8

CONTRACT LAW
A S Bhat*

THIS PART of the survey is based on 50 cases, covering different facets of

contractual relations. Only nine cases have reached the Supreme Court and the
rest have been decided by the various high courts. The courts have reiterated the
already established legal principles which are discussed hereunder.

I OFFER

The Supreme Court was to decide in Kanhaiya Lai Agrawal v. Union of

India and Others1 whether the tender offered by the appellant with the rebate
could have been accepted and whether such acceptance would affect the interest
of any other party. In this case, the appellant made his offer of concessional rates
along with the tender while respondent no. 5 made such offer after opening of
the tenders. The apex court held that it is difficult to conceive that respondent
no. 5 who is a prudent businessman would not be aware of commercial practice
of giving rebate or concession in the event of quick finalization of a transaction.
What the appellant offered was part of the tender itself while respondent no. 5
made such offer separately and much later. Therefore, there was nothing illegal
or arbitrary on the part of railway administration in accepting the offer of the
appellant, which was made at the time of submitting the tender itself even if
rates offered by respondent no. 5 were the lowest2

II CONCLUDED CONTRACT

In S. Butail and Co v. H.P State Forest Corporation3 the HP High Court

reiterated an already established legal principle that an offer may be accepted
either by express words or positive conduct. In the instant case, the defendant
asked the plaintiff to proceed with the case without any reservation even after
receiving the letter from the plaintiff containing the terms of professional fee. It
was held that it amounted to acceptance of the offer by conduct and there is a
concluded contract between the parties.4

* Professor of Law/Dean, Academic Affairs, University of Kashmir. The author is grateful to

Farooq Ahmad, Mohammed Ayub Dar and Fareed Ahmad Rafiqui for their assistance in preparing
this survey.
1 AIR 2002 SC 2766.
2 Id. at 2771.
3 AIR 2002 HP 1.
4 Id. at 5.
170 Annual Survey of Indian Law [2002

The expression "concluded contract" came for determination again in Union

of India v. Peeco Hydrantic Pvt. Ltd.5 It was held that when the offer has been
accepted and the same has been conveyed to the offeror, the contract stands
concluded. There is then no merit in contending that acceptor did not accept
arbitration clause contained in the offer. The Supreme Court found an opportunity
to delineate on the scope of concluded contract in M/s Build India Construction
System v. Union of India.6 In this case the contract entered into between the
parties contained an arbitration clause to refer all disputes to a sole arbitrator.
The arbitrator was not required to give a reasoned decision. The contractor had
signed the acceptance letter to abide by general terms and conditions of contract
as modified. The government afterwards amended the general terms and conditions
of the contract by which the arbitrator was required to give a reasoned decision.
A dispute arose between the parties, which was referred to the arbitrator who
gave an unreasoned award. The appellate court set aside this award on the
ground that the arbitrator was required to give a reasoned award in view of the
amendment. This decision was overruled by the apex court on the ground that
the award was not liable to be set aside for want of reasons. There was nothing
in the acceptance letter, which either expressly or by necessary implication, spelt
out that the contractor had authorized the respondent to carry out modification
in the terms and conditions of the contract, otherwise than by mutual agreement
and to hold him bound by such modifications which were not even brought to
his knowledge or not consented to by him.

Ill ESSENTIALS OF CONTRACT

In Shantiniketan Co. Op Housing Society Ltd. v. District Registrar

Cooperative Societies7 it was held that there is no prohibition under section 11
of the Indian Contract Act for a foreign citizen to become a party to a contract.
Section 11 requires that parties to a contract must be of the age of majority
according to law to which they are subject and should not be disqualified from
contracting.

