Mohan Lal vs Suraj Mani and another.

Mian Jalal-ud-Din, J.—This appeal raises an important question relating to the extent of the liability of the surety for the performance of the

decree passed on the basis of compromise between the plaintiff and the defendant.

Mohan Lal the plaintiff appellant brought a suit against Suraj Mani the defendant respondent for the recovery of Rs. 6126.00 in the court of

District Judge Udhampur. During the pendency of the suit Nitya Nand in the course of attachment proceedings executed a surety bond and

engaged himself to pay Rs. 6126.00 if the court eventually Passed a decree against the defendant. While the trial of the suit was in progress the

plaintiff entered into a compromise with the defendant respondent as a result of which the court passed a decree for Rs. 6126.00 in favour of the

appellant. According to the terms of compromise the decretal amount was to be paid in instalments at the rate of Rs. 200.00 per month. The

compromise was effected without the knowledge of the surety. Afterwards execution proceedings were taken out by the decree holder and he

sought to proceed against the surety. This was contested by the surety on the footing that his obligation under the surety bond had ceased to exist

as the decree proceeded on the basis of compromise of which the surety had no knowledge. Negotiations between the decree holder and the

judgment debtor regarding the mode of payment which had resulted in the passing of the consent decree discharges the surety under the law of

contract. On a consideration of the matter the court of the District Judge came to the conclusion that the surety was not liable to the decree holder

and that he stood discharged under the terms of the bond. Aggrieved by this the decree holder has come up in appeal before this court.

The appeal was originally heard by a Division Bench of this Court. During the course of argument it was found that this court had expressed

divergent views on the matter by enunciating two conflicting principles one in AIR 1962 J & K 72 and the other in AIR 1968 J & K 93. The

authorities not being unanimous it was felt that the matter required further consideration by a larger Bench. It is these circumstances that the case

has been referred to the Full Bench.

We have heard the learned counsel for the parties.

In the instant case, as has been stated above, the surety made himself liable towards the decree holder to Pay the amount of Rs. 6126.00. if

eventually a decree was passed against the judgment debtor. A decree for Rs. 6126.00 was undoubtedly passed in favour of the decree holder in

pursuance of compromise arrived at between the parties. The question that falls for our determination is whether the surety's liability under the

surety bond continues or has ceased to exist when the surety was not present when the compromise deed was scribed and the decree was passed

in the case. In my opinion this would not militate against the principle underlying Section 145 of the Code of Civil Procedure. In order to determine

whether a surety stands discharged or continues to be liable under the surety bond the real test to apply is to find out the terms of the bond and its

scope. where the plaintiff and the defendant have entered into a compromise without the consent of the surety by which he is seriously prejudiced

and according to which substantial departure is made from the terms of the surety bond under which the surety engages himself to pay the decretal

money then of course the surety would be deemed to have been discharged and ceased to be liable on the surety bond as this would be in

accordance with the principle governing Sections 135 to 139 of the Contract Act. But in a case where only a consent decree is passed on the

basis of compromise and such decree was in the contemplation of the parties to the suit including the surety when the latter became a surety and

there is nothing in the decree which shows that the compromise is at variance with the terms of the surety bond then notwithstanding the fact that

the surety was not present at the time of compromise entered into between the parties to the suit pursuant to which the consent decree is passed

the surety continues to remain liable and does not stand discharged. The view enunciated in AIR 1962 J & K 72 is therefore the correct view on

the subject. That case is on all fours with the facts of the present case, as in that case the court had passed a consent decree on the basis of

compromise arrived at between the parties. The surety had executed a bond during the pendency of the suit that he would be liable to pay the

decretal amount in case a decree was passed against the defendant. It was held that according to the recitals in the surety bond the surety did not

either impliedly or specifically exclude the passing of the consent decree and therefore on the terms of the bond there could have been no doubt

that the consent decree was in contemplation of the surety when he executed the bond and on that ground alone he could not assail the execution

taken out against him. Not only is the view that I take in the present case in consonance with the aforesaid authority of the Division Bench of this

court but this view also finds support in AIR 1931 Bom 55. Chakkunny, (Surety) Vs. Viswanatha Iyer, (Decree-holder), and Jatindra Narayan

Deb Vs. Gauranga Chandra Dutta Banik and Another . The last mentioned authority related to a case where the surety had executed a bond in the

course of proceedings under Order 38 Rule 5 C. P. C. The undertaking given by the surety was to pay the decretal amount if a decree was

eventually passed in the suit. Afterwards a consent decree was passed and instalments were fixed by the court with the consent of the parties just

as in the instant case. It was held that under the law the surety bond had to be given effect irrespective of any conditional order of attachment and

there was nothing to limit the meaning of the terms of decree as used in order 38 C. P. C. It could relate to the decree passed on adjudication by

the court or by consent or on compromise between the parties provided the decree in question was not obtained with a view to prejudice the

interest of the surety. It was further held that even if the surety was not a consenting party to the decree it could as well bind him. The matter rested

upon the construction of the surety bond.

