1. First defendant is the appellant. Union of India filed the suit O. S. No. 256 of 1971 on the file of City Civil Court, Hyderabad for recovery of Rs. 46,644-75 being the balance of Bank guarantee payable by the first defendant to the plaintiff, against the first defendant; and in the alternative, against defendants 1 and 2 and for subsequent interest from the date of the suit at 6% per annum till the date of recovery and for costs.
2. The plaint averments are:-- The second defendant was appointed by the plaintiff as the sole advertising agent to procure advertisements in the Telephone Directories for a total of five issues commencing from July, 1965. An agreement was entered into between the plaintiff and the second defendant on 6-4-1965. As per Clause 4 of the said agreement the second defendant gave Bank guarantee by the first defendant Bank on 30-4-1965 for the due performance by him of the terms of the agreement. As per the Bank guarantee, the Bank is liable for a sum not exceeding Rs. 47,325-75 if the second defendant failed to perform his part of the contract. The issues of the Directory were published during July, 1965, January, 1966, Aug., 1966, Feb., 1967 and Sept., 1967. As per Clause 5 of the agreement the plaintiff will pay to the sole advertising agent a commission of twenty-five per cent on Rs. 63,101/- of the minimum gross revenue guaranteed by the sole advertising agent and in no case the minimum net share of the Government revenue should be less than Rs. 47,325-75. The plaintiff although has fixed the minimum rates chargeable by the second defendant, has not fixed the maximum rates that could be charged from the advertisers by him and so the second defendant is empowered to collect any higher rate than the minimum rates prescribed. In respect of collections over and above the gross minimum revenue of Rs. 63,101/- the second defendant is allowed an additional commission of Rs. 15/- per cent on such additional collections. The second defendant is also under an obligation to maintain proper accounts for these sums along with the concerned vouchers and to allow the Posts and Telegraphs Department to audit such accounts as per Clause 12 of the agreement. The second defendant submitted his revenue statements for all the issues as required in Clause 7 of the agreement. The arithmetical discrepancies in the statements were pointed out by the District Manager, Telephones relating to certain issues, which the second defendant duly corrected. The second defendant accepted and remitted the revenue as per the statements. In fact, in respect of the revenue statement for July, 1965 it was noticed that a sum of Rs. 681/- being the Government's share was short-remitted. In spite of reminders the second defendant failed to remit the same which the Bank eventually paid.
3. The District Manager, Telephones, Hyderabad addressed several letters to the second defendant directing him to submit his accounts to Posts and Telegraphs audit as per Clause 12 of the agreement but he never responded. Ultimately a registered letter dated 12-3-1968 was sent. The second defendant instead of submitting the accounts, gave an evasive reply dated 19-3-1968 stating that he had submitted the statement of revenue and remitted the Government's share and so there remained nothing to be done by him. The District Manager concluded that it was no use in pursuing the matter with the second defendant, and issued a notice dated 6-7-1968 to the first defendant calling upon to remit the sum of Rs. 46,644-75 because of the breach committed by the second defendant. The second defendant was given an opportunity again on 4-9-68 on which a letter was addressed by the District Manager to produce his accounts, to which he replied on 21-9-1968 that the accounts for the last one year in respect of Hyderabad Branch were to be compiled in the ledgers in respect of the suit Directories. Thus, it is clear that the second defendant has not. compiled the accounts in a regular manner and cannot make them available as required under Clause 12 of the agreement. The first defendant Bank also disowned any liability to its letter dated 6-9-1968. The plaintiff has credible information that the second defendant has collected higher rates than shown in the revenue statements and thereby caused loss to the Government and committed breach of trust of the agreement, Failure to submit the accounts to the audit is a breach of the terms of the agreement. As such the first defendant has become liable to the balance as guaranteed under the bond. The suit filed earlier on the same averments was dismissed on a technical ground that no notice was issued to the Registrar of Co-operative Societies as required under Section 164 of the Maharashtra Co-operative Societies Act and, therefore, after due compliance with the said provision, the present suit was filed.