IV FREE CONSENT

The HP High Court in Roshanlal v. Kartar Chand* followed a number of

earlier rulings9 to delineate on the scope of section 16. It was held that there was
no fiduciary relationship between the donor and donee in the instant case. There
was also no evidence on record to show that the defendant was in a position to
dominate the will of the donor merely because the donor was 55 years of age

5 AIR 2002 Del 367.

6 AIR 2002 SC 2437.
7 AIR 2002 Guj 428 at 437.
8 AIR 2002 HP 134.
9 For instance : Raghunath Prasad Sahu v. Sarju Prasad Sahu, AIR 1924 PC 60 ; Parishad
Harswal v. Karnal Distillery Co. Ltd., AIR 1963 SC 1279.
Vol. XXXVIII] Contract Law 171

or the witnesses attesting the gift deed were neither from the village of the
plaintiff nor from the village of the defendant. It cannot be presumed that the gift
deed was the result of undue influence. In Asha Qurreshi v. Afaq Qurreshi,10 it
was held that to constitute fraud it is not essential that there shall be any
misrepresentation by express words. It is sufficient if the party defending
knowingly induced the plaintiff to enter into a contract by leading him to believe
that which the party deceiving knows to be false.

V PUBLIC POLICY

In Rohit Dhawan v. G.K. Malhotra and Another,11 it was laid down that
the doctrine of perpetuity should not be applied to the agreement where the
defendant is a manufacturer and the plaintiff is only a selling agent. It was
held that the character of perpetuity attaches to the legal personalities of the
contracting parties. A contract between them, indefinite in duration, may
not be determinable by one party by giving notice of termination, yet the
doctrine of permanance has no application to mercantile or commercial
contracts or if it applies, is subject to a wide class of exceptions especially
where mutual trust and confidence is involved. These contracts are against
the public policy because in such cases one party may completely ruin the
other party's business by sheer inaction on their part.
It was restated in Ranjana Nagpal alias Ranjana Malik v. Devi Ram and
Others,12 that a contract which vests jurisdiction in a court which cannot exercise
it under section 20 of the CPC is void and hit by section 23 of the Contract Act
because of being against public policy.
Similarly, it was held in Shrihari Jena alias Das v. Khetramohan Jena13 that
where a deed of exchange of properties was to be obtained from registration
office only after criminal cases were compromised, such agreements are void
and against public policy. In ONGC v. M/s Streamline Shipping Co.,14 there was
a contract between ONGC and the shipping company for manning, running,
operating, repairing and maintaining on hire of three vessels. This contract was
for a period of three years. There was a clause in the contract giving right to
ONGC to terminate the contract after the expiry of one year without assigning
any reasons. It was held that this clause is not unconscionable or opposed to
public policy.

VI VOID AGREEMENTS

The Supreme Court in Nutan Kumar v. 2nd Additional District Judge,15

held that unless the statute specifically provides that a contract contrary to

10 AIR 2002 HP. 213.

11 AIR 2002 Del 151.
12 AIR 2002 HP 166.
13 AIR 2002 Ori 195.
14 AIR 2002 Bom 420.
15 AIR 2002 SC 3456.
172 Annual Survey of Indian Law [2002

the provisions of statute would be void, the contract would remain binding
between the parties and could be enforced between them. It was held, in the
instant case, that in the absence of any mandatory provisions of the Act, the
agreement of lease between landlord and tenant is not void and the parties
are bound as between themselves to observe conditions. In R.G. Jogdand v.
K.J. Naikwade,16 the Bombay High Court held that the court cannot render
any assistance to the party with regard to the agreements which are void,
especially where the plaintiff knew that his agreement with the defendant
was null and void.
In Kalyan Singh v. Ranjot Singh,11 goods were sent by the plaintiff for sale
in Lucknow and for which a cheque was issued by the defendant. There was a
clause in the contract stating that the plaintiff will not encash the cheque till
payment was received by the defendant from Lucknow. There was, thus,
uncertainty as to the period when the amount was to be received by the appellant.
It was held that the agreement was void on the ground of uncertainty and the
claim of the appellant cannot be defeated simply on the ground that the defendant
has not received the amount from Lucknow.

