DRT has no jurisdiction to issue Certificate of Recovery against the Guarantor

(1) It is respectfully submitted that the recovery proceedings against the Guarantor before hon’ble Debts Recovery Tribunal (hereinafter ‘DRT’ or ‘Tribunal’) under section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter ‘the Act’) are absolutely unlawful. DRT has no jurisdiction to proceed against the Guarantor as he has not taken any "debt", which he has to repay.  As per section 4 of the U.S. Statutes of Frauds, 1677 a promise ‘to answer for the debt, default or miscarriage of another person’ is a contract of guarantee. The Guarantor promises to discharge the debtor’s liability if the debtor should fail to do so. The Guarantor’s liability is therefore secondary to that of the principal debtor {Guild & Co. v. Conrad (1894) 2 QB 885, 896}.

1.1  Section 2(g) of the Act defines ‘debt' to mean:

“any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil Court or any arbitration award or otherwise or under a mortgage and subsisting and legally recoverable on, the date of the application.”

Hon’ble Bombay High Court in Centurion Bank Ltd. vs Indian Lead Ltd. And Anr. {(2000) 100 Comp Cas 537 Bom; (1999-3) 101 Bom LR 556; Decided on 20 August, 1999} has, inter alia, held as follows.

"19. It has been pointed out that defendant No. 2 is a guarantor against whom the suit is only for recovery of money. The suit against the guarantor is not a suit for recovery of debt but for enforcement of the guarantee." (Emphasis supplied)

The readers may please note that, unless stated otherwise, the contents of all the following paragraphs are the relevant extract from the judgment of Hon’ble Supreme Court in Nahar Industrial Enterprises Ltd vs Hongkong & Shanghai Banking Corp. {2009 (2) DRTC 273 (SC); Decided on 29 July, 2009}. (Further, the italics/bold/underline have been supplied by me in all the following paragraphs as per the comparative importance of the content).

(2) Hon’ble Supreme Court in Karnataka State Financial Corporation Vs N. Narasimahaiah & Ors {2008 AIR 1797, 2008 (5) SCC 176; Decided on 13/03/2008} has, inter alia, observed as follows.

“12. If special provisions are made in derogation to the general right of a citizen, the statute, in our opinion, should receive strict construction. “

14. Section 29 of the Act nowhere states that the corporation can proceed against the surety even if some properties are mortgaged or hypothecated by it. The right of the financial corporation in terms of Section 29 of the Act must be exercised only on a defaulting party. There cannot be any default as is envisaged in Section 29 by a surety or a guarantor. The liabilities of a surety or the guarantor to repay the loan of the principal debtor arises only when a default is made by the latter.

“18. Apart from the defences available to a principal borrower under the provisions of the Indian Contract Act, a surety or a guarantor is entitled to take additional defence. Such additional defence may be taken by the guarantor not only against the corporation but also against the principal debtor. He, in a given situation, would be entitled to show that the contract of guarantee has come to a not. Ordinarily, therefore, when a guarantee is sought to be enforced, the same must be done through a court having appropriate jurisdiction. In the absence of any express provision in the statute, a person being in lawful possession cannot be deprived thereof by reason of default on the part of a principal borrower.” (Emphasis supplied)

(3) Therefore, now let us examine whether DRT is a court having appropriate jurisdiction?

(4) Section 17 of the Act reads as under:

“Section 17 - Jurisdiction, powers and authority of Tribunals.--(1) A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions.”

Section 18 bars the jurisdiction of all courts in relation to the matters specified in Section 17 (except of the Supreme Court and of a High Court under Articles 226 and 227 of the Constitution).

“18. Bar of Jurisdiction.—On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under articles 226 and 227 of the Constitution) in relation to the matters specified in section 17.”

4.1 Section 22 provides for the procedure and powers of the Tribunal and Appellate Tribunal, sub-section (1) whereof reads as under: “Section 22 - Procedure and Powers of the Tribunal and the Appellate Tribunal.--(1) The Tribunal and the Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and, subject to the other provisions of this Act and of any rules, the Tribunal and the Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings.”

4.2  The term ‘jurisdiction’ means the authority to enforce laws or pronounce legal judgments. Proceedings before DRT is sui generis (means ‘of his own kind’ or ‘peculiar to himself’) and totally different from the procedure in a Civil Court.

