RAMCHANDRA B LOYALKA Vs. SHAPURJI N BHOWNAGREE

JUDGEMENT

(1.) THIS is an appeal from a decision of Mr. Justice Somjee. The plaintiff is a sub-broker and was employed as such by the defendant, who is a broker, on the terms of a contract, exhibit A, which was subsequently modified by exhibit B, to which documents I will refer in a moment. The plaintiff sues for an account of the commission payable to him under the agreements. The only substantial point, which appears to have been argued before the learned Judge and which has been argued on this appeal, is as to the liability of the plaintiff in respect of default made by the clients introduced by him. The learned Judge held that the plaintiff had been discharged from liability under circumstances which I will narrate in a moment, and the real question is whether that order is right. The learned Judge referred the matter to the Commissioner for taking accounts, and no doubt the matter will have to be referred to the Commissioner, and the only question before us is as to the basis on which these disputed items should be dealt with.

(2.) THE contract, exhibit A, is in the form of a letter dated March 12, 1935; it is addressed by the plaintiff to the defendant and says : With reference to the business in shares, securities and other commodities which I have agreed to canvass from my constituents approved by you, and to introduce and place with or procure tot you I hereby agree with you as follows : That I shall be answerable and responsible to you for all business secured by me from my constituents and to be answerable and responsible for the due payments by the said constituents for all moneys due in respect of such business as you may from time to time transact at my request and I agree on demand to make good any default on part of my said constituents and also to pay all damages, costs, charges and expenses that may be incurred by you or due to you by reason of such default. It is agreed that I shall be entitled to get 50% return of brokerage for business secured by me.

(3.) APART from that, I think that the contract is a contract of indemnity within the meaning of the Indian Contract Act. Section 124 defines a contract of indemnity as being 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. This contract seems to me clearly to fall within the terms of that definition. The promisor is agreeing to save the promisee from loss occasioned by the conduct of the constituents introduced. On the other hand, a contract of guarantee is defined in Section 126 in these terms : 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'. It is I think true that a contract might fall within both those definitions, but it is clear from Section 126 that a contract of guarantee involves three parties,- the creditor, the surety and the principal debtor-, and I agree with the view taken by the Madras) High Court in Periamanna Marakkayar v. Banians & Co. (1925) I.L.R. 49 Mad. 156 that a contract of guarantee involves a contract to which those parties are privy. Of course, the contract need not be embodied in a single document, but I think there must be a contract or contracts to which the three parties referred to in Section 126 are privy. There must be a contract, first of all, between the principal debtor and the creditor. That lays the foundation for the whole transaction. Then there must be a contract between the surety and the creditor, by which the surety guarantees the debt, and no doubt the consideration for that contract may move either from the creditor or from the principal debtor or both. But if those are the only contracts, in my opinion, the case is one of indemnity. In order to constitute a contract of guarantee there must be a third contract, by which the principal debtor expressly or impliedly requests the surety to act as surety. Unless that element is present, it is impossible in my view to work out the rights and liabilities of the surety under the Indian Contract Act. Section 145 provides that in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. It is impossible to imply a promise by the principal debtor to indemnify the surety, unless the principal debtor is privy to the contract of suretyship. A promise cannot be implied against a stranger to the transaction of guarantee. Again, the right of a surety to call upon the principal debtor to discharge the debt of the creditor which has become due,-a right which is referred to in Mulla's note to Section 145 of the Contract Act, and is illustrated by the English case there referred to, Asckerson v. Tredegar Dry Dock and Wharf Company, Limited, [1909] 2 Ch. 401 cannot be worked out, unless the principal debtor has authorized the contract of suretyship. Unless he has done that, the surety is not in a position to compel the principal debtor to pay the debt. In my view, therefore, exhibit A is a contract of indemnity and not a contract of guarantee the principal debtors, namely the constituents introduced by the plaintiff not only knew nothing of the alleged guarantee, but were unascertained when the contract was made.