THE HIGH COURT 0F SIKKIM =-GANGTOK (Civil Appellate Jurisdiction) For Appellant RFA No.02 of 2009 The State Bank of India, Gangtok Branch Office : M. G. Marg, Gangtok, East Sikkim. versus ..... Appellant Shri Vivek Garg, S/o Shri Saroj Garg (Agarwal) Shri Saroj Garg, S/o Shri Laxmi Narayan Shri Ganga Ram Sharma, S/o Lat:e Ram Prasad Sharma, All resident of - Bhardwaj Niwas, Diesel Power House, Gangtok, East Sikkim. ..... Respond`ents •:`L : Mr. A. Moulik, Senior Advocate„ + with Mr. N. G. Sherpa, Mr. Manish Kr. Jain and Mr. Leonard Gurung, Advocates. For Respondents No.1 &2 : None present. ForRespondentNo. 3 : Mr. B. K. Rai, Advocate with Ms. Binita Thapa and Ms. Karishma Chettri, Advocates. BEFORE : HON'BLE MR. JUSTICE S. P. WANGDI, JUDGE. Last date of hearing : 17-05-2010 DATE OF JUDGMENT = 24-05-2010 J` U D G M E N T Wangdi,I J. This appeal is directed against the judgment and decree dated 25-11-2008 passed by the District Judge, East and i.::-1- ., 1 .` `T e-,a 2 North Sikkim, at Gangtok, in Money Suit no.3 of 2005, by which the suit filed by the appellant-bank against the respondents for recovery of Rs.5,05,336.73 was dismissed. 2, The case of the appellant in the suit is that the respondents had jointly applied to t:he appellant-bank for a term loan amounting Rs.3,54,000/- under the ``SBI Education Loan Scheme" as financial assistance to the respondent no.1 Shri Vivek Garg for undergoing 8. Tech (Degree course) in Sikkim Manipal Instit:ute of Technology, Mazitar, East Sikkim, which was sanctioned under agreed terms and conditions more specifically provided in the Agreement for Term Loan Exhibit-5 executed by and between the appellant bank and the respondents no. 1 and 2 and other related documents. The respondent no.1 and his father respondent no.2 were the principle borrowers wit:h the respondent no.3 as their guarantor and, t:here fore, they were ].ointly and severally liable for t:he repayment of the loan with int:erest accruing thereon. As per the appellant, the respondent no.3 by a Guarantee Agreement marked Exhibit 3 executed by him, had agreed to repay the dues and payable by the borrowers, the respondents no. 1 and 2, to the bank wit:h accrued interest, cost, charges, expenses, etc., in the event they defaulted in doing so and also would indemnify and keep the bank indemnified against all loss of the principle, interest and other moneys, etc. and that he would be treated as the principle debtor to t:he bank for all payments against the principal borrowers and further that the guarant:ee would be a ca •--,1 continuing one. According to the appellant, the respondents had applied for the loan in the prescribed form (Exhibit 1) which along with the proposal form (Exhibit 2) and the arrangement letter (Exhibit 4) were duly signed by all of them. 3. Letter dated 17-02-2004 of t:he appellant-bank sent t:o the respondents no.1 and 2 through speed post demanding repayment of the loan with interest was returned with the postal remark ``addressee left withoutlinformation". It was lat:er learnt by the appellant-bank that the respondents no.1 and 2 had left the place and address shown in the prescribed application form and in other related documents without any trace, whereupon they lodged a FIR in the Sadar Police St:ation, Gangtok on 12-09-2004. Later coming to learn of t:heir being at Naya Bazar, Kurseong, Dar].eeling, W.B., the appellant issued to them in that address a legal notice on 17-11-2004 demanding repayment of the loan with accrued interest but was also ret:urned by the postal authorities as \ unserved. Similar notice issued to the respondent no.3 at his address at Gangtok, was not responded to in spite of it being received by him. Thereafter, notices were published in ``Janpath Samachar" (Hindi Newspaper) ,on 26-06-2005 with photographs of the respondents no.1 and 2 calling upon them to repay the dues of the appellant-bank, but that too failed to evoke any response. The t:otal dues against the loan as on 10-08-2005 wit:h Interest computed @11.5% per annum was Rs.5,05,336.73, wlthout prejudice to the future interest @11.5% untll recovery of the 9-0 4 entire dues. Ultimately, t:he appellant-bank filed Money Suit no.23 of 2005 against all the respondents in the Court of t:he District Judge, East and North Sikkim at Gangtok on 23-08-2005 for recovery of the aforesaid sum and other consequential reliefs. 