1. The facts out of which this appeal arises are mostly undisputed. The plaintiff's father Supdu was a Police Sub-Inspector. Defendant No. 2, who died during the pendency of the suit, was his maternal uncle's son and was serving as a munim in the shop of Jamnadas Mayaram at Ranala. Supdu used to send monies to the deceased, defendant No. 2, for being credited in the shop of Jamnadas Mayaram. He died in 1919 and thereafter defendant No. 2 withdrew Rs. 5,000 from Supdu's khata in Jamnadas's shop and lent it to defendant No. 1 on a mortgage bond in his own favour, dated July 31, 1925. The plaintiffs protested against this and after some correspondence between defendant No. 2 and plaintiff No. 2, defendant No. 2 passed a promissory note for Rs. 5,000 and future interest at nine per cent, per annum in favour of plaintiff No. 2 on April 28, 1928 (exhibit 98). The promissory note was renewed in 1931 and again in 1934 (exhibits 99 and 100). The plaintiffs filed this suit to recover Rs. 8,000 from defendant No. 1 by the sale of the mortgaged property and if there remained any deficit they asked for liberty to proceed against defendant No. 2's estate in the hands of his sons who appear as his legal representatives after his death during the pendency of the suit. It was contended on behalf of the sons of defendant No. 2 that defendant No. 2, Nimbaji, was not in any way liable to satisfy the mortgage and that the promissory note passed by him was intended to be merely an acknowledgment that the mortgage deed taken by him from defendant No. 1 belonged to plaintiffs. The trial Court disallowed that contention and passed the usual mortgage decree for Rs. 8,000 and future interest at six per cent. per annum against defendant No. 1 to be recovered by the sale of the mortgaged property, and it ordered that for deficit the estate of defendant No. 2 in the hands of his legal representatives should be proceeded against by the plaintiffs. The legal representatives of defendant No. 2 have presented this appeal.
2. The trial Court has interpreted the promissory notes passed by defendant No. 2 as a collateral security, the consideration for such security being the acceptance of the mortgage deed taken by defendant No. 2 in his own name, and it held that as the promissory notes expressly recited a promise to pay, defendant No. 2 must be deemed to have undertaken the liability under the mortgage deed. It is not clear from the judgment whether the undertaking was regarded as a guarantee or a contract of indemnity, but the decretal order shows that it was treated as an agreement to make good any loss that might be caused to the plaintiffs if the sale proceeds of the mortgaged property be found to be insufficient to satisfy the mortgage debt. Yet in paragraph 26 of the judgment there are certain observations which go to indicate that under the promissory notes defendant No. 2 was regarded as having undertaken to pay the mortgage debt itself. Mr. Ramnath on behalf of the appellants contends that in fact defendant No. 2 did not guarantee the payment of the debt of defendant No. 1 and that as defendant No. 1 was not a party to the promissory note or to any promise which defendant No. 2 may have given to the plaintiffs there was no contract of guarantee as denned in Section 126 of the Indian Contract Act. He relied upon the ruling in Periammm Mamkkayar v. Banians & Co. (1925) I.L.R. 49 Mad. 156 in support of his contention that a contract of guarantee requires three parties, the creditor, the principal debtor, and the surety, and that there can be no contract of guarantee if the principal debtor is not a party to it. On the other hand, Mr. Adarkar for the plantiffs relies upon the ruling in Muthu Raman v. Chhma Vellayan (1916) I.L.R. 39 Mad. 965 and on ill. (b) to Section 127 of the Indian Contract Act, and contends that a contract of guarantee may be bilateral though in that case the surety may not be entitled to the benefit of Section 145 of the Indian Contract Act as against the principal debtor if the latter is not a party to that contract. I do not think it necessary to go into this question in this case since on the construction of the promissory notes sued upon I hold the contract to be one of idemnity and not guarantee or suretyship.