VII AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS

The Supreme Court in M/s Shriram City Union Finance Corp. Ltd. v. Rama
Mishra1% reiterated the already established legal position that it is open for parties
to choose any one of the two competent courts to decide their disputes and such
agreements are not invalid. Once parties decide to be subject to one of the two
courts having jurisdiction over the dispute, it is not open for them to choose a
different forum.
In Ranjana Nagpal alias Ranjana Malik v. Devi Ram and Others,™ it was
held that before the parties can agree to vest the jurisdiction in a particular court,
two or more courts including the one in whom the jurisdiction is agreed to be
vested must have the jurisdiction under section 20 of the CPC. The parties
cannot vest jurisdiction in a court, which does not have the jurisdiction. Such
agreement would be against the statute and thus hit by section 28 of the Contract
Act.
In M/s Polymer Papers Ltd. v. Gurmit Singh20 it was restated that a person
has no right to restrain the defendant from doing business similar to that of the
plaintiff. Such a restraint against the defendant from manufacturing, selling or
otherwise dealing in machines similar to those manufactured by the plaintiff is
clearly barred by section 27 of the Contract Act.

16 AIR 2002 Bom 148.

17 AIR 2002 HP 180.
18 AIR 2002 SC 2402.
19 Supra note 12.
20 AIR 2002 Del 530.
Vol. XXXVilli Contract Law 173

VIII TIME AS ESSENCE OF CONTRACT

In Lala Sumar Chand Goyal v. Rakesh Kumar21 the Allahabad High Court
restated that the parties must conclude their contract or perform the contract as
per the time schedule where time is of the essence of the contract. But where
time is not so crucial, the contract cannot be said to have been repudiated merely
on the ground that it was not concluded on the date on which the defendant
intended to conclude it.
In K. Ramakrishnan and Others v. Siddhammal and Others22 it was held
that though generally time is considered to be the essence of the contract, the
legal proposition is that time is not the essence of contract in case of the sale
of immovable properties, unless it is specifically stipulated that the time fixed
in the sale agreement is a relevant factor and the said time is considered the
essence of the contract, and putting the other side on notice to the said effect.23
The Madras High Court in Sri Brahadambal Agency and Partnership Firm v.
Ramaswamy and Others24 held that time is not the essence of the contract in
case of immovable property. This dictum of law is, however, subject to two
exceptions. The first one being that it should be stipulated in the contract itself
that time is the essence of the contract and the second one is that the party
considering the time as the essence of the contract should put the other party on
notice. Unless both these conditions are complied with, the rule that the time is
not the essence of the contract so far as it is concerned with immovable properties
shall prevail.
Again in Rakha Singh v. Babu Singh25 it was reiterated that in case of
contract of immovable property, time is usually not of essence of the contract
unless parties specifically insert this clause in the agreement.

IX FRUSTRATION OF CONTRACT

The Supreme Court in Nirmala Anand v. Advent Corp. Pvt. Ltd.26 laid down
that the contract to sell the immovable property cannot be said to be frustrated
where the permission of the competent authorities to construct flats is terminated
but the order is likely to be revoked. In the instant case, there was an agreement
for the purchase of a flat in a building constructed on the plot leased out by
municipality. The permission to construct the building was later on refused by
the municipality authorities. However, it was found that due to public pressure
there was every possibility of the government as well as the municipality,
respectively, renewing the lease and revalidating the building plans in question.
It was held that under these circumstances the contract in question cannot be
said to have been frustrated.

21 AIR 2002 All 83.

22 AIR 2002 Mad 241.
23 Id. at 247.
24 AIR 2002 Mad 352.
25 AIR 2002 P & H 270.
26 AIR 2002 SC 2290.
174 Annual Survey of Indian Law [2002

X NOVATION

There are various situations contemplated under section 62 of the Contract

Act that could absolve any party to the contract from performing original contract.
But whether a given situation is covered under section 62 has always proved a
tricky question. Two situations, namely, material alteration and accord and
satisfaction have been deliberated upon by the courts during the year under survey.

Material alteration
The Supreme Court in Ram Khilona v. Sardar21 held that material alteration
in a contract is one which varies the rights, liabilities or legal position of the
parties as ascertained by the deed in its original state or otherwise varies the
legal effect of the instrument. It was held in the instant case that where there was
an agreement to sell some property and the vendees subsequently introduced in
the original agreement two independent persons as marginal witnesses it could
not be said that there was a material alteration. Such alteration did not bring
about change in validity or enforceability of the agreement.

