- The bailment of goods as security for payment of a debt or performance of a promise is called" pledge". The bailor is in this case called the" pawnor". The bailee is called the" pawnee".
As observed by the learned Author Mulla in the Transfer of Property Act, the Transfer of Property Act refers to mortgages of immovable property and the Indian ContractAct refers to pledges of moveable property but neither Act deals with mortgages of moveable property. Section 172 of the Indian Contract Act defines 'pledge' as follows :
impliedly authorised to sell the goods pledged in case of default in accordance with the provisions of the Contract Act. In case of mortgage however, a general but limited property is transferred to the creditor but the possession may or may not be transferred to the mortgagee. Where money is advanced by way of loan upon the security of goods the transaction may take the form of a mortgage or a pledge.
Andhra High Court
Shatzadi Begum Saheba And Ors. vs Girdharilal Sanghi And Ors.
Bench: M Reddy, J Reddy
Madhava Reddy, J.
1. This appeal by defendants 1 to 11 is directed against the judgment and decree in O.S. No. 53 of 1970 on the file of the Chief Judge, City Civil Court, Hyderabad. The plaintiffs, respondents 1 and 2 herein filed a suit for the recovery of a sum of Rupees 57,751-90 together with interest pendente lite until realization and costs against the estate of late Sri A.K. Babu Khan in the hands of defendants 1 to 11.
2. It is the case of the plaintiffs that late Sri A.K. Babu Khan pledged 2650 shares of the Hyderabad Construction Company Limited, Hyderabad through one Kapurachand Shrimal, Share and Stock Broker with Smt. Najeebunisa Begum to whom Sri Babu Khan had to pay Rs. 54,000. Sri A.K. Babu khan requested the plaintiffs 1 and 2 and one Sri Hargovind Bajjaj (who will be hereinafter referred to as the 'plaintiffs') who not being available to join the plaintiffs in filing the suit, has been impleaded as the 12th defendant, to redeem the said shares from Smt. Najeebunnisa Begum by paying Rs. 54,000 and to keep the said shares as pledge against the loan thus advanced to Sri A.K. Babu Khan. Accordingly, the plaintiffs paid Rs. 54,000 to Smt. Najeebunnisa Begum and redeemed the shares Sri A.K. Babu Khan, executed an agreement of pledge on 6th July, 1965 marked Ex. A-1 in the suit. Incorporating the terms agreed upon between the parties, Sri A.K. Babu Khan executed a document on 6-7-1965 the salient terms of the said agreement are :
(i) that the shares shall be lodged by the plaintiffs for transfer in their names :
(ii) that Sri A.K. Babu Khan would redeem the shares at any time within two years on payment of the said amount without interest together with the amount of transfer fee ;
(iii) that if the amount is not paid within two years, interest at 9% shall be charged for a period of one year;
(iv) that if the amount is not paid, the plaintiffs shall be entitled to dispose of the said shares at the risk and responsibility of Sri A.K. Babu Khan after intimating him.
Accordingly the plaintiffs redeemed the shares by paying Rs. 54,000 to Smt. Najeebunnisa Begum and got the shares transferred to their name. In spite of several demands, Sri A.K. Babu Khan and after his death, his legal heirs, defendants 1 to 11 herein failed to pay the amount due and redeem the pledged shares. When no reply was given to the lawyer's notice dated 14th August, 1969 the plaintiffs issued a further notice intimating the defendants that unless the shares are redeemed by payment of the amount due inclusive of interest, the shares would be sold at public auction on 10-4-1970 at the office of Sri B.C. Jain advocate and that the short fall, if any, would be recovered from them. A notice to that effect was published in the papers and hand-bills were also distributed intimating the share-brokers and intending purchasers about the proposed sale. But the defendants failed to pay the amount and redeem the shares. The shares were, therefore, sold at a public auction on 10-4-1970. After deducting the amount of Rs. 9,613-00 realised by the sale of the said 2650 shares, the principal amount and the interest due thereon at 9 per cent per annum from 6-7-1967 to 10-4-70 which comes to Rs. 67,751-00 is sought to be recovered from the estate of Sri A.K. Babu Khan in the hands of the defendants.
3. The defendants denied the plaint allegations for want of knowledge. They however, admit that Sri A.K. Babu Khan executed the agreement dated 6th July, 1965. But they contended that the interpretation sought to be placed by the plaintiffs on the agreement is not correct. According to them, the transaction was not one of pledge but one of out and out sale with an option of repurchase being vested in Sri A.K. Babu Khan. They also pleaded that on the date of the agreement Sri A.K. Babu Khan was not the owner of the said shares and could not have created a valid pledge. A plea that the suit was barred by limitation was also raised. In the result, they prayed for the dismissal of the suit.
4. The learned Chief Judge held that the suit transaction cannot by any stretch of imagination be described as a pledge but that the transaction under Ex. A-1 is one of sale. But at the same time he was of the view that this finding does not deprive the plaintiffs of their right to sue on the original debt on the principle of money had and received. He also held that the estate of late Sri A.K. Babu Khan was liable to discharge the amount of Rs. 54,000 borrowed by late Sri A.K. Babu Khan through P.W. 2 for the purpose of redeeming the shares from Smt. Najeebunnisa Begum he further held that the cause of action arose at the end of two years period given under Ex. As-1 to Sri A.K. Babu Khan for repayment of the amount and that the suit was not barred by limitation. As regards the plaintiffs' claim of interest while declaring that they were not entitled to interest till 10-4-1970, it allowed interest of Rupees 4,860-00, it allowed interest on Rupees 49,446-90 at 6 per cent.
5. In this appeal, the learned counsel for the defendants appellants strenuously contends that the defendants appellants must succeed upon the finding of the court below that the transaction was not one of pledge but one of sale. The question of money had and received cannot arise when the transaction is one of sale. According to him in any event as the transaction covered by Ex. A-1 is not one of pledge, this suit must fail. He also contends that inasmuch as it is filed beyond three years of Ex. A-1 agreement the suit was barred by limitation.
6. The agreement between the parties is reduced to writing on 6-7-1965. The nature of the transaction must depend upon the interpretation of the terms of the said agreement and only if the terms are not clear or are susceptible of more than one interpretation, the conduct of the parties and the surrounding circumstances may help to ascertain the real intention of the parties.
7. The suit transaction relates to 2650 shares of Hyderabad Construction Company Limited. As can be gathered from that document, on the date of the agreement, three shares belonging to Sri A.K. Babu Khan were pledged by Sri Kapurachand Srimal with Smt. Najeebunnisa Begum for Rs. 54,000. All but 100 shares were fully paid up and they were standing in the name of different persons. 1900 shares were in the name of State Bank of Hyderabad, 250 in the name of Mrs. Lala Bee Saheba, 300 in the name of H.M.Surati and 100 in the name of Indira Vadan H. Surati. The plaintiffs were to obtain release of all these shares by paying Rs. 54,000 to Najeebunnisa Begum Saheba. They were also to lodge these shares for transfer in their names immediately. Sir A.K. Babu Khan was given the right to pay the amount including the transfer fee and take delivery of all these shares within a period of two years from that date. A further period of one year thereafter was also given to Sri A.K. Babu Khan, to take back these shares from the plaintiffs by paying the entire amount with 9 per cent interest. If the amounts were not paid even within the above stipulated period, the plaintiffs were given the right to dispose of the shares in open market at the risk and responsibility of Sri A.K. Babu Khan. They were however, required to give him prior intimation. The plaintiffs were also given full voting rights in the company on the said shares. As and when a part payment was made by Sri A.K. Babu Khan, the shares were to be delivered to him in proportion to such payment. Sri A.K. Babu Khan and the plaintiffs signed the agreement. This document is attested by two sons of Sri A.K. Babu Khan one of whom is the fifth defendant. The execution of this agreement is not in dispute. It is also not disputed that thereafter the plaintiffs paid Rs. 54,000 to Najeebunnisa Begum which is evidenced by the receipt. Ex. A-1 dated 8th July, 1965 and the shares were delivered to them. These shares were accompanied by blank transfer forms signed by the registered owners. Exs. X-2 to X-5 are the transfer forms which have been produced by D.W. 1. The plaintiffs submitted these transfer form s and obtained transfer of these shares in their respective names. Exs. X-6 to X-9 are the original entries in the registers of the Company and Ex. X-9A are the true copies thereof. It may also be noticed that the first plaintiff was elected as Director of the Hyderabad Construction Company. He also field a complaint against Sri A.K. Babu Khan alleging that he had failed to send a notice of the meeting of the Board of Directors. These documents are not disputed. These documents are also proved by the evidence of D.W. 2 who is an employee of the Hyderabad Construction Company Sri A.K. Babu Khan never paid the amount and never took back these shares. A notice Ex. B-1 dated 12th July, 1968 was issued on behalf of the plaintiffs to Sri A.K. Babu Khan calling upon him to pay Rs. 54,000 with interest from 7-7-1967 to 6-7-1968 amount to Rs. 4,860-00 and Rs. 300-00 being the notice charges and redeem his shares within one week of receipt of the notice failing which he was threatened with a suit to recover the said amount. Sri A.K. Babu Khan did not reply to the notice. Sri Babu Khan died in October 1968. Another notice dated 14th August, 1969 was issued on behalf of the plaintiffs through their Advocate to the heirs of late Sri A.K. Babu Khan, defendants 1 to 11 herein calling upon them to pay the amount. Office copy of that notice is marked as Ex. A-2. Defendants 1 to 11 neither sent any reply nor paid the amount demanded. The plaintiffs thereupon got issued another notice. Ex. A-3 dated 1-4-1970 informing the defendants 1 to 11 that if the amount of Rs. 54,000 together with interest upto date amounting to Rs. 12,859 and the notice charges of Rs. 300 are not paid within one week, all the 2650 shares would be sold in public auction on 10-4-1970 at 4-30 p.m. at the office of their Advocate Sri B.C. Jain and that whatever amount is realized would be given credit to and a suit for the recovery of the balance of the amount and costs of auction would be filed. Exs. A-5 to A-9 are the postal acknowledgment of some of the defendants in this behalf and Ex. A-10 is one of the envelopes addressed to the tenth defendant which was returned. In reply to this notice, defendants 1 to 4 published a notice under the signature of their Advocate in the 'Siasat' a local Urdu Daily and also in the English Daily 'Deccan Chronicle' which are marked respectively as Exs. A-4 and B-5 to the effect that the shares were not pledged as stated but that they were sold to the plaintiffs and others. According to Ex. A-3 notice, auction was held on 10-4-1970. The auction proceedings are marked as Ex. A-11. The plaintiffs thereupon caused another notice issued through their Advocate Sri B.C Jain on 4-7-1970 intimating the defendants that only a sum of Rupees 9,613-10 were realised by the sale of the shares and calling upon them to pay the balance of the amount of Rs. 54,406-90 within seven days failing which a suit would be filed. The defendants not having paid the amount, the suit was eventually filed.
