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Petitioner: NATIONAL CONSTRUCTION LTD. VS Respondent: STANDARD INSURANCE CO. LTD.
Court Name: Sindh High Court Judge(s): Ibadat Yar Khan Title: NATIONAL CONSTRUCTION LTD. vs STANDARD INSURANCE CO. LTD. Case No.: Suit No, 552 of 1981 Date of Judgment:1983-10-04 Reported As: 1984 CLC 286 Result: Application allowed
Judgment ORDER ' The defendant in this case have executed a Guarantee in favour of the plaintiffs undertaking to pay to the plaintiffs a sum not exceeding Rs, 6,00,000 "If Messrs. Integrated Construction Services fail to repay this amount to you in accordance with the terms and conditions of the said contract without reference to Messrs Integrated Construction Services." 2. The plaintiff have filed this suit against the defendant Guarantor claiming a sum of Rs, 5,62,817.45 made up of the principal amount and interest on the allegation that the said Messrs Integrated Construction Services have defaulted in the performance of contract which they had with the plaintiff and as such have become liable to the plaintiffs. The plaintiffs invoking the guarantee mentioned above are entitled to make this recovery from the defendant. The defendants have filed written statement stoutly contesting the allegations that the said Integrated Construction Services have ever been guilty of any breach or any -default in their performance or any occasion has occurred for enforcing the guarantee. The defendants also objected to maintainability of suit on account "non-joinder of Integrated Construction Services, Islamabad, who are necessary party and whose presence before the Court is necessary to enable the Hon'able Court effectually and completely to adjudicate upon and settle all questions involved in the suit." 3. Before the parties could proceed any further the defendant, has moved this application under Order I, rule 10, C. P. C. Praying therein that the said Integrated Construction Services, be ordered to be joined as a party in the suit. The plaintiffs are opposing this application. Both the learned counsel for the parties have addressed me at full length. The apparently short but all embracing question for determination is whether the Integrated Construction Services should be ordered to be joined in the suits as desired by the plaintiffs or the application should be dismissed and suit
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should proceed only against the guarantor/defendant. In other words whether the said Integrated Construction Services are a necessary or a proper party within the meaning of sub-rules (1) and (2) of rule 10 of Order I, C. P. C. 4. To fully comprehend the impact of the contentions raised by the defendant 1 would reproduce the defendants' application under Order I, rule 10 read with section 151, C. P. C. In extension :- "It is prayed on behalf of defendant that this Hon'ble Court will be pleased to order to join Integrated Construction Services (a firm or person carrying on business in said name) having their office and place of business in House No, 55, Street 36, F-6/1, Islamabad, as defendant No, 2. 2. The plaint alleges that (a) Integrated Construction Services contracted with plaintiff to carry out work of construction in Jhelum as Sub-Contractors of plaintiff ; (b) the said Integrated Construction Services were principal debtors of guarantee issued by this defendant which is conditioned upon the plaintiff making mobilisation advance of Rs, 6,00,000 to be recovered from monthly running accounts bills ; (c) Integrated Construction Services abandoned the contract and failed to carry out their obligations therein and plaintiffs claim to have become entitled to refund of sum of Rs, 5,20,300 from them. (d) which plaintiffs claim to recover from this defendant. 3. In the premises acts and conduct of said Integrated Construction Services alleged in plaint are the foundation or basis of claim and are in issue and in controversy in suit and the said Intergrated Construction Services, this defendant submits, ought to have been joined as defendant in suit for true and proper adjudication but not joined mala fide. 4. The presence of Inegrated Construction Services, this defendant submits, is necessary to adjudicate upon and settle all questions involved in the suit and this defendant submits that Hon'ble Court will be pleased to grant relief prayed and to award costs to this defendant. "An affidavit in support is herewith filed." ' An affidavit has been filed by the defendant and to avoid repetition I would quote only para. 4 of this affidavit :- "4. In the premises acts and conduct of Integrated Construction Services are in issue and in controversy in the suit and the said Integrated Construction Services ought to have been joined as defendant for true and proper adjudication but are not joined mala fide." 5. As stated earlier the plaintiffs are opposing this request and it would be proper