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Petitioner: FIDAALLY VS Respondent: SYED IQBAL SHABBIR
P L D 1960 (W
P L D 1960 (W. P.) Karachi 241
Before Wahiduddin Ahmad, J
FIDAALLY‑Plaintiff
versus
Syed IQBAL SHABBIR and another‑Defendants
Suit No. 9 of 1958, decided on 14th December 1959.
(a) Civil Procedure Code (V of 1908), O. XXXVII, r. 3 (2) ----Defendant failing to furnish security‑Not entitled to defend suit--- Court may allow defendant to participate in proceedings.
(b) Contract Act (IX of 1872), S. 126‑Pronote‑Surety liable to endorsee of pronote.
Seth Pratapsingh Moholalbhai and another v. Keshavlal Harilal Setalvad and another A I R 1935 P C 21 ref.
(c) Surety‑ Pronote‑Surety a favoured debtor.
The surety is a favoured debtor and the words of the guarantee should be construed as far as possible in favour of the guarantor.
(d) Transfer of Property Act (IV of 1882), S. 130‑Assign ment of debt‑Pronote endorsed in favour of third person by drawee‑Assignee can file suit against surety as well‑Contract Act (IX of 1872), Ss. 126, 128 and 133.
The liability of a surety is co‑extensive with the principal debtor and if the debtor remains liable then the surety is also liable in respect of that claim. The mere fact that the creditor has assigned his claim in favour of a third party will not discharge the surety because he is in no way prejudiced by that fact. The guarantee given by the surety is for the payment of the debt and it matters very little who recovers the debt. By assigning the debt the surety's position is not in any way changed and prejudiced and he continues to remain liable for the original debt in view of the guarantee given by him. A surety is not discharged if the pronote is assigned in favour of a third person the transfer of the right and liabilities under the pronote must be made by assignment or endorsement according to law. The provisions of section 130, Transfer of Property Act, only require that an assignment should be in writing. It does not require it to be in any particular form or to be couched in technical language. The endorsement of drawee of pronote in favour of plaintiff is in the nature of an assignment and on the assignment of the debt to a third person all the rights attached to it including the guarantee are acquired by the assignee, who can file a suit against the surety. The incidence of the transfer of an assign ment is that the assignee acquires all the rights and interest of the assignor and is entitled to sue the person liable for the debt.
Wheatley v. Bastow 44 E R 102 ; Bradford Old Bank, Limited v. Sutcliffe (1918) 2 K B 833 ; Gana Nath Sen v. Ranjit Ray I L R (1942) 1 Cal. 11 ; Dowlatram Mohandas v.; Vasdeo Manghumal I L R (1942) Kar. 516 ; William Brandt's Sons & Co. v. Dunlop Rubber Company, Limited 1905 A C 454 ; Gopi Nath v. Mst. Bekali and others A I R 1935 All. 837 ; Saminatha Pillay and Kandasawmy Pillay v. Dorasawmy Naick and others 1 I C 212 and Rama lyen v. Venkatachellam Patter and others I L R 30 Mad. 75 ref.
(e) Negotiable Instruments Act (XXXVI of 1881), Ss. 1 & 13-- Pronote‑Contract of guarantee‑Not covered by S. 13 Liability of surety.
The contract of guarantee is neither covered by section 13 of the Negotiable Instruments Act nor is governed by any usage saved under section 1 of the said Act.
A stranger, who is not one of those persons mentioned in section 51 of the Negotiable Instruments Act, signs a negotiable instrument for the purpose of standing guarantee to the drawee, he does not become an endorser under the Act and incur the liability of the endorser. He will be held liable as a guarantor or to the person who stands in immediate relationship to him and he cannot be held liable as a guarantor to other persons.
Thakursey Hansraj v. Kishandas Rewachand and another A I R 1925 Sind 9=76 I C 282 and Brojendro Kissore Roy Chowdhury v. The Hindusthan Co‑operative Insurance Society, Ltd. 39 I C 705 ref.
A. A. Fazeel for Plaintiff.
S. M. Raza for Defendant No. 1.
Fakhruddin for Defendant No. 2.
Dates of hearing : 13th October and 11th November 1959.