8. In the context of the above sequence of events and the evidence on record we may first examine whether the suit transaction was one of sale of shares as pleaded by the defendants.
9. It is significant to note that the consideration for the transfer of the shares in favour of the plaintiffs was not fixed per share. On the date of the suit transaction, these shares were pledged with Najeebunnisa Begum for Rs. 54,000. The plaintiffs were requested to obtain release of these shares by paying a sum of Rs. 54,000 due to due to Najeebunnisa Begum from Sri A.K. Babu Khan. Unless Sri A.K. Babu Khan thought the value of the shares was more than Rs.54,000 he would not have obtained release of the shares by paying that amount. The amount paid to Najeebunnisa Begum was not the consideration for the sale of these shares in favour of the plaintiffs. It was in view of the terms of the agreement, the plaintiffs paid Rs. 54,000 to Najeebunnisa Begum and obtained transfer of shares in their names.
10. It was argued by Mr. Balagopal, the lac for the appellants that only because there was a sale of shares in favour of the plaintiffs-respondents, blank transfer forms were signed and delivered to them, they were given the right to vote and stand for election. In fact, their names were recorded in the books of the company as shareholders and on the strength of the shares one of them was also elected as a Director. One of the plaintiffs also filed a complaint against Sri A.K. Babu Khan in Criminal Court for not giving him notice of the meeting of the Board of Directors. Thus the plaintiffs exercised all the rights of a purchaser of the shares and therefore, the transaction was one of sale and not a pledge.
11. The fact that blank forms were executed in favour of the plaintiffs and that the plaintiffs were recorded as share holders in the books of the Company and they also exercised the rights of the shareholders and one of them was elected as a Director is not a consequence which follows only when there is a sale of shares; it may even result form a mortgage of shares. As observed by the learned Author, Mulla in his book on the Transfer of Property Act, 1882, "Shares are moveable property in Indian Law and may be subject-matter of a mortgage or a pledge.............. A deposit of the certificate accompanied by duly executed blank transfer deed has been held to be a mortgage both in England and in India as the transaction clearly authorises the creditor to fill up the blanks and get his name registered."
12. In Narasayyamma v. Andhra Bank, AIR 1969 Andh Pra 273 it was held that the mere obtaining of blank transfer of shares was not conclusive of whether the transaction is one of mortgage or pledge. The Court observed :
".............. obtaining of blank transfers is a convenient mode of exercising the rights of sale which the pledgee in law is entitled to do."
13. Thus the above factors do not conclusively establish that the transaction is only one of sale. It all depends upon the cumulative effect of all the recitals in the agreement and the intention of the parties. A reading of all the terms and conditions of the suit transaction evidenced by Ex. A-1 and the intention of the parties gathered from all the surrounding circumstances as also their conduct militates against the plea of sale of these shares by Sri A.K. Babu Khan in favour of the plaintiffs. Vide (1901) 2 Ch 314 at p. 316; (1902) 1 Ch 579; (1910) 1 Ch 632 and .
14. The transfer of these shares both under provisions of the Company Law as well as under the express terms of agreement gave the plaintiffs full voting rights in the company. Sri A.K. Babu Khan was, however, given the option to take back his shares at any time within two years of the agreement by paying only Rs. 54,000 and not the full market price at the relevant time. The plaintiff could not refuse to re-deliver these shares to Sri A.K. Babu Khan if he chose to take them back within two years. Even at the end of two years but within one year thereafter Sri A.K. Babu Khan had the right to a return of all the shares on payment of Rs. 54,000 and interest at 9 per cent thereon. The plaintiffs were bound to return the shares even then. The question of Sri A.K. Babu Khan's paying Rupees 54,000 with interest at 9 per cent could never have provided for the same if the transaction was one of sale. This shows that the transfer of these shares in favour of the plaintiffs was not absolute. It was subject to certain conditions. This transfer was subject to Sri A.K. Babu Khan repaying the amount at any time within three years and asking for return of these shares. In fact, one of the terms of the agreement stipulates that whenever part payment is made by Sri A.K. Babu Khan, the shares will be returned to him in proportion to the amount paid by him. If the shares were sold outright to the plaintiffs and the plaintiffs had purchased the same such a condition would not have found a place in the agreement. This condition totally belies the claim of the defendants that the transaction was one of out and out sale and that the plaintiffs had purchased these shares for Rs. 54,000. It is further stipulated that if the amount is not paid even within three years of the agreement, the plaintiff shall have the right to dispose of the shares in open market at the risk and responsibility of the first party. The words "at the risk and responsibility of the first party" clinchingly establish that Sri A.K. Babu Khan was primarily under an obligation to repay the amount at least within a period of three years and take back the shares. The shares were held by the plaintiffs only as security for the payments. If it was an out and out sale as pleaded by the defendants, the question of the shares being sold in open market at the risk and responsibility of Sri A.K. Babu Khan cannot arise. This could arise only if Sri A.K. Babu Khan still had an interest in the shares and that could subsist only if the transaction was not one o sale and right. The plaintiffs denied that there was any sale of shares in their favour and that is what P.W. 1 who is the first plaintiff and P.W. 2 Kapurchand Shrimal through whom the shares were initially pledged with Najeebunnisa Begum and later taken delivery of by the plaintiffs by paying Rs. 54,000 deposed. There is no evidence to the contrary. Sri A.K. Babu Khan had died. The only other witness who deposed anything in this behalf is the 5th defendant examined as D.W. 2. He is also the attesting witness of Ex. A-1. He deposed that he signed the document, Ex. A-1 when asked to do so by his father. He was neither told about the contents of the document nor did he himself read them. He frankly admits that his father did not tell him about these transactions. He deposed that after the plaintiffs left, his father told him that the plaintiffs have purchased the shares of the Company. He further deposes that his father never told him that these shares were pledged with the plaintiffs. In the written statement he did not state this fact. When the 5th defendant had signed Ex. A-1 it is highly improbable that his father would have once again told him that the shares were sold to the plaintiffs. Further if it was a case of sale, there is no reason why Sri A.K. Babu Khan should not have given a reply to that effect in response to the notice. Ex. B-4 After the death of Sri A.K. Babu Khan, even the defendants did not send any reply to the plaintiff's notice Ex. A-2. Only in response to the second notice they took up the plea that the shares were sold by Sri A.K. Babu Khan to the plaintiffs. In the face of the recitals of the document, Ex. A-1, the evidence on record and the conduct of Sri A.K. Babu Khan and the defendants themselves, the plea of the defendants that there was a sale of these shares in favour of the plaintiffs cannot be upheld. The finding of the court below in this behalf cannot be sustained.
