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Issues: Interpretation of Section 128 of the Contract Act in a guarantee contract, effect of subsequent events on guarantor's liability, discharge of surety by operation of law, applicability of insolvency laws on surety's liability.
In this judgment by the Madras High Court, the Civil Revision Petition involved a Small Cause Suit on a promissory note executed by an agriculturist (first defendant) and guaranteed by a non-agriculturist (second defendant). The issue at hand was the interpretation of the guarantee contract and the liability of the guarantor under Section 128 of the Contract Act. The contract stated that the guarantor would be liable if the principal debtor failed to pay the debt. The lower court allowed the second defendant to benefit from the reduction of the principal debtor's liability under Section 128. However, the revision petition argued that the liability of the guarantor should be co-extensive with that of the principal debtor unless otherwise provided in the contract. It contended that subsequent events after the contract should be governed by other sections of the Contract Act, such as Sections 133, 134, and 135. The petitioner relied on legal precedents to support the argument that the discharge of the principal debtor by operation of law does not discharge the surety. The judgment discussed the principle that a discharge of the principal debtor by operation of law does not discharge the surety, as recognized in legal texts and previous court decisions. It referenced cases from India and abroad to support the contention that the liability of the surety continues even if the debt of the principal debtor disappears by operation of law. The judgment highlighted the provisions of the insolvency laws, which indicate that the surety's liability remains despite the discharge of the principal debtor. It emphasized that Section 128 of the Contract Act may not govern all future changes in the parties' liabilities, but in cases where a new statutory provision grants a partial discharge to the principal debtor without the creditor's involvement, the guarantor's liability remains unaffected. The Court concluded that the lower court erred in restricting the relief against the second defendant to the scaled-down debt amount under the Act. It also noted that even if the interpretation of Section 128 was incorrect, the second defendant could still be held liable for interest based on the Madras Debtors Protection Act. The revision petition was allowed, granting the plaintiff a decree against the second defendant for the principal sum due with specified interest rates and costs. The decree against the first defendant remained unchanged, and the judgment clarified the application of legal principles regarding surety liability and the interpretation of guarantee contracts under the Contract Act.
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