4. During the course of t:he proceedings before the trial Court, it appears that the notice of summons could not be served upon the respondents no.1 and 2, requiring the appellant taking resort to substitut:ed service by publication in a local newspaper. The substit:uted service not having been responded t:o by the respondents no.1 and 2, they were proceeded ex parfe vide the order of the trial Court dated 21-06-2006. From the proceedings of t:he trial Court available on record, it is seen that it was only the respondent no.3 who appeared diligently in each date fixed by the Court and contested the suit by filing written statement. It would not be necessary to deal wit:h each and every averments contained in the written statement but suffice it to state that the respondent no.3 did not deny the factum of the respondents no.1 and 2 having taken the loan and him having stood as guarantor by executing the deed of guarantee marked as Exhibit 3. The suit: was cont:ested by him on the ground that since t:he appellant and the respondents no.1 and 2 had made material variation in t:he manner of disbursement of the loan wit:hout his consent, in as much as, it was deposited directly in the personal account of the borrowers, i.e., the respondents no.1 and 2, instead of the institution which was the agreed mode of disbursement, he stood discharged as a i..=vL '®-a guarantor. It was further stated that vide the application for loan Exhibit 1, the respondents no.1 and 2 had pledged an immovable asset, namely, ``Krishna Restaurant" having the declared value of Rs.2,50,000/- which the appellant-bank allowed the respondents- borrowers t:o part with. The appellant having varied the terms of the contract and having allowed the borrowers to part with the pledged security which as per the respondent no.3, was in connivance with the borrowers, he stood discharged from the guarantee. In fact:, on coming to learn of the manner of disbursement in violation of and contrary to the agreed terms, the respondent no.3 vide his letter dated 05-07-2003 addressed to t:he Assistant Bank Manager, SBI (HQ), Gangtok, conveyed his wit:hdrawal from t:he guarantee, but as per the respondent no. 3, the bank chose not to respond. Based upon the pleadings for the purpose, the t:rial Court framed the following issues:- ``1. Whether the suit is maintainable against the defendant No.3? Whether the defendant No.3 is liable to re- pay the educational loan taken by defendant Nos.1 and 2? Whether the plaintiff alt:ered the t:erms of the cont:ract without the consent of defenda'nt No.3? 4. Whether the plaintiff has violated the terms of guarantee agreement ent:ered between the plaintiff, defendant Nos.1 and 2 and the defendant No.3? 5. Reliefs." e-Q 6` The learned trial Court after considering the pleadings and the evidence on record decided all the issues against the appellants and vide the impugned judgment came to a finding t:hat the appellant-bank had alt:ered the terms of the contract and, therefore, neither the suit was maintainable against respondent no.3 nor was he liable to repay the loan taken by t:he respondents no.1 and 2 thereby leading to the dismissal of the suit. Before this Court, it was submit:t:ed by Mr. A. Moulik, senior advocate, appearing on behalf of t:he appellant-bank, that the findings of the trial Court in respect of issues no.3 and 4 were grossly erroneous and in total disregard to the various clauses of the Guarantee Agreement Exhibit 3 and that the issues no.1, 2 and 5 having been decided on the basis of the findings on issues no.3 and 4 in holding that the suit against t:he respondent no.3 as a guarantor was not maintainable, was also untenable in law and the facts and circumstances of the case and, therefore, the impugned judgment was liable to be set aside. The learned senior counsel submitted that the relationship between the appellant-bank and t:he guar.antor respondent no.3 was the creation of the Guarantee Agreement Exhibit 3 executed by and bet:ween them and, therefore, his responsibility to the bank had to be considered in the light of the terms and conditions prescribed therein, notwithstanding the fact t:hat the respondent no.3 along with the respondents no.1 and 2, had also signe.d on t:he other documents iE e-@ 7 being the application for loan - Exhibit 1, the proposal form - Exhibit 2 and the arrangement letter - Exhibit 4. Laying emphasis on t:he various clauses of the Guarantee Agreement, it was submitted t:hat even if t:he respon.dent no.3 had acquired the legal right to be discharged from t:he surety for the reasons st:at:ed by him, such right stood waived by him. 8` It was submitted by Mr. Moulik that by the application of Section 137 of the Indian Contract Act, 1872, the responsibility of respondent no.3 as a guarantor could not be discharged even assuming that there was forbearance, omission or any other indulgences by the bank shown in favour of the borrower which as per the learned senior counsel, had