15. If the transaction is not one of sale, what then is it? Is it pledge or a mortgage? The defendants-appellants contend that the plaintiffs can succeed only if the transaction is proved to be one of pledge and according to them it is not a pledge.
16. Whether a transaction is one of 'pledge' or a 'mortgage' is not often free from difficulty. As observed by the learned Author Mulla in the Transfer of Property Act, the Transfer of Property Act refers to mortgages of immovable property and the Indian Contract Act refers to pledges of moveable property but neither Act deals with mortgages of moveable property. Section 172 of the Indian Contract Act defines 'pledge' as follows :
"The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The bailer is in this case, allied 'Pawner'. The bailee is called the 'Pawnee'.
17. The three essential features of a 'pledge' are : (1) there must be a bailment of goods i.e. delivery of goods, (2) the bailment must be by way of security and (3) the security must be for payment of a debt or a performance of a promise. As observed in Sanjiva Row's commentaries on Indian Contract Act "a 'pledge' is delivery of goods by the pledgor to the pledgee by way of security upon a contract that they shall when the debt is paid or the promise is performed be returned or otherwise disposed of according to the directions of the pledgor.............. A pledgee does not have the right of ownership, though he has the right of possession, but not the right of enjoyment; a pledgee has the right of disposition which is limited to disposition of pledgee's rights only and of a sale only after notice and subject to certain limitation." While the owner has the right of possession as well as the right of enjoyment and right of disposition, the pledgee has only the right of possession but not the right of enjoyment. The pledger's right of disposition is governed by the terms of the pledge and is limited to the recovery of the amount due to him under that pledge.
18. In Kunhum Elaya Nayar v. Krishna Pattar, (1942) 2 Mad LJ 120= (AIR 1943 Mad 74) where there was mere deposit of shares certificates without any deed of transfer, the transaction was held to be one of pledge. But a deposit of certificates accompanied by a duly executed blank transfer deed constitutes a mortgage. In case of a pledge a special interest and not special property is transferred to the pledgee who is impliedly authorised to sell the goods pledged in case of default in accordance with the provisions of the Contract Act. In case of mortgage however, a general but limited property is transferred to the creditor but the possession may or may not be transferred to the mortgagee. Where money is advanced by way of loan upon the security of goods the transaction may take the form of a mortgage or a pledge.
"The distinction between a pledge and mortgage is that while under a pledge there is only a bailment, under mortgage there is one sort of transfer of right of property by way of security............."
In a judgment of a single Judge of the High Court in Md. Sultan v. Firm Rapratap Kannya Lal, is was held :
"A pledge is the delivery of goods by the pledgor to the pledgee by way of security upon a contract that they shall when the debt is paid or the promise is performed, be returned or otherwise disposed of according to the directions of the pledgor. A pledge would therefore, create an estate which vests in the pledgee, which is distinguishable from ownership since an owner owns (a) the right of possession, (b) the right of enjoyment and (c) the right of disposition. But a pledgee does not have the right of ownership though he has the right of a pledgee which include only the right of possession but not the right of enjoyment. A pledgee has the right of disposition which is limited to the disposition of pledgee rights only and of a sale only after notice and subject to certain limitations as is clear from the various provisions of the Indian Contract Act."
19. It is therefore to be recognised that although the hypothecation and mortgage of moveable are not specifically mentioned in the Contract Act, but that Act not being exhaustive law on the subject and as the above said transactions have long been recognised as valid in India these transactions will have to be given effect to. In the absence of specific rules applicable to any matter, the principle recognised in the various Civil Courts Act is that the Courts should decide according to justice, equity and good conscience which is considered to be equivalent to the English Law wherever such law is applicable to Indian conditions. It is only under this principle that the hypothecation or mortgage of moveable property, although to specifically provided in the Contract Act are valid and a decree can be passed in enforcement of such transactions.
20. The Privy Council in In Re- The Odessa, 1916 AC 145 emphasises that the notion of enjoyment is excluded from the concept of pledge and if something more than mere possession of shares is given to the creditor it ceases to be pledge. The distinction between a pledge and a mortgage has been referred to in Md. Sultan v. Firm Ramapratap Kanniyalal, at p. 204 in the same words as pointed out by Sanjiva Row in his Commentaries on the Indian Contract Act, in Radhakirhsnan v. Madras Peoples' Bank, AIR 1943 Mad 73 Leach, C.J. pointed out the distinction between mortgage and pledge thus :
"The difference between a mortgage and a pledge of goods is that in a mortgage the ownership of the goods passes, whereas in a pledge the pledgee gets possession, but no right to the goods beyond what is necessary to secure the debt."
21. A Bench of this Court in Narasayamma v. Andhra Bank (supra) pointed out the essential distinction between a pledge and a mortgage in the following words:
"Unlike a pledge, a mortgage acquires a general property in the thing mortgaged subject to the right of redemption of the mortgagor. In other words the legal estate of the goods mortgaged passes on to the mortgagee. But a pledgee had only the special property in the goods pledged, namely, the right of retainer of the goods as security, and in case of default he must either bring a suit against the pawner or sell the gods after giving a reasonable notice. Whether a particular transaction is a mortgage of moveable property or a pledge can only be determined by reference to the intention of the parties and other surrounding circumstances."
22. In that decision, the Division Bench pointed out that as shares are treated as moveable property in India, the mere fact that along with the instrument of security some shares were delivered along with the blank share transfer forms duly signed without more, does not mean that the transaction is one of mortgage. A pledge of shares can also be accompanied by blank transfers. Obtaining of blank transfers is a convenient mode of exercising the right of sale when the pledgee in law is entitled to do.
23. In view of the above position of law the contention of the learned counsel for the appellants that since the blank transfer forms are obtained, it is necessarily a pledge cannot be upheld. Such forms may be obtained both in case the pledge as well as mortgage. But the main point of distinction between a pledge and a mortgage is that the right of enjoyment of the property is not given to a pledgee, that right vests in a mortgagee. In the instant case, it is seen that the shares wee not only accompanied by blank transfer forms but under the agreement Ex. A-1, the transferee was specifically given the right to obtain the transfer of shares in his favour and also exercise the rights of a shareholder. In fact, it was stipulated that the shares shall be lodged for transfer by the plaintiffs in their names immediately.
24. Accordingly transfer of shares was effected in favour of the plaintiffs and they exercised the right o voting, one of them was also elected as director. Thus the transferee enjoyed certain rights with respect to the shares which were given in their possession. Something more than mere delivery of shares with blank forms to enjoyment of the shares was bestowed on the plaintiffs which is consistent with an agreement of pledge; and consistent with mortgage.
25. The learned counsel for the appellant next contends that if it were a mortgage the plaintiffs could not have exercised the right of private sale and that establishes that it is not a mortgage. In case of mortgage, he could have only enforced the right of a mortgage by suing for the sale of the shares or for the appointment of a Receiver, the plaintiffs could not have sold them privately. In this behalf reliance is placed upon a judgment of the Madras High Court in Venkatachalam v. Venkatrami, AIR 1940 Mad 929. That was a case of mortgage of land and the crop. The court held that so far as the land is concerned it is mortgage of immovable property and governed by the provisions of the Transfer of Property Act but as regards the crop, it was held to be a mortgage of a moveable property and the mortgagee could only enforce the right of mortgage by suing for sale of the property. A mortgage of a moveable property is not entitled to claim possession, his right is only to enforce the mortgage by suing for sale of the property or the appointment of a receiver to secure possession of it in order that his security may be realized. Basing upon this decision the learned counsel for the appellant contends that since there is provision in the suit agreement for private sale that constitute only a pledge and not mortgage and therefore the plaintiff could not have sold the share privately, their only remedy was to approach the court. Be that as it may, if this contention of the appellants is accepted that establishes the suit mortgage to be a pledge. However, in our view, the fact that the parties have agreed that the subject-matter of the security may be sold in case of default without intervention of the Court does not necessarily imply that the transaction is one of pledge. Even in the case of mortgage of moveables the parties could so stipulate and shares have always been deemed to be moveable in India. Even in the case of a mortgage of moveables if under the terms of the contract entered into between the parties a right of private sale is given, that could be exercised. As stated by the learned Author, Mulla in his book on Transfer of Property Act, it is not as if the right of private sale could be vested only under a pledge and that a constitutes the distinguishing feature between a mortgage and a pledge.
26. In Inre Ahmed, AIR 1932 Bom 613 Kania, J., held that even a mortgagee of moveable has a right to sell without the intervention of the court. He further held that
"the rights of mortgagee of a moveable property are not in any way inferior to the rights of a pledgee because the mortgagee has the general estate in the property which is mortgaged to him. Besides he has the right to sell the property without the intervention of the court if the mortgagor after a proper notice is given to him to repay the money, fails to do so.