Accord and satisfaction

The Calcutta High Court in M/s Saraswat Trading Agency v. UOl,2*
propounded many principles pertaining to the doctrine of accord and satisfaction.
It was laid down that (1) when a promise is to be performed within a certain
time, it has to be performed on any day before the lapse of that time. (2) When
a promisor does not perform his part of the promise he cannot claim performance
of the reciprocal promise. (3) In case of accord and satisfaction and similar other
situations, strict performance of the promisor's obligation is insisted upon by the
courts. (4) Mere payment and acceptance of a lesser sum without the accord that
it will be in extinction of the balance liability will not be full satisfaction of the
debt. Otherwise, as a standard practice every debtor would send to the creditor
a lesser sum by way of a cheque with appropriate covering documents taking the
chance. If encashed, the debtor can then get away without paying the balance
sum. This cannot be permitted by law. (5) Where a creditor agreed that if lesser
sum than due was paid before a specified date, it would be accepted as full
satisfaction of all claims.The debtor will be discharged from the responsibility
only when he performs his part strictly in accordance with new terms and
conditions.

Rescission of contract
The AP High Court in Grandhi Subramanayam v. Vissamsethi Visweswara
Rao (FB)29 followed English as well as Indian cases30 to reach the conclusion

27 AIR 2002 SC 2548.

28 AIR 2002 Cal 51.
29 AIR 2002 AP 71.
30 R.V Ward Ltd v. Bignall, (1967) 2 All ER 449; Ross T. Smyth and Co. Ltd. v. T.D. Bailey Sons
and Co., (1940) 3. All ER 60; State v. M/s M.K. Patel and Co., AIR 1985 Guj 179; De-Smet
India Pvt. Ltd v. B.P Industrial Corporation, AIR 1980 All 253.
Vol. XXXVIII] Contract Law 175

that the plaintiff cannot claim refund of the amount in a situation where he had
all along been ready and willing to perform his part of the contract. Where the
defendant has not either expressly or by necessary implications accepted the
repudiation on the part of the plaintiff, the refund of the amount in favour of the
plaintiff cannot be decreed.31

XI QUASI CONTRACT

In R Baskar Bhat v. H.P. Corp. Ltd,32 the Madras High Court, while following
earlier rulings,33 laid down that allowing the plaintiff to claim arrears of rent for
the months it was not due would amount to unjust enrichment impinging sections
69 and 70 of the Contract Act.

XII DAMAGES

In M.M.T.C. Ltd. v. S. Mohamed Ganie34 the plaintiff, a government

undertaking, was dealing with export of marine products. The defendant was
doing business in seafood. Plaintiff agreed to give financial assistance to the
defendant. A clause was incorporated in the agreement stating that the defendant
will compensate the plaintiff in case of rejection of cargo, non-payment etc by
the foreign buyer. A consignment was sent by the defendant which was rejected
by the foreign buyer on the ground that the goods were damaged due to mal-
functioning of container in which goods were shipped. The plaintiff contended
that the defendant is liable because a clause to this effect was already incorporated
in the agreement. The court rejected this argument and held that this clause is
not flexible enough to include negligence of shipping agent also. The goods
were rejected because of the mal-functioning of the container for which shipping
agent should be held responsible and not the defendant.
In M/s Geep Industrial Syndicate Limited v. Union of India35 contract was
made for the supply of more than 18 lakh batteries. The petitioner guaranteed
performance and life of such batteries. These batteries got discharged prematurely,
without completing the life as per guarantee. The lower court passed award by
reducing price proportionately on the basis of representative sample pre estimating
the loss in the light of formula stipulated in their contract. This decision of the
lower court was upheld by the Delhi High Court.
While expounding the term "reasonable compensation" in section 73, the
Madras High Court in M/s Macbrite Engineers v. Tamil Nadu Sugar Corp.
Ltd.,36 laid down that the word "reasonable compensation" gives a wide discretion
to the court in the assessment of damages. The only restriction is that the court