to evaluate their opposition on their own version as embodied in the following paragraphs of their counter-affidavit dated 30th March, 1982. "Para. 3. That the contents of para. 2 of the application are not denied. However, on the contract having been, abandoned Messrs Integrated Construction Services should have repaid the balance amount to the plaintiff, which it failed to do. ' Para. 4. That the contents of para. 3 of the application as stated, are denied. It is submitted that the defendant guaranteed repayment of mobilisation advance and since Integrated Construction Services have failed to carry out the contract and/or repay the balance amount the defendant is liable under the guarantee to make pay- ment of the amount to the plaintiff. The liability of the defendant is co-extensive and there was no need to join Messrs Integrated Construction Services in the suit. ' Para. 5. That the contents of para. 4 of the application are denied. It is denied that the Integrated Construction Services is a necessary party to the suit. It appears that the defendant has tiled the
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application with intent to delay the proceedings in the suit. In any case the Integrated Construction Services is beyond the jurisdiction of this Honourable Court." 6. During the hearing in Court, both the learned counsel convassed their points of view. Mr. Mansoorul Arfin, learned counsel for the plaintiff argued his case on the premises.. "The liability of the defendant is co-extensive and there was no need to join Messrs Integrated Construction Services in the suit." (Para. 4 of the counter-affidavit). In support of this argument he cited case law. 7. It is often said and is repeated by the plaintiff in this case that the liability of the surety is co- extensive with that of the principal debtor. I must at once say that there is no cavil on that. If there is an admitted default either in performance or in payment, a right would accrue to the plaintiff to sue the principal debtor/defaulter. But if he so chooses, he may by-pass the principal debtor and right away pursue his remedy against the, surety. In such a case it would not be open to the surety to contest the action on the ground that the plaintiff could not initiate an action against such surety, 'without first exhausting his remedies against the principal debtor. By now the principle is well established that in the absence of a contract to the contrary in case of proven default the plaintiff's action against the surety would not be defeated because he had failed to sue the principal debtor and/or had not exhausted his remedies against him. Such is the view in all the cases cited by the learned counsel for the plaintiff. ' In AIR 1919 Lab. 355, the facts of the case were that on 7th June, 1916 the principal debtor one Gulab applied to be adjudged as an insolvent and on 11th December, 1916, he was so adjudicated. In such a situation the plaintiff-creditor filed a suit against the surety and it was held that :- "In my opinion the real meaning of the stipulation in the bond is that if the principal debtor makes default in payment according to the agreement the sureties shall be liable. I do not think it was necessary for the creditor to make a formal demand of payment from his debtor. It was the latter's duty to pay the debt as agreed upon and when he made default in payment the sureties became liable. In any case when Gulab filed his application to be declared insolvent, a cause of action arose against the sureties for Gulab's application was tantamount to a declaration that he would not pay his debts." ' In AIR 1919 Sind 103 the plaintiff had filed a suit against the principal debtor as well as the surety. Later be had dropped the principal and proceeded with the surety alone. It was held that :- "The suit is maintainable against the surety although no suit has been filed against the principal." ' In PLD 1982 Kar. 577 the principle was reaffirmed that :- "The creditor's right to proceed against the surety is not necessary to the right to proceed against the principal debtor personally. A surety in the absence of a contract to the contrary cannot compel the creditor to first exhaust his remedy against the principal-debtor." ' PLD 1968 SC 83.-In this case the question which fell for determination was whether if the creditor has been negligent in taking action against the pledged goods belonging to the principal debtor and has fell upon Fixed deposit receipts which were offered by the surety to guarantee the repayment of the loan his action would be sustainable. S. A. Rehman, J, delivering the judgment of the Court answered this question in two parts. First he dealt with the general proposition and at page 91 of the report held :- "The failure of the Bank to call upon Mr. Rafiq Butt and Mr. Taqi Butt to pay them the proceeds of the pledged goods, may not amount to a variance of the terms of the contract between the principal debtor and the creditor, within the meaning of section 133 of the Contract Act. The legal consequence of this failure was not the discharge of the principal debtor and section 134 of the Contract Act would not be attracted to the case. Nor would section 135 seem to be applicable, because there was no composition with, or promise made to give time to, or not to sue the principal debtor. Mere furtherance, on the part of the creditor to sue the principal debtor, or to enforce any other remedy against him, would not, in the absence of any provision in the guarantee