27. In Devarges v. Sandeman Clark & Co., (1902) 1 Ch 579 Lord Justices declared that the mortgagee of shares (the mortgage not being by deed) has in the absence of an express power of sale an implied power to sell the shares on default by the mortgagee in payment of the amount due at the time appointed for payment, or if no time be fixed then on the expiration of a reasonable notice by the mortgagee requiring payment on a day certain."
28. In Ex parte Official Recovery in Remorritt, 18 Queen Bench Division 222 it was declared that when if a bill of sale contains an express power for the grantee to seize the goods, the grantee when he has seized the goods has power to sell them after the expiration of five days fixed by Bills of Sale Act, 1882. We have, therefore, no hesitation in holding that the power of sale conferred by the express terms of the agreement between the parties does not make it a pledge inasmuch as the right of enjoyment of the shares is also created under the agreement in favour of the plaintiff.
29. In Jagannath v. Fatechand AIR 1949 Nag 363 following the decision in Nanhuji v. Chinna, (1911) 10 Ind Cas 869 (Nag), the Bench held that as there is no statute governing the mortgage of moveables parties are exclusively bound by the terms of the agreement and the right of the mortgagee is to foreclose is regulated by the contract. Having regard to the terms of the agreement the court held that the transaction therein to be one of mortgage and not pledge. In Radhakrishna v. Madras Peoples' Bank Ltd.,(supra) Lach C.J. observed that a mortgage can also be a pledge. A Bench of the Andhra Pradesh High Court in Narasayamma v. Andhra Bank (supra) held the transaction to be one of pledge notwithstanding the shares being accompanied by blank transfer forms.
30. In the instant case, the shares were given into possession of the plaintiff they were authorised to lodge them with the company and obtain their transfer in their favour and also exercise the rights of a shareholder. Thus rights more than what vest in a pledgee were crated in favour of the plaintiff. They were given the right to enjoy these shares so long as he amount is not paid by the defendants. For payment of the amount a period of three years was given and in default the plaintiffs were given the right to sell the shares at the risk and responsibility of the defendants. Though this right is a right akin to that of a pledgee that itself does not exclude the transaction from being one of mortgage. As the essential distinction between the pledge and a mortgage is that in the former there is no right to enjoyment while in the latter such a right is given the suit transaction must be held to be a mortgage. This transaction may also amount to a pledge but as it is something more than that and the rights of the parties are governed by the terms of Ex. A-1 it is held to be a mortgage. In bringing the shares to sale, the plaintiffs have only exercised their right under Ex. A-1 and not because they were pledgee. In our view the suit transaction constitutes a mortgage.
31. It was next contended by the lac for the appellants Mr. Bala Gopal that if the transaction is one of a mortgage the plaintiffs cannot be granted the relief prayed for, for they have sought the relief in the suit on the footing that the suit transaction is one of pledge. He points out that neither in the notice issued prior to the suit nor anywhere in the plaint has the suit transaction been described as a mortgage, it is only referred to as a pledge and relief was sought on that basis. If the plaintiff had put forward a case of mortgage, the defendants would have taken several pleas in defence. They would, therefore, be prejudiced if any relief is granted to the plaintiffs on the footing that the suit transaction is a mortgage.
32. If we examine the plaint and the prior notice, it cannot be said that the plaintiffs described the suit transaction as a mere pledge and that they have never implied that it is one of mortgage. At the most it could be said that they had not taken a clear stand on this aspect.
33. In the plaint the suit agreement is no doubt referred to as an agreement of pledge, but at the same time the salient terms of the agreement are enumerated. One of the terms of the agreement is that Sri A.K. Babu Khan shall redeem the shares at any time within two years. The question of redemption can arise only in the case of a mortgage. Though in the first notice, Ex. A-2 dated 14-8-1969 issued on behalf of the plaintiffs, the shares were said to be pledged with the plaintiffs and defendant No. 12 it was also stated therein that Sri A.K. Babu Khan should redeem the shares at any time within two years on payment of Rs. 54,000 and as he had not redeemed the shares even after the third year, they are entitled to claim interest at 9 per cent and that the estate of Sri A.K. Babu Khan was liable to meet the claim in the final notice, Ex. A-3 dated 1-4-70 issued before the institution of the suit this transaction was neither referred to as a pledge nor as a mortgage. Only a demand for the amount due together with interest and the charges of the notice was made and it was stated that the hare shall be sold by public auction. In view of the above, what all could be stated at the most is that the plaintiffs were not clear in their mind as to whether the suit transaction amounted to a pledge or a mortgage. But it cannot be categorically held that the description of the suit agreement in the plaint wholly excludes the notion of mortgage. The crucial terms of the document have been stated in the notices as well as in the plaint. The document itself is filed along with the plaint. In these circumstances, it is for the Court to construe whether the agreement constitutes a pledge or mortgage. The mere fact that the plaintiffs have termed it as a pledge although it is a mortgage cannot be a ground for refusing the relief which they are entitled to on the terms of the agreement which are not in dispute. Whatever relief the plaintiffs are entitled to on the facts found by the Court must be awarded.
34. It is, however, argued that if the plaintiffs are awarded relief on the footing that the suit transaction is a mortgage the defendants would be prejudiced, but what other defences were open to them. It is not stated. Merely because the plaintiffs specifically did not plead this as a mortgage, they cannot be denied the relief they are entitled to under that agreement. No doubt as contended by the learned counsel for the defendants appellants and as laid down in Kanda v. Waghu, AIR 1950 PC 68 that the determination in a case should be founded upon a amendment to be found in the pleadings and as observed in Trojan & Co., v. Nagappa Chettiar, it is well settled that the
decision of a case cannot be based on grounds outside the pleadings of the parties and that it is the case pleaded that has to be found in that case where the plaintiffs had based his claim for a certain sum of money on the ground that the defendant had sold certain shares belonging to him without his instructions but he was not able to prove that the sale was not authorised by him the Supreme Court reversing the decision of the High Court held that the plaintiff could not be given a decree for the sum claimed on the ground of failure of consideration as he had no set up any such alternative claim in the plaint or even at the later stage when he sought to amend the plaint. But in this case, it cannot be said that the claim of the plaintiff for the recovery of the money due does not arise from the pleading and the terms of the agreement. Whether that agreement constitutes a pledge or a mortgage it is for the Court to determine. As laid down by Privy Council even in Kanda v. Waghu, AIR 1950 PC 68 (supra)all that is necessary is that "the determination of cause should be founded upon the case to be found in the pleadings or involved in or consistent with the case thereby made." As discussed above a case of mortgage is clearly made not by the pleadings in this case. There is no statute governing mortgage or moveables and very many features of a mortgage and a pledge are similar. If in these circumstances, when the party while describing the suit agreement to be a pledge filed the agreement executed between the parties the relief which follows from such agreement cannot be denied. In Kedar Lal v. Hari Lal, Fazal Ali J., speaking for the Court said :
"I would be slow to throw out a claim on a mere technicality of pleading when the substance of the thing is there and no prejudice is caused to the other side, however, clumsily or inartisticlly the plaint may be worded. In any event, it is always open to a Court to give a plaintiff such general or other relief as it deems just to the same extent as if it had been asked for provided that occasions no prejudice to the other side beyond what can be compensated for in costs."
That dicta squarely applied to the facts of this case for we are unable to see what prejudice the defendants would suffer. We therefore, hold that in the present case the plaintiffs are entitled to the relief on the footing that the suit agreement constitutes a mortgage.
35. The only other question that remains to be considered is whether the suit is barred by limitation. That contention is based on the ground that the right to sue for the recovery of the amount accrued to the plaintiffs on the date when the loan was advanced and the suit agreement was executed i.e. on 6-7-1965. According to the defendants the suit ought to have been filed within three years of the suit agreement i.e. before 6-7-1968 and the suit filed on 18-6-1970 is barred by limitation. It is Article 19 that is applicable. But a reading of the agreement would clearly show that the plaintiff had no right to demand payment of the amount at any time after the execution of the agreement Sri A.K. Babu Khan was given the right to pay at any time within two years without being label to pay interest. He was given a further period of one year to pay the amount with interest The plaintiff was not therefore obliged to file a suit within the period of three years. He had the option to wait till the expiry of the three years and demand the payment of the principal with interest thereafter Art. 19 of the present Limitation Act which corresponds to Art. 57 of the old Act reads as follows :
'For money payable Three When the loan for money lent years is made."
