Author: Rashi Aggrawal, Manipal University Jaipur
TO THE POINT
The 1969 Supreme Court judgment in Bank of Bihar Ltd. v. Damodar Prasad is a corner case in Indian Contract Law, especially under Section 128 of the Indian Contract Act, 1872. It addresses a critical question — whether a surety can demand that a creditor exhaust remedies against the top debtor before invoking the guarantee. In this case, the surety, Damodar Prasad, had executed a guarantee in favour of Bank of Bihar for a loan given to the top debtor. still, he fitted a condition that the bank must first take legal action against the borrower before turning to him for prepayment. When the bank sought to apply the guarantee, Damodar Prasad refused to pay, citing the condition he’d added.
The Supreme Court ruled that such a condition was invalid. According to the Court, under Section 128, the liability of the surety isco-extensive with that of the top debtor. This means the creditor can directly do against the surety the moment the top debtor defaults. No legal demand authorizations the creditor to first file suit against the borrower or to exhaust remedies against him. The Court emphasized that allowing similar restrictive clauses would master the veritably purpose of suretyship, which exists to give fresh security to the creditor. It corroborated the creditor’s freedom to decide from whom to recover the debt and underlined the list nature of guarantees, anyhow of fresh limitations fitted unilaterally by the surety.
USE OF JARGON
Surety – The person who promises to discharge the debt of another if the debtor fails.
Principal Debtor – The party primarily liable to pay the debt.
Indemnity – Protection or security against legal liability or loss.
Co-extensive Liability – Liability that’s equal in compass and extent to another’s.
Discharge of Surety – Legal release of a surety from the obligation.
Collateral Contract – An supplementary agreement related to the main contract.
Dereliction – Failure to fulfill a legal obligation, especially payment.
Creditor’s Right of Election – The creditor’s choice to do against either debtor or surety.
Waiver – Voluntary handover of a given legal right.
Unilateral Condition – A term assessed by one party without collective agreement.
THE PROOF
The ruling in Bank of Bihar Ltd. v. Damodar Prasad rests on a strict interpretation of Section 128 of the Indian Contract Act, 1872, which explicitly states that “ the liability of the surety isco-extensive with that of the top debtor, unless it’s else handed by the contract. ” This means that the surety’s obligation kicks in incontinently upon the debtor’s dereliction, and not after the creditor has exhausted all remedies against the top borrower.
The Court set up the surety’s condition — that the bank must first sue the borrower — negative to this principle. Such a clause would basically rewrite the law, allowing sureties to unilaterally weaken their scores, thereby undermining the enforceability of guarantees.
The Court categorically stated that fitting such a condition defeats the spirit and function of Section 128, which is to give immediate and unconditional expedient to the creditor. likewise, the judgment clarified that the creditor has the right of election — that is, the choice to do against the top debtor, the surety, or both. The Court also appertained to English law principles to support the view that a surety’s obligation is n’t secondary or residual, but concurrent and inversely enforceable.
This case also highlights how courts interpret the intention behind a guarantee rigorously, conserving the lender’s capability to recover debts instantly. It emphasizes that a guarantee is n’t simply emblematic but fairly binding and enforceable without procedural hindrances created by the patron.
ABSTRACT
Bank of Bihar Ltd. v. Damodar Prasad is a corner case that clarified the legal position of suretyship under Indian law. The core issue was whether a surety could mandate the order in which a creditor must act when recovering a debt — specifically, if the creditor must first essay to recover from the top debtor before turning to the surety. The Supreme Court ruled that such a condition added by the surety was fairly invalid.
According to Section 128 of the Indian Contract Act, 1872, the liability of a surety isco-extensive, meaning it arises incontinently upon the debtor’s dereliction and is n’t subject to any prerequisites. The creditor is free to directly sue the surety without first initiating proceedings against the top debtor.
This decision is significant because it strengthens the enforceability
of guarantees and reinforces the notion that contractual scores must be recognized as they’re — not as parties latterly interpret or modify them. It sets a precedent that prevents sureties from adding unilateral conditions that limit their liability, thereby guarding creditors’ interests.
The Court also made it clear that the purpose of a surety is to give fresh security, not procedural detainments. This judgment is now extensively cited in cases involving guarantees and has come foundational in understanding creditor rights and surety scores in India.
CASE LAWS
Bank of Bihar Ltd. v. Damodar Prasad (1969 AIR 297)
Held that a surety can not put a condition taking the creditor to first do against the top debtor. Section 128 makes the liabilityco-extensive and immediate.
State Bank of India v. Indexport Registered (1992 AIR 1740)
The Supreme Court reaffirmed that the creditor is n’t bound to exhaust remedies against the debtor before suing the surety.
Union Bank of India v. Manku Narayana (1987 AIR 1078)
The Court held that liability of the surety arises incontinently on the top debtor’s dereliction, indeed if no proceedings have been initiated against the debtor.
Punjab National Bank v. Bikram Cotton Mills (1970 AIR
1973)
The surety’s liability is enforceable on dereliction without any obligation on the creditor to delay proceedings or file a suit against the borrower.