3. In a contract of guarantee there is an expectation that a third person, the principal debtor, will perform the promise or discharge his liability to the creditor and the promise of the guarantor or surety is conditional on the default of that third party. Under Section 128 of the Indian Contract Act his liability is co-extensive with that of the principal debtor, and the cause of action accrues as soon as the latter commits a default, so that under the expln. to Order II, Rule 2, of the Civil Procedure Code, the obligation of the principal debtor and . the collateral security offered by the surety for its performance are to be deemed to constitute but one cause of action. Whereas in a contract of indemnity the promisor engages to save the promisee from loss caused by the conduct of the promisor himself or by the conduct of any other person (s. 124 of the Indian Contract Act). The cause of action for a claim against the promisor accrues to the promisee when the latter is actually damnified, and his suit is governed by Article 83 of the Indian Limitation Act. Under a con-trapt of indemnity the promisee can claim only damages as distinguished from the debt for the non-payment of which the promisor has agreed to indemnify him.
4. Bearing this distinction in mind we have to determine the nature of the liability arising under the promissory notes passed by defendant No. 2 in favour of plaintiff No. 2. All the three promissory notes (exhibits 98, 99 and 100) are similarly worded and if they are taken literally they do not purport to create a contract either of indemnity or of guarantee, but contain an unqualified promise by defendant No. 2 to pay on demand Rs. 5,000 with future interest at nine per cent, per annum. The plaintiffs might have sued on the last of those promissory notes to recover Rs. 5,000 and interest from defendant No. 2 without any reference to defendant No. 1 or the mortgage deed passed by him, but they do not want to treat it as a promissory note pure and simple. The consideration of the promissory notes is thus described in them :
I give you this promise that I owe you Rs. 5,000 ; that is in this way. This amount is given to Ana Narayan (defendant No. 1) on July 31, 1925, and a, mortgage-deed is taken for that amount from him in my name regarding his houses, lands etc. That debt is due to you and it is not mine. This pro-note is given to you for that debt. The interest is at twelve annas per cent, per month. This amount including interest will be paid to you or to your order when you demand it at any place without any excuse. I have received the consideration.
5. The first of these three promissory notes was passed by defendant No. 2 after a good deal of correspondence between him and plaintiff No.
2. Defendant No. 2 had apparently not taken the consent of any of the plaintiffs to withdraw the amount from the shop of Jamnadas Mayaram and advance it to' defendant No. 1 on a mortgage bond in his own name. Plaintff No. 2 appears to have sent a strong protest in a language which was apparently not liked by defendant No. 2. The letters written by plaintiff No. 2 to defendant No. 2 have not been produced, but the replies sent by defendant No. 2" are produced at exhibits Nos. 89 to 92, 94 and 96. In exhibit 89, dated April 6, 1926, defendant No. 2 wrote,
I cannot reply to your letters, but I shall personally tell you. I cannot use the same language which you have used owing to my age. You are after all young. I cannot compete with you... I have been demanding monies from Ana Patil. (defendant No. 1). I shall let you know what he says. I have done a thing without taking your permission. It is my mistake. Henceforth I will take care. I cannot blame you. Because there may be profit or there may be loss. If there-is profit you want to grab it; if there is a loss you want to hold me responsible for it. I have never made any such transaction before. You have reproached me for doing it. I have now learnt a lesson from a Guru. In case you do not get cash from Ana Patil, are you ready to take lands from him ?
6. After this letter there were some negotiations regarding the purchase of the lands of defendant No. 1 and when the negotiations fell through, defendant No. 2 wrote exhibit 91 to plaintiff No. 2 on October 9, 1926, in which he stated that he was sending him a promissory note of Rs. 5,000 bearing the date of the mortgage bond. It appears from the statement of plaintiff No. 2 (exhibit 101) that as the promissory note was insufficiently stamped it was sent back and subsequently another promissory note for Rs. 5,000 dated April 28, 1928, was sent. When it was about to be time-barred the promissory note (exhibit 99) was passed in 1931 and again a third promissory note (exhibit 100) was passed in 1934. It is alleged in the plaint that the plaintiffs' claim against defendant No. 2 is kept alive by this third promissory note of 1934.
