P L D 1965 Supreme Court 634 (PLP)

MUHAMMAD YAQUB ALI, J.‑On the oral prayer of Mr. A. A. Fazeel learned counsel for the plaintiff (respondent No. 1), we A have agreed to grant‑ leave for withdrawal of the suit against the appellant with permission to file a fresh suit, but before the appeal is allowed in these terms, it appears necessary to . refer to the facts of the case and decision on certain questions of law arising therefrom by the learned Judges of the High Court of West Pakistan, Karachi Bench, who respectively dealt with the suit on the original side and in appeal.

2. The relevant facts are that on the 25th of May 1957, Sayyed Iqbal Shabbir, respondent No. 2 purchased the exhibi tion rights of an Indian cinematograph picture named `Gajre' belonging to Hashim Bhai (P. W. 3) and in payment thereof executed the promissory note Exh. 5/1 in‑ favour of Zahid Hussain (P. W. 2) an attorney of the owner. The payment was guaranteed by Ismail Bhai (appellant) by placing his signa tures below the following writing on the back of the promissory note : "I. Ismail Bhai guarantee this".

3. In the original manuscript after the name of Ismail Bhai the words "of Muhammadi Re‑Rolling" and after the word `this' the words "promissory note" appeared which were struck off by the appellant. On the 19th of September 1957, Zahid Hussain endorsed the promissory note Exh. 5/1 in favour of Fida Ali, plaintiff by the writing "please pay to Fida Ali Ibrahim Mandiwala". After issuing notices of demand, the plaintiff on the 2nd of January 1958 instituted the present suitagainst the appellant and respondent No. 2 under Order XXXVII, rule 2, C. P. C. for recovery of Rs. 75,000 with interest pendente lite at 6 per cent. per annum and costs of the suit.

4. After the writ of summons was served on the appel lant and respondent .No. 2, both of them applied under Order XXXVII, rule 3, C. P. C. for permission to defend the suit. The appellant in his affidavit repudiated liability for the amount claimed in the suit on the ground that he was informed that the promissory note 'was without consideration; that he had not guaranteed the promissory note which was given by respon dent No. 2 by way of collateral security "in respect of certain transaction and agreement that passed between defendant No. 1 and one Hashim Bhai on whose behalf the said Zahid Hussain had acted'"' and that the guarantee was without consideration and not assignable. In the affidavit filed by respondent No. 2 numerous grounds were raised including failure of consideration, fraud and breach of contract. The appellant was given leave to defend unconditionally but leave was refused to respondent No. 2 on account of his failure to furnish security for the amount claimed and costs of the suit. In the written statement filed by the appellant on the 17th of January 1959, tic particulars of the transaction between respondent No. 2 and Hashim Bhai were set out in paragraphs 2 and 3 vie. that respondent No. 2 had purchased from Hashim Bhai the film named `Gajre' for Rs. 75,000 which was subsequently declared to be an evacuee property and as a result thereof the agreement was frustrated. In paragraph 8 the guarantee given by the appellant was claimed to be without consideration and not assignable at law.

5. The questions which properly, arose for determining the liability of the appellant for the sum in suit were (i) whether the appellant had guaranteed the promissory note Exh. 5/1 or had only stood as a surety for the debt created in favour of Zahid Hussain to the extent of default made by respondent No. 2; and (ii) whether on the endorsement of the promissory note by Zahid Hussain in favour of the plaintiff, the appellant had become liable to him as an indorser under the Negotiable Instruments Act.' The learned Single Judge was, however, persuaded to frame seven issues which embodied the controversy (i) whether the promissory note Exh. 5/1 was executed without consideration;. (ii) whether it was executed by way of collateral security for the price ‑of the film `Gajre'; (iii) whether the film had become evacuee property and if so, what was its effect; (iv) whether the appellant did not guarantee the payment of the promissory note; (v) whether the guarantee by the appellant was not assignable; (vi) whether the appellant was not jointly and severally liable to pay; and (vii) the relief, if any, to which the plaintiff was entitled.

