P L D 1984 Karachi 211 (PLP)

The respondent No. 1 filed a suit for recovery of Rs. 6,322.71 against the respondent No. 2 and the appellant. On 12-2-1960 the respondent No. 1 had granted a loan/overdraft facility to the respondent No.

2. The appellant executed a letter of guarantee, dated 12-2- 1960 in favour of the respon dent No. 1 which was a continuing guarantee. On 1-2-1965 a sum of Rs. 5,402.20 was due and payable which the appellant and respondent No. 2 failed to pay. The respondent No. 2 requested for further time and in acknowledgment of the liability and in consideration of the time granted by the respondent No. 1 the respondent No. 2 executed and delivered a promissory note to respondent No. I on 1-2-1965 for Rs. 5,403.20 with interest at 9% per annum with monthly rest It was further pleaded that by his letters, dated 2-I-1963, 21-8:1963 and 10-8-1965 the respondent No. 2 acknowledged his liability and promised to pay the amount due to the respondent No.

1. It was alleged that the respondent No. 2 deposited several amounts during 13-4-1964 and 23-10-1967 towards the repayment of the loan. On 24-5-1968 the respondent No. 1 served a notice on the appellant calling upon him to pay Rs. 6,178.04 within 7 days from the receipt of the notice falling which legal action shall be taken. As the said amount was not paid the respondent No. 1 filed suit on 22-7-1968 for recovery of Rs. 6,322.71. The respondent No. 2 remained absent and the matter proceeded ex parte against him. The appellant, however, filed his written statement denying his liability and also pleaded that the suit was barred by time. It was further pleaded that letter of acknowledgment written by the respondent No. 2 was not valid and did not extend the period of limitation. The appellant, however, admitted that loan of Rs. 3,000 was advanced to the respondent No. 2 on 12-2-1960 and he had executed letter of guarantee, guaranting the repayment of principal of Rs. 3,000 and interest but it could not be extended to a period of transac tions, between the respondents Nos. 1 and

2. He denied any knowledge about the promissory note executed by the respondent No. 2 and pleaded that due to variance in the contract without his consent, he (appellant) stood discharged. Mr. Mazhar Ali Siddiqui the learned counsel for the appellant has contended that the suit against the appellant was barred by time and further that by obtaining a promissory note dated 1-2-1965 whereby the rate of interest was changed without the knowledge and consent of the appellant, the liability of the appellant was discharged. The plea of limitation is based on the ground that the letter of guarantee was executed on 12-2-1960, and suit was filed on 22-7-1968, therefore, it was clearly barred by time. It has been further contended by the learned counsel for the appellant that even if the liability was acknowledged by the respon dent No. 2 by executing the promissory note on 1:2-1965 the suit was filed after the expiry of three years from that date hence it is barred by time. In order to consider whether the suit against the appellant is time-barred one has to see the contents of the letter of guarantee, the opening paragraph of which reads as follows :- "In consideration of your making or continuing advances or otherwise giving or continuing credit or accommodation to Syed Ayub herein after called the Principal, I/we jointly and severally guarantee to you due repayment within two days after demand of all moneys which shall at any time be due to you from the principal in any shape or form together with interest, charges, costs etc. Provided that the total amount recoverable from me/us jointly and severally under this guarantee shall not at any time exceed the principal sum of Rs. 3,000 (Rupees three thousand) only exclusive of interest and charges." From the terms of this guarantee it seems that the amount guaranteed was to be repaid within two days after the demand has been made by the respondent No 1 together with interest and charges. Therefore. the cause of action for filing the suit arose two days after the demand was made provided the appellant had failed to pay within that period. Reference can be made to 1981 C L C 89 and 1982 C L C 1101. In this regard the learned counsel for the appellant has referred to a letter dated 8-2-1965 (Exh. 9) written by the appellant to respondent No.