31 Id. at 75.
32 AIR 2002 Mad 330.
33 See for instance Ganda Singh v. Secy of State, AIR 1939 Pesh. 101; Manohar Lai v. Bengal
Potteries Ltd, AIR 1958 Pat 457.
34 AIR 2002 Mad 378.
35 AIR 2002 NOC 180 (Del).
36 AIR 2002 Mad 429.
176 Annual Survey of Indian Law [2002

cannot decree damages exceeding the amount previously agreed upon by the
parties. The discretion of the court in the matter of reducing the amount of
damages agreed upon is left unqualified by any specific limitation, though of
course the expression 'reasonable compensation' used in the section necessarily
implies that the discretion so vested must be exercised with care, caution, and
on sound principles.
In T.N Civil Supplies Corp. Ltd. v. M/s Oswal S.E. (Madras) Units,31 the
plaintiff corporation called for tenders for disposal of rice bran produced in its
rice mill. The defendant purchaser offered the highest tender, which was accepted
by the plaintiff. The stocks were sold on "as is where is basis". There was no
specification to the effect that whether it was cone polished rice bran or huller
type rice bran or any other variety. The defendant allayed that he was given to
understand that the variety of rice bran was cone polished. Because of the
misrepresentation on the part of the plaintiff he was not bound to remove the
stock. The court concluded that the defendant had committed breach of contract
and was liable to compensate the loss caused to the plaintiff.38
In P. K Abdulla v. State of Kerala,39 the Kerala High Court was called to
delineate on the scope of section 74 of the Contract Act. It was laid down that
where the respondent has failed to prove that he had sustained legal injury due
to breach committed by the appellant, he is not entitled to damages. If the party
complaining is in a position to aduce evidence whereby the court can assess
reasonable compensation then without proof of actual loss, damages will not be
awarded and the amount mentioned by the contract will be penalty. In such
circumstances, the respondents are not entitled to forfeit the security money.
This principle applies to retention amount also.
In Pravara Sahakari Sakhar Kharkhava Ltd. v. Express Industrial Corp40
the defendant made part delivery of the goods and then wrongfully withheld the
supply of the balance goods. The contract did not contain penalty clause to this
effect. It was held that the plaintiff did not succeed in making claim for liquidated
damages because it could not be proved that the defendant was unable to make
use of partly delivered goods in its manufacturing process of sugar. However,
breach of the contract by the supplier affecting purchasers' purchase of sugar
could entitle the plaintiff to the award of unliquidated damages.41
In Thyssen Stahlunion Gmbh v. Steel Authority of India,42 it was laid down
that section 73 of the Contract Act provides that claimant should be put into the
same position as he would have been had the contract been performed.
Furthermore, unless and until the party proves the damages actually suffered by
him or the compensation paid by him to a third party on account of breach of
contract by the seller, it is not entitled to any damages or compensation.

37 AIR 2002 Mad 35.

38 Id. at 41.
39 AIR 2002 Ker 108.
40 AIR 2002 B o m 185.
41 Id. at 194.
42 AIR 2002 Del 255.
Vol. XXXVIII] Contract Law 177

XIII GUARANTEE

In Indian Bank v. State of Tamil Nadu43 it was held that section 128 of the
Contract Act deals with the liability of the guarantor as being co-extensive with
that of the principal debtor. The word co-extensive indicates the upper limit of
the liability of surety. Furthermore, in the absence of the principal debtor, suit
can be filed against the guarantor alone.
Again, in Ram Bahadur Singh and Another v. Tehsildar Bilsi and Others44
it was held that it is open to creditor to straightway proceed against guarantor
without first proceeding against principal debtor.
In Annama Jose and Another v. Kerala Financial Corporation,
Thiruvananthapuram, and Others,45 loan was advanced to a company and the
guarantee deed was executed by directors of the company. It was held that
subsequent letter of acknowledgement of debt issued by such directors on behalf
of the company does not bind the directors of the company.
In Hagglunds Drives A.B. v National Heavy Engg. Co-operative Ltd., Pune46
it was held that the issuing bank is bound to observe and honour the terms of
the guarantee. The beneficiary of a bank guarantee cannot be restrained from
invoking the bank guarantee and the issuing bank cannot be injuncted from
paying over the proceeds of the bank guarantee save in the case of fraud which
vitiates the entire underlying transaction or in a case where irretrievable injustice
would be caused by the invocation or the encashment of the bank guarantee .
The issuing bank is not concerned with the terms of the underlying transaction
between the beneficiary of the bank guarantee and the person at whose behest
the bank guarantee was issued by the guaranteeing bank. The bank guarantee is
a tripartite contract between the issuing bank and the beneficiary. The bank is
not a party to the underlying contract between the beneficiary and the person at
whose behest bank guarantee is issued.47
The Delhi High Court in Rigoss Exports International Pvt. Ltd. v. Tartan
Infomark Ltd,4H laid down that the courts should be slow in granting injunctions
restraining realization of the bank guarantees except in two situations-(l) If a
fraud is played whereby the seller is induced to furnish a bank guarantee of
which the beneficiary wants to take unjust advantage, and (2) where allowing
the encashment of unconditional bank guarantee would result in irretrievable
harm or injustice to one of the parties concerned.49
In State Bank of India v. Gautami Devi Gupta,50 it was laid down that
section 171 of the Contract Act gives statutory recognition to the concept of
banker's general lien. It provides that the bankers may, in the absence of a