4. The second defendant remained ex parte.
5. The first defendant in its written statement while admitting the guarantee executed in favour of the Government, denied its liability on the ground that its liability would arise only if the second defendant failed to remit to the plaintiff a sum of Rs. 47,325-75 the minimum revenue guaranteed under the said agreement. Since the said amount is remitted, the first defendant's liability came to an end. Clause 1 of the guarantee deed is unenforceable so far as it travels beyond the scope and the purpose of the said deed. The plaintiff checked the revenue statements submitted by the second defendant and issued confirmatory note. So, it is not open to the plaintiff to seek any relief against the first defendant and the plaintiff is estopped from reopening the matter. Except stating that the Government has credible information regarding excess collections, no material has been placed to prove the actual loss. The mere default committed to produce account books for the audit cannot give rise to cause of action and so the suit should be dismissed.
6. The trial Court framed the following issues:
1. Has the plaintiff any cause of action against the 1st defendant?
2. What is the effect of Clause l of the deed of guarantee dated 30-4-1965 on the suit claim against the defendant No. 1?
3. Is the plaintiff's claim barred by the rule of estoppel?
4. Is the plaintiff entitled to interest from 19-7-1968 to 19-4-1971?
5. Is the court-fee paid sufficient?
6. Has the second defendant failed to submit the accounts to P. & T. Audit as per Clause 12 of the agreement?
7. If so, is not the plaintiff entitled to claim a sum of Rs. 46,644-70 from the 1st defendant?
8. To what relief?
7. The trial Court gave findings on Issues 1, 2, 3, 6 and 7 in favour of the plaintiff and decreed the suit for a sum of Rs. 46,644-70 against the first defendant with costs.
8. Sri T. Veerabhadrayya, the learned Counsel for the appellant raised the following contentions: (1) When the second defendant remitted the minimum revenue guaranteed, the liability of the first defendant came to an end. (2) As and when the second defendant submitted revenue statements they were checked and confirmed by the plaintiff and, therefore, the plaintiff is now estopped from recovering any amount. (3) It is for the plaintiff to establish that the second defendant has committed any actual breach of the agreement, and even if the second defendant failed to produce the accounts, the recovery cannot be made from the first defendant. (4) The plaintiff has to prove actual loss and without establishing the same the plaintiff is not entitled to recover.
9. The counter contentions of the learned Standing Counsel for Union of India are: -- (1) Ex. A-2 is in the nature of indemnity and, therefore, the first defendant is liable in law, as the indemnifier will have to make good the loss caused to the creditor. (2) Even if the bond is to be construed as a guarantee, Exs. A-1 and A-2 will have to be read together in order to spell out the liability of the surety. (3) The question of estoppel does not arise as there is no representation or promise that has been made to the first defendant. (4) No loss need be proved or established as the ascertained sum is already shown in Ex. A-2 towards damages.
10. The points, in the main, therefore, that arise for adjudication are:--
1. What is the nature of liability of the first defendant and whether he can be proceeded against, before seeking any remedy against the second defendant?
2. Whether there has been any breach of the contract causing loss to the plaintiff? If so, is it necessary for the plaintiff to establish the same?
3. Whether the plaintiff is estopped from recovering any loss from the first defendant?
11. Point No. 1:-- In order to adjudicate this point, the relevant portions of Ex. A-1 and Ex. A-2 and also the statutory provisions may be noticed. Clauses 3, 4, 5, 7, 12 and 15 of the agreement (Ex. A-2) executed by the second defendant, are as under:
"3. The Sole Advertising Agents guarantee the minimum gross revenue to the Government of Rupees sixtythree thousand one hundred and one per issue.
4. On the execution of these presents the Sole Advertising Agents shall furnish to the Government a Bank Guarantee in a sum equivalent to the Government share of the minimum guaranteed gross revenue for one issue in the prescribed form viz., Rupees fortyseven thousand three hundred twentyfive and seventyfive paise only.
5. The Government will pay to the Sole Advertising Agents a commission of 25% (Twentyfive per cent only) of the gross revenue procured by the Sole Advertising Agents in respect of Advertisements procured by them per issue provided further that the Sole Advertising Agents shall be entitled to an additional commission of 15% (fifteen per cent only) on such gross revenue as exceeds Rs. 63,101/- (Rupees sixtythree thousand one hundred and one only).