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to the contrary, discharge the sure ty, "as is provided by section 139 of the Act. However, sections 139 and 141 of the Contract Act may call for consideration in this behalf." ' The learned Judge then dealt with the other part of the case analysing the effect of sections 139 and 141 of the Contract Act and concluded : "The inference, therefore, seems clear that both by virtue of section 139 and section 141, the Bank was disentitled from realising its dues from the fixed deposit receipt of Mst. Zaitoon Begum". 8. I think I have done full justice to the learned counsel by examining every case in details which he very enthusiastically cited in support of a proposition which is so well-established and needs no support. I accept the proposition that the liability of a surety is co-extensive with that of principal debtor. 9. This expression clearly means that in the first instance the existence of a liability must be established. The liability cannot occur until there is a default or failure or breach on the part of the principal debtor. Once such a failure is established, the creditor's right or cause of action is born and a right for claiming a relief has accrued. From thi point of time and not before this, the creditor has a right to pursue his remedy against both the principal debtor as well as against the surety. IC Now it is his choice to sue both I n one action, to first seek a redres against the principal debtor and failing there chase the guarantor on directly launch an action against the guarantor totally by- passing the principal debtor. If he.Chooses to adopt the last of the three courses it would be no defence in such an action to plead that the creditor ought t have first exhausted his remedies against the principal debtor. It is in this context that the expression "the liability of a surety is co- extensiv with the principal debtor" is freely and so frequently used. 10. The central question which may arise in this case is whether the plaintiff has any cause of action to file this suit till such time that the liability against the principal debtor is either admitted or has been adjudicated or established through any other mode of proof. Until such time that a liability against the principal debtor is determined any action against the surety would be premature. ' In order to better appreciate the position let me reproduce the relevant portion of the guarantee document filed by the plaintiff :- "Whereas the National Construction Ltd., has agreed to pay a sum of Rs, 6,00,000 (Rupees six lacs only) being approximately 5% (five per cent.) of the Contract value to Messrs Integrated Construction Services as Mobilisation Advance which shall be recovered from their monthly running Accounts bills in accordance with the terms and conditions of the Contract." ' Note the words "agreed to pay". In para. Of the written statement the defendant says :- "The sum was not paid and advanced Nor Shown to be So." ' The words "Nor shown to be so" express a deeper meaning when read with relevant paras. Of the plaint. No clear and plain assertion is made in the plaint that this Rs, 6,00,000 was actually paid as had been agreed to be paid, ' The next para. Of the guarantee document is equally important. It is -4 as follows :- "We, Messrs The Standard Insurance Company Ltd., hereby guarantee to pay you unconditionally on demand any sum up to but not exceedir.g Rs, 6,00,000 (Rupees six lacs only) if Messrs Integrated Construction Services fail to repay this amount to you in accordance with the terms and conditions of the said contract without reference to Messrs Integrated Construction Services." ' The clause imports a new element in the contract of guarantee by making a reference to the performance of contract between the plaintiff and Messrs Integrated Construction Services. ' These words read with para. 9 of the written statement of the defendants seem to be fatal to the very maintainability of the suit. I quote para. 9 of the written statement :- "9. The plaintiff have not given particulars of their claim. This defendant is informed by Messrs Integrated Construction Services that the plaintiff did not pay and make the advance, committed breaches of and did not perform their obligations under the contract and frustrated the contract.
