MUSHIR ALAM, J.---The appellant-Industrial Development Bank of Pakistan (IDBP) has challenged the judgment, dated 20.02.2009, passed by a learned Division Bench of High Court of Sindh at Karachi in High Court Appeal No.287 of 2007, (since reported as IDBP v. Hyderabad Beverages Co.
Pvt. Ltd. 2009 CLD 727), whereby Order dated 24.10.2007, passed by a learned Single Judge in Chambers on C.M.A. No.2409/04 under section 133 of the Contract Act, filed by Syed Kassim Raza, respondent No.6 herein, was allowed vide impugned order dated 24.10.2007 and the respondent No.6 was absolved from his liability being guarantor/mortgagor in respect of loan advanced to the respondents Nos.1 to 5.
2. To appreciate the rival contentions of the parties, brief facts as . may be relevant for the purpose of instant appeal appear to be that the appellant-IDBP sanctioned loan in favour of respondents Nos.1 to 5 (herein after referred as borrowers) in the sum of Rs.10 million. The borrowers secured the repayment of loan against various security documents and charge on their properties. Respondent No.6, also stood guarantor and to secure the finance availed by the borrowers created equitable mortgage dated 25.02.1993, in respect of his personal property bearing Survey No.251, measuring 1 Acre, 11 Ghuntas, situated in Deh Okewera, Tapo Songal, Gulshan Town, Karachi. From the record, it appears that default was committed, by the borrowers that led to the filing of J.M. No.47 of 1994, in which proceedings parties negotiated a compromise/settlement and a "Supplemental Agreement" dated 3.12.1996 was executed between the Appellant IDBP, borrowers and the Respondent No.6 as well. The respondent No.6 as Guarantor per paragraph (IV) of the recital, thereto, agreed "the guarantor have agreed to the extension of time for repayment and have also consented to the terms and conditions of supplemental Agreement". Borrowers signed and delivered fresh documents in acknowledgement of outstanding liability and so also in furtherance to such compromise respondent No.6 executed another Guarantee dated 3.12.1998. Said guarantee carried a recital, which inter alia assured due repayment and discharge of the liability on demand, together with all costs and charges and due observance and performance of the Supplemental Agreement, by the borrowers. The guarantee also contained a pledge in terms of the recital, which reads as follows:- "In consideration aforesaid I do hereby further agree, undertake and guarantee as follows:-
(a) That my liability to you here under shall be that of principal debtor and at your option you may treat me as primarily liable for the payment of the Finance and all other obligations, responsibilities and liabilities of the customer under the Financing Agreement.
(b) That this guarantee shall not be considered as satisfied or discharged of any payment or satisfaction of the whole or any part of the sum or sums of money owing or at any time hereafter by the customer or by discharging of the customer by operation of law or otherwise or for any other reason but shall be a continuing security and shall extend to cover any sum or sums of money which shall for the time being constitute the outstanding to you from the customer under the Financing Agreement.
(c) That this Guarantee is additional and without prejudice to any securities, guarantees, decrees, obligations, rights and remedies which you may now or hereafter have or which may otherwise be available to you in respect of the indebtedness and liability hereby guaranteed.
(d) That you may as you think fit with or without reference or notice to me at all times without prejudice to this Guarantee and without discharging or in any way affecting my liability here under, grant time or other indulgence to or accept or make any composition or arrangement with the customer or any person or persons liable in respect of the indebtedness and liability hereby guaranteed and also vary,- abstain from perfecting, exchange, renew, discharges, release, realize, enforce and deal with any securities, guarantees, obligations or decrees now or hereafter held by you in respect thereof.
(e) That I waive all surety-ship or other rights at any time inconsistent with any of the terms hereof and further agree that if the customer shall become insolvent, bankrupt enter into liquidation (compulsory or voluntary) or make any arrangement or composition with creditors you may (notwithstanding payment to you by us or any other person of the whole or any part of the amount hereby secured) rank as creditors and prove against the estate of the customer for the full amount of all you claims against the customers or agree to and accept any composition in respect thereof and you may receive and retain the whole of the dividends composition or other payments thereon to the exclusion of all my rights as guarantor for the customer in competition with you until all your claims are fully satisfied and I will not by paying off the amount payable by me or any part thereof or otherwise prove or claim against the estate of the customer until the .whole of your claims against the customer have been satisfied and you may enforce and recover payment from me of the full amount payable by me notwithstanding any such proof or composition as aforesaid."
3. Record shows that the Borrowers again committed default, which led to the filing of J.M. No.45 of 2000 and during pendency of the recovery proceedings, the State Bank of Pakistan issued Circular.
No.29, dated 19.07.2003, whereby same incentive and concession was offered to the respondents through offer letter dated 17.01.2004.