(5) Section 2 (2) of the Code of Civil Procedure, 1908 (hereinafter ‘the Code’) defines a “decree” to mean the formal expression of an adjudication which, so far as regards the Court expressing it, conclusively determines the rights of the parties with regard to all or any of the matters in controversy in the suit and may be either preliminary or final. `Judge' has been defined under Section 2(8) of the Code to mean the presiding officer of a Civil Court. Section 2(14) of  the Code defines an “order” to mean the formal expression of any decision of a Civil Court which is not a decree.

(6) Delhi High Court in Cofex Exports Ltd. vs. Canara Bank [AIR 1997 Delhi 355] opined that Debt Recovery Tribunal is not a court but is a Tribunal having been created by a statute vested with a special jurisdiction to try only applications by banks or financial institutions to recover any debt. Although having regard to the provisions contained in clauses (a) to (b) of sub-section (2) of Section 22 of the Act it had all the trappings of a court but it was held not to be a court as such. In relation to the conflict of jurisdiction between the Civil Court and the Tribunal, it was observed:

“39. Finality shall attach to the findings arrived at and reached by each of the two within its respective jurisdictional competence. Issues heard and decided by the Tribunal shall operate as res judicata and shall bind the parties in the suit before the civil court by virtue of explanation VIII to S. 11 Civil Procedure Code. However, the civil court shall be free to decide such issues as lie within its jurisdictional competence. If the civil court must decide an issue seized by it and within its competence and if there be an unavoidable conflict between the findings recorded by the civil court and by the Tribunal, the finding of Civil Court would obviously override and supersede the findings recorded by the Tribunal for a court is a court and tribunal is a tribunal; the former adjudicates on trial, the later holds only a summary inquiry guided by principles of natural justice as the Act provides.”

(Emphasis supplied)

It was, thus, held that the Tribunal is inferior to that of the Civil Court.

(7) Civil court is a body established by law for administration of justice. We may notice that a learned Single Judge of the Calcutta High Court in State Bank of India vs Madhumita Construction Pvt Ltd (AIR 2003 Cal. 7) and a Division Bench of the Delhi High Court in Cofex Exports Ltd. vs. Canara Bank [AIR 1997 Delhi 355] have held that the DRT is not a court and it exercises powers of a civil court only in respect of limited matters. Civil Courts are constituted under statutes, like Bengal, Agra and Assam Civil Courts Act, 1887. Pecuniary and territorial jurisdiction of the civil courts are fixed in terms thereof. Jurisdiction to determine subject matter of suit, however, emanates from Section 9 of the Code.

7.1 In P. Sarathy v. State Bank of India {2000 (5) SCC 355} Hon’ble Supreme Court has held :-

“12. It will be noticed that Section 14 of the Limitation Act does not speak of a “civil court” but speaks only of a “court”. It is not necessary that the court spoken of in Section 14 should be a “civil court”. Any authority or tribunal having the trappings of a court would be a “court” within the meaning of this section.

13. ... in order to constitute a court in the strict sense of the term, an essential condition is that the court should have, apart from having some of the  trappings of a judicial tribunal, power to give a decision or a definitive judgment which has finality and authoritativeness which are the essential tests of a judicial pronouncement”. (Emphasis supplied)

(8)  If the Tribunal was to be treated to be a civil court, the debtor or even a third party must have an independent right to approach it without having to wait for the Bank or Financial Institution to approach it first. The continuance of its counter-claim is entirely dependant on the continuance of the applications filed by the Bank. Before it no declaratory relief can be sought for by the debtor. It is true that claim for damages would be maintainable but the same have been provided by way of extending the right of counter-claim.

8.1 Debt Recovery Tribunal cannot pass a decree. It can issue only recovery certificates. [See Sections 19(2) and 19(22) of the Act]. The power of the Tribunal to grant interim order is attenuated with circumspection. {See Dataware Design Labs. v. State Bank of India, {[2005] 12 Comp. Cas. 176 (Ker) at 184}.

8.2 Concededly in the proceeding before the Debt Recovery Tribunal detailed examination; cross-examinations, provisions of the Evidence Act as also application of other provisions of the Code of Civil Procedure like interrogatories, discoveries of documents and admission need not be gone into. Taking recourse to such proceedings would be an exception. Entire focus of the proceedings before the Debt Recovery Tribunal centers round the legally recoverable dues of the bank.