36. This provision is a general article applicable for suits for recovery of money lent. That would be applicable when the right to recover the amount is based on mere lending of the amount and the suit is based on the factum of lending and not governed by any agreement giving option to the debtor to pay after a certain period stipulated, under the agreement, obviously the creditor cannot enforce his claim within that period. Any suit filed within that period could be successfully resisted by the debtor under the terms of the agreement as premature. Having regard to the terms of the suit agreement, the plaintiffs could not enforce their claim for the recovery of the amount lent at any time within three years. The present suit in our view, is one for which no period of limitation is provided elsewhere in the new Act, and therefore, Article 113 would apply. That provides a period of three years and the period would begin to run form the date when the right to sue accrues. In the instant case, the suit is filed within three years after the period for repayment allowed to Sri A.K. Babu Khan. The first notice demanding the amount was issued on 1-4-70 in response to which alone the defendants respondents denied their liability to pay by publishing a notification in the Urdu daily 'Siya Sat' on 9-4-1970. The plaintiffs sold the shares by public auction on 10-4-1970 and after issuing a further notice, Ex. A-12 on 4-6-1970 have instituted the present suit. The right to sue in our view, accrued to the plaintiffs on the expiry of three years from the date of the suit agreement when in spite of demand for defendants did not pay the amount due under the agreement. The suit is therefore, held to be within limitation in Yellappa v. Desayappa (1906) ILR 30 Bom 218 on which reliance is placed by the learned counsel for the
defendants-appellants, the suit was held to be barred by limitation. But that was a suit for the recovery of money secured by a pledge it was construed to be a suit for money lent and the period of limitation was held to be three years from the time the loan was made. So also in the case in Saiyid Ali Khan v Debi Prasad (1902) ILR 24 All 251. Following the earlier decision in Madan Mohan Lal v. Kanhai Lal, (1895) ILR 17 All 284, the court held that the suit of a pawnee to recover the balance of his debt after accounting for the proceeds of the sale of articles pledged is governed by Article 57 of the Second Schedule to the Indian Limitation Act, 1877 viz., three years from the date of the loan and the suit brought beyond that period was barred by limitation. But these cases were cases of pledges of moveables and not cases of mortgages.
37. Further it does not appear that in any of those cases the debtor or pledgor was given the option to pay the amount at any time within three years of the pledge. These two decisions in our view do not apply to the facts of the present case, firstly because the suit transaction is one of mortgage and secondly because under the express terms of the agreement the money lent could be paid by the debtor any time within three years from the date of the agreement. The suit is therefore held to be within time.
38. In view of the foregoing discussion this appeal fails and is accordingly dismissed with costs.
39. Appeal dismissed.
Section 126 in The Indian Contract Act, 1872
126. " Contract of guarantee"," surety", principal debtor" and" creditor".- 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". A guarantee may be either oral or written.
A contract of guarantee is defined in section 126 of theContract Act as follows : "126. 'Contract of guarantee', 'surety', 'principal debtor' and 'creditor'. - A 'contract of guarantee' is a contract to perform the promises 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'. A guarantee may be either oral or written." 7. A contract of indemnity is defined in section 124 of the Contract Act and that reads as follows : "124. 'Contract of indemnity' defined. - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a 'contract of indemnity"
Bombay High Court
Taj Trade And Transport Co. Ltd vs Oil And Natural Gas Commission And
Bench: A Cazi
A.A. Cazi J.
1. I am passing orders on three suits which are for referring disputes to arbitration and on three petitions which are for interim reliefs in those proceedings. The circumstances giving rise to these proceedings are stated in the following paragraph.
2. It will be noticed the titles of the suits given above that the parties are the same in all three suits. However, the different suits have been filed because they arise from three different agreements which are in respect of three different shipping vessels, viz., (i) M. V. Ramey Tide, (ii) M. V. Jensen Tide, and (iii) M. V. Mire Tide. Suit No. 347 of 1991 arises from the agreement pertaining to M. V. Ramey Tide, Suit No. 348 of 1991 arises from the agreement pertaining to M. V. Jensen Tide and Suit No. 349 of 1991 arises from the agreement pertaining to M. V. Mire Tide. These three vessels are foreign vessels which the plaintiffs had chartered from the foreign owners, Tidewaters Marine Service Inc. Foreign vessels cannot be legally plied in Indian waters without licence from the Director-General of Shipping, Government of India. The plaintiffs obtained "specified period licences" in respect of these vessels. Prior to the dispute, the last of such licences for M. V. Ramey Tide expired on December 20, 1990, that for M. V. Jensen Tide expired on November 30, 1990, and that for M. V. Mire Tide expired on November 30, 1990. The plaintiffs entered into three separate agreements in respect of the three vessels with the first defendant, under which they charter-hired these three vessels to the first defendant for one year with effect from the date of delivery of the vessel to the first defendant as provide in clause 1.2.1 of each agreement. M. V. Ramey Tide was delivered on December 21, 1989, and the one year period in respect of the said vessel ended on December 20, 1990. M. V. Jensen Tide was delivered to the first defendant on November 20, 1989, and the one-year period expired on November 19, 1990. M. V. Mire Tide was delivered on November 25, 1989, and the one-year period expired on November 24, 1990. On October 17, 1990, there was further renewal of the periods of the charter-hire agreements for one year. This would, however, require extension of the licence from the Director-General of Shipping and this was sought for by the plaintiffs by their letter dated October 31, 1990, but by a telex dated December 13, 1990, the Director-General Shipping informed the plaintiffs that the request for extension could not be acceded to as per Government decision. The plaintiffs then informed the first defendant that the Director-General of Shipping had refused to extend the licences and, therefore, the agreements would stand canceled and to treat the communication in each case as notice under clause 13.1 of each agreement. According to the plaintiffs on January 5, 1991, they handed over the vessels to foreign owners from whom they had obtained the same. Further, according to the plaintiffs, on January 11, 1991, they received a letter dated January 4, 1991, from the Director-General of Shipping that the licence for M. V. Jensen Tide was extended for three months and on January 12, 1991, they received a letter dated January 10, 1991, from the Director-General of Shipping that the licence period for the other two shops was also extended for three months. It appears that the first defendant charged the plaintiffs for breach of contract and they sought to invoke the three bank guarantees that were given pursuant to the three agreements (i.e., the main agreements). In each bank guarantee there is a reference to the corresponding main agreement requiring the plaintiffs to furnish a performance guarantee and the guarantee goes on to state :
" ....... The State Bank of India (hereinafter referred to as 'the bank' which expression shall, unless repugnant to the context of meaning thereof, include all its successors, administrators, executors and assigns) do hereby guarantee and undertake to pay to the extent of Rs. 5,63,450 (rupees five lakhs sixty-three thousand four hundred and fifty only) in aggregate at any time without any demur, reservation, recourse, contest or protest and/or without any reference to the contractor. Any such demand made by the contractor on the bank shall be conclusive and binding notwithstanding and difference before any court, tribunal, arbitrators or any other authority. We agree that the guarantee herein contained shall be irrevocable and shall continue to be enforceable till it is discharged by the Commission in writing.
The Commission shall have the fullest liberty, without affecting in any way the liability of the bank under this guarantee from time to time, to extend the time for performance of the contract by the contractor or vary the terms of the contract. The Commission shall have the fullest liberty, without affecting this guarantee, to postpone, from time to time, exercise of power vested in them or of any right they might have against the contractor and to exercise the same at any time and in my manner and either to enforce or to forebear to enforce any covenants contained or implied in the contract between the Commission and the contractor or any other course of remedy or security available to the Commission. The banks shall not be released of its obligations under these presents by any exercise by the Commission of its liberty with reference to matters aforesaid or any of them or by reason of any other act or forbearance or other acts of commission or omission on the part of the Commission or any other matter or thing whatsoever which under law should, but for this provision, have the effect of relieving the bank.
The bank also agreed that the Commission at its option be entitled to enforce this guarantee against the banks as the principal debtor, in the first instance, without proceeding against the contractor and notwithstanding any security or other guarantee that the Commission may have in relation to the contractor's liabilities."
3. Under the main agreement between the plaintiffs and the first defendant, there is a clause for arbitration for referring the disputes/differences or questions to arbitration. The plaintiffs have, therefore, filed these three suits for the reliefs as pointed out above. They also took out three arbitration petitions for interim reliefs and sought an interim orders. On February 4, 1991, the trial court had refused to grant any as interim injunction. Against those three orders, the plaintiffs had flied appeals, being Appeals Nos. 133, 134 and 135 of 1991, to the Appellate Bench of this court. In the meanwhile, the bank guarantees in respect of Jensen Tide and Mire Tide were already encased and, therefore, the appeals relating to those vessels, viz., Appeals Nos. 134 and 135 of 1991, were withdrawn. Appeal No. 133 of 1991 was decided on July 5, 1991, and the order passed thereon is as follows :
"The appeal is treated as included in the day's cause list and taken up for hearing.
Notice of the appeal is waived by Mr. Thakker, learned counsel appearing on behalf of respondents No. 1. Upon the oral request of learned counsel for the appellants, the name of the respondents No. 2 is deleted, so far as the appeal is concerned.