The matter under consideration appears to have been clinched by the observations made by the Supreme Court in Raja Bahadur Dhanraj Girji

Vs. Raja P. Parthasarathy Rayanimvaru and Others, . Their Lordships have expressed the view that although Section 135 of the Contract Act

does not in terms apply to surety bond executed in favour of the court there can be no doubt that the equitable rule underlying the section must

apply to it. The question as to whether the liability of the surety is discharged by a compromise in the judicial proceedings in which the surety

executed must depend upon the surety bond itself. If the terms indicate that the surety undertook the liability on the basis that the dispute should be

decided by the court and not amicably settled, the compromise will effect discharge of the surety but if the terms show that the parties and the

surety contemplated that there might be an amicable settlement as well and the surety executed the bond knowing that he might be liable under the

compromise decree there can be no discharge and the surety will be liable under the compromise decree.

In view of this authoritative pronouncement of the highest court of the land the controversy among the High Courts on the subject has now been

set at rest. According to these observations the liability of the surety in the present case has not been discharged and he continues to be liable on

the surety bond because the passing of the consent decree was well within his contemplation at the time of the execution of the surety bond. The

compromise decree passed could not be said to have caused any prejudice to the surety in so far as his obligation under the bond was concerned.

The view taken in AIR 1968 J & K 93 and AIR 1968 Del 108 cannot, therefore, with respect be said to have laid down good law on the subject.

The result is that the appeal is allowed, the order of the court below is set aside and it is held that the surety continues to be liable under the

surety bond towards the decree holder. In view of the circumstances of the case we make no order as to costs.

Syed Wasi-ud-Din, J.

9.- I agree.

Ali C. J.:-

I entirely agree with the judgment proposed by my brother Jalal-ud-Din J. but would like to add a few lines of my own.

The question as to whether a surety is discharged if a compromise is entered into by a judgment debtor with the decree-holder is indeed a

vexed one and does not appear to be free from difficulty. There was some divergence of judicial opinion on this point but by virtue of the decision

reported in Raja Bahadur Dhanraj Girji Vs. Raja P. Parthasarathy Rayanimvaru and Others, the controversy has now been set at rest. In the

earlier case of this court in AIR 1962 J & K 72 I had written the leading judgement and had taken the view which is in consonance with the view

taken by the Supreme Court and which has now been taken by Jalal-ud-Din J. In the later case reported in AIR 1968 J & K 93. it is true that I

was also a party to that judgment where a contrary view was taken but that was because our attention was not drawn to the earlier decision in AIR

1962 J & K 72 nor to the Supreme Court decision (Supra). In view, however, of the decision of the Supreme Court, the decision in AIR 1968 J

& K 93 (Supra) can no longer be held to be good law and must therefore be overruled.

It seems to me that the dominant question in such cases is the question of intention which has to be spelt out from the recitals in the surety

bond. In common parlance a decree includes a decree on contest as well as a decree passed on the basis of a compromise. Thus where a surety

seeks to bind himself to Pay the decretal amount, he contemplates not only a decree on contest but also a decree passed on the basis of a

compromise or otherwise. Indeed if the intention of the surety is that he should be bound only by a decree which would be passed on contest and

not otherwise, then he must specifically make this averment in the surety bond to make his intention clear. In the absence of any such specific

averment in the surety bond, we do not see any reason why the surety would stand discharged merely because a decree has been passed on the

basis of a compromise. It is manifest that whenever a surety executes a bond, he is fully conscious of the fact that it is binding on him and has to

pay the amount decreed either on contest or on compromise or otherwise. In case the surety's liability under the surety bond is confined to a

particular mode of decree, he should expressly mention this fact in the bond.

For these reasons, therefore, I agree that the appeal be allowed and the order of the court below be set aside.