8.3 For the aforementioned purpose, we must bear in mind the distinction between two types of courts, viz., civil courts and the courts trying disputes of civil nature. Only because a court or a tribunal is entitled to determine an issue involving civil nature, the same by itself would not lead to the conclusion that it is a civil court. For the said purpose, as noticed hereinbefore, a legal fiction is required to be created before it would have all attributes of a civil court. The Tribunal could have been treated to be a civil court provided it could pass a decree and it had all the attributes of a civil court including undertaking of a full-fledged trial in terms of the provisions of the Code of Civil Procedure and/or the Evidence Act.

8.4  It is now trite law that jurisdiction of a court must be determined having regard to the purpose and object of the Act. If the Parliament, keeping in view the purpose and object thereof thought it fit to create separate tribunal so as to enable the banks and the financial institutions to recover the debts expeditiously wherefor the provisions contained in the Code of Civil Procedure as also the Evidence Act need not necessarily be resorted to, in our opinion, by taking recourse to the doctrine of purposive construction, another jurisdiction cannot be conferred upon it so as to enable this Court to transfer the case from the civil court to a tribunal.

(9) CONCLUSION: The Tribunal was constituted with a specific purpose as is evident from its statement of objects. The preamble of the Act also is a pointer to that too. We have also noticed the scheme of the Act. It has a limited jurisdiction. Under the Act, as it originally stood, did not even have any power to entertain a claim of set off or counter-claim. No independent proceedings can be initiated before it by a debtor. A debtor under the common law of contract as also in terms of the loan agreement may have an independent right. No forum has been created for endorsement of that right. Jurisdiction of a civil court as noticed hereinbefore is barred only in respect of the matters which strictly come within the purview of Section 17 thereof and not beyond the same. The Civil Court, therefore, will continue to have jurisdiction. Even in respect of set off or counter-claim, having regard to the provisions of sub-sections (6) to (11) of Section 19 of the Act, it is evident :-

a) That the proceedings must be initiated by the bank

b) Some species of the remedy as provided therein would be available therefor.

c) In terms of sub-section (11) of Section 19, the bank or the financial institution is at liberty to send a borrower out of the forum.

d) In terms of the provisions of the Act, thus, the claim of the borrower is excluded and not included.

e) In the event the bank withdraws his claim the counter-claim would not survive which may be contrasted with Rule 6 of Order VIII of the Code.

f) Sub-section (9) of Section 19 of the Act in relation thereto has a limited application.

g) The claim petition by the bank or the financial institution must relate to a lending/borrowing transaction between a bank or the financial institution and the borrower.

h) The banks or the financial institutions, thus, have a primacy in respect of the proceedings before the Tribunal.

 i) An order of injunction, attachment or appointment of a receiver can be initiated only at the instance of the bank or the financial institution. We, however, do not mean to suggest that a Tribunal having a plenary power, even otherwise would not be entitled to pass an order of injunction or an interim order, although ordinarily expressly it had no statutory power in relation thereto.

j) It can issue a certificate only for recovery of its dues. It cannot pass a decree.

It was held by hon’ble Supreme Court that the Tribunal, therefore, would not be a Civil Court.

(10) In State Bank of India v. Madhumita Construction (Pvt.) Ltd. and others, [AIR 2003 Cal 7], the Calcutta High Court has held:-

“13.  The Tribunal constituted under the DRT Act is not a Court. It is a Tribunal having the trappings of a Court. A Tribunal with trappings of Court cannot be equated with a Court as is understood from the expression “Court”. A Court is a body established by law for the administration of justice by Judges or Magistrates. This definition may include a Tribunal as well. Inasmuch as, it is also a body constituted or established by law for administration of justice. But, when it comes to the distinction between Court and Tribunal, then the Court as it understood is different from a Tribunal. The word “Court”, however, has not been defined anywhere in any law.”

10.1  In Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd.,[ (2007) 6 SCC 236 ], Supreme Court has held:-

“Para 77. In Harinagar Sugar Mills v. Shyam Sundar Jhunjhunwala this Court held: (AIR p. 1680, para 32)

By `courts' is meant courts of civil judicature and by `tribunals', those bodies of men who are appointed to decide controversies arising under certain special laws. Among the powers of the State is included the power to decide such controversies. This is  undoubtedly one of the attributes of the State, and is aptly called the judicial power of the State.”