7. After the Directory is printed, the Sole Advertising Agents shall remit the Government share of the gross revenue or the guaranteed amount whichever is higher to the District Manager, Telephones, Hyderabad, within 60 days of receipt of voucher copies along with a detailed statement in triplicate showing the rates charged and the net revenue. In the event of failure on the part of the Sole Advertising Agents to remit the aforesaid amount within the period specified, the District Manager, Telephones, Hyderabad, shall be entitled at his discretion to recover from the Sole Advertising Agents as agreed liquidated damages and not by way of penalty a sum of 1% (one per cent only) of the guaranteed minimum gross revenue or Rs. 100/- whichever is higher for every day by which the payment is so delayed.
12. The Sole Advertising Agents shall keep proper accounts in respect of the procurement of advertisements under this agreement and shall allow the Posts and Telegraphs Audit Office to audit such accounts.
15. The Government shall be at liberty to terminate this agreement forthwith in the event of the Sole Advertising Agents being adjudged insolvent or having a receiving order or order for administration of his estate made against him or by giving three months' notice in writing if the Sole Advertising Agents commit breach of any of the terms and conditions of the agreement or if there be any default on the part of the Sole Advertising Agents in due performance of the stipulations hereof or failure to pay to the Government the share of revenue payable to the Government within the stipulated time."
Ex. A-2 the guarantee given by defendant No. 1 in so far as it is relevant, reads thus:
"This deed of Guarantee made this 30th day of April 1965 between the President of India, hereinafter called "the Government" (which expression shall, unless excluded by or repugnant to the context include his successors and assigns) of the one part and Nagpur Nagarik Sahakari Bank Ltd., Nagpur hereinafter called "the Bank" (which expression shall, unless excluded by or repugnant to the context, include its successors and assigns) of the other part.
Whereas by an. Agreement dated 6th Apr., 1965, made between the Government of the one part and Sri Chandra Prakash, son of Chhaganmal Gandhi residing at Gandhi Bag, Nagpur, carrying business as Advertising Agent under the name of Gandhi Publicity Service a sole proprietor concern and having its registered office at Paliwal Building, Gandhibagh, Nagpur-2 (hereinafter called "the Company") of the other, the Government appointed the company as their Sole Advertising Agents to procure advertisements to be printed and published in the Hyderabad Telephone Directory on the terms and conditions mentioned in the said Agreement.
And whereas Clause 4 of the said agreement provided that the company should procure a bank guarantee in favour of the Government in a sum of Rs. 47.325.75 p. (Rupees fortyseven thousand, three hundred and twentyfive and paise seventyfive only) as security for the minimum revenue guaranteed by the company under Clause 3 of the said agreement.
And whereas at the request of the company the bank has agreed to execute these presents.
Now this indenture witnesseth and it is hereby agreed and declared by and between the parties as follows :--
(1) The Bank hereby guarantees to the Government the observance and performance by the company of the various terms and obligations as provided in the said agreement and further undertakes to pay to the Government a sum not exceeding Rs. 47,325-75 P. (Rupees fortyseven thousand, three hundred and twentyfive and paise seventyfive only) on demand and without any demur in the event of the company failing or neglecting to pay or to perform the various duties and obligations under the said agreement or otherwise committing breach of any of the terms and conditions of the said agreement and it is hereby agreed and declared that the decision of the District Manager, Telephones, Hyderabad that the company has so failed and neglected to perform any of the duties and obligations indicated in the said agreement shall be final and binding on the bank.
(2) to (4) xx xx xx xx xx xx xx xx xx XX XX XX XX XX". 12. Sections 124, 126, 128, 140 and 145 of the Indian Contract Act read as under: "124. A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a 'contract of indemnity.'
126. 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'. A guarantee may be either oral or written.
128. The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided by the contract.
140. Where a guaranteed debt has become due, or default of the principal debtor to perform guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.
145. In every contract of guarantee there is an implied promise by the principal debtor to idemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully."