JUDGMENT
This is a suit for the recovery of Rs. 76,000 on a pronote executed on the 29th of May 1957 by defendant No. 1 in favour of one Zabid Hussain in consideration of the price of the film "Gajre" sold to him. Defendant No. 2 on the back of the pronote signed as a guarantor and made an endorsement to that effect. On 19‑9‑1957 Zahid Hussain endorsed or assigned the said promissory note in favour of the plaintiff. The plaintiff called upon the defendants to pay the amount due to him by a notice dated 5‑10‑1951, but the defendants failed to pay the amount due from them under the pronote, and the plaintiff has filed this suit for the recovery of the principal amount and interest. Defendant No. 1 is sued as principal debtor and defend ant No. 2 as guarantor of defendant No. 1.
The suit was filed under Order 37, C. P. C. Defendant No. 1 and defendant No. 2 applied to defend the suit and on the 1st of December 1958, I allowed defendant No. 1 to defend it on furnishing security for the claim and costs of the suit to the satisfaction of the Nazir within a fortnight. Defendant No. 2 was granted leave to defend the suit unconditionally. Defendant No. 1 failed to furnish the security and on 2‑2‑1959 Qadeeruddin, J. ordered that the suit against defendant No. 2 will proceed and postponed the passing of the decree against defendant No. 1 till the decision of the suit against the other defendant. On 13‑10‑1959, I permitted defendant No. 1 to participate in the proceedings, but this did not entitle him to) defend the suit as he had failed to furnish security.
The suit is resisted by defendant No. 2 on the grounds that the promissory note was obtained from defendant No. 1 by way of collateral security in respect of the price of the film "Gajre" purchased from one Hasham Bhoy for Rs. 65,000, and as the said film has been declared as evacuee property, the agreement was frustrated and no claim on its basis was maintainable, and that the pronote was without consideration. Defendant No. 2 also denied that he gave guarantee in respect of the promissory note, and in the alternative pleaded that he was discharged from liability. He denies his liability to pay the amount in suit and claims that the alleged guarantee is not assignable and the assign ment is invalid in law.
On these pleadings the following issues were framed :‑
(1) Whether the Promissory Note was not executed for valuable consideration ?
(2) Whether the Promissory Note was executed by way of collateral security for price of the film, `Gajre' ?
(3) Whether the film `Gajre' is evacuee property ? If so, what is the effect ?
(4) Whether the defendant No. 2 did not guarantee the payment of the Promissory Note ?
(5) Whether the Guarantee by defendant No. 2 was not assignable and valid or whether the purported assignment is valid and binding on defendant No. 2 ?
(6) Whether the defendant No. 2 is not jointly and severally liable to pay ?
(7) Relief, if any, to which the plaintiff is entitled ?
The plaintiff and defendant No. 2 adduced evidence in support of their contentions. The plaintiff examined himself (Exh. 5), Zahid Hussain (Exh. 6) and Hasham Bhoy (Exh. 7) as witnesses. Defendant No. 2 only examined himself (Exh. 8) as a witness in this case.
Mr. Fakhruddin, the learned counsel for defendant No. 2, admitted that it was sufficiently proved on the record that the promissory note (Exh. 511) was for valuable consideration.
In my opinion the evidence adduced on behalf of the plaintiff satisfactorily proves that the consideration of pronote (Exh. 5/1) was the price of the film "Gajre" sold by P. W. Zahid Hussain (Exh. 6) on behalf of P. W. Hasham Bhoy (Exh. 7) to defendant No. 1. This film was sold for Rs. 75,000 and was delivered to defendant No. 1 on 30‑5‑1957, which is fully supported by receipt Exh. 6/1. I therefore hold that the pronote was executed for valuable consideration and the plaintiff is entitled to claim the amount due on it from defendant No. 1.
At the time of arguments, Mr. Fakhruddin admitted that defendant No. 2 signed the pronote Exh. 5/1 as a guarantor of defendant No. 1, but contended that he did not give any guarantee for the payment of the amount due under the promissory note and only stood surety for the payment of the price of the film "Gajre" to Mr. Zahid Hussain, who was a personal friend of the defendants. His line of argument is that a surety is a favoured debtor and it is the duty of the Court to find out the circum stances which led the guarantor to stand surety on behalf of the principal debtor. According to the learned counsel the terms of the guarantee should be construed as far as possible in favour of the surety.
