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State of M.P v.

Kaluram

STATEMENT OF FACTS

1) There was an auction for sale of felled trees in 1954 in Range Seoni. Jagatram was
declared as the highest bidder. The trees were sold to him for Rs. 12,100. The amount of
the bid was payable in four instalments of Rs. 3,025 each : the first instalment to be paid
immediately on acceptance of the bid, the second on December 1, 1954, the third on
February 1, 1955 and the fourth on May 1, 1955. Jagatram executed a contract in favour
of the Governor of Madhya Pradesh in which were incorporated the terms and
conditions of the sale.
2) The terms and conditions of the sale basically stated that the quantity of the produce
was the quantity that existed at the time when the contract was entered into. The
contractor that is Jagatram might remove the forest produce as per the terms and
conditions of the contract. The contractor could commence to remove the forest area
produce only after furnishing the necessary coupe boundary certificate. This certificate
was available after the forest authorities had done the inspection.

3) Jagatram paid the first instalment due under the contract on July 28, 1954, and
subscribed his signature to the terms of the contract. Nathuram and Kaluram stood
sureties for him

4) Jagatram removed almost the entire quantity of trees sold to him, but since he did not
pay the remaining three instalments of the price, the State of Madhya Pradesh took
proceedings to recover from Kaluram the amount due by Jagatram as arrears of land
revenue.

5. Kaluram then commenced an action against the State of Madhya Pradesh for a
declaration that he was not liable to pay the arrears of forest dues recoverable from
Jagatram.

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State of M.P v. Kaluram

ISSUES RAISED

1) Whether the forest authorities of the State had parted with the security which
they possessed for recovery?

2) Whether the surety is discharged from his liability to pay under Section 141 of
Indian Contract Act?

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State of M.P v. Kaluram

ARGUMENTS FROM PLAINTIFF

1) It was contended from the plaintiff that according to Section 141 of Indian
Contract Act, 1872 if the creditor loses or parts with such security then surety is
discharged to the extent of value of security. In the instant case state consisting
of right under section 83 of Forest Act to prevent removal of trees and right to
sell them for non payment of price but even when second instalment was not
paid state didn’t take necessary steps to prevent the contractor from selling the
trees.
2) The forest authorities had given time to Jagatram and omitted to take steps which
were their duty towards the surety, steps such as prompt seizure and sale of the
trees after the second instalment had fallen due.

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State of M.P v. Kaluram

3) Since they had not taken those steps and not seized those trees his eventual
remedy against Jagatram was impaired and according to section 1411 of Indian
Contract Act, 1872 . Kaluram stood discharged from liability as surety.

4) Kaluram claimed that an injuction order should be passed restraining the State
from realising or from continuing the recovery proceedings with regard to the
forest dues from him.

ARGUMENTS BY DEFENDANTS

1) It was contended by the defendant that according to Section 1412 of Indian


Contract Act ,1872 there is no where written that mere inaction on the part of
forest authorities does amount to parting with securities and therefore surety
should not be allowed to be discharged from his liability.

1
A surety is entitled to the benefit of every security which the creditor has against the principal debtor at
the time when the contract of suretyship is entered into, whether the surety knows of the existence of such
security or not; and, if the creditor loses, or, without consent of the surety, parts with such security, the
surety is discharged to the extent of the value of the security
2
Supra note 1

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State of M.P v. Kaluram

JUDGEMENTS

JUDGEMENT OF THE TRIAL COURT

The Trial Court held that the forest officers were negligent in allowing the contractor
Jagatram to remove the trees sold, and on that account the security of the surety was

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State of M.P v. Kaluram

impaired, and the surety stood discharged for the whole amount recoverable from the
contractor.

JUDGEMENT OF THE HIGH COURT

The High Court of Madhya Pradesh confirmed the decree of the Trial Court.

JUDGEMENT OF THE SUPREME COURT

While delivering this landmark judgement Supreme Court rejected the contention of the
State that mere inaction on part of forest authorities does not amount to loss or parting
with the security and even mere omission of any act by the creditor discharge surety
from his liability.

GROUNDS FOR JUDGEMENT BY SUPREME COURT

There were three grounds on which judgement was delivered

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State of M.P v. Kaluram

1. First, the Hon’ble Supreme Court of was of opinion that the expression security
in Section 1413 is not used in any technical sense; it includes all rights which the
creditor has against the property at the date of contract. the surety is entitled on
payment of the debt or performance of all that he is liable for, to the benefit of
the rights of creditor against the principal debtor which arise out of the
transaction which give rise to the right or liability, he is therefore on payment of
the amount due by the principal debtor entitled to be put in the same position in
which the creditor stood in relation to principal debtor. If the creditor has lost or
parted with the security without the consent of surety, the latter, is by the
provision contained in Section 141 discharged to the extent of the value of the
security lost or parted with.