7. The obligation undertaken by defendant No. 2 under these promissory notes is thus described by the plaintiffs themselves in para. 7 of the plaint :
The plaintiffs informed defendant No. 2 that the said transaction was done by him unauthorisedly and that the plaintiffs were being put to a loss thereby. Defendant No. 2 therefore admitted that the liability for the amount in the said transaction was upon him and in respect of that he has given from time to time in writing promissory notes of Rs. 5,000 in the name of plaintiff No. 2. In this way as defendant No. 2 has accepted the liability for the amount of the said mortgage deed defendant No. 2 is liable to pay the amount payable under the said mortgage deed. Hence he is made a defendant.
8. It is not correct to say that defendant No. 2 accepted the liability for the amount due under defendant No. 1's mortgage deed. In that case he would have passed a promissory note for the full amount due under that deed on the respective dates on which the promissory notes were passed. But each promissory note was for Rs. 5,000 and future interest only. This indicates that defendant No. 2 undertook to make good the loss, if any, resulting from the transaction up to Rs. 5,000. If the agreement was intended to be a contract of guarantee as defined in Section 126 of the Indian Contract Act, defendant No. 2 should have undertaken to discharge defendant No. 1's liability in case of default. But the default had already taken place when the first promissory note was passed, since the period of one year fixed for the repayment of the mortgage debt had already expired. It is, therefore, evident that defendant No. 2 did not intend to stand surety for defendant No. 1, but promised to indemnify the plaintiffs in case any loss was caused to them by his unauthorised meddling with their money. That even the plaintiffs themselves took the same view is clear from the relief claimed by them against defendant No. 2 in this suit. Their prayetf in para. 9, Clause (c), in the plaint runs as follows :
If the amount is not fully paid (satisfied) from the proceeds of sale of the mortgaged properties, liberty to claim the proper relief to recover the deficit amount from defendant No. 2 personally should be reserved to the plaintiffs.
9. This shows that they want to recover only the deficit from the appellants and the lower Court also has passed a decree against them to the same effect. Had defendant No. 2 been a surety for defendant No. 1's debt, a joint decree for the entire amount would have been passed against the appellants. Hence the most favourable construction in favour of the plaintiffs which can be placed on the promissory notes is that they created a contract of indemnity whereby defendant No. 2 undertook to make good any loss that they might sustain. It was open to the plaintiffs to repudiate the mortgage transaction altogether and claim the whole of the amount from defendant No. 2, leaving him to file a suit against defendant No. 1 to recover the mortgage amount. But the plaintiffs chose to accept that mortgage transaction and to treat defendant No. 2 as their benamidar. It follows from this that they can hold the appellants responsible only for the loss suffered by them in consequence of that transaction, and in fact they have not claimed anything more from them in this suit.
10. Thus the contract being one of indemnity the plaintiffs' claim against defendant No. 2 must be held to be premature. It is clear from Section s 124 and 125 of the Indian Contract Act and Article 83 of the Indian Limitation Act that under a contract of indemnity the cause of action arises when the damage which the indemnity is intended to cover is suffered, and a suit brought before the actual loss had accrued must be thrown out as premature. The plaintiffs cannot sue the appellants in anticipation that the proceeds realised by the sale of the mortgaged property would be insufficient and there would be some deficit left. The right to sue accrues only when such deficit occurs in fact and not till then, and the plaintiffs will have three years thereafter within which they can sue the appellants to recover that deficit. But the claim made by the plaintiffs against defendant No. 2 in this suit must be rejected as premature.
11. Mr. Ramnath further argued on behalf of the appellants that the agreement contained in the promissory notes, whatever be its nature, was void for want of consideration. Mr. Adarkar pointed out that the consideration was the plaintiffs' acceptance of the mortgage transaction entered into by defendant No. 2 with their money without their consent. They would have repudiated it had not defendant No. 2 agreed to indemnify them and given them the promissory notes. Whether this is a good consideration for the agreement or not will have to be decided if and when a proper suit is filed by the plaintiffs to enforce it and it is not necessary to express any opinion on that point in this case.
12. The appeal is, therefore, allowed and the order passed by the trial Court against defendant No. 2 is deleted from the decree. The suit stands dismissed as against defendant No. 2 and his legal representatives. The appellants shall recover their costs from the plaintiffs in both the Courts.
N.J. Wadia, J.
13. I agree.