I will first take up the question of the nature of the guarantee by defendant No. 2. It may be mentioned that the endorsement on the back of Exh. 5/1 is typed written and reads as under
"I Ismailbhoy of Mohamadi Re‑rollings Guarantee this e pronote". But the words "of Mohamadi Re‑rollings" andl "pronote" are scored out. Defendant No. 2's version is that he scratched these words on the definite understanding that he was not standing surety of defendant .No. 1 for the payment of the pronote, but only gave guarantee and made himself responsible to pay the price of the film "Gajre" viz : Rs. 75,000 in case defendant No. 1 failed to pay it to Zahid Hussain. Defendant stated in Court
"These words were scratched out by me before signature. I did not stand guarantee for the pronote but only payment to Zahid Hussain if defendant No. 1 did not pay him the amount. This was accepted by Zahid Hussain."
In cross‑examination he admitted that he was the partner of Mohammadi Re‑rolling Mill, and further stated that Zahid Hussain told him "that if I give guarantee, he would give the picture to defendant No. 1. I told him that I was prepared to give guarantee of defendant No. 1 and not for the pronote". Zahid Hussain was also examined as a witness in this case as Exh. 6, who stated in emphatic terms that defendant No. 2 became a guarantor for the payment of the amount due under the pronote by endorsing this fact on its back. His version is that defendant No. 1 purchased from him "Gajre" film for Rs. 75,000, but was not in a position to make cash payment and offered to execute a promissory note, which was to be guaranteed by defendant No. 2. According to him he delivered next day on these terms the film "Gajre". This witness; however, stated that he noted the scratched portions for the first time at the time of the endorse ment in favour of the plaintiff.
Out of the two versions, I am inclined to accept the plaintiff's case. It appears to me that defendant No. 2 scratched the words "of Mohamadi Re‑rolling" because he did not want to involve the name of the mill in which he was only a partner. No significance can be attached to the scoring of the word "pronote". The case set up by defendant No. 2 is not acceptable firstly, because the version given in Court was not put to Zahid Hussain in his cross‑examination; and secondly, because if defendant No. 2 had not stood surety for the pronote there was no necessity for him to endorse this fact on the back of the pronote. His. explanation to a question put by me is that
"I signed on the back of the pronote as Zahid Hussain told that I need not worry as money will be paid within a month",
is most unsatisfactory. There is no explanation why the word "this" was not scored out.
The unscratched portion reads as
"I Ismailbhoy Guarantee this".
If defendant No. 2 did not stand surety for the pronote, the word "this" should also have been scored out. The unscored portion of the endorsement clearly manifests that defendant No. 2 stood surety for the pronote.
The learned counsel for defendant No. 2 urged that I should believe the statement of defendant No. 2 as both P. W. Zahid Hussain and P. W. Hasham Bhoy are not reliable witnesses. He referred me to their statements to show that although Hasham Bhoy (Exh. 7) admitted that Zahid Hussain was aware of the previous negotiations between him and defendant No. 1 about the sale of film "Gajre", but Zahid Hussain denied it. He also urged that it was unbelievable that Zahid Hussain would not notice the words scratched on the pronote. In my opinion the discrepancies on these points cannot prove that the version given by defendant No. 2 is correct. I quite agree with the learned counsel for defendant No. 2 that the surety is a favoured debtor and that the words of the guarantee should be construed as far as possible in favour of the guarantor. But in spite of this on the plain reading of the words of the guarantee it is not possible for me to hold that defendant No. 2 only guaranteed the payment of the debt by defendant No. 1 to Zahid Hussain and did not stand surety for the payment of the amount due under the pronote. I am fully convinced that defendant No. 2 stood surety for the pronote as he made the endorsement of this fact on the pronote and promised in unequivocal terms that he guarantees the payment of the pronote. I will therefore decide this point against defendant No. 2.