6. In affirmation and rebuttal of the issues, the plaintiff besides himself entering the witness‑box examined two other witnesses via: Zahid Hussain, the payee of the promissory note Exh. 5/1 and Hashim Bhai, the owner of the film `Gajre'. The evidence examined on behalf of the plaintiff made it clear that (i) the promissory note on the basis of which the suit was filed was executed by respondent No. 2 on account of the price of the exhibition rights of the picture `Gajre' and not for cash consideration as stated therein; (ii) the beneficiary of the debt created by the promissory note was Hashim Bhai and not Zahid Hussain; (iii) the debt was not transferred by Zahid Hussain to the plaintiff; and (iv) the appellant was sued as a surety of respondent No. 2 and not as an indorser of the promissory note. In rebuttal the appellant appeared as his own witness and stated that he had ‑deleted the words "of Mohammadi Re‑Rolling" and " promissory note " from the guarantee typed on the back of the promissory note Exh. 5/1 by Zahid Hussain, as he did not want to make his firm liable for the amount, or himself to guarantee the promissory note, but had only stood as a surety for the payment of the amount to Zahid Hussain in case of default by respondent No. 2.

7. In the light of the evidence led by the parties, the learned Single Judge under issues Nos. 1 and 2 held that the promissory note Exh. 5/1 was executed by respondent No. 2 for valuable consideration and not by way of collateral security. Issue No. 3, whether the film `Gajre' was declared as an evacuee property, was considered‑ irrelevant for the decision of the case. Under issues Nos. 4 and 5, it` was held that the appellant had guaranteed ,the payment of the promissory note and the guarantee was assign‑able and valid and the appellant was liable to pay the amount under the promissory note to the plaintiff. In view of the finding the next issue whether the appellant was not jointly and severally liable to pay was considered unnecessary and in the result the suit was decreed against the appellant as stated in the beginning of the order.

8. The plea raised by the appellant that he had not guaranteed the promissory note but had only stood surety for payment of the amount to Zahid Hussain in case of default by respondent No. 2 was repelled by the learned Single Judge for the reason that if the appellant did not stand surety for the promissory note, the word "this" should also have been scored off from the term of the guarantee. It was accordingly concluded that the unscored portion of the endorsement clearly manifests that defendant No. 2 (appellant) stood surety for the pronote." In view of the withdrawal of the suit against the appellant as an indorser of the promissory note, it is not necessary to deal with the reasoning of the learned Single Judge on the point but it may be stated in passing that the deletion of the words "promissory note" made the intention of the appellant, that he was not guaranteeing the promissory note, more manifest than the retention of the word "this". Of course if the words "promissory note" were not included in the manuscript the word "this" could perhaps be interpreted as referring to the promissory note but such an inference could no longer be drawn when the word `promissory note' was expressly deleted. The principal question, whether the appellant was liable as an indorser, was found against the plaintiff but the suit was decreed against the appellant on the basis that the endorsement in favour of the plaintiff operated as an assignment of the guarantee by the appellant in favour of Zahid Hussain. On appeal the learned Judges of the Letters Patent Bench, held that the guarantee was an actionable claim and as such assignable and that the indorsement of the promissory note Exh. 5/1 was sufficient to constitute and it did in fact constitute an assignment of the guarantee. The contention raised on behalf of the appellant that the indorsement could not be treated as an assignment because it was not duly stamped was rejected by the learned Judges on the following reasoning: "Article 62 exempts the transfer by indorsement of a pro missory note, and by definition in section 2 (22) a pro‑note includes a promise of payment upon a contingency which may or may not happen, and the guarantee in this case falls within the definition. The indorsement therefore did not require a stamp."

9. In short the guarantee by the appellant was treated as a promissory note‑a construction clearly repugnant to the definition of a promissory note in section 4 of the Negotiable Instruments Act. Lastly it was observed that the Negotiable Instruments Act deals with particular kinds of actionable claims, while the Transfer of Property Act deals with actionable claims in general, and their transfer by assignment; but nonetheless an indorsement is a species of assignment and there is nothing in either Act to prevent the payee from assigning by appropriate words his rights arising from the face of the instrument not only against the maker but also against the guarantor.

10. The observations of the learned Judges referred to above indicate that indorsement of a promissory note and assignment of the debt created by it were considered to be more or less similar in respect of the rights and liabilities created by them‑a view which with due respect to the learned Judges is not tenable in law.