1. In this letter while referring to a letter by respondent No. 1 dated 12th January, 1975, the appellant offered to pay Rs. 200 p.m. towards the balance outstanding in the name of the respon dent No. 2 and proposed that he would start paying if the proposal was accepted. No reply seems to have been given as it is not on record. The learned counsel for the appellant while referring to this letter contended that in fact the demand had been made by the respondent No. I by a letter dated 12-1-1965 therefore in view of the term of the guarantee this suit was barred by time. The learned counsel for the respondent No. 1 contended that the letter dated 12-1-1965 has not been produced and it is not known whether any demand was made from the appellant or it was merely a letter addressed to respondent No. 2 and copy endorsed to the appellant. Both the parties have not produced this letter. As this letter was replied by the appellant. it should be in his possession. The assertion that this letter was a letter of demand should be affirmatively established by the appellant. No attempt has been made to prove that by letter dated 12-1-1965 the respondent No. 1 had made a demand. Neither in his statement the appellant has stated that a letter dated 12-1-1965 was received by him whereby the respondent No. 1 bad demanded repayment of the loan guaranteed under the letter of guarantee, nor such a question has been put to the respondent's witness in cross- examination. As the respondent No. 1 had not produced copy of this letter, the appellant should have produced it or if it had been misplaced he could have served a notice on the respondent No. 1 to produce its copy. It was open for him to lead even secondary evidence to prove the contents of the letter. A party raising plea of limitation should establish the facts on the basis of which it can be concluded that the suit is barred by time. The appellant has not established that prior to notice of demand dated 24-5-1968 any other notice was issued by the respondent No.

1. Notice dated 12=1-1965 has not been produced nor it has been established that it was a notice of demand. In these circumstances the suit is within time having been filed within a period of three years from two days after the date of notice of demand dated 24-5-1968. The next contention of the learned counsel for the appellant is that by execution of promissory note dated 1-2-1965 by the respondent No. 2 the terms of contract between the respondent No. 1 and respondent No. 2 were varied without the knowledge and consent of the appellant, hence the guarantee stands discharged. It is an admitted position that on 1-2-1965 the respon dent No. 1 executed a promissory note for Rs. 5,403.20 payable with interest at 9 % per annum with monthly rest. The amount mentioned in the pronote was due to the respondent No. 1 on 1-2-1965. Mr. Siddiqui has contended that by changing the rate of interest the contract has completely been varied and the appellant's cannot be held liable for the obligation which has not been guaranteed by the appellant. To correctly appreciate this contention it is necessary to revert to the letter of guarantee to find out what has been guaranteed by the appellant. according to the letter of guarantee the appellant has guaranteed repayment of all moneys which shall at any time be due to the respondent No. 1-together with interest, charges, and costs. The only limitation placed was that the principal amount shall not exceed Rs. 3,

