Saturday, November 03, 2007

Contract Act_Practical Problems_57

A bank sanctions an overdraft limit against the security of a continuing guarantee. The surety dies. Can the bank proceed against the heirs of the surety under the guarantee and, if so, to what extent ?

The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee as regards future transactions. It may, however, be noted that the estate of the surety shall be liable for all transactions entered into between the creditor and the principle debtor prior to the death of the surety, unless there was a contract to the contrary. However, his estate shall not be liable for the transactions entered into after his death, even if the creditor has no notice of the death.

Thus, in the given problem, since there is nothing against attachment of surety's properties after his death, the heirs of the surety shall be liable for the debit balance in the overdraft account but this liability shall be limited to the higher of the following two:

1. The amount of debit balance in the overdraft account as on the date of surety's death;

2. The value of the surety's estate acquired by the heirs.

Contract Act_Practical Problems_56

A guaranteed the honesty of a servant in the employment of B. The servant was guilty of dishonesty in the course of the service, but B continued to employ him and did not inform A of what had occurred. Subsequently, the servant committed further acts of dishonesty. B requires A to make good the loss. Discuss the liability of A.

In the given case, A cannot be held liable because of change in circumstances not brought to his notice by the creditor having knowledge of the same. Under such circumstances. Section 139 of the Indian Contract Act, 1872 becomes operative. It provides that if the creditor does any act which is inconsistent with the right of surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of surety himself against the principal debtor is thereby impaired, the surety is discharged. Thus, in the present case the omission of the creditor to inform A of servant's dishonesty and his conduct of continuing to employ him, shall discharge the surety A.

Contract Act_Practical Problems_55

A decree passed in favour of creditor against the debtor and the surety, stipulates that the decree shall not be executed against the surety, before the creditor has taken all steps to execute it against the debtor. Is the stipulation sustainable?

The stipulation in question that the decree shall not be executed against surety before the creditor has exhausted his remedies against debtor, is against law and, therefore, shall not be sustainable. Section 128 of the Indian Contract Act, 1872 makes the liability of the surety coextensive with that of the principal debtor, unless the

contract provides otherwise. Since no such provision is stated to have been so provided, the liability of the surety arises as soon as principal debtor defaults. Any such provision that the remedies be first exhausted against debtor will tantamount to postponement of surety's liability which shall be against the spirit of the provisions of the Indian Contract Act as stated above.

Hence, the decree passed in favour of creditor with the said stipulation is not valid and the creditor may proceed against the decree of the lower court and get the judgement rectified.