It was next urged by the learned counsel for defendant No. 2 that the circumstances in this case fully prove that defendant No. 2 was friendly both with Zahid Hussain and defendant No. 1 and gave this guarantee only to Zahid Hussain and did not stand surety to any other person, and surely not to a stranger. He also contended that by endorsement there is variation in the contract and the guarantor is released from the obligation under section 133 of the Contract Act. In this connection he drew my attention to a decision of their Lordships of the Privy Council reported in Seth Pratapsingh Moholalbhai and another v. Keshavlal Harilal Setalavd and another (AIR 1935 P C 21). In my opinion this contention has no force. If defendant No. 2 is otherwise liable, I do not see any reason why he has been prejudiced. Defendant No. 2 stood surety for the fulfilment of the obligations under the pronote and there is abundant authority for the proposition that a surety is liable to the endorsee of a pronote. Section 37 of the Negotiable Instruments Act provides that the maker of a promissory note to cheque, the drawer of a bill of exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary, liable thereon as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or acceptor. Mr. Ali Ahmed Fazeel, the learned counsel for the plaintiff, however, rightly contended that the endorsement of Zahid Hussain in favour of plaintiff is in the nature of an assignment and on the assignment of the debt to a third person all the rights attached to it including the guarantee are acquired by the assignee, who can file a suit against the surety. This contention is fully supported by two English decisions reported in Wheatley v. Bastow (44 Eng. Rep. 102 at p. 109) and Bradford Old Bank, Limited v. Sutcliffe ((1918) 2 K B 833). This view also finds support in Gana Nath Sen v. Ranjit Ray (I L R (1942) 1 Cal. 11). In 44 English Reports 102 at page 109 Lord Justice Knight Bruce observed
"This point, so far as I am aware, is wholly new, and it is certainly of great importance, as it introduces a new element into the consideration of the cases of principal and surety. In the absence of authority we can determine the question only upon principle. It must depend upon what are the relative obligations of the creditor, the assignee and the surety, arising out of the relation which subsists between them.
The creditor is, no doubt, under the obligation of preserving the securities, which he takes from the principal debtor, for (as observed by the Vice‑Chancellor) the surety may entitle himself to the benefit of those securities, and if any of them be lost by the act or default of the creditor, the surety may be wholly or partially discharged, but the creditor enters into no contract with the surety not to assign the debt or the securities. The law gives him the right to assign them ; and if he does so assign them, the obligation which attached upon the creditor attaches upon the assignee. The position of the surety is in no respect altered. The assignee, on the other hand, acquires by the assignment all the rights of the assignor, and it is difficult, I think, to see how the surety can be in a better position against the assignee than he was in against the assignor.
The surety, it is said, has the right to know who is the assignee ; but, admitting this right, the question still remains, is the right of the assignee against the surety destroyed because the fact of the assignment has not been communicated to him ?
On whom does the law cast the onus of finding the creditor ? Generally speaking, as I conceive, upon the debtor ; but, apart from this consideration, the surety, if he has no notice of the assignment, may pay the creditor, and the payment, as I appre hend, will be perfectly good against the assignee ; and if, upon the payment being made or tendered, the creditor be required to deliver, and does not deliver any securities held by him, the surety would, no doubt, be entitled to relief in this Court, and to stay any proceedings by the creditor. It is to be remembered in these cases, that a surety though a favoured debtor is still a debtor, and that he may at any time relieve himself by paying the debt ; and further, that if notice to the surety of the assignment of the debt be held to be necessary, serious impedi ments to assignments by creditors may in many cases be created.
Upon these grounds I feel compelled, in the absence of authority, respectfully to dissent from the opinion which the Vice‑Chancellor has expressed, and to hold that the plaintiff's fund has not been discharged upon the grounds on which the Vice‑Chancellor has relied".
This view was also accepted as correct in (1918) 2 K B 833. Scrutton, L. J. observed
"All that takes place is quite consistent with an assignment of the debt by the old bank to the new bank with notice to the debtor, and it is immaterial that the old bank only retains the securities and any rights it retains as trustee for the new bank. This transaction does not, in my opinion, discharge the surety for the original debt which is assigned. This defence therefore, fails."
I am in respectful agreement with the view expressed in these two cases. It appears to me that under sections 126 and 128 of the Indian Contract Act the liability of a surety is co‑extensive with the principal debtor and if the debtor remains liable then the surety is also liable in respect of that claim. The mere fact that the creditor has assigned his claim in favour of a third party will not discharge the surety because he is in no way prejudiced by that fact. The guarantee given by the surety is for the payment of the debt and it matters very little who recovers the debt. I am clearly of the opinion that by assigning the debt the surety's position is not in any way changed and prejudiced and he continues to remain liable for the original debt in view of the guarantee given by him.
The learned counsel for the defendant No. 2 contended that there being a variation in the contract the surety is discharged under section 133 of the Contract Act. But it applies only to those cases where any change is effected in the terms of the contract between the principal debtor and the creditor without the consent of the surely. Surely assignment of a debt is not an agreement of such a nature and on the principle enunciated in the above‑mentioned two English decisions there is not the least H doubt that the surety is not discharged for that reason.