13. The guarantee bond Ex. A-2 has been brought into being by virtue of Clause 4 of the agreement Ex. A-1 as it mandates furnishing to the Government a Bank guarantee. In fact, Clause 4 of Ex. A-2 has been explicitly referred to in the third paragraph in Ex. A-2. the Bank guarantee. The document Ex. A-2 is titled as "Bank guarantee given by defendant No. 1" and the form employed is "Bank Guarantee Form" and in the preamble itself it is stated as "this deed of guarantee" and then in the third para, reference to Clause 4 of the agreement Ex. A-1 was made wherein it is again stated "the company should procure a bank guarantee in favour of the Government." That apart, in the text of Ex. A-2 in all its clauses comprising four in number, the word "guarantee" has been employed. It is, therefore, in this setting one has to determine the nature of the document.
14. Under Section 124 of the Contract Act, no doubt the contract is bilateral as only two parties are involved, namely, the promisor and the promisee. The promisor promises to make good the loss though caused by a third party. This gives rise to the contract of indemnity, whereas Section 126 of the Contract Act gives rise to a contract of guarantee wherein three persons are involved. Under this section, a party who promises to discharge the liability of a third person in case of his default and gives 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". The last sentence in this section, viz., "A guarantee may be either oral or written" has special significance. This contract is, therefore, trilateral unlike the contract of indemnity which, as stated earlier, is bilateral. Where, the contract is one of indemnity, the non-liability of the principal debtor does not affect the obligation undertaken by the indemnifier which is primary, whereas every contract of guarantee is not a contract of indemnity, for, in the absence of special circumstances the liability of a surety is only ancillary and can rest only on a valid obligation on the part of the party whose debt or obligation is guaranteed.
15. Section 128 of the Contract Act lays down that the liability of the surety is co-extensive with that of the principal debtor, meaning thereby that the liability of the surety cannot be in excess of what the principal debtor would himself be liable.
16. Viewed in the context of the above format the document Ex. A-2 may at first flush give the colour of indemnity as the third-party, viz., the principal debtor, does not figure herein but in essence in our judgment, it is guarantee and the reason is twofold. Firstly, the entire document by itself shows that it is a contract of guarantee because right from top to bottom the title and the form which has been selected for the purposes of execution, reference to the particular clause of the original agreement entered into between the Government and the principal debtor and all the clauses comprised in the text of Ex. A-2, speak to the guarantee and nothing else.
17. Secondly, in view of the last sentence, in Section 126 of the Contract Act, namely, "A contract may be either oral or written", Ex. A-2 by necessary and irresistible implication ropes in the third-party, namely, the principal debtor as well, by virtue of reference to Clause 4 of Ex. A-1 in the recitals of Ex. A-2 because the contract of guarantee could also be oral. Merely because the third-party, namely, the principal debtor, does not figure in by nomination in Ex. A-2, it cannot be said that it gives rise to contract of indemnity as in effect, substance and essence it is a contract of guarantee because primarily and essentially it is the substance that has to be looked into and not the form in order to determine in such cases as to whether it is a contract of guarantee or indemnity.
In Suresh Narain v. Akhauri, , a Division Bench held that it is not necessary that the principal debtor should as a matter of law, be an express party to the contract of guarantee; it is sufficient that the principal debtor is a party by implication to the contract. In Ramchandra v. Shapurji, AIR 1940 Bom 315 a Division Bench comprising Beaumont, C.J. and Kania, J. held that in order to constitute a contract of guarantee there must be a third contract by which the principal debtor expressly or impliedly requests the party to act as surety. In Chattanatha v. Central Bank of India, AIR 1965 SC 1856, it has been held that where a transaction between the same parties is contained in more than one document, they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document. In Muthu Raman Chetty v. Chinna Vellayan Chetty, (1916) ILR 39 Mad 965: (AIR 1917 Mad 83), it has been held by the Madras High Court that a person may become a surety without the knowledge and consent of the principal debtor, but the only rights which he acquires in that case are those given by Sections 140, 141 and 145 of the Indian Contract Act.
In Jagannath Baksh Singh v. Chandra Bhukhan Singh, AIR 1937 Oudh 19 it has been held that for a contract of suretyship there should be concurrence of the principal debtor, the creditor and the surety, but that does not mean that there must be evidence showing that the surety undertook his obligation at the express request of the principal debtor.