10.2  In Supreme Court Legal Aid Committee v. Union of India it was held: (SCC p.745, para 14)

 “14. It is common knowledge that a `court' is an agency created by the sovereign for the purpose of administering of justice. It is a place where justice is judicially administered. It is a legal entity.”

(11) EXCLUSION OF JURISDICTION MUST BE EXPRESS:

It must be remembered that the jurisdiction of a civil court is plenary in nature. Unless the same is ousted, expressly or by necessary implication, it will have jurisdiction to try all types of suits.

11.1  In Dwarka Prasad Agarwal v. Ramesh Chander Agarwal, [(2003) 6 SCC 220] five principles were laid down stating :-

“22. The dispute between the parties was eminently a civil dispute and not a dispute under the provisions of the Companies Act. Section 9 of the Code of Civil Procedure confers jurisdiction upon the civil courts to determine all disputes of civil nature unless the same is barred under a statute either expressly or by necessary implication. Bar of jurisdiction of a civil court is not to be readily inferred. A provision seeking to bar jurisdiction of a civil court requires strict interpretation. The court, it is well settled, would normally  lean in favour of construction, which would uphold retention of jurisdiction of the civil court. The burden of proof in this behalf shall be on the party who asserts that the civil court's jurisdiction is ousted. (See Sahebgouda v. Ogeppa, (2003) 6 SCC 151.) Even otherwise, the civil court's jurisdiction is not completely ousted under the Companies Act, 1956.

11.2    In Nagri Pracharini Sabha v. Vth Addl. Distt. and Sessions Judge, [1991 Supp (2) SCC 36] Supreme Court has held :-

“2. A litigant having a grievance of a civil nature has, independently of any statute, a right to institute a suit in the civil court unless its cognizance is either expressly or impliedly barred. The position is well-settled that exclusion of jurisdiction of the civil court is not to be readily inferred and such exclusion must be either expressly or implied.

11.3   In Ramesh Chand Ardawatiya v. Anil Panjwani, [(2003) 7 SCC 350] Supreme Court opined :-

“19. ..Where there is a special tribunal conferred with jurisdiction or exclusive jurisdiction to try a particular class of cases even then the civil court can entertain a civil suit of that class on availability of a few grounds. An exclusion of jurisdiction of the civil court is not to be readily inferred. (See Dhulabhai v. State of M.P.)

11.4 The Act, although, was enacted for a specific purpose but having regard to the exclusion of jurisdiction expressly provided for in Sections 17 and 18 of the Act, it is difficult to hold that a civil court's jurisdiction is completely ousted. Indisputably the banks and the financial institutions for the purpose of enforcement of their claim for a sum below Rs. 10 lakhs would have to file civil suits before the civil courts. It is only for the claims of the banks and the financial institutions above the aforementioned sum that they have to approach the Debt Recovery Tribunal. It is also without any cavil that the banks and the financial institutions, keeping in view the provisions of Sections 17 and 18 of the Act, are necessarily required to file their claim petitions before the Tribunal. The converse is not true.

11.5  Debtors can file their claims of set off or counter-claims only when a claim application is filed and not otherwise. Even in a given situation the banks and/or the financial institutions can ask the Tribunal to pass an appropriate order for getting the claims of set-off or the counter claims, determined by a civil court. The Tribunal is not a high powered tribunal. It is a one man Tribunal. Unlike some Special Acts, as for example Andhra Pradesh Land Grabbing (Prohibition) Act, 1982 it does not contain a deeming provision that the Tribunal would be deemed to be a civil court.

11.6  The liabilities and rights of the parties have not been created under the Act. Only a new forum has been created. The banks and the financial institutions cannot approach the Tribunal unless the debt has become due. In such a contingency, indisputably a civil suit would lie.

(12) Sub-section (3) of Section 22 of the Act raises a legal fiction that the proceeding before the Tribunal or the Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 and for all the purposes of Section 196 of the Indian Penal Code, 1860. The very fact that a legal fiction has been created and the Tribunal or the Appellate Tribunal shall be deemed to be a civil court for purposes of Section 195 and Chapter XXVI of the Code of Civil Procedure, 1973, itself suggests that the Parliament did not intend to take away the jurisdiction of the civil court. In any event, the said legal faction has a limited application. Its scope and ambit cannot be extended.

12.1 Supreme Court accepted that disposal of a civil suit takes a long time. But indisputably remedy of summary and speedy trial by itself would not be sufficient to oust the jurisdiction of the civil court. Had the intention of the Parliament been so, it could have expressly said so. Casus omissus, as is well known, cannot be supplied.