000. There is no reference to the rate of interest. The appellant has guaranteed repayment of principal amount of Rs. 3,000 and interest. It was a continuing guarantee in respect of advances and giving accommodation to the respondent No. 2 without any reference to the rate of interest. The guarantee seems to have been made with reference to the contract between the creditor and principal debtor because the loan of Rs. 3,000 was advanced on .12-2-1560 when simultaneously the letter of guarantee was also executed. The fact that guarantee was limited to principal amount of Rs. 3,000 supports this view. In this background it has to be considered whether by execution of a pronote with increased rate of interest the surety is discharged. In Seth Pratapsingh Moholalbhai and another v. Keshavlal Harilal Setalwad and another (AIR1935PC21) it was held that where the contract between the creditor and principal debtor is the basis of the surety bond and is referred to in the surety bond or is shown to the surety before execution of the .surety bond, any alteration in the contract between creditor and principal debtor, without the consent of the surety will discharge the surety. According to section 133 of Contract Act "any variance made in the terms of the contract between the principal debtor and creditor, discharges the surety as to transactions subsequent to variance". The witness on behalf of respondent No. 1 stated that the loan was advanced at 8 % per annum. On 1-2-1965 the respondent No. 2 executed a promissory note for the balance due on that date promising to pay with interest at the rate of 9 % per annum with monthly rest. The respondent No. 1 has claimed Rs. 6,322.71 calculated on the basis of the enhanced rate as mentioned in the promissory rate. From the statement of witness of the respondent No. I it is clear that the loan was advanced orally by the manager on 12-2-1960 when the guarantee was also executed. Therefore at the time of advancing the loan and execution of guarantee all the three parties were aware of the amount of loan and the terms on which it was given. The fact that interest was charged at 8 % per annum suggests that this was the agreed rare. In these circumstances could the respondent No. 1 charge interest at a higher rate with the consent of the respondent No. 2 without varying the terms of contract. ' This was not possible. The respondents Nos. I and 2 agreed to a variation in terms of contract. Mr. Arfin contended that mere charge of interest is not a variation of contract. In transaction where loan is advanced, rate of interest is an important condition which in fact is the profit earned by the creditor. An increase in the rate of interest correspondingly increases the principal debtor liability and likewise the liability of the guarantor is also effected. This would therefore amount to a variance in the terms of the contract between the creditor and the principal debtor. If it is without consent of the surety section 133 will apply. A contract of guarantee implies the existence of three parties the creditor, principal debtor and the surety and also a contract between the creditor and principal vdebtor which is the foundation of contract of guarantee. The surety would be liable and held bound to things he has guaranteed. He cannot p be held bound for things he has not contracted. Once a variation in a contract between the creditor and principal debtor is trade their obligations are to be governed by the new terms and unless the surety has consented to such a variation, there is nothing for which he can be bound because the obligation of the principal debtor would be different from what he had guaranteed. The learned counsel for respondent No. 1 has relied on Egbert and others v. Northern National Crown Bank (A I R 1918 P C 210), where the guarantor had guaranteed all contractual indebtedness to 75000 dollars "in consideration of (the bank) agreeing to deal with (the company) as customer in the way of its business as a bank". There was no reference to any rate of interest but it was implied that the bank would charge interest to accordance with law i.e. 7 per cent. After some time the bank started charging interest at 8 % with the consent of the debtor-company. The guarantor pleaded that an agreement between the company and the bank to charge interest at 8 per cent. was an alteration in contract without its consent therefore the guarantor was discharged. It was held :- "The question is not free from difficulty, but their Lordships think that the views of the Court of appeal are right. What is guaranteed is not any one advance of Rs. 75,000 dollars, but all contractual indebtedness up to 75,000 dollars. That indebtedness may be, and in fact was, the result of a series of contracts. Each of the contracts was a contract to repay the money advanced with interest thereon. It is legitimate to read into each contract, from the guarantors point of view, a condition that the interest should not exceed 7 per cent. But the difficulty in the appellant's argument lies in this, that the so-called agreement to charge 8 per cent is statutorily invalid and of no effect. Although of no effect to legalize the interest, it does not invalidate the contract to repay the principal. That was inferentially decided by Mo Rugh's case. Accordingly the indebtedness in respect of the principal has not been interfered with." This case seems to . be distinguishable on facts. The guarantee was for "all contractual indebtedness upto Rs. 75,000 dollars without any reference to the interest". In the present case the appellant had guaranteed principal up to Rs. 3,000 and interest which was agreed to be at 8 % per annum. Subse quently the respondents agreed to change the rate of interest to 9 % per annum without the consent of the appellant. In the Privy Council case the so-called agreement to enhance rate of interest was statutorily invalid and of no effect but this is not so in the present case. The respondent No. 1 obtained a promissory note on condition different from the agreed terms and has filed suit for recovery of amount calculated on the basis of this varied agreement. The law, relating to discharge of surety is well-settled and the Privy Council has referred with approval the following passage from Holme v. Burnskill ((1878) 3 Q B D 495) "The cases as to discharge of a surety by an agreement made by the creditor to give time to the principal debtor are only an exemplification of the rule stated by Lord Lough-Borough in the case of Rees v. Berrington. It is the clearest and most evident equity not to carry on any transaction without the knowledge of him (the surety), who must necessarily have a concern in every transaction with the principal debtor. You cannot keep him bound and transact his affairs (for they are as much his as your own), without consulting him. The true view, in my opinion, is that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is, without enquiry, evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged yet that, it is not self evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court will not, in an action against the surety, go into an enquiry as to the effect of the alteration or allow the question whether the surety is discharged or not to be determined by finding of a jury as to the materiality of the alteration, or on the question whether it is to the prejudice of the surety but will hold that in such a case the surety himself must be the sole Judge whether or not he will consent to remain liable, notwithstanding the alteration and that if he has not so consented he will be discharged." Reference can be made to A I R 1935 P C

21. Applying the above principle to the facts of the present case it is clear that the contract between the respondents has been varied without the consent of the appellant, therefore, the appellant will be discharged. The judgment and decree passed against the appellant is set aside. The appeal is allowed. M. y. x. Appeal allowed.