Union Bank of India v. A.P. Bhonsle: A Case Analysis

Introduction

The provided case law of “Union Bank of India vs AP Bhonsle 1991 Mah HC“ deals with the concept of Contracts of Guarantee. To properly get into the analytical part of the case and the judgement, we need to firstly bifurcate the statutory provisions of the case and get a comprehensive knowledge of the same. Thus, we initially start by discussing the concept of Guarantee and Sections of the same.

What is a Guarantee in simplest terms?

“Halsbury Laws of England defines Guarantee as an accessory contract by which the promisor undertakes to be answerable to the promisee for the debt, default or miscarriage of another person whose primary liability to the promisee must exist or be contemplated.”[1]

It implies the existence of a liability, actual or prospective and is also known as the contract of suretyship.

Section 126 of the India Contract Act states that 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.”[2] A guarantee may be either oral or written.

In simpler words, it comprises 3 parties:

Surety/Guarantor- A surety is a person giving a guarantee in a contract of guarantee. A person who takes responsibility to pay a sum of money, performs any duty for another person in case that person fails to perform such work.[3]

Principal Debtor- The one who borrows or is liable to pay and on whose default the guarantee is given.

Creditor- The party who has given something of value to borrow and stands to receive the payment for such a thing and to whom the guarantee is given.[4]

It is a tripartite agreement and not time-barred to the existing liability. The guarantee amount is payable on demand and the surety must not pay any sum higher than what has been guaranteed, ie, the debt issued by the creditor. The consideration solely lies between the creditor and the debtor and not between the debtor and the guarantor. The contract can be either oral or written and either express or implied as favoured by the parties.

For example, Amit borrowed a sum of Rs. 20000 from Sheetal. Jaanvi, Amit’s supervisor, pledged to the creditor, Sheetal that if Amit fails the repayment procedure, she will refund it. Here, Sheetal who lent out money is the creditor, Amit is the principal debtor, and Jaanvi is the surety/guarantor.

A Guarantee Contract is not a principal transaction, but rather an independent transaction resulting in separate and mutual duties. A Contract of Guarantee is a full and distinct deal within itself, and its implementation cannot be limited by the conditions of the underlying terms of the contract.

Section 127- Surety does not have a personal consideration for himself. “Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.”[5] There is no need for a direct flow of consideration between the surety and the creditor.

Illustration (c)- A sells and delivers goods to B.C. afterwards, without consideration agrees to pay for them in default of B. The agreement is void.[6]

Past consideration- “Past consideration is a promise for a voluntary deed performed in the past to assist the person making the pledge to pay or do something later.” It signifies that payment will be paid later for an act performed without any assurance from the other party. When the promisor’s incentive for making the promise is a former benefit he received that gave rise to a responsibility to provide restitution, the promise is said to be offered for past consideration. Previously, there was no consideration, but today there is a good and solid consideration.

Background

This section provides the facts and scenarios behind the given case.

Decided on April 24, 1991

• On August 29, 1977, defendants Nos. 1 and 2 acquired a loan of Rs. 37000 from the Bank to acquire one Tempo Matador Diesel Van for their business. Additionally, a cash credit limit up to Rs. 7,500/- was also granted. On the same day, defendants Nos. 1 and 2 executed a promissory note and a hypothecation bond against the amount of Rs. 37.500/- paid in cash.
• On September 14, 1977, The third defendant (respondent in the case), AP Bhonsle, executed a letter of guarantee binding himself to the extent of Rs. 45,000/- and interest keeping defendants 1 and 2’s views in consideration. Thus, by section 126 we can imply that Defendants 1 and 2 were the principal debtors who took a loan from the creditor, The Union Bank of India. Accordingly, Mr AP Bhonsle took the role of surety after his conduct of signing the letter of guarantee.
• Upon default on repayment by defendants 1 and 2, the plaintiff claimed Rs. 60,221.95 together with interest at the rate of 17% per annum from March 1980. Because they did not attend, an ex parte decision was entered against them for the full amount of the demand.
• Simultaneously the respondent denied assuming the role of surety for defendants 1 and 2 and contended to be in any way or means related to the loan. He also denied signing any letter on September 14 and claimed the letter was misinterpreted and signed by him without his proper knowledge.
• Claiming that since there was no consideration at the time of the letter of guarantee on 14th September 1977, the defendant took the defence of illustration (c) of Section 127 of the Act saying the provisions of Section 127 of the Contract Act could not be invoked by the plaintiff. Mrs. Agni, learned Counsel for the respondent, said that “anything done or promise made” is vague in compliance with Section 127 and cannot be interpreted to suggest that “anything done or promise made” referred towards something done previously in the past. i.e., prior to the guarantee contract and hence the contract of guarantee is void and the respondent is discharged of the liability to act over the same.

According to Illustration (c), it was presented that even if the sale had taken place earlier, but the money remained unpaid, the transaction would be viewed as not forming the consideration for the future contract of guarantee.

Issues Raised

1. Was the letter of guarantee misinterpreted by the defendants to obtain the respondent’s signature?
2. Is the past consideration valid in the case of the contract of Guarantee?
3. Can illustration be read as an extension of the meaning of the section?

For the sake of the content covered in the guidelines and the syllabus, we will only focus on issues 2 and 3 in the project.

Judgement

The validity of past consideration under the guarantee contract has always been a subject of the issue in the legal fraternity. While some high courts have positive views over it, many contend it equally and strongly.

It was determined that if the language of the text of Section 127 of the Contract Act is clear and precise, the scope of the text cannot be limited by imposing a limitation on the expression “anything done or any promise made for the benefit of the principal debtor” that it be done at the time of giving the guarantee. The phrasing is broad enough to embrace anything done or a promise made prior to making the assurance and would not limit the section’s application to simply what was done contemporaneously.