This brings me to the next question urged by Mr. Fakhruddin, learned counsel for defendant No. 2, that assuming that his client guaranteed the promissory note, there is no assignment of contract or guarantee in favour of the endorsee as the contract of guarantee is not a negotiable instrument and there is no consideration between the guarantor and the endorsee. The learned counsel argued that the guarantee given by defendant No. 2 was not negotiable and could not be assigned. Admittedly the contract of guarantee is neither covered by section 13 of the 1 Negotiable Instruments Act nor is governed by any usage saved under section 1 of the said enactment. According to the learned counsel, the position of defendant No. 2 is that of a stranger, who is not one of those persons enumerated in sections 15 and 51 of the Negotiable Instruments Act who may endorse and negotiate an instrument ; he can at the most be considered as the backer of the promissory note, whose endorsement will not make him an endorser to incur the liabilities under the Act.
Mr. Ali Ahmed Fazeel, the learned counsel for the plaintiff, on the other hand contended that the Negotiable Instruments Act is silent as to the liability of a stranger endorser and invited my attention to two decisions reported in Thakursey Hansraj v. Kishandas Rewachand and another (AIR 1925 Sind 9=76 I C 282) and Brojendro Kissore Roy Chowdhury v. The Hindusthan Co‑operative Insurance Society, Ltd. (39 I C 705). In the first case Rupchand, J. held that
" The signature on the back of a Negotiable Instrument of a person who is neither the maker nor the holder thereof does not amount to an endorsement within the meaning of section 15 of the Negotiable Instruments Act",
but on the evidence before him found that his position was that of a guarantor, who guaranteed the payment of the amount and put his signature with the object of rendering himself liable for the amount. In the second case a person endorsed on the back of a pronote the words
"Re‑payment guaranteed by me".
The learned Judges of the Calcutta High Court held it to be a contract of guarantee by the person signing the endorsement and observed that such a person's liability as a surety arises under it from the date of the note and he continues to be liable till such time as the principal debtor is liable. Both these cases, however, were between persons who had immediate relationship with each other and is not the case of an endorsee, who sued a stranger as a guarantor for the payment of the amount to the drawee of the promissory note. Mr. Ali Ahmed Fazeel, the learned counsel for the plaintiff, in support of the liability of such a person, referred me to the view expressed by the learned author in Byles on Bills of Exchange, 21st edition at page 174 which reads as under :
"A third person signing a bill usually places his signature upon the back of it : hence he is said to `back' the bill and his signature is commonly called an endorsement. The object of backing a bill is to increase its value by reason of the additional credit which it derives from the signature of the third person. This presupposes that the third person, by his signature, has made himself liable upon the bill. This is clearly the case where the bill has been discounted and the bill is in the hands of a holder in due course : the third person comes under an obligation to all subsequent holders precisely similar to that of the drawer. The endorsement, however, does not impose the same obligation in the case of prior parties. When, therefore, the drawer seeks to hold the third person liable if the acceptor dishonours the bill, he is in effect treating the third person as a surety for the acceptor."
Under section 56 of the English Bill of Exchange, 1882 there is a specific provision that where a person signs a bill otherwise than as drawer or acceptor, he thereby incurs the liabilities of an indorser to a holder in due course. No such provision exists in the Pakistan statute. These principles therefore cannot be applied in Pakistan. It appears to me that a stranger, who is not one of those persons mentioned in section 51 of the Negoti able Instruments Act, signs a negotiable instrument for the purpose of standing guarantee to the drawee, he does not become an endorser under the Act and incur the liability of the endorser. I agree with the Sind and Calcutta view that he will be held liable as a guarantee to the person who stands in immediate relationship to him. In my opinion he cannot be held liable as a guarantor to other persons.
But Mr. Ali Ahmed Fazeel, the learned counsel for the plaintiff, argued that even if defendant No. 2 is not made liable under the provisions of the Negotiable Instruments Act, the endorsement of Zahid Hussain in favour of the plaintiff is in the nature of an assignment of a chose‑in‑action and defendant No. 2 is liable on it. There is much force in this contention. There is a conflict of opinion on the question whether the assign ment of a negotiable instrument is at all possible. One view is that as section 137 of the Transfer of Property Act excludes negotiable instruments from the purview of the chapter of Transfer of Actionable Claims, the assignment of a negotiable…
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