also been categorically agreed upon in terms of clause (2) of the Guarantee Agreement. It was pointed out that by clause (11) of t:he Guarantee Agreement:, the respondent no.3 had consented, amongst others, to any variat:ion that may be effected in the terms of the loan arrangement of any composition between the bank and the borrower, and in event of such variation, the guarantor would not be released or discharged from his obligations under the Guarantee Agreement:. Having thus agreed by executing the Guarantee Agreement Exhibit 3 which was to be a continuing one in terms of clause (7) and, having agreed to be treat:ed as the principle debtor to t:he bank for all payments guaranteed by him as per clause (6) therein, the respondent no.3 was bound to discharge his obligations under the Guarantee Agreement. In other words, those were the terms i,i` 9-C) of a legal and valid concluded contract entered between the appellant-bank and the respondent no.3 and that being so, neither of the parties could resile there from. 9. In support of his submission, Mr. Moulik referred to the c.ase Of Sita Ram Gupta vs. Punjab National Bank & Ors. .. 92008J 5 SCC 7ZI, paragraph 8 of which .reads as under:- "8. The question is whether the appellant, having entered into such an agreement of guarantee with the Bank, had waived his right under the Act. In our view, the High Court has rightly held and we tco are of the view that the appellant cannot: claim the benefit under Section 130 of the Act because he had waived the benefit by entering into the agreement of guarantee with the Bank. In Lachoo Mal v. Radhev Shvam this Court: observed that the aeneral DrinciDle is that evervone has a riaht to waive and to aaree to waive the advantaae of a law or rule made solelv for the benefit and Drotection of the individual in his private capacity which may be dispensed with without infringing any public right or public Principle. In Halsbury's Laws of England, Vol. 8, 3rd Edn., it has been stated in para 248 at p.143 as under:- ``248. Contracting out.- As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him by an Act of Parliament, or, as it is said, can contract himself out: of the Act, unless it can be shown that such an agreement is in the circumstances of the particular case contrary to pub//c po//ay, Statutory conditions may, however, be imposed in such terms that they cannot be waived by agreement, and, in certain circumstances, the legislature has expressly provided that any such agreement shall be void." (emphasis supplied)" [emphasis supp[ied] ZO, Next, reliance was placed upon in the case of I. Ra/-u Setty vs. Bank of Boroda -. AIR 1992 Karnatalka 108, .in whiich t:he Division Bench of Karnataka High Court in paragraph 11 held as follows:- im --a "11. We are of the view tliat as the provisions contained in Chapter VIII of the Act relate to indemnity and guarantee, they deal with one subject and they are to be read together. The liability of t:he surety as stated in general terms in S. 128 of the Act is no doubt co-ext:ensive with that of the principal debtor, but this liability is also subject to the terms of the contract; because S. 128 of the Act itself sDecificallv Drovides that the liabilitv of a surety is co- ext:ensive with that of the DrinciDal debtor unless it is otherwise Drovided bv the contract. Thus the liabilitv of the suretv is subiect to the terms of the contract as mav be arrived at between the Darties. The words "unless it is otherwise Drovided in the contract" occurrina in Section 128 of the Act will also ciovem th: e other Drovisions contained in ChaDt:er VIII of the Act and enable the suretv to aive uD the riahts available to him under Sections 133, 134, 135, 139 and 141 of the Act I:emphasis sL]pp]ied] 11. The third case relied upon by Mr. Moulik was t:he case oF Central Bank of India vs. M/s. Multi BIock Private Ltd. & Ors. : AIR 1997 Bombay log, in which paragraph 27 reads as follows:- "27. The defendants have waived their rights conferred under Sections 133, 134, 135, 139 and 141 of the Contract Act. But, in my view, the said waiver will not affect the validity and efflcaay of the transaction of advancement of loan and furnishing of the guarantee by the guarant:ors. Section 23 of the Indian Contract Act is mainly concerned with the consideration or object of the agreement of guarant:ee or consideration of the contract and the riahts available under ChaDter VIII in Indian Contract Act can be waived bv the auarantors and such waiver will not defeat anv Drovision of law. It is not possible to say and view lthe various clauses in the guarantee bond are such which are opposed to public policy or tainted with