The appeal arises out of a petition under section 41 of the Arbitration Act, 1940, hereinafter called 'the said Act' seeking interim relief in an arbitration suit under section 20 of the said Act. The trial court having refused to grant ad interim relief, the original petitioners have brought the present appeal.
We have heard learned counsel for the parities at length and have taken into consideration all the relevant factors and aspects. We are of the view that this is a fit and proper case in which the arbitration suit under section 20 should be heard on an expeditious basis and that till it is heard the as interim relief granted by the appeal court at the stage of admission should continue to remain operative.
Under the circumstances, subject to what follows, the appeal succeeds to the extent that the order of ad interim relief granted by the appeal court on April 29, 1991, shall continue to remain operative till the arbitration suit is heard and decided. The court is informed that no affidavit in reply had been filed in the arbitration suit. Let this be done on or before July 22, 1991. Affidavit-in-rejoinder, if any, to be filed on or before August 12, 1991. The suit along with the petition shall be taken up for hearing in the week next thereafter, i.e., in the week commencing on and from August 26, 1991, and it will be heard preferably from day-to-day and disposed of as expeditiously as possible. However, if for some unavoidable reasons, the arbitration suit cannot be heard and decide as provided hereinabove, it will be open to the respondent to move the trial court for hearing the petition under section 41 separately and to pass appropriate orders as to interim relief in accordance with law.
We are informed that two other arbitration suits between the same parties and involving the same point, namely, Arbitration Suits Nos. 348 of 1991, and 349 of 1991, are pending. By consent of parties, it is directed that all the three suits shall be heard together.
Learned counsel for the appellants states that the bank guarantee having been invoked by the respondent within 60 days in the arbitration suit with which we are concerned herein, there is no question of the expiry thereof and that there is, therefore, no need to give a separate direction that the bank guarantee be kept alive till the suit is heard. In view of the statement, no orders are issued in that regard.
We wish to make it clear that the appeal court shall not be deemed to have expressed any opinion on the merits of the dispute.
No order as to costs.
No order on Notice of Motion No. 1115 of 1991."
4. It is in these circumstances that out of the three arbitration petitions, only Arbitration Petition No. 34 of 1991 survives for decision on the question of grant of interim injunction and the same is now heard by me The three suits are also heard by me on the point of referring to arbitration the disputes mentioned in paragraph 10 of each plaint.
5. Dr. Chandrachud submitted, and in my opinion rightly, that two questions arise for my decision, viz., (i) Whether the dispute regarding invoking the bank guarantee is referable to arbitration or not ? and (ii) Whether interim injunction ought to be granted or not ?
6. On the first question, it was submitted by Dr. Chandrachud that a contract of guarantee is necessarily a tripartite agreement. A contract of guarantee is defined in section 126 of the Contract Act as follows :
"126. 'Contract of guarantee', 'surety', 'principal debtor' and 'creditor'. - A 'contract of guarantee' is a contract to perform the promises 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'. A guarantee may be either oral or written."
7. A contract of indemnity is defined in section 124 of the Contract Act and that reads as follows :
"124. 'Contract of indemnity' defined. - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a 'contract of indemnity".
8. The Supreme Court held in Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd. as follows (at page 932 of 40 Comp Cas) : "A contract of guarantee requires concurrence of three persons - the principal debtor, the surety and the creditor - the surety undertaking an obligation at the request, express or implied, of the principal debtor. The obligation of the surety depends substantially on the principal debtor's default; under a contract of indemnity liability arises from loss caused to the promisee by the conduct of the promisor himself or by the conduct of another person." The Calcutta High Court (Sabyasachi Mukharji and A. K. Janah JJ.) observed in State Bank of India v. Economic Trading Co., , that in the case of bank guarantee, by definition the third party was always on the scene. This question also arose for decision in the case of Nangia Construction (India) (P) Ltd. v. National Buildings Construction Corporation Ltd.  2 Comp LJ 265;  73 Comp Cas 701 (Delhi). It was pointed out there that statutory provisions regarding guarantees were to be found in sections 124 to 147 of the Indian Contract Act, 1872, and that specifically section 126 of the Contract Act dealt with guarantees. Then, a reference was made to the Supreme Court decision in Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd. , and it was observed (at page 721 of 73 Comp Cas) : "In view of the aforesaid law declared by the Supreme Court in Punjab National Bank Ltd. v. Shri Vikram Cotton Mills Ltd. , by virtue of article 141 of the Constitution, it was permissible for any person to hold otherwise. The Supreme Court had clearly stated that a contract of guarantee requires concurrence of three persons. This being the situation, a contract of guarantee, because of section 126 of the Contract Act, has always to be considered as a tripartite document in India ...... By virtue of the provisions of section 126 of the Indian Contract Act, 1872, every bank guarantee is a tripartite contract between the banker, the beneficiary and the person at whose instance the bank issues the bank guarantee. Thus, if a contract between two persons postulates that one of them shall furnish a bank guarantee, then the bank guarantee cannot be independent of the principal contract on account of which the bank guarantee was issued by the banker in favour of the beneficiary."
9. Reliance was placed by Mr. Nitin Thakkar on behalf of the first defendant on the decision dated August 29, 1990, given by Dhanuka J. in Arbitration Petition No. 155 of 1990 (see Suresh Arjundas Bakhtiani v. Union of India  74 Comp Cas 192 (Bom)). Now, it is true that Dhanuka J. observed there that the party at whose instance the bank guarantee is furnished is not a party to the contract of bank guarantee. But, and I say with respect, this observation appears to me to be in direct conflict with what the Supreme Court held in Punjab National Bank's case  40 Comp Cas 927 on the meaning of a guarantee as defined in section 126 of the Contract Act. I, therefore, hold that the dispute regarding invoking the bank guarantee is referable to arbitration.
10. As regards the second question, the relevant portion of the bank guarantee has already been reproduced above. It is very similar to the bank guarantee that camp up for consideration before the Supreme Court in the case of U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. , where the facts were as
follows : The respondent entered into an agreement with the appellant for constructing a vanaspati manufacturing plant for the latter. The contract required the respondent to furnish two bank guarantees for proper construction and successful commissioning of the plant. Accordingly, the Bank of India executed two bank guarantees in favour of the appellants. The relevant portion of one of the bank guarantees is as follows (at page 287) :
"Now, therefore, the bank hereby guarantees to make unconditional payment of Rs. 16.5 lakhs (rupees sixteen lakhs fifty thousand only) to the Federation on demand at its office at Lucknow without any further question or reference to the seller on the seller's failure to fulfil the terms of the sale on the following terms and conditions :
(a) The sole judge for deciding whether the seller has failed to fulfil the terms of the sale, shall be the PCF ...
(d) The bank's liability under this guarantee deed is limited to Rs. 16.5 lakhs (rupees sixteen lakhs fifty thousand only).
(e) This guarantee shall not be revoked by the bank in any case before the expiry of its date without the written permission of the federation."
11. The other was a guarantee to secure an advance and it is not necessary to consider the second bank guarantee here. When a dispute arose between the parties as to erection and performance of the plant, the respondent approached the Court of the Civil Judge by a petition under section 41 of the Arbitration Act read with rules 1 and 2 of Order 39 of the Civil Procedure Code, seeking an injunction restraining the appellant from invoking the bank guarantees. The trial court dismissed the petition. The respondent then moved a revision petition before the High Court. The High Court allowed the revision and proceeding on the basis that the injunction was sought not against the bank but against the appellant, restrained the appellant from invoking the bank guarantees. The appellant then filed an appeal before the Supreme Court. The question before the Supreme Court was only one, namely, whether there was any scope for injunction. The Supreme Court answered the question in the negative stating that an irrevocable commitment either in the form of confirmed bank guarantee or an irrevocable letter of credit could not be interfered with except in case of fraud or in case of a question of apprehension of irretrievable injustice. As pointed out earlier, the bank guarantee in our case is in similar terms with the bank guarantee in U.P. Co-operative Federations' case  65 Comp Cas 283. It is an irrevocable commitment in the form of a confirmed bank guarantee. Therefore, no injunction can be granted except in the case of fraud or in the case of a question of apprehension of irretrievable injustice. In the present case, neither there is any fraud nor is there any case of apprehension of irretrievable injustice. Further, though I have stated above that the bank guarantee in our case is very similar to the bank guarantee in U.P. Co-operative Federation's case  65 Comp Cas 283 (SC), I might clarify that there is one difference but that difference makes the case for refusal to grant injunction still stronger and I will explain that difference while considering J. R. Enterprises v. State Trading Corporation of India Ltd., .