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According to them, amount advanced was only Rs, 5,22,000 mobilization provided and taken over by the plaintiff Rs, 6,63,350 recovered and/or adjusted, in addition to above, Rs, 2,45,289.56 payment due but not made and loss or damage suffered over Rs, 20,00,000." 11. In this situation the dispute between the plaintiff and Messrs Integrated Construction Services has arisen. As stated at the bar the parties have or are likely to file actions for adjudication of these disputes. 12. In case the said Messrs Integrated Construction Services in their action against the plaintiff and obtain a decree to the effect that the N. C. C. (plaintiff have committed the breach and the Integrated Services have suffered no liability in that contract and it is adjudicated in that action that either the said sum of Rs, 6,00,000 was not paid or if paid has been deducted from the bills and realised from their bills in full or in part as per agreement between them, how then this guarantee would remain enforceable against the defendants? Assuming they have realised this or a part of this amount, would they not be having a double advantage of double payments. Again, will it not be having two inconsistent judgments on the same cause of action ? The liabyity of the two is co-extensive. The Rawalpindi Court absolving the principal-debtor from the liability and the Karachi Court saddling the surety with the same liability. 13. When I put these questions to Mr. Mansoorul Arfin, the learned counsel frankly conceded that the right of recovery from the surety was dependent upon his first proving an undisputed liability of Messrs Integrated Construction Services. But the learned counsel hastened to add that he would do so by leading evidence of such default in performance/ failure of payment etc. In the present suit. I should avoid expressing any opinion whether such a course would be permissible to the learned counsel or not, but for the purposes of this case I am obliged to say that this by itself would be a good ground to allow the defendant's application under Order I, rule 10, C. P. C. For joining the said Messrs Integrated Construction Services against whom the learned counsel is contemplating to lead evidence in absentia. If it is a triangular action as it has turned out to be on his own admission, will it not be appropriate to join all the interested parties in one action, avoid multiplicity of legal actions and possibly contradictory findings on the same issues. 14. I may say that this case has peculiar features of its own. It is not a plain case of loan or admitted liability of a principal debtor. It is a case of contested liability. 15. In support of my finding on this part of the case I would rely on a very well-considered judgment of Hidayatullah, J. Reported in AIR 1948 Nag. 123. "4. A contract of guarantee must be construed strictly in favour of the surety. This is settled law ; further, under section 128, Contract Act the liability of a surety is co-extensive with that of the principal debtor unless it is otherwise provided for by the contract. The contract of guarantee has, therefore, to be construed to find out the exact point of time when the liability of the surety arises. In some cases it may be that the surety's liability may begin simultaneously with the liability of the person guaranteed. But there are cases in which this may not happen. It was held in 53 I C 999 at p. 1000 as under : ' The liability of a surety does not necessarily in all cases arise simultaneously with that of the principal. It often happens that the remedy against the principal is barred and the liability of the surety arises. The question depends on the terms of the contract of guarantee by which the surety has bound himself.' ' If there is no stipulation to the contrary the liability of the surety arises at once. ' It has been held in a large number of cases that where the liability arises only on the happening of a contingency the surety is not liable on his contract until that contingency has actually happened. 5. In the present case the agreement was that the surety was to make good the deficit which may be found due on the sale of the mortgaged property. The surety is entitled to say that the plaintiff
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must take action against the mortgaged property before he can claim any relief against him. This is borne out by the cases which have been cited above in which the claim was held to be premature. In my opinion, therefore, the claim of the plaintiff (respondent 1 in this matter) against the surety-appellant is premature." There are other observations in the judgment but it is not necessary to reproduce them. Suffice it to say that a proved default of the principal/F debtor must pre-exist before a right of the creditor to enforce his right' against the surety would co-exist with principal-debtor. 16. Now I take up the next point on which the two learned counsel have addressed me and had Mr. Mansoorul Arfin the learned counsel for the plaintiff not detained me by advancing arguments on the question of liability of the surety, I would have come direct to the point at issue namely the prayer in the application filed by the defendant praying for joining the Integrated Construction as a defendant. The learned counsel for the plaintiff vehemently opposes this application. ' Order I, rule 10, C. P. C. Has 5 sub-rules but for purposes of the case - on hand sub-rule (1) and sub-rule (2) are relevant. 