2. Second , referring to the instant case the court observed that The State
Government has therefore under the terms of the contract and by virtue of the
forest act, even though the property in the goods has passed to the contractor had
certain rights which were:-

• The right to stop removal of the goods and take possession thereof till the
amount due is paid and to sell the goods if the amount is not paid when due
• The State has also the power to prohibit removal of the goods when the value
of the forest produce removed by the contractor exceeds the amount of
instalments already paid
• To check and examine the goods
• To terminate the contract in case of default in payment of the amount due
and to take possession of the goods either in the contract area or in the depots
of the contractor.

In the instant case the forest authorities were negligent to use these rights to
prevent the security and allowed jagatram to remove the goods even when
second instalment was not paid.

3. Third, the court observed that since the Forest department were negligent in
issuing the coup certificate to Jagatram and allowed him to remove the trees and
3
Indian Contract Act,1872

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State of M.P v. Kaluram

sell them so according to Section 141 they lost the securities and thus surety is
discharged from his liability .

PERSONAL COMMENTS ON THE JUDGEMENT

This case comes under Section 1394 and Section 141 of Indian contract act which
says that surety is discharged when creditor does any act which is inconsistent with the
right of the surety. In the instant case the court decided that state of M.P did not take any
steps to recover this amount not did they stop the removal of the felled trees on default
of payment. It was held that since the state government had failed to take necessary
steps to recover the amount from the purchaser by allowing him to take away the trees.
The surety’s remedy against the principal debtor had been impaired and thus surety was
held discharged from his liability.

The court in the instant case provided the actual meaning of the term “security” used
in Section 141 of Indian Contract Act. The court made it clear that the word security
used in this section is not used in any technical sense; it includes all rights which the
creditor has against the property at the date of contract. The surety is entitled on
payment of the debt or performance of all that he is liable for, to the benefit of the rights
of creditor against the principal debtor. In the instant case Kaluram is entitled to get all
the rights which is with Jagatram on paying the rest of the instalments.

In a case5 it was held by the court that the defendant became surety upon the faith of
there being some real and substantial security pledged, as well as his own credit, to the
plaintiff; and he was entitled, therefore, to the benefit of that real and substantial security
in the event of his being called on to fulfil his duty as a surety, and to pay the debt for

4
If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act
which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is discharged.
5
Wulff and Billing v. Jay, 1872 7 QB 756

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State of M.P v. Kaluram

which he had so become surety. He will, however, be discharged from his liability as
surety if the creditors have put it out of their power to hand over to the surety the means
of recouping himself by the security given by the principal.

Section 141 was incorporated in the Indian contract act to discharge the surety from
his liability against the creditor for his security. Referring to the instant case it can be
seen that the forest authorities were negligent to stop Jagatram from removing the trees
and taking them inspite of non payment of required instalments. He was given a coup
certificate to take the felled trees and state also didn’t use their rights incorporated in
Section 836. The Forest authorities could have easily stopped him from performing these
acts when the second installement became due but the forst authorities were negligent in
doing so, which was included in parting or losing of security by the Hon’ble Supreme
Court.

According to section 141 the surety is discharged if the principal debtor gets
discharged due to the fault of the creditor. If there is no voluntary act of the creditor in
the discharge of the principal debtor the surety continues to be liable inspite of discharge
of the principal debtor. In a case7 it was held by the Hon’ble Supreme Court that surety
was not discharged even though principal was discharged because the discharge of
principal debtor was not due to voluntary act of the creditor .

So the decisions taken by the supreme court in the instant case is totally justified as
surety provided some security to the creditor for his payment but if creditor party or
loses such security the surety is held to be discharged from his liability the extent the
security is lost according to Section 141 of Indian Contract Act. Now it is clear from this
section that when creditor is at fault in protecting the securities only then surety can be
discharged from his liability but if a case arises when creditor is not at fault in protecting
the security and if in that case security is lost then surety can’t be discharged from his
liability even though he has suffered some loss. So in the instant case when the forest
authorities were negligent in protecting the rights of the security by stopping the
contractor from removing the felled trees clearly comes under Section 141 of India

6
Forest Act,1927
7
I.F.C.I Ltd v. Cannanore Spg and Weaving Mills Ltd AIR 2002 SC 1841

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State of M.P v. Kaluram

Contract Act,1872 and thus surety was held to be discharged from his liability is
completely justified.

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