18. The learned standing counsel for the respondent has placed reliance on the decision in Periyamianna v. Banians and Co.. AIR 1926 Mad 544 for the position that unless the debtor is a party to the contract of guarantee, it cannot be a contract of guarantee; but we are not persuaded to accede to the same in view of the authoritative decisions to the contra. In fact, in this very decision, it has been held:
"Section 126 of the Act (Contract Act), which defines a contract of guarantee though it does not say expressly that the debtor should be a party to the contract clearly implies, in my opinion, that there should be three parties to it namely, the surety, the principal debtor and the creditor; otherwise it will only be a contract of indemnity."
From the above it is manifest, and we have no hesitation to hold, that a contract of guarantee is no doubt tripartite in nature but it is not necessary or essential that the principal debtor must expressly be a party to that document. It is adequate if his obligation is established by implication. The surety's liability is co-extensive with that of the principal debtor unless otherwise by special provision it is so varied, In our undoubted view, therefore, the liability of the first defendant, reading Exs. A-1 and A-2 in combination, is that of a surety and, therefore, the assurance which has been given by the first defendant is one of guarantee and not indemnity.
19. We find no difficulty in answering the second limb of the first point, namely, whether the suit to enforce a contract of guarantee can succeed even if the plaintiff has not exhausted his remedies against the principal debtor, as it has been sufficiently covered by the authorities. See Suresh Narain v. Akhauri, and Mahanth Singh v. U. Ba Yi, AIR 1939 PC 110. The answer, therefore, is quite apparent, and it is in the affirmative.
20. Point No. 2 :-- Under Clause 5 of Ex. A-1 agreement, the Government will pay to the second defendant a commission of twentyfive per cent of the gross revenue procured by the second defendant in respect of advertisements procured by him per issue and further the second defendant shall also be entitled to an additional commission of fifteen per cent on such gross revenue which exceeds Rs. 63,101/-. Under Clause 12, it is incumbent upon the second defendant to maintain proper accounts in respect of the procurement of advertisements and allow the Posts and Telegraphs Department to audit such accounts. Under Clause (1) of Ex. A-2 Bank guarantee, the Bank has guaranteed to the Government the observance and performance by the Company of the terms and obligations provided in the agreement Ex. A-l and has further undertaken to pay to the Government a sum not exceeding Rs. 47,325.75 p. without any demur in the event of the company (D-2) falling or neglecting to perform the various duties and obligations or committing breach of any of the terms and conditions of the said agreement. The submission of the learned counsel for the appellant is that the second defendant has submitted revenue statements under Exs. A-4 to A-8 and the same have been checked and confirmed and, therefore, there is no further obligation to furnish any accounts. His further argument is that the excess amounts that were paid by the (advertisers over and above the rates mentioned in the schedule were given to the two agents named in Exs. X-l and X-2 dated 15-4-1965 and, therefore, any excess sum over and above the assured minimum even if received was made over to the agents of the second defendant and so no excess amount has been received which would entitle the Government to receive (50% of tin said amount under Clause (5) of the agreement. In fact, no excess amounts have been collected by the second defendant. So, no breach has been committed. This submission is too good to be true in the light of the evidence of the second defendant himself, who, as D.W. 1, admitted that he collected more amounts from the advertisers than the scheduled rates which he did not show in the revenue statements Exs. A-4 to A-8. The observations of the trial Court in this behalf, which are relevant, may be extracted here:
"It is clear from the admission of D. W, 1 that he collected more amounts from the advertisers and he did not show the actual amount collected from the advertisers in the revenue statements Exs. A-4 to A-8. The learned counsel for the first defendant contended that since the second defendant did not receive the actual amounts in respect of each advertisement and, therefore, he did not show these amounts in Exs. A-4 to A-8. A new case has been built up in the evidence of D. W. 1 for the first time that for the purpose of procuring advertisement the second defendant entered into agreements with two persons under Exs. X-l and X-2 on 15-2-1965 and the excess amounts that were paid by the advertisers over and above the rates mentioned in the schedule were given to these two agents. It is admitted in the evidence of D. W. 1 that the terms of Ex. A-1 do not authorise him to enter into an agreement with the third parties for the purpose of fulfilling the terms therein. He also admitted that he did not inform this fact to the department."