43 AIR 2002 Mad 426.

44 AIR 2002 All 344.
45 AIR 2002 Ker 396.
46 AIR 2002 B o m 305.
47 Id. at 311.
48 AIR 2002 Del 285.
49 Id. at 294.
50 AIR 2002 M P 81.
178 Annual Survey of Indian Law [2002

contract to the contrary, retain as a security for a general balance of account any
goods bailed to them. Money is a species of goods, which may be the subject
matter of bailment and over which lien may be exercised. The general lien of
banker's as judicially recognized, and dealt with in section 171 attaches to all
goods and securities deposited with them as bankers by a customer or by a third
person on a customer's account provided there is no contract, express or implied,
inconsistent with such lien. There is no gainsaying that such a lien extends to
fixed deposit receipts also which the customer deposits.
The Madras High Court in Indian Bank, Rasipuram v. Sri Annapoorna
Finance,51 maintained a distinction between banker's lien and banker's right to
set off. It was held that while a lien is confined to securities and properties in
the bank's custody, the set-off is in relation to money and may arise from a
contract or from the mercantile usage or by operation of law. The bank could
exercise its right to set-off in the balance money of a customer, provided there
exists mutual demands and in order that one demand might be set-off against the
other, both must exist mutually between the parties.
The Delhi High Court in Rampur Engineering Co. Ltd. v. United Construction
Co. and Others52 held that it is a settled law that the beneficiary is entitled to
invoke the bank guarantee strictly according to its terms. The bank guarantee is
an independent and distinct contract between the bank and the beneficiary. In
such cases there is a specified stipulation that the bank shall unconditionally and
irrevocably pay on demand the amount of liability undertaken in the guarantee
without any demur or dispute in accordance with the terms of the bank guarantee.
There is no escape from the liability of the bank to get its guarantee encashed
by its beneficiary.
The court cautioned that if the invocation of the bank guarantee is interfered
with by the court merely on the representation that there are disputes between
the beneficiary and the person at whose instance the bank guarantee was furnished,
it is likely to erode the very trust and faith of the people in the banking
transactions. Unless there is a fraud or injury apparent on the face of transaction,
the bank guarantee should not be kept in abeyance or put in cold storage. Where
the bank fails to take necessary steps for the recovery of the amount under the
bank guarantee from the debtor, the court is entitled to burden the bank with the
responsibility to compensate and reimburse the stipulated amount to the
beneficiary.53

Liability of surety
The MP High Court in State Bank of India v. Goutmi Devi Gupta54 restated
the already established principle relating to liability of surety. It was laid down
that by virtue of section 128 of the Contract Act, the liability of the surety is co-
extensive with that of the principal debtor. The surety thus becomes liable to pay