(13)  VESTED RIGHT OF APPEAL: When a person files a civil suit his right to prosecute the same in terms of the provisions of the Code as also his right of appeal by way of first appeal; second appeal etc. are preserved. Such rights cannot be curtailed, far less taken away except by reason of an express provision contained in the statute. Such a provision in the statute must be express or must be found out by necessary implication.

13.1 The Code not only contains procedural provisions but also substantive rights ; right of appeal is one of them. A forum of appeal is determined in terms of the provisions of the Code having regard to the pecuniary jurisdiction of the Court as may be notified by the appropriate Government from time to time. A suitor has the right to maintain a first appeal. A second appeal also is maintainable before a High Court, subject of course to the effect that questions of law must be there for the court's consideration. For the said purpose no pre-deposit is required to be made, as is necessary in terms of the Act, that 75% of the awarded amount is required to be deposited, subject of course, to an order to the contrary, which may be passed by the Debt Recovery Appellate Tribunal. Such a right of conditional appeal, in our opinion, curtails party's right to maintain an appeal as a matter of right.

13.2  In the event, however, if a civil suit is transferred to the Debt Recovery Tribunal, the plaintiff would be deprived of his right in relation to the procedural mechanism as contained in the Code as also the Evidence Act. His right of appeal would also stand curtailed. While exercising the power of transfer, the High Court and this Court would thus be curtailing the right of a suitor indirectly which could not be done directly. It clearly establishes the Parliamentary intent that only civil suits are subject matter of inter State transfer from one civil court to another civil court. If such a power is exercised, all the rights of the plaintiff remain intact, no right is taken away and no right is diluted.

(14) What agreements are contracts

Section 10 of the Indian Contract Act, 1872 provides that - An agreement between two or more parties becomes a contract when the following conditions are satisfied:

(1) …xxx…    

(2) ……xxx………….

(3) The parties’ consent is free.

(4) ……..xxx………..

14.1 “Free consent” defined

“Consent is said to be free when it is not caused by:

(1) ………xxx……………

(2) undue influence, as defined in Section 16, or

(3) ……xxx…...

(4) ………xxx…………...

(5) ……xxx………………

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation or mistake.”

(15) “Undue Influence”           

Section 16 of the Contract Act provides that-

“(1) A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

(2) ………xxx…………….

(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of other.” (Emphasis supplied)

15.1  “Section 19-A. Power to set aside contract induced by undue influence.—When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.”

15.2 Position of dominance necessary for presumption to arise

The Privy Council in Raghunath Prasad v Sarju Prasad AIR 1924 PC 60 pointed out the conditions for presumption to arise. Referring to sub-section (3) of Section 16, which provides for presumption of undue influence, Lord SHAW observed as follows:

“By this sub-section three matters are dealt with. In the first place, the relations between the parities to each other must be such that one is in a position to dominate the will of the other. Once that position is substantiated the second stage has been reached, viz., the issue whether the contract has been induced by undue influence. Upon the determination of this issue a third point emerges, which is that of onus probandi. The burden of proving that the contract was not induced by the undue influence is to lie upon the person who was in a position to dominate the will of the other.

Error is almost sure to arise if the order of these propositions be changed. The unconscionableness of the bargain is not the first thing to be considered. The first thing to be considered  is the relations of these parties. Were they such as to put one in a position to dominate the will of the other?” (Emphasis supplied)

15.3 Inequality of bargaining power

The presumption of undue influence may also arise from the fact that there is such an inequality of bargaining power between the parties that one can cause economic duress to the other. The decision of the Court of Appeal in Lloyds Bank v. Bundy (1975) 1 QB 326. is a remarkable illustration of the concept of inequality of bargaining power.

A  contractor borrowed a sum of money from a bank. He could not pay back in time. The banker pressed for payment or for security. He suggested that his father might mortgage the family’s only residential house. The bank officer visited the father and obtained his signatures upon readymade papers. The contractor still could not pay and the banker sought to enforce the mortgage which might have meant throwing out of the family from its only residence. Accordingly, Mr Bundy relied upon the unfair character of the mortgage. He was allowed to set aside the mortgage.