The trial Court further observed:
"On a careful consideration of the entire material on record, I am unable to accept that Exs. X-l and X-2 are genuine. As per Ex. A-1 the second defendant has to furnish a bank guarantee. Till then the defendant will not get any right under the terms of Ex. A-1 to perform the contractual obligations. Ex. A-2 bank guarantee was executed on 30-4-1965. Only on the execution of Bank guarantee Ex. A-2 the contract is complete. If the second defendant wanted to procure the advertisements for the five issues it is only after the bank executed Ex. A-2. Till that time the second defendant cannot think of entering into contract with any third-parties for procuring the advertisements............ It appears that the second defendant entered into an agreement with third-parties even before there was a valid agreement between the plaintiff and the second defendant. Therefore, it is doubtful whether any such agreement was entered into by the second defendant. The alleged agents appointed under Exs. X-1 and X-2 are not examined".
The trial Court also observed:
"But contrary to the terms No. 5 of Ex. A-1 a term has been incorporated in Exs. X-l and X-2 in column No. 8 to the following effect: 'That you will not be entitled to any salary, but you shall be entitled to get the amounts received over and above the Government scheduled rates prescribed in our contract with them'. This is quite contrary to the terms of Ex. A-1. Therefore, for all the above reasons this is a clear afterthought of the second defendant who appears to have fabricated these two documents in order to help the first defendant since the latter obliged him to stand as guarantee. ..... In view of Clause 1 of Ex. A-2 the bank is liable for the breaches committed by the second defendant."
We completely concur with this finding. Any arrangement arrived at inter se between the second defendant and third parties contrary to the terms of Ex. A-1 will not be of any avail to the second defendant and a fortiori to the first defendant. He has to account for the entire excess amount received over and above the sum of Rs. 63,101/- vis-a-vis each issue as the plaintiff will be entitled to sixty per cent and the defendant No. 2 will be entitled to retain forty per cent as per Clause 5 of Ex. A-1. In view of the above, we hold that the second defendant has committed breach of the agreement and has caused loss to the plaintiff.
21. Now, it is to be seen whether it is mandatory on the part of the plaintiff to prove the loss sustained so as to be made good by the first defendant. Relying on Clause 1 of the Bank guarantee, the learned standing counsel for the respondent contends that even if the damages for the breach of the terms can certainly be culled out from the terms of the contract, and if the term of the contract fixes the damages in case of breach, it is needless to go beyond and prove the same, since in this case Clause 1 of Ex. A-2 provides for a sum of Rs. 47,325.75 p., the payment of which is undertaken by the surety in case of breach of contract under Ex. A-1. There is, therefore, no necessity to further establish by any evidence the damages or loss incurred because the claim is restricted to Rs. 47,325.75 p. We apprehend the submission is not founded on substance. The words employed in Clause 1 of Ex. A-2, namely, "the Bank hereby guarantees to the Government the observance and performance by the company of the terms and obligations as provided in the said agreement and further undertakes to pay to the Government a sum not exceeding Rs. 47,325.75 p. on demand and without any demur ............ committing breach of any of the terms", do not admit of any doubt. "A sum not exceeding Rs. 47,325.75" indicates that for failure to perform certain terms of the contract, certain sum not exceeding Rupees 47,325.75 will be claimed. In other words, in order to claim certain sum, which may not eventually go beyond Rs. 47,325.75 in any case, it has to be established by evidence as to the sum representing the loss or the damage. To construe otherwise, will be doing not only violence to the language employed in the said clause but also 1o the canons of construction. In Fateh Chand v. Balkishan Dass, the Supreme Court while construing Section 74 of the Indian Contract Act, held :
"Section 74 of the Indian Contract Act is clearly an attempt to eliminate the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties; a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to the aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty."
In Maula Bux v. Union of India, it has been held that the expression "whether or not actual damage or loss is proved to have been caused thereby" (occurring in Section 74 of the Indian Contract Act) is intended to cover different classes of contracts which come before the Courts. In case of breach of some contracts it may be impossible for the Court to assess compensation arising from breach, while in other cases compensation can be calculated in accordance with the established rules. Where the Court is unable to assess the compensation, the sum named by the parties, if it be regarded as a genuine pre-estimate, may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. This ratio has also been approved by the decision in Union of India v. R. D. and C. Co., .