51 AIR 2002 Mad 180.

52 AIR 2002 Del 170.
53 Id. at 178.
54 Supra note 50.
Vol. XXXVIII1 Contract Law 179

the entire amount. His liability is immediate and simultaneous. It is not deferred
until the creditor either exhausts his remedies against the principal debtor
personally or against the property mortgaged or hypothecated by him. The creditor
gets the right to recover the amount straight away from the surety. The right of
the creditor to proceed against the surety is not dependant or contingent upon his
remedy being exhausted against the borrower. The creditor cannot be asked to
pursue his remedies against the principal debtor whether personally or against
his mortgaged or hypothecated property in the first instance. If on principle a
guarantor could be sued without even suing the principal debtor there is no
reason, even if the decretal amount is covered by the mortgage decree, to force
the decree holder to proceed against the mortgaged property first and then to
proceed against the guarantor. In Indian Overseas Bank v. S.N.G. Castorety Pvt.
Ltd.55 it was held that the liability of the surety arises only if the deed of
guarantee is executed. Where a guarantor simply gives a general assurance to
pay the amount to the creditor as against the guarantee deed executed by the co-
sureties, his general assurance cannot be construed as a guarantee deed.
In U.O.I, v. Monin Enterprises,56 the borrower availed the cash credit facility
from time to time and the amount of credit was enhanced from time to time. The
bank never asked the borrower to furnish security. However, a deed of guarantee
was executed by the guarantor after the cash credit facility was finally enhanced
to Rs. 45,000/-. This deed was in usual format and there was no stipulation that
guarantee covered consideration paid in the past. Bank in fact had permitted the
borrower to withdraw loan amount without any guarantee. It was held that the
guarantor was not liable for repayment of loan.
The Allahabad High Court in Kailash Chand John v. UP Financial
Corporation, Kanpur and Others,57 laid down that the liability of guarantors is
co-extensive with that of the principal borrower. Therefore, the corporation
(respondent) can proceed against the guarantors on the basis of their guarantees.
If there are several remedies available to the respondents, it is their choice as to
which remedy it would pursue and the defaulting party cannot compel the creditor
to take recourse to any particular remedy.

Continuing guarantee
In Indian Bank, Madras v. State of Tamil Nadu and Others,5* it was laid
down that whether in a particular case a guarantee is continuing or not is a
question of the intention of the parties, as expressed by the language they have
employed; understanding it fairly in the sense in which it is used; and this
intention is best ascertained by looking to the relative position of the parties at
the time the instrument is written. It was further held that so long as the account
is live, ie, neither settled nor refused by guarantors to carry out the obligation,
period of limitation would not start running. It would start from the date of

55 AIR 2002 Del 309.

56 AIR 2002 Kant 270.
57 AIR 2002 All 2002.
58 AIR 2002 Mad 423.
180 Annual Survey of Indian Law [2002

breach. Therefore, the suit filed within three years from the date of notice by
bank invoking guarantees was within the period of limitation.

XIV BAILMENT

The Supreme Court in Om Shankar Biyani v. Board of Trustees, Port of

Calcutta59 laid down that it is not a true proposition that the bailee, who exercises
lien is not entitled to charge rent for storage of goods. Where the lien is exercised
for non-payment of rent or storage charge, the bailee is within his right to
exercise the lien. If held otherwise, it would lead to catastrophic result. If the
bailee were to refuse to allow clearance and exercise his right of lien as he is
bound to do, the bailor's purpose would be served.

XV PLEDGE

In Suraj Sanghi Finance Ltd. v. Credential Finance Ltd.6{) it was held that
the plaintiff under section 176 of the Contract Act has a right to retain pledged
goods, until such time defendants make payment. A plaintiff has a right to file
a suit for the recovery of money without proceeding against pledged goods or
other collateral securities.

XVI LIABILITY OF AGENT

In Rail India Technical and Economic Services Ltd. Bangalore v. Ravi

Constructions, Bangalore6* the Karnataka High Court held that section 230 of
the Contract Act makes it clear that an agent is not personally bound by the
contract entered into on behalf of the principal in the absence of any contract to
the contrary.
The Calcutta High Court in W.B. Essential Commodities Supply Corp. Ltd.
v. Karen FT Corp.62 held that when the plaintiff has chosen to sue the foreign
principal, the agent is automatically relieved of his liability so far as it relates
to dealings and transactions between the plaintiff and the principal. It was open
for the plaintiff to sue the principal alone leaving out the agent. Both the principal
and agent cannot be sued. There must be an election by the plaintiff of the party
against whom he wants to recover his claim.

59 AIR 2002 SC 1217.

60 AIR 2002 Bom 484.
61 AIR 2002 N O C 30 (Kant).
62 AIR 2002 Cal 211.