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Written by: Ishit Todwal
CASE FACTS
The plaintiff (National Provincial Bank of England, limited) filed a case to recover a sum of 3322l. on a guarantee given by the defendant Lord Glanusk whereby he guarantees all the money which might be due Samuel Hood Cowper Coles, on March 1, 1906.
Coles had opened an account called “capital account” which the bank manager admitted to be an estate account.
Coles on March 12, 1907, wrote to Powell stating that he paid 1000l to Lloyds bank, Brecon from capital account with defendant’s approval.
Powell refused the cheque as he did not believe in allowing Coles to increase his liabilities just to pay off his debt at another bank.
On March 18, 1907, Powell wrote to Morgan (Lloyds bank manager) stating that he suspects that cheque was used to pay off Coles’ own liabilities at Lloyds bank and the cheque drawn was on account opened for a special purpose and which should not be overdrawn.
He got no replies but was satisfied after a conversation with the Brecon manager as to the application of 1000l and cleared the transaction.
Defendant argued that there was a duty of disclosure upon the bank to tell him about the transaction.
LEGAL ISSUES
· Whether some suspicious transactions were to be communicated to the guarantor that is Lord Glanusk?
· Whether Lord Glanusk (the defendant) be discharged from his guarantee?
RULES
“Section 143 in Indian Contract Act, 1872”[1]
“Guarantee obtained by concealment, invalid - Any guarantee which the creditor has obtained by means of keeping silence as to a material circumstance, is invalid.”
ANALYSIS
A contract of guarantee is defined under Section 126 of the Indian Contract Act[2] as a contract to perform the promise or relieve the responsibility of the defaulting party if he fails to fulfil his promise.
A guarantee contract is made up of three parties: the creditor, the principal debtor, and the surety. In this tripartite contract, the surety enters into contractual agreements with both the creditor and the principal debtor to ensure the fulfilment of contractual, tortious, or statutory obligations defaulted by the principal debtor, thereby ensuring the creditor's safety and dependability.
But the third party that is the surety also needs to be protected and assured against any exploitation which can be either from principal debtor or creditor to meet their own goals.
Here, by inserting the nullity element in Indian Contract Act, the surety is protected against such possible exploitation.
[3]“Section 143 of the Indian Contract Act, of 1872” states “Guarantee obtained by concealment, invalid. —Any guarantee which the creditor has obtained by means of keeping silence as to a material circumstance, is invalid.”
Any sort of active concealment must be referred to when it comes to the relevant facts surrounding the agreement between the creditor and the principal debtor. The phrase 'keeping silence' obviously suggests deliberate concealment as opposed to simple non-disclosure. It essentially means that if the creditor fails to provide information about material facts and circumstances pertaining to the transaction, he is not covered by the ambit of concealment unless the surety expressly requests information from the creditor.
But, a contract of guarantee is not a contract of Uberrima Fides
The Latin word "uberrima fides" indicates “utmost good faith”, the lack of any deception which arose while discussing the magnitude of responsibility that the creditor owes to the surety. A guarantee contract, on the other hand, is not regulated by the principle of 'uberrima fide,' or good faith. "The creditor has no universal obligation to disclose the entire condition of affairs to the potential cautioner.
Instances in which a pre-existing condition, age, income, occupation, or insurance policy are withheld or given erroneous and misleading information by the insured. The insurer can dismiss a claim that emerges after the insured's death because the insured failed to disclose relevant information during the contractual procedure.
The proposer or life insured has a solemn responsibility to disclose all key facts that the insurer may consider while choosing whether or not to accept the proposal. If the life assured or proposer fails to reveal all true and correct pertinent facts to the insurer, the insurance is worthless, and the life assured or any anyone claiming benefits under the policy is not eligible to receive benefits. The burden of evidence is with the insurer to show that the claim was refused due to non-disclosure or misrepresentation of significant facts.
In the case where bank guarantee occurs, the bank-agent is permitted to presume that the surety has already enlightened himself on the matter of various aspects of obligation which he is going to take on. The Agent is not mandated to supply any piece of information or statements, but only if the information is requested, he is obligated and required to provide it accurately.
Now, coming back to case where Lord Glanusk demanded that he was not supplied with the information, it was held that with regard to a guarantee, a creditor is under no responsibility to tell an intended surety of problems damaging the debtor's credit or of any factors linked with the operation he is about to embark on that will make the position more vitiated, this was the decision which was based from the case “Wythes v. Labouchere”[4]
Also, Lord Glanusk (the defendant) would not be discharged from his guarantee as there was no obligation to inform him of the transactions. Furthermore, Indian contract Act section 143[5] would not be applicable in this case as there was no concealment of important facts. So, he would not be discharged from his guarantee.
CONCLUSION
The present case established a precedent that has been cited in other later judgements.
HORRIDGE J. presided over the hearing and rendered his verdict.
Justice considered all relevant facts, circumstances, laws, and regulations before making a
decision.
Justice HORRIDGE held that there was clearly no contract between the plaintiffs and Coles altering the position that Coles, according to his own evidence, opened accounts for his own convenience, all which accounts were, in his view, covered by the guarantee of the defendant. And with regard to a guarantee, a creditor is under no responsibility to tell an intended surety of problems damaging the debtor's credit or of any factors linked with the transaction in which he is about to engage that will make the position more vitiated.
He gave a judgement in favour of plaintiff for 3322l with interest and the defendant was not discharged from his liability.
Later, certain sections were added to Indian Contract Act, 1872 to protect surety from the exploitation of Creditor or the principal debtor, these sections allow power with surety to make the contract voidable.
[1] Indian Contract Act,1872 (Acts of Parliament), s. 143. [2] Indian Contract Act,1872 (Acts of Parliament), s. 126. [3] Indian Contract Act,1872 (Acts of Parliament), s. 143. [4] Wythes v. Labouchere, (1859) 3 De G. & J. 593 : 44 E.R. 1397. [5] Indian Contract Act,1872 (Acts of Parliament), s. 143.