17. The rules postulate that if a necessary or even a proper party has not been joined in the action, the Court should in its discretion order that such party should be joined. The burden of argument of Mr. Rahimtoola is that "the acts and conduct of said Integrated Construction Services alleged in the plaint are the foundations or basis of claim and are in issue and in controversy in suit and the said Integrated Construction Services, this defendant submits ought to have been joined as defendant in suit for true and proper adjudication but not joined mala fide". 18. I have discussed exhaustively in the preceding paras. Of this judgment that the cause of action against the surety arises only when the default of the party for whom or on whose behalf the surety has offered the guarantee, has been established. To explain the point let me give an illustration. A undertakes to bear the educational expenses of B and B promises to serve A for a period of 5 years failing which he would pay 5 lacs to A being the expenses incurred on the education of B by A. C guarantees this payment if B fails to serve A for five years and or makes a default of payment of five lacs to A in lieu thereof. Suppose A made a default in bearing the educational expenses of B wholly or partly and B did not get all the amount which A has promised to pay, or having incurred all the expenses refused to employee B in service and himself committed the breach, can A in these circumstances straightaway file a suit for recovery of Rs, 5 lacs from C on the basis of the guarantee offered by C. To me the answer is in negative. A would be entitled to make a claim against C, if and only if he can establish that he has fulfilled all the conditions of the contract with B and B has failed to perform his part of the bargain. This may be proved either on admitted facts or in case of disagreement or dispute between A and B through a decree or award fixing the liability squarely on B. In my opinion no cause of action would accrue to A against B until such time that B's liability is finally determined. From this stage A would have a right of recovery against both B and C and if he chooses to by-pass B and straightaway files an action against C, his action would be maintainable. It is settled law that his failure to first sue B or even join B in an action against C would not defeat his action. On the analogy of the above case. Can it be said that the plaintiffs have established that they have paid the whole amount of Rs, 6,00,000 (six lacs) which they had promised to advance as "Mobilisation Advance" to the Integrated Service, that they have not recovered the whole or part of this amount from the running bills of the said Integrated Services as per their agreement and last but not the least the said Integrated Services have abandoned the contract and have not been illegally driven away by the plaintiff themselves until all these questions are positively answered how can the plaintiff rush to the court and apprehend the defendant in this suit without proving the default of the said Integrated Services. 19. The position taken by the plaintiff is narrated in para. 4 of their counter-affidavit dated 30th February, 1982 and is as follows :-
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"It is submitted that the defendant guaranted repayment of advance and since Mobilisation Integrated Construction Services have failed to carry out the contract and/or repay the balance amount the defendant is liable under the guarantee to make payment of the amount to the plaintiff." 20. As against this assertion the position taken by the defendant is as follows. In para. 9 of their W. S. They state : "The plaintiff have not given particulars of their claim. The defendant is informed by Messrs Integrated Construction Services that the plaintiff did not pay and take the advance, committed breaches of and did not perform their obligations under the contract and frustrated the contract. According to them, amount advanced was only Rs, 5,22,000 mobilization provided and taken over by the plaintiff Rs, 6,63,450, recovered and/or adjusted, in addition to above, Rs, 2,45,289.56 payments due but not made and loss or damage suffered over Rs, 20,00,000." In my opinion when there is neither an agreed failure nor an adjudicated default, on the part of principal debtor the presence of Integrated Services in the present suit is not only proper but necessary. To try an action depending on their alleged breach, in their absence would be most undesirable. 21. Mr. Mansoorul Arfin relied on only one case reported in AIR 1977 Goa 4. It was a suit for specific performance of a contract of sale of land. The owner defendant having already sold his land to the "Intervenor" had again contracted to sell the same land to the plaintiff resulting in an action for specific performance of the agreement of sale in favour of the plaintiff. An…
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