Citing the case of Kali Charan v. Abdul Rahman[7], where it was asserted by the guarantor that the guarantee bond was without provisions, that they were not guarantees for the buyer at the execution transaction, and that the aggrieved party failed to implement the terms of the settlement on default of the principal amount, and the cases of M. Ghulam Husain Khan and Anr. v. M. Faiyaz Ali Khan and Anr,[8], Paulo Varghese and Ors. v. Ittipe Abraham and Ors.^[9] and Ram Narain v. Lt. Col Hari Singh and Anr.[10] Were followed leading the judges to hold that despite the mismatch of the time frame of the formation of the consideration in the contract, anything done or promised in favour of the principal debtor is a full-fledged legitimate consideration to a surety for giving a guarantee.

The court stated that it is a well-established understanding that an outline does not enlarge the significance of the portion and that it should not be read as restricting the activity of a segment, particularly where doing so would abridge the right granted by the plain wording of the Section.

In this case, it was also mentioned that the delineation of Section 101 in the Indian Evidence Act was restricting a right that was granted under Section 106 of the demonstration, and thus the court had concluded that the representation won’t constrain a right that is given in the Section. Furthermore, Section 127 can be deduced to not require the assurance contract concurrently.

Analysis

Past consideration has been deemed valid under Section 2(d) of ICA despite many courts contending that if we go along the lines of the definition of the consideration provided under the Indian Contract Act, the past consideration would be invalid since consideration is something done at the desire of the promisor. Being retrospective of the present time, past consideration doesn’t have the ability to be formed at the desire of the promisor.

Though the ICA defines a contract of guarantee as a special contract and provides its own concept of consideration under section 127. As a result, in my opinion, the definition that contains the phrase “anything done” demonstrates a contrary aim to include even the consideration that does not move on the surety’s wish. As a result, the argument that it should be prohibited owing to the limitation of 2(d) is invalid.

This topic has been discussed over years through several courts with a few leanings towards the validity of past consideration while others contending strongly against it yet there’s no proper statement from the Supreme court to be able to finalise a ground for the same.

However, in my opinion, I feel that the ambiguity of “anything” in the definition has proved to be even more effective in the context of a contract of guarantee. The whole concept of guarantee was played to benefit the debtor and putting the concept of past consideration to test adds to the given theme. It also benefits the creditor as he doesn’t have to live in uncertainty over the loan and can get repaid by the proper date.

Agreeing to what the court had to say in the given case, an illustration is there to provide a basic and clear understanding of the concept. Laying down its applicability in future cases, which differ in facts and issues, setting it as a precedent is a slow move and hinders the judicial process.

I favour the ruling of the case in Union Bank of India vs. AP Bhonsle and thus state that Section 127 should be free to be interpreted in its broader sense as long as it complies with the law and order and for the benefit of the cases. It would be of immense help if the Supreme Court follows the direction and lays out a proper judgement regarding the same.

Conclusion

The Indian contract law emerged in 1872, yet there are arrangements that are still unfriendly and require explanation given the world’s accelerating economy. One of the contentious issues is the legitimacy of previous thought in ensuring contracts. Guarantee contracts are a regular part of a company and a technique for banks to ensure they receive their credited money on time.

The argument under Section 127 of the Indian Contract Act, which characterises the idea of an assurance contract, has been going on for a long time, and various courts have given varying interpretations of whether previous thought should be considerable.

We may conclude from the above attempt that a Guarantee contract fills in as an assuarance around the significant debt holder on the off chance that he fails on the advance repayment. Concerning the guarantor, his duties are co-extensive with those of the indebted person, and he should pay something similar to what the borrower would do in a prudent competent condition. There are no provisions under the Contract Act that substantially imperil the guarantee or deal with the lender’s needs.

Unlike English law, Indian law is not constrained by a strict word-for-word translation and hence became important in determining the legality of the previous thinking in the agreement. With the Supreme Court recently deciding that it should be substantial while ending a case, there is finally some bearing the Indian courts may utilise to offer future judgements and promote the legislation about this topic.

The validity of previous thinking has been preserved in other precedent-based regulation countries as well by applying imaginative techniques of getting around the literary impediment of the legislation as it achieves the aim of the agreement.

References

[1] 2(3) LORD MACKAY OF CLASHFERN, HALSBURY’S LAWS OF ENGLAND (FOURTH EDITION REISSUE) 50 (2003)

[2] THE INDIAN CONTRACT ACT,1872(9 OF 1872) 61 (AMBITION PUBLICATIONS)

[3] Sristi Chawla, What is Contract of Guarantee, IPLEADERS (Mar. 22, 2022, 9:50 PM), https://blog.ipleaders.in/contract-of-guarantee/

[4] Sutripto Bose, Essentials of a Contract of Guarantee, LEGALSERVICEINDIA (Mar. 22, 2022, 10:09 AM), https://www.legalserviceindia.com/legal/article-7706-essentials-of-a-contract-of-guarantee.html

[5] INDIANKANOON, https://indiankanoon.org/doc/777650/ (last visited Mar. 22, 2022).

[6] INDIANKANOON, supra note 5, at 5

[7] Kali Charan v. Abdul Rahman, AIR 1918 PC 226

[8] M. Ghulam Husain Khan and Anr. v. M. Faiyaz Ali Khan and Anr., AIR 1940 Oudh 346

[9] Paulo Varghese and Ors. v. Ittipe Abraham and Ors., AIR 1952 Travancore-Cochin 202

[10] Ram Narain v. Lt. Col Hari Singh and Anr., AIR 1964 Rajasthan 76

This article has been submitted by Ananya Mishra, a student at Hidayatullah National Law University, Raipur.