12. Reliance was placed by Dr. Chandrachud on the case of J. R. Enterprises v. State Trading Corporation of India Ltd., . There also there was a main agreement and a bank guarantee. The bank guarantee stated (at page 457) : "The bank do hereby unconditionally and irrevocably guarantee that if the agents fail to perform any of their obligations contained in the said contract dated September 10, 1982, including any amendments or modifications to the aforesaid contract dated September 10, 1982, made between the agents and the State Trading Corporation, the bank shall pay forthwith to the State Trading Corporation such amount or amounts as the bank may be called upon to pay subject to the maximum of Rs. 10 lakhs (rupees ten lakhs) plus interest ... Any amount notified to the bank in writing by the general manager of the State Trading Corporation as being due from the bank under or by virtue of this revolving guarantee shall be conclusive evidence against the bank of the amount due to the State Trading Corporation and shall not be questioned by the bank." Now, in the first place, there is a material difference between the guarantee in our case and the guarantee given in J. R. Enterprises' case  69 Comp Cas 454 (Delhi). The difference may be explained by giving different instances. An instance may arise where under a contract between A and B, B has to perform the contract and A may demand performance security from B and this security may be in the form of cash deposit to be paid at the time of commencement of the contract or at any subsequent time during the contract (care being taken to see that this date is before occurrence of default). After the default on the part of B has occurred, it is then that A may appropriate the deposit amount or part of it as damages towards the loss which he may have suffered. Thus, there are two material points of time, viz., (i) an earlier point of time when the deposit amount is payable by B to A even though A has not suffered any loss, and (ii) a later date when loss is suffered giving a right to A to appropriate the deposit amount towards his loss. If B, instead of paying the cash deposit, furnishes a bank guarantee, the other terms being the same, then the bank would be liable to pay the cash amount to A even before the loss is suffered. In our case, the payment under the bank guarantee has to be made by the bank to the extend to Rs. 5,63,450 at any time without any demur, reservation, recourse, contest or protest and/or without any reference to the contractor. In short, this is replacement of payment of the cash deposit. In J. R. Enterprises' case  69 Comp Cas 454 (Delhi), payment under the bank guarantee became due only when loss was suffered. This is the difference between our case and J. R. Enterprises' case  69 Comp Cas 454 (Delhi). However, J. R. Enterprises' case  69 Comp Cas 454 (Delhi) conflicts with the decision of the Supreme Court given in U.P. Co-operative Federation Ltd.'s case  65 Comp Cas 283, where payment under the bank guarantee would become due on loss being suffered. For all these reasons, I hold that no injunction can be granted.
13. Hence, I pass the following order :
14. Arbitration Petition No. 34 of 1991 stands dismissed. Arbitration Petitions Nos. 35 of 1991 and 36 of 1991 do not survive and hence dismissed. No order as to costs. Mr. Kapadia prays for continuation of ad interim injunction for a period of four weeks. The ad interim injunction is continued for four weeks.
15. In Suits Nos. 347 of 1991, 348 of 1991, order in terms of prayers (a) and (b) in each of these three suits
Sections 124 and 125 of the Indian Contract Act, 1872.
Section 124 defines the contract of indemnity as a contractby which one party promises to safeguard the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Mr. Tendolkar argues that what the promisor promises to save the promisee from is the loss caused to him and not loss which may be caused to him. Further, under Section 125 all that the promisee is entitled to recover from the promisor are damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies. Mr. Tendolkar contends that until the mortgagee files a suit against the plaintiff and obtains judgment which the plaintiff is compelled to satisfy the plaintiff is not entitled to sue the defendant.
Section 124 defines the contract of indemnity as a contractby which one party promises to safeguard the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Mr. Tendolkar argues that what the promisor promises to save the promisee from is the loss caused to him and not loss which may be caused to him. Further, under Section 125 all that the promisee is entitled to recover from the promisor are damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies. Mr. Tendolkar contends that until the mortgagee files a suit against the plaintiff and obtains judgment which the plaintiff is compelled to satisfy the plaintiff is not entitled to sue the defendant.
Bombay High Court
Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri
1. This is a suit by the plaintiff to enforce an indemnity. It seems that in the year 1934 the plaintiff entered into an agreement with the Municipal Corporation for the City of Bombay for the lease of a plot of land bearing No. 226A of the Dadar Matunga Estate for a term of 999 years. In pursuance of the agreement the plaintiff was put in possession of that plot of land. At the request of the defendant the plaintiff agreed to transfer the benefit of the agreement for lease with the Municipal Corporation to the defendant. Thereupon the defendant entered into possession of the plot of land and commenced to erect a building thereon. The materials for the construction of the building were supplied by one Keshavdas Mohandas, and the amount therefor exceeded Rs. 5,000. Keshavdas Mohandas made pressing demands upon the defendant for the payment of that amount, and at the request of the defendant the plaintiff mortgaged the property to Keshavdas Mohandas by depositing the title deeds relating thereto to secure payment of a sum of Rs. 5,000 by a writing dated January 14, 1937. Under the terms of the writing the plaintiff covenanted to pay to Keshavdas Mohandas on January 14, 1938, the sum of Rs. 5,000 and interest thereon at the rate of ten annas per Rs. 100 per Gujarati month with monthly rests. In connection with the construction of the said building a further sum exceeding Rs. 5,000 became payable by the defendant to Keshavdas Mohandas. The plaintiff again at the request of the defendant effected a further charge on the property in favour of Keshavdas Mohandas to secure a further sum of Rs. 5,000 and interest by a writing dated March 23, 1937. The due date for the payment of this sum was also January 14, 1938. Under this writing the rate of interest was the same as under the previous writing. On July 30, 1939, the defendant gave a writing to the plaintiff stating that in connection with the building transferred by the plaintiff to the defendant's name, the defendant would be responsible for discharging the mortgages on the same and that the defendant would execute another mortgage deed in favour of the mortgagee in place of those executed by the plaintiff. On July 29, 1939, the plaintiff at the request of the defendant wrote a letter to the Bombay Municipality asking them to transfer the plot of land to the name of the defendant. The transfer was duly sanctioned by the Improvement Committee of the Bombay Municipality on August 26, 1939. No formal lease has up till now been executed by the Bombay Municipality in favour of the defendant. The plaintiff thereafter on several occasions called upon the defendant to procure from Keshavdas Mohandas a release of the plaintiff from his liability under the mortgage and the deed of further charge, but the defendant failed to do so. The plaintiff alleges in the plaint that the defendant is in possession of the property and in enjoyment of the rents and profits thereof, and he has paid some interest to the mortgagee from time to time ; but a large amount of interest is in arrears and remains unpaid. The defendant has also failed to pay ground rent to the Bombay Municipality and to get the property duly insured. The plaintiff submits that he executed the mortgage and the deed of further charge at the request of the defendant because the agreement for lease stood in the name of the plaintiff and, therefore, the defendant is liable to indemnify the plaintiff in respect of all liability under the mortgage and the deed of further charge. He, therefore, prays that the defendant be ordered to procure from the mortgagee a release of the plaintiff from all liability under the deed of mortgage and further charge and also that the defendant may be ordered to pay into Court the sum required to pay off the whole amount due to the mortgagee under the mortgage and further charge and that the amount so brought into Court be utilised for the purpose of paying off the mortgage and further charge.
2. When the suit was called on, Mr. Tendolkar for the defendant admitted all the facts alleged by the plaintiff in the plaint and raised only two issues to the effect (1) whether the plaint discloses any cause of action and (2) whether the suit was premature. Mr. Tendolkar argues that unless and until the indemnified has suffered a loss he is not entitled to sue the indemnifier and, according to him, as in this case there is no averment in the plaint that he has suffered any actual loss, there is no cause of action on which the plaintiff can sue and in any event the suit is premature. Mr. Tendolkar relies for his arguments on Sections 124 and 125 of the Indian Contract Act, 1872. Section 124 defines the contract of indemnity as a contract by which one party promises to safeguard the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Mr. Tendolkar argues that what the promisor promises to save the promisee from is the loss caused to him and not loss which may be caused to him. Further, under Section 125 all that the promisee is entitled to recover from the promisor are damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies. Mr. Tendolkar contends that until the mortgagee files a suit against the plaintiff and obtains judgment which the plaintiff is compelled to satisfy the plaintiff is not entitled to sue the defendant.
3. If the whole law of indemnity was embodied in Sections 124 and 125 of the Indian Contract Act, there would be considerable force in the contention of Mr. Tendolkar ; but that is obviously not so. The Indian Contract Act is both an amending and a consolidating Act, and it is not exhaustive of the law of contract to be applied by the Courts in India. Section 124 deals only with one particular kind of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person, but does not deal with those classes of cases where the indemnity arises from. loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.