The learned standing counsel for the respondent relied on the decision in Chunilal V. Mehta and Sons Ltd. v. C.S. and M. Co. Ltd., , wherein it is held:
"Where parties name in a contract reduced to writing a sum of money to be paid as liquidated damages they must be deemed to exclude the right to claim an unascertained sum of money as damages. The right to claim liquidated damages is enforceable under Section 74 of the Contract Act and where such a right is found to exist no question of ascertaining damages really arises. Where the parties have deliberately specified the amount of liquidated damages there can be no presumption that they at the same time, intended to allow the party who has suffered by the breach to give a go-by to the sum specified and claim instead a sum of money which was not ascertained or ascertainable at the date of the breach."
The purport of this decision is that where the parties have deliberately specified the amount of liquidated damages there can be no presumption that they at the same time intended to allow the party who has suffered by the breach to give a go-by to the sum specified and claim instead, a sum of money which was not ascertained or ascertainable at the date of the breach. There can be little or no quarrel with the proposition laid down-hereinabove. Therefore, it is of little or no assistance for the respondent. In fact, the later decisions are very categorical with regard to the damages to be claimed in case of a breach of contract. What is, therefore, manifest [from the above is that where the Court is not in a position to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure, of reasonable compensation, but not if the sum named is in the nature of a penalty. Further, where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him.
22. In view of the above, we hold that the sum mentioned in Clause 1 of Ex. A-2 is an unascertained sum and the loss suffered in this case in terms of money can be determined and, therefore, it is obligatory on the part of the plaintiff to prove the loss suffered by it. In fact, in this case an attempt has been made by procuring numerous letters from the customers, with whom orders had been placed by the second defendant, showing thereby that certain sums in excess of the scheduled rates have been charged for the purpose of advertisements, and exhibiting the same in this case. So, it is not a question of impossibility of establishing the case of excess amounts collected by the second defendant. In this view of the matter, we hold that it is incumbent upon the plaintiff to prove and establish the loss caused to it in order to recover the same from the first defendant, who, as we held earlier, is liable to make good the same.
23. Point No. 3:-- Coming to this point, viz., whether the plaintiff is estopped from recovering any loss from the first defendant, the contention of the learned counsel for the appellant is that there is no clause in the agreement Ex. A-1 that once the revenue statements are submitted and checked and found correct, there is no further provision in Ex. A-2 for subjecting the accounts to the audit of Posts and Telegraphs Department and, therefore, the plaintiff is estopped from recovering any amount. We see little or no substance in this contention of the learned counsel.
24. Ex. A-62 is a letter dated 4-9-1968 addressed by Posts and Telegraphs Department to the second defendant, wherein it has been stated:
"You are being regularly reminded since 19-12-1966 to submit your accounts for audit. All the while you did not reply our letters. Only when the Department had taken steps to recover from the Bank you raised some objections regarding audit of your accounts. Till you perform all your obligations as per the terms and conditions of the agreement, the Department has every right to ask you to perform your obligations ..... You have already been informed through our earlier letters that the statement of revenue submitted by you is not susceptible of audit unless all the relevant records are produced supported by valid vouchers. The statements of revenue submitted by you as required in Clauses 7 and 13 of the agreement were returned to you after verifying the arithmetic details of advertisements and the amounts shown therein, ..... Though this office has been reminding you to submit the accounts for audit since a long time, you maintained silence on this issue all the while. It is not correct to say that the Department has waived or given up its claims to audit your accounts. ..... It is good to see that in the letter under reply, you have expressed your willingness to submit to audit your accounts at your Head Office by P. & T. Department. We accept your offer to audit. ..... In conclusion it may kindly be noted that the acceptance of the offer now made by you to submit your accounts for audit does not in any way prejudice the claims already made or that may be made by the Government on the Bank to enforce the Bank Guarantee for recovering any amounts which the Government may be entitled to including the amounts that may be found due from you as a result of the auditing."