11. A promissory note is defined in section 4 of the Negoti able Instruments Act as an instrument in writing (not being a bank‑note or a currency‑note) containing an unconditional) undertaking, signed by the maker, to pay on demand or at a fixed or determinable future time a certain sum of money only to, or to the order of, a certain .person, or to the bearer B of the instrument. It should be noticed that there is no mention of consideration in the definition and in that it differs from the definition of an agreement under the Contract Act. The maker or a holder of negotiable instrument, e.g., a promissory note, may indorse it by signing the same, otherwise than as such maker, for the purpose of negotiation. He is thereupon called the `endorser'. The liability of an indorser is laid down in section 35 of the Negotiable Instruments Act in the terms that in the absence of a contract to the contrary, the indorser of a negotiable instrument, by indorsing it, engages that on due presentment it shall be accepted and paid according to its tenor and that if it be dishonoured he will compensate the holder or subse quent indorser who is compelled to pay it for any loss or damage caused to him by such dishonour. Section 37 provides that the maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are, in. the absence of a contract to the contrary, respectively liable thereon as principal debtors, and other parties thereto are liable thereon as sureties for the maker, drawer or acceptor, as the case may be. Under section 38 as between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each subsequent party. The rights of an indorsee are set out in section 50 viz., that subject to the provisions of the Act relating to restrictive, conditional and qualified indorsement, the indorsement of negotiable instrument followed by delivery transfer to the indorsee the property therein with the right of further negotiation. Lastly section 51 provides that every sole maker, drawer, payee or an endorsee, or all of several joint makers, drawers, payees, or indorsees, of a negotiable instrument may, if the negotiability of such instru ment has not been restricted or excluded as mentioned in section 50, endorse and negotiate the same.

12. There is nothing in the Negotiable Instruments Ac to support the view that the parties to a negotiable instrument, other than the maker, the drawer, payee, acceptor or indorser thereof, can be held liable as an indorser or that the liabilities of other parties thereto such as a surety can be negotiated. Nevertheless a surety is liable for payment of the debt created c by the instrument backed by him but the contract will be governed by the provisions of sections 127 to 147 of the Con tract Act subject always to the rule that 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 English decisions) on the point are distinguishable because under section 56 of the English Bill of Exchange Act, 1882, where a person signs a bill otherwise than as drawer or acceptor, he thereby incurs the liability of an indorser to a holder in due course. The ‑law in Pakistan has now been brought in conformity with the British Statute by the Negotiable Instruments (Amendment) Ordinance, 1962 by which section 29‑C has been added to the parent Act which provides that "a person placing his signature upon a negotiable instrument otherwise than as maker, drawer, .or acceptor is presumed to be an indorser unless he clearly, indicates by appropriate words his intention to be bound in some other capacity". In the absence of such a provision in the Negotiable Instruments Act at the relevant time, it was not possible to hold the appellant liable as an indorser of the promissory note Exh. 5/1.

13. The suit against the appellant which was based on indorsement siinpliciter should accordingly have been dismissed but as , mentioned above, the learned Judges of the High Court in the alternative held that the indorsement of the promissory note Exh. 5/1 also operated as an assignment of the guarantee given by the appellant for payment of the debt created by it. As seen above this was not the plaintiff's case nor indeed could Zahid Hussain have transferred the debt which in reality belonged to Hashim Bhai (P. W. 3). It must further be noticed that assuming. that the debt created by the promissory note Exh. 5/1 and the guarantee given by the appellant had been transferred to the plaintiff, the suit would not have been competent under Order XXXVII, rule 2, C. P. C. and as such it would have been open to respondent No. 2 to raise questions of failure of consideration, frustration of the contract under which the promissory note Exh. 5/1 was executed, and a number of the pleas of defence set out in the affidavit filed alongwith the application under Order XXXVII, rule 3, C. P. C. The suit in present form was, therefore, liable to be dismissed on either consideration.

14. As the plaintiff's suit under Order XXXVII, rule 2, C. P. C. is liable to be dismissed on account of a legal defect, we grant permission to withdraw the suit against the appellant with permission to file a fresh suit for such relief as may be available to him in law. In the result the appeal is allowed and the decree passed. against the appellant by the High Court of West Pakistan Karachi, is set aside with costs. S. Q. Appeal allowed.