4. In the present suit the indemnity arises because the plaintiff has become liable owing to something which he has done at the request of the defendant and therefore, in my opinion, Section 124 does not apply at all to the facts of this case. Further, Section 125, as the marginal note indicates, only deals with the rights of the indemnity-holder in the event of his being sued. Section 125 is by no means exhaustive of the rights of the indemnity-holder as I shall presently point out. The indemnity-holder has other rights besides those mentioned in Section
5. Mr. Tendolkar has further relied on two decisions, one of our Court and the other of the High Court of Calcutta. In Shankar Nimbaji v. Laxman Supdu (1939) 42 Bom. L.R. 175 an appellate bench of this Court held that under a contract of indemnity the cause of action arises when the damage which the indemnity is intended to cover is suffered, and a suit brought before actual loss accrues is premature. The proposition of law stated in these wide terms undoubtedly supports the arguments of Mr. Tendolkar. But if one examines the facts of that case, the decision there did not require the enunciation of the law in these very extensive terms, and I am not prepared to extend the principle of that case beyond the facts proved there and for the decision of which it was necessary. The facts of that case were that one Supdu used to deposit monies with defendant No. 2. After the death of Supdu, defendant No. 2 withdrew Rs. 5,000 from Supdu's khata and lent them to defendant No. 1 on a mortgage bond in his own favour. The plaintiffs, who were the sons of Supdu, protested against this and after some correspondence, defendant No. 2 passed a promissory note for Rs. 5,000 in favour of the plaintiffs. The plaintiffs then filed a suit to recover Rs. 5,000 and interest from defendant No. 1 by sale of the mortgaged property and in case of deficit prayed for a decree against the estate of defendant No. 2 which was in the hands of his sons, defendant No. 2 having died during the pendency of the suit. On these facts the Court held that the plaintiffs could not sue the defendants in anticipation that the proceeds realised by the sale of the mortgaged property would be insufficient and there would be some deficit left. The Court construed the promissory note as an indemnity given by defendant No. 2 to the plaintiffs in case any loss was caused to them by his unauthorised meddling with their money. As pointed out in the judgment, it was open to the plaintiffs to repudiate the mortgage transaction altogether and claim the whole of the amount] from defendant No. 2, leaving him to file a suit against defendant No. 1 to recover the mortgage amount; but the plaintiffs chose to accept that mortgage transaction and to treat defendant No. 2 as their benamidar and, therefore, all that they claimed to recover from defendant No, 2 was the loss, if any, that they might suffer in consequence of the mortgage transaction. It is, therefore, clear that if the plaintiffs recovered their full claim from the mortgaged property, defendant No. 2 would not be liable at all and, therefore, till the mortgaged property was sold and the deficit, if any, ascertained it was impossible to say whether the plaintiffs had suffered any loss which defendant No. 2 could be called upon to indemnify. Therefore, on the peculiar facts of that case it was necessary that the plaintiffs should suffer actual loss before they could maintain their action on the indemnity. But I am not prepared to read this judgment to mean that in no case can an indemnity-holder maintain an action against an indemnifier unless he has suffered actual loss.
6. In Chand Bibi v. Santoshkumar Pal (1933) I.L.R. 60 Cal. 761 the father of the defendant purchased from the plaintiffs their eleven annas share in certain property. This property including some other property was mortgaged by the plaintiffs to secure a sum of Rs. 2,700. The purchaser, the defendant's father, covenanted to pay off the mortgage debt and release the property which he had purchased and the other property from the mortgage. He also agreed to indemnify the plaintiffs if they were made liable for the mortgage debt. The defendant's father failed to pay off the mortgage debt, and the plaintiffs filed the action to enforce the covenant. In his judgment at page 765 Mr. Justice Lort-Williams observed that as the plaintiffs had not yet had to pay anything in respect of the mortgage although they were called upon to do so, and as the mortgagee had not yet taken any proceedings on the mortgage, the plaintiffs had not yet suffered any damage, and, therefore, the suit was premature so far as the cause of action on the indemnity was concerned. With great respect to the learned Judge who decided this case it was not at all a considered judgment on this particular point--no authorities having been cited before him. He also apparently overlooked the fact that he himself decided an earlier case of the same Court (Osmal Jamal & Sons, Ltd. v. Gopal Purshattam (1928) I.L.R. 56 Cal. 262). Further, although the facts of the case are not very clearly stated, it seems from the arguments of counsel that the covenant in the conveyance in favour of the defendant's father was that the plaintiffs could not recover any amount from the purchaser until they paid the money to the mortgagee. If that was so, then the decision turns on the construction of the actual language of the covenant. Further, it does not appear whether the plaintiffs were personally liable to the mortgagees because it would be open to the mortgagees to enforce their mortgage claim against the property conveyed to the defendant's father, and if they could recover the full amount from the sale of that property, the plaintiffs might not be liable at all. In any case I prefer to follow the judgment of the same learned Judge in Osman Jamal & Sons, Ltd. v. Gopal Purshattam, when he considered all the English authorities and delivered a considered judgment. In that case the plaintiff company agreed to act as commission agents for the defendant firm for the purchase and sale of hessian and gunnies and charge commission on all such purchases, and the defendant firm agreed to indemnify the plaintiff company against all losses in respect of such transactions. Pursuant to the agreement the plaintiff company purchased certain hessian from one Maliram Ramjidas. The defendant firm failed to pay for or take delivery of the hessian purchases. Maliram Ramjidas re-sold the hessian goods at less than the contract price and claimed the difference as damages from; the plaintiff company. The plaintiff company went into liquidation, and the Official Liquidator filed a suit to recover the amount claimed by Maliram Ramjidas from the defendant firm under the indemnity. It was urged by the defendants that inasmuch as the plaintiffs had not yet paid any amount to Maliram Ramjidas in respect of their liability they were not at present entitled to maintain their suit under the indemnity. Mr. Justice Lort-Williams negatived the contention and passed a decree in favour of the plaintiff company with a direction that the amount when recovered from the defendant firm should be paid to Maliram Ramjidas.
7. It is true that under the English common law no action could be maintained until actual loss had been incurred. It was very soon realized that an indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to wait till a judgment was pronounced, and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore the Court of equity stepped in and mitigated the rigour of the common law. The Court of equity held that if his liability had become absolute then he was entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient money which would constitute a fund for paying off the claim whenever it was made. As a matter of fact, it has been conceded at the bar by Mr. Tendolkar that in England the plaintiff could have maintained a suit of the nature which he has filed here; but, as I have pointed out, Mr. Tendolkar contends that the law in this country is different. I have already held that Sections 124 and 125 of the Indian Contract Act are not exhaustive of the law of indemnity and that the Courts here would apply the same equitable principles that the Courts in England do. Therefore, if the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off.
8. It is further argued by Mr. Tendolkar that in this case the liability of the plaintiff is not absolute but contingent. Mr. Tendolkar says that there is nothing to show that if the mortgagee was to sue to enforce his mortgage and the property was sold, there would be any deficit for which the plaintiff would be liable. Mr. Tendolkar overlooks the fact that under both the mortgage and the further charge there is a personal covenant by the plaintiff to pay the amount due, and it would be open to the mortgagee to sue the plaintiff on the personal covenant reserving his rights under the security. Therefore, the liability of the plaintiff under the personal covenant is absolute and unconditional, and he would have no answer to a suit filed by the mortgagee under that covenant. Mr. Tendolkar suggests that if such a suit were filed the Court would, under Section 68, Sub-section (2), of the Transfer of Property Act, exercise its discretion and stay the suit until the mortgagee had exhausted all his available remedies against the mortgaged property or the mortgagee had abandoned his security. I do not propose to speculate as to what the Court might do in the event of this suit being filed. If the plaintiff is sufficiently substantial--and I am told he is--the mortgagee may content himself with obtaining a personal decree against him and give up his security, I, therefore, hold that the plaintiff is entitled to be indemnified by the defendant against all liability under the mortgage and the deed of further charge.
9. Turning to the prayers of the plaint, the plaintiff wants a declaration that he is entitled to be indemnified by the defendant. I do not think he is so entitled as the defendant has never denied the indemnity nor challenged his right to be indemnified.
10. The order that I will make will, therefore, be that the defendant be ordered to procure from the mortgagee a release of the plaintiff from all liability under the deed of mortgage and further charge. I give him three months' time to do so. In default of his doing so, the defendant to pay into Court the amount required to pay off the whole amount due to the mortgagee under the mortgage and further charge and that the amount so brought into Court to be utilised for the purpose of paying off the said mortgage and further charge.
11. There will also be a decree for the plaintiff for the costs of the suit.
12. It is not possible to ascertain today what would be the amount which the defendant would have to pay into Court in the event of his not procuring from the mortgagee a release of the plaintiff from all liability under the deed of mortgage and further charge. I have, therefore, not indicated the amount in the order I have made about payment by the defendant into Court of the money due under the mortgage. In case there is any difficulty as to working out this part of my order, I will give the parties liberty to apply under the decree.