This apart, in the letter addressed by the Posts and Telegraphs Department dated 6th July, 1968 to the Bank under Ex. A-14, it is stated:
"Many a time the Advertising Agent was requested to submit his accounts for verification by the P. & T. Audit. He had persistently ignored to comply with the demand made upon him in those letters and ultimately in his letter No. Nil dated 19-3-1968 be made reference to certain irrelevant matters and stated that as he had submitted a statement of accounts and paid all Government dues under the agreement, nothing remained to be done on his part..... Recently some information has come to the knowledge of the Government which cast some doubts on the correctness of the statement of accounts furnished by the Advertising Agent. ..... By reason of the Bank guarantee dated 30-4-1965 furnished by you, you have bound yourselves under Clause (1) of the said guarantee..... The Advertising Agent is acting in violation of Clause (12) of the agreement ... ...the advertising Agent is guilty of breach of Clause (12) of the agreement ..... There is an obligation on you under the terms of the Bank guarantee to see that the Advertising Agent fulfils all the terms and obligations of the agreement dated 6-4-1965. You are therefore informed of the aforesaid breach committed by M/s. Gandhi Publicity Service, Nagpur (D2) and hereby called upon to remit the sum of Rs. 46,644-75 p. deducting Rs. 681/- being the amount outstanding against the Advertising Agent for July, 1965 issue, which has been remitted by you under your letter No. 1579/1967-68 dated 25-6-68, within seven days from the date of receipt of this letter".
It is equally pertinent and significant to notice the contents of the letter written by the Bank addressing the respondent's representative under Ex. B-6 dated 14-3-1968, which reads as follows:
"With reference to your copy of letter ..... We have to inform you that we have sent the following telegram to Shri C.P. Gandhi (D-2) for doing the needful in the matter:
"Divisional Engineer Telephones require accounts for five issues of Telephone Directory before Nineteenth March. Submit immediately with copy to Bank".
25. In view of this unambiguous and unequivocal correspondence between all the three necessary parties, viz., the principal debtor, the creditor and the surety, it is evident that the surety as well as the principal debtor were kept informed of their obligations with regard to the submission of the accounts for audit under the terms and conditions of the agreement as well as the Bank guarantee, and the surety as well as the principal debtor acknowledged the same. In fact, the surety reminded the principal debtor to comply with the conditions of the contract by submitting the accounts to the Posts and Telegraphs Department for audit, which has been systematically turned down by the second defendant by observing more in its breach rather than in implementation. If that is so, it is irresistible to conclude that there is absolutely no scope for the doctrine of estoppel to be called in aid by the appellant. In the view we have taken, we have no hesitation to reject the contention of the learned counsel for the appellant.
26. To sum up :--
(1) A contracts of guarantee, unlike a contract of indemnity which is bilateral, is tripartite where three persons, viz., the principal debtor, the creditor and the surety, are involved But, it is not necessary or sine qua non that the principal debtor must expressly be a party to the document of guarantee, as it is adequate if the principal debtor is a party by implication. In that view, the liability of the appellant (1st defendant), reading Exs. A-1 and A-2 in combination, is that of a surety.
(2) It is not necessary that the creditor must first seek remedy against the principal debtor before proceeding against the surety.
(3) The principal debtor (2nd defendant) has committed breach of the agreement: (Ex. A-1) and so has caused loss to the creditor i. e., respondent-plaintiff.
(4) Where the Court is not in a position to assess the compensation, the sum named by the parties if it be regarded as a genuine pre-estimate may be taken into consideration as the measure of reasonable compensation, but not if the sum named is in the nature of a penalty. Further, where loss in terms of money can be determined, the party claiming compensation must prove the loss suffered by him. In our judgment, therefore, the sum mentioned in Clause (1) of Ex. A-2 is an unascertained sum, and the loss suffered in this case in terms of money can be determined and, therefore, it is obligatory on the part of the respondent-plaintiff to prove the loss suffered by it.
(5) There is absolutely no scope for the doctrine of estoppel to be called in aid by the appellant (1st defendant).
27. In view of the above, we allow the appeal and remand the case to the Court of first instance for determining the actual loss suffered by the respondent-plaintiff, to which he will be eventually entitled. Both parties will be at liberty to adduce fresh evidence should they so desire.
28. In the result, the appeal is allowed, the judgment and decree of the Lower Court are set aside, and the matter is remanded to the lower Court for fresh disposal in the light of the findings given above. Costs will abide by the result. The Court fee paid herein is directed to be refunded.
29. An oral application for leave to appeal to the Supreme Court made by the learned Counsel for the Union of India is rejected as in oar view no substantial question of law of general importance arises in this case so as to be considered by the Supreme Court.