immorality. On the other hand, the Dublic policy should be that one should not allow to defeat the debt of the creditor .......... " [emphasis supp[ied] 12. It was further submitted by Mr. Moulik that in so far as the respondent no.3 is concerned, it was necessary to consider t:he Guarantee Agreement executed by him as regards his liability to jill --a 10 the bank while necessarily excluding the other document:s executed by the respondents including t:he respondent no.3 who was the guarantor. The Guarantee Agreement const:ituted a separate, distinct and independent contract between the bank and the guarantor and that it is independent of the main agreement entered between the appellant-bank and the respondents no.1 and 2. Reference in this regard was made to the case of fJi-ndrusfan Construction Co. Ltd. vs. State of Bihar & Ors. .. AIR 1999 SC 3710, particularly to the following portion of paragraph 20:- ``20. As pointed out above, Bank Guarantee constit:uted a separate, dist:inct: and independent cont:ract. This contract is between the Bank and the defendants. It is independent of t:he main contract between the HCCL and the defendants. 13. On the other hand, Mr. 8. K. Rai, advocate appearing on behalf of the respondent no.3, submitted that the respondent no.3 had agreed to be the guarantor only aft:er being satisfied of the t:erms and conditions contained in all t:he documents being Exhibit 1, Exhibit 2, Exhibit 3, Exhibit 4 and Exhibit 5. As per him, all those documents had to be read together as that formed the basis of his agreeing to be .the guarantor and not in exclusion of each ot:her as was being contended on behalf of the appellant. It was his case that in the Agreement For Term, Loan Exhibit 5, the manner of disbursement had been clearly set out in clause (2) thereof as per which the disbursement of loan would be made directly to the institution towards payment of tuition fees and that only such part of the loan necessary towards purchase of books for :i. --a 11 the prosecution of studies of the course undertaken would be paid to t:he student from t:ime to time on the condition that he produces the related receipts evidencing purchase of the books before the bank within a reasonable t:ime from the disbursement: of the amount made to him. Mr. Rai also drew the attention of this Court to clause (10) of the arrangement letter Exhibit 4 in terms of which in sub-clause (a) the very term provided in clause (2) of the agreement` for term loan Exhibit 5 had been stipulated. On the strength of t:hese clauses, Mr. 8. K. Rai submitted that those being the essential conditions of the contract of loan, it was necessary for the parties to have strictly complied with them, which was not done. Contrary thereto, the appellant had made material variation in t:he said terms in connivance wit:h the principal borrowers, i.e., respondents no.1 and 2, and got the major portion of t:he loan transferred in the account of the borrowers directly except a sum of Rs.77,300/- that was paid to t:he institution directly. Mr. Rai further submitted that on coming to learn of this fact, the respondent no.3 by his letter dated 05-07-2003, addressed to the Assistant General Manager, SBI (HQ), Gangtok (Exhibit 82), conveyed his wit:hdrawal as the guarant:or. It was argued that the way in which the appellant and the respondents no.1 and 2 had conduct:ed themselves after the loan had been sanctioned and t:he documents executed by the respondent no.3, clearly indicated their fraudulent intention and that in order to succeed in t:heir fraud they had mis-represented the facts to the respondent no.3 and, on such mis-representat:ion the loan documents including the Guarantee iEi --a 12 Agreement were got execut:ed by him. It was, therefore, submit:ted that by application of the provisions of Sections 142 and 143 of the Contract Act the Guarantee Agreement entered into by him was rendered invalid and was a nullity in t:he eye of law. It was further submitted that even assuming that the Guarantee Agreement remains valid, he cannot be held responsible for more than the amount of the first: disbursement that was made in due compliance of t:he terms of the agreement. In other words, as the first instalment of Rs.77,300/- had been disbursed as per the agreed terms and conditions, he would be liable only to that extent and nothing further. In support of his submission, Mr. Rai referred to the case Of State Maharashtra vs. Dr. M. N. Kaul (dead) by his legal representatives & Anr. .. AIR 1967 SC 1634 .ir\ paragraph 6 of which it has been held as under:- "6. The question is whether this guarantee is enforceable. That depends upon the terms under which the