' The respondents as a token of acceptance were required to sign a settlement in terms of the offer made by the appellant-IDBP. The respondents, however, did not sign any agreement as required through the offer letter, referred to above, but forwarded 12 post-dated cheques, out of which first two cheques on presentation were dishonored. Correspondence was exchanged between the parties leading to no result, which led to the withdrawal of incentive package through letter dated 22.07.2005.
4. It is also a matter of record that during pendency of J.M. No.45 of 2000, on the application of the borrowers, the Court allowed them to operate the factory under the supervision of the Nazir, but since the appellant was not able to run the factory, such concession was withdrawn by the Court vide order dated 9.9.2005.
5. Respondent No.6 on 4.12.2004, filed C.M.A. No.2409 of 2004, under section 133 of the Contract Act, subject matter of instant appeal on the ground inter alia that there is variation in terms of finance agreement and secondly that outstanding liability, which had swollen to Rs.33 million was reduced to Rs.9 million and since the incentive package offered by the Appellant was accepted by borrowers, thus absolving respondent No.6 of any liability under the Guarantee. It was further stated that the factory which was attached was de-sealed and handed over to the principal borrower without the consent of respondent No.6, as such he stood discharged in terms of section 133 of the Contract Act.
6. Learned counsel appearing for the appellant-IDBP contends that earlier J.M. No.47/94, was compromised and the settlement arrived at between the parties was a consent settlement to which respondent No.6 was also party. It was further contended that there was no variation of the original finance agreement that could lead to discharge of the surety in terms of section 133 of the Contract Act. According to learned ASC for the Appellant, settlement was made as a grace, substantial relief was given to the borrowers to repay the liability, which did not amount to any variation in terms of original finance agreement and even otherwise, respondent No.6 waived off his right, if any, under the contract of Guarantee dated 3.12.1998. It is, therefore, contended that now respondent No.6 cannot be allowed to be wriggled out of his contractual obligations.
7. Mr. Abrar Hassan, learned ASC, appearing for respondent No.6, has supported the impugned judgment and order passed by the learned Division Bench and the learned Single Judge in Chambers, respectively. It was contended that once the rescheduled package was accepted by borrowers and cheques were issued, respondent No.6 stands absolved of its liability under the guarantee.
8. We have heard the arguments of learned counsel for the parties and have gone through the material available on record. The bone of contention turns on interpretation of section 133 of the Contract Act, which is reproduced as under:- "133. Discharge of surety by variance in terms of contract.--- Any variance, made without the surety's consent in the terms of the contract between the principal 'debtor' and the creditor, discharges the surety as to transactions subsequent to the variance."
9. . The controversy similar to one arose herein had come up for consideration in number of cases.
In the case of Aftab A. Sheikh v. Trust Leasing Corporation Limited (2003 CLD 702), a learned Bench after considering similar arguments held as follows; "If variation or composition of the loan or time etc. as to its repayment was allowed by the creditor to the borrower and consent/assent in advance thereto was given by the guarantor in the letter of guarantee, subsequent to the date of guarantee, such variation, composition, extension, change or indulgence being within the contemplation of the parties at the time of execution of guarantee did not effect discharge of the surety/guarantee from obligations under the guarantee. And as such surety continued to be bound by the terms of the guarantee despite moratorium, enlargement of time, composition and variations between the creditors and principal borrower."
10. In another case from Indian jurisdiction, reported as Lloyds Steel Industries Ltd. v. Indian Oil Corporation Ltd. (AIR 1999 Delhi 248), the Delhi High Court examined terms of guarantee similar to one subject matter of instant proceedings. The answer to the arguments raised before us by the parties is found in paragraphs 15 and 23 of the cited judgment, which read as under:- "15. It is abundantly clear from above that the impugned bank guarantees in the present case are couched in the widest possible terms to cover every type of eventuality which the parties may face subsequent to their entering into the present contract. The bank guarantees in question embrace within their fold any formal contract entered into subsequent to the contract in question.
They also take care of the suppression of the present contract and all modifications and amendments thereto. Thus any change, modification, suppression and novation of the impugned contract is taken care of by the bank guarantees in question and they would continue to remain intact despite the said variation, modification and change in the contract. Thus the plaintiff cannot be heard to say that the alleged modification and variation in the contract led to the discharge of defendant No.2 and the banker did not remain liable any more.
23. It was next contended by learned counsel for the plaintiff that the consent of the surety, if any, must be subsequent to the variation in the terms of the contract. Any consent prior to the variation would be of no avail to the creditor. I am sorry I am unable to agree with the contention of the learned counsel for the plaintiff To my mind, it would not make any difference if the consent is prior to the impugned variation or subsequent thereto; nevertheless it would be treated as consent within the meaning of Section 133 of the Contract Act. The above view is fortified by the following authorities.