Industrial Finance Corporation v. Cannanore Spg. & Wvg. Mills
(2002 AIR SC 1841)
Clarified that surety can not escape liability by counting on
procedural expostulations or internal arrangements.
Bhaskaran v. Sankaran Vaidhyan Balan (1999 AIR SC 3762)
Though related to cheque dishonour, emphasized that legal scores under fiscal guarantees are enforceable upon dereliction.
Anirudhan v. Thomco’s Bank Ltd. (1963 AIR 746)
Reaffirmed that concurrence to guarantee binds the surety to fulfill scores without procedural detainments or fresh conditions.
State Bank of India v. Premco Saw Mill (1981 AIR SC 1444) Stressed on theco-extensive nature of liability and upheld the creditor’s right to recover directly from the surety.
ICICI Bank Ltd. v. Grapco Mining (2006 SCC 1775)
The court held that the surety’s liability is direct and unconditional unless explicitly altered in jotting by both parties.
Deepak Mahajan v. Union of India (1994 AIR 1775)
While not a pure surety case, it supported the principle that conditions against the plain language of law are void.
CONCULSION
The Bank of Bihar Ltd. v. Damodar Prasad case sets a clear legal precedent that upholds the saintship of contractual scores, especially concerning suretyship. It establishes that a surety can not escape liability by unilaterally adding conditions that delay or alter the creditor’s right to recovery.
The judgment affirms the interpretation of Section 128 of the Indian Contract Act, icing that the liability of the surety isco-extensive and arises incontinently upon dereliction. The significance of this case lies in its clarity and thickness with the intention of the law — that guarantees are meant to give fresh security to creditors, not procedural complexity. The Court correctly defended the bank’s
right to apply the guarantee directly, emphasizing the significance of a free and secure credit system. The ruling sends a strong communication that courts wo n’t tolerate attempts to adulterate legal scores through extraneous conditions. It ensures that banks and fiscal institutions can operate with confidence, knowing that guarantees are n’t subject to the vagrancies of sponsors after the agreement is made.
For law scholars and interpreters, this case is a foundational authority on suretyship. It also offers sapience into how Indian courts approach the balance between contractual freedom and statutory authorizations. Eventually, this judgment reinforces that trust and enforceability go hand in hand in fiscal deals.
FAQs
Q1 Can a surety refuse payment until the top debtor is sued?
No. As per Bank of Bihar v. Damodar Prasad, the surety can not put such a condition. The law provides that a surety’s liability arises the moment the top debtor defaults. The creditor has complete freedom to sue either the debtor or the surety.
Q2 What’s the meaning ofco-extensive liability?
Co-extensive liability means that the surety’s obligation is equal in compass and timing to that of the top debtor. Once the top debtor defaults, the surety is incontinently liable, and the creditor can initiate recovery proceedings against either party, or both.
Q3 Can the creditor recover the full quantum from the surety?
Yes. Section 128 allows the creditor to recover the full quantum from the surety if the top debtor defaults. The surety has no legal base to argue that only a portion should be paid unless stated in the original contract.
Q4 Can the surety add a clause taking previous action against the debtor?
No. similar clauses are against the law. In Bank of Bihar v. Damodar Prasad, the Supreme Court abrogated a analogous clause and clarified that a surety can not unilaterally put similar limitations on the creditor’s rights.
Q5 Is the creditor obliged to inform the surety before filing suit? While it’s good practice, there’s no legal demand under Section 128 to notify the surety before initiating recovery, especially if the dereliction is apparent and undisputed. The creditor may act at their discretion.
Q6 What happens if the top debtor is insolvent?
Indeed in the case of bankruptcy, the creditor can still do against the surety. The surety’s liability is n’t contingent on the fiscal capacity of the top debtor. They’re both singly liable once a dereliction occurs.
Q7 Can a surety be discharged if the creditor detainments recovery? No. Bare detention by the creditor does n’t discharge the surety unless it prejudices the surety’s position materially or violates specific terms of the contract. Courts are doubtful to excuse liability on the ground of detention alone.
Q8 Can the surety recover from the top debtor after paying?
Yes. Once the surety pays the creditor, they’re entitled to be remunerated by the top debtor. This right of remuneration arises from the nature of the relationship between surety and debtor.
Q9 Can the surety be sued without the debtor being sued?
Yes. The creditor is n’t bound to sue the top debtor first. The creditor has a legal right to directly pursue recovery from the surety, and courts have upheld this right constantly in case laws.
Q10 Is a guarantee a separate contract from the loan agreement?
Yes. A guarantee is an independent contract between the creditor and the surety. It’s enforceable on its own, handed the primary debt exists and the top debtor has defaulted.
Q11 Can a surety contract be oral?
Though written guarantees are preferred for legal clarity, oral guarantees are fairly valid in India unless specifically needed to be in writing under a particular enactment or circumstance.
Q12 How long is a surety liable under Indian law?
The surety remains liable until the debt is paid, the contract is discharged, or a valid release is granted. Liability can also be extinguished by legal termination of the guarantee or performance of the contract.