guarantor bound himself. Under the law he ccarmot be made liable for more than he has undertaken, .................,..,....... To this there are some exceptions. In case of ambiguity when all other rules of construction fail, the courts interpret the guarantee contra proferentem that is, against the guarantor or use the recitals to control the meaning of t:he operative part where that is possible. But whatever the mode employed, the cardinal rule is that the auarantor must not be made liable bevond the terms of his enaaaement." [emphasis supp]ied] ]4. It was further urged by Mr. 8. K. Rai that there was a serious negligence on the part of the appellant-bank in not having secured the assets pledged by the borrowers, i.e., respondents no.1 and 2, which consisted of one-seventh of joint ancestral 13 property in Kurseong worth about Rs.50 lacs, M/s. Krishna Restaurant, NH-31A, Gangtok valued at Rs.2.5 lacs and LIC policy no.451159 for Rs.50,000/- and that instead of liquidating those assets belonging to the borrowers, they chose to remain idle and allowed the borrowers to part with them. Therefore, as per the learned counsel by application of Section 141 of the Contract Act the respondent no.3 was discharged to the extent of t:he security which in any case was more than the value of the loan and the amount which is now due and payable t:o the appellant. Therefore, the District Judge having considered all these aspects of t:he case, had rightly passed the impugned judgment dismissing the suit filed by the appellant and, therefore, the appeal ought to be dismissed for the same reasons. ]5. Having considered the rival contentions and upon perusal of the records of the case and the evidence of the parties, the question that needs det:ermination for the purpose of t:his appeal appears to be a limited one. It was an admit:ted posit:ion of the parties that emerged during t:he course of hearing of the appeal that the primary question to be answered for the disposal of the appeal is as to whether having regard to the terms and conditions of the Guarantee Agreement Exhibit 3, is t:he respondent no.3 discharged from his obligation as the guarantor by application of Section 133 of the Cont:ract Act? For this purpose,.it is immaterial to go through the evidence adduced by the parties as it can be decided on the basis of the documents, more particularly, the --C) -'0 14 Guarantee Agreement filed in the case. We may consider clauses 2, 6, 7, 8, 9 and 11 of the said Guarantee Agreement Exhibit 3:- ``2. The Bank shall have the fullest liberty without affecting this guarantee to postpone for any time or from time to time to enforce or forbear to enforce any remedies or securities available to the Bank and the Guarantor(s) shall not be released by any exercise by t:he Bank of its liberty wit:h reference to the matter aforesaid or any of them or by reason of time being given to t:he Borrower or any ot:her forbearance act or omission on the part of the Bank or any other indulgence by the Bank to t:he Borrower or by any other matter or thing whatsoever which under the law relating to sureties would but for t:his provision have the effect of so releasing the Guarantor(s). 6. In order t:o give effect to the guarantee herein contained the Bank shall be entitled t:o act as if the Guarantor(s) was the principal debtor to the Bank for all payments guaranteed by him / them as aforesai'd to the Bank. 7. The guarantee herein contained is a continuing one for all amounts due to the Bank by the Borrower under or in respect of the aforesaid advance granted as aforesaid as also for all interest costs and other moneys which may from t:ime to time become due and remain unpaid to t:he Bank hereunder. The guarantee shall be irrevocable and enforceable against t:he Guarantor(s) notwithstanding any dispute between the Bank and Borrower. The guarantee herein cont:ained shall be enforceable against the Guarantor(s) notwithstanding the student at any time leaving the said S.i.k.k.i.in...M.a.p.ip.a.I...In.S.I..... 9.f |§.€b...... (name of t:he institution) and / or giving up the st:udies for the course of .B...I.e.c.b. or changing the said course to some other course. --a 15 11. It is agreed by the Guarantor(s) that notwithstanding any variat:ion made in the terms of the aforesaid arrangements of any composition between the Bank and the Borrower or any promise given by the Bank to the Borrower to give time t:o or not t:o sue or the Bank parting with any of the securities given by the Borrower, the Guarantor(s) shall not released or discharged of his / their obligations under this guarant:ee and in the event of such variation, composition, promise or parting with