(1) Citibank NA, New Delhi v. Juggial Kamlapat Jute Mills Co. Ltd., Kanpur, AIR 1982 Delhi 487: A single Judge of this Court opined (vide para 57) .... With utmost respect, therefore, I would follow the Privy Council and the Madras Judgments and hold that the rights conferred on the surety under sections 133, 135 or 141 could be waived by specific agreement in the deed of guarantee. As a matter of fact, such as agreement would amount to consent within the meaning of those sections.
(2) British Motor Trust Company Ltd. v. Hyams, (1934) 50 Times Law Reports 230. Normally speaking any alteration in the contract between the creditor and the debtor was sufficient to release the Surety, but the effect was expressly excluded in this case. To give a meaning to the word "variation" one must look at the context in which it occurred and here the provision was so wide that it was almost impossible to put any limit to the power to vary. He held that the agreement of February 17, 1932 must be regarded as only a variation of the old agreement and not as such a new agreement as would release the guarantor. It might be that the position of the debtor was so altered that he would be less able to repay the guarantor, but even such a change was not beyond the very wide power of variation contained in the guarantee. There must, therefore, be a judgment for the plaintiffs."
11. When we examine the case of respondent No.6 as made out in the application under section 133 of the Contract Act, 1872 as reproduced, above, it is abundantly clear that respondent No.6 as a A guarantor in widest of its terms agreed and consented that the appellant IDBP could settle the debt by extending any concession "you think fit with or without reference or notice to me at all times without prejudice to this Guarantee and without discharging or in any way affecting my liability here under, grant time or other indulgence to or accept or make any composition or arrangement with the customer or any person or persons liable in respect of the indebtedness and liability hereby guaranteed and also vary, abstain from perfecting, exchange, renew, discharges, release, realize, enforce and deal with any securities, guarantees, obligations or decrees now or hereafter held by you in respect thereof'. In the face of such pledge, the Respondent No.6 had bartered away his rights and or defense against any variation of contract, if any, under section 133 of the Contract Act, 1872 and "waived all surety-ship or other rights at any time inconsistent with the term hereof".
12. Variation of contract, within the contemplation of section 133 of the Contract Act, 1872, means material variation or alteration in the original contract, that may prejudicially or adversely affect the surety, any composition or concession offered by the creditor, whereby, rescheduling the liability with substantial markup waived or written-off leading to reduction in liability of borrower is normal banking practice. It does not amount to variation of finance agreement. Had such incentive been accepted and acted upon by the borrower, it would have in fact reduced the risk and liability of the Respondent No.6 as well.
13. Guarantee of Respondent No.6 was continuing guarantee, consideration of which was original finance agreement dated 25.5.1993. Appellant-IDBP, successfully demonstrated and established that the claim in J.M. No.45/2000 had arisen out of original finance agreement, which was subsequently negotiated for a settlement as offered by the appellant Bank to which the Respondent No.6 was also a party thus, Respondent No.6 was liable under his guarantee being continuing guarantee. Such word of honor of Respondent No.6 as guarantor under the original guarantee and subsequent supplemental agreement/guarantee dated 3.12.1998 was for the benefit of principal borrower arising out of original finance agreement. In the case in hand as admitted by the Respondent No.6, in paragraph No.6 of his application under section 133 of Contract Act, per incentive scheme the Appellant-IDBP rescheduled the loan amount that had swollen to Rs.33.50 million and had agreed to accept Rs.9.00 million in satisfaction of entire outstanding liability in installments. The Respondent No.6 as guarantor had given his approval and consent in anticipation thereto, in most unequivocal terms in the letter of guarantee dated 3.12.1994 as reproduced above. Any rescheduling, composition or manner of repayment in installment or any grace shown by the Appellant-IDBP was with the concurrence and within the sight and contemplation of the borrowers as well as of Respondent No.6, at the time of supplemental agreement and guarantee as noted above. It is now well established that liability of surety is co- extensive with the principal borrower. Therefore, the respondent No.6 continued to be bound by the terms of the guarantee. Record further shows that the incentive dated 19.7.2003 offered to the Respondents was not availed and same was withdrawn by the Appellant-MBP on July 22, 2005.
Even otherwise, any abortive or attempted variation in terms of contract, which does not become effective, will not absolve the guarantor/surety of original contracted liability. Once the incentive package is withdrawn parties including the surety/guarantor are relegated to their respective original position as before the incentive offer was made and or acted upon. The Courts below have overlooked such aspect of the case.
14. In view of the foregoing discussion, the impugned judgment, dated 20.02.2009, passed by a learned Division Bench as well as the order dated 24.10.2007, passed by a learned Single Judge in Chambers in the High Court are set aside and the application under section 133 of the Contract Act, filed by respondent No.6 Syed Kassim Raza, stands dismissed. Civil appeal is allowed.