15.4   Judicial intervention for rescuing parties from unreasonable terms

In Central Inland Water Transport Corpn vs. Brojo Nath Ganguly (1986 3 SCC 156, 206)  the Supreme Court has noted that the word “unconscionable” means something as shows no regard for conscience and which is irreconcilable with what is right or reasonable. The matter before the court was a service contract. A clause in the contract empowered the employer (a Govt. undertaking) to remove an employee by three months’ notice or pay in lieu. The employee, who contested the validity of this clause, was removed by handing him over a three months’ pay packet. The Supreme Court regarded the clause to be constitutionally as well as contractually void. The court added that any term which is so unfair and unreasonable as to shock the conscience of the court would be opposed to public policy therefore also void under section 23 of the Contract Act. The contract was not based upon a real consent. It was rather an imposition upon a needy person. The term was unconstitutional because it was so absolute that any officer could be made a target irrespective of his conduct, good or bad.  (Emphasis supplied)

15.5  Commenting upon this expanding power of the court to relieve a party from the consequences of his own contract, a learned writer J H Baker has said that “freedom of contract turns out to be a misleading guide when so many contracts are not free in the economic sense. The notion of contract as private legislation appears less attractive when legislation is always drawn up one-sidedly. Judges are empowered to read in terms which are not there, or read out terms which are there. They are to impose reasonableness. Whatever is not reasonable is not law. If the parties have agreed to something unreasonable, they should be treated as if they have not agreed at all and released”. (Emphasis supplied) (J. H. Baker, From Sanctity of Contract to Reasonable Expectation, Current Legal Problems 1979).

15.6   Serious terms of a contract must be specifically brought to the notice of the parties

The Bombay High Court in Road Transport Corpn Vs. Kirloskar Bros Ltd ( AIR 1981 Bom 299 ) said that it is for the carrier to plead and prove that the print on the receipt was brought to the notice of the consignor and that he had agreed to and accepted the same. The Court held that it is necessary that serious terms of a contract must be specifically brought to the notice of the parties whose rights are sought to be curtailed. In Oriental Fire and General Ins Co Vs. New Suraj Transport Co (AIR 1985 All 136) the consignment note was not even signed by the booking party or his agent, the Allahabad High Court held that the consignor was not bound by a printed term about the exclusive jurisdiction. The Court said that something more must be done than merely printing the terms on consignment documents. (Emphasis supplied)

15.7 In Road Transport Organisation of India vs. Barunai Powerloom Weaver’s Coop Society Ltd ( 1994 84 Cal LT 174 ) the Calcutta High Court held that the law requires that before making a person bound by any such term ( a clause in a consignment note as to exclusive jurisdiction ) it must be proved that the same was brought to the knowledge of the consignor in such a way that it should seem to be the result of a mutual assent. In Grandhi Pitchaiah Venkatraju & Co vs. Palukuri Jagannadham & Co ( AIR 1975 AP 32 ) where a consignment way bill contained the words “subject to Calcutta jurisdiction”,  the Andhra Pradesh High Court ignored it since it was not one to which the plaintiff assented.  Following these principles in East India Transport Agency vs. National Insurance Co ( AIR 1991 AP 53 FB ) the Andhra Pradesh High Court came to the conclusion that a term as to the place of suit was not binding on the insurer who had paid out the consignee and who was  then suing the carrier for the negligent loss of the goods unless it could be proved that the insurer too was made or was otherwise aware of the terms. 

15.8 The law plays in this respect the role of a parent. It has been opined by the learned author Anthony T Kronman, in Paternalism and the Law of Contracts, (1988) 32 Yale Law Journal 763 “A person who would give away too much of his own liberty must be protected from himself, no matter how rational his decision or compelling the circumstances.” (J. H. Baker, From Sanctity of Contract to Reasonable Expectation, Current Legal Problems 1979).

Therefore, it is desirable that the Courts should take cognizance of the legal gimmick being played by the Banks in drafting their documents regarding personal guarantee agreement and if the Guarantor has agreed to something unreasonable, he should be treated as if he has not agreed at all and released.

(16) Contract of Guarantee - Scheme of Indian Contract Act, 1872

Sections 139, 140 and 141 of the Indian Contract Act, 1872 provide as follows.

139. Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy.—If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.

140. Rights of surety on payment or performance.—Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor.

141. Surety’s right to benefit of creditor’s securities.—A surety is entitled to the benefit of every security which the creditor has against the  principal debtor at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.

(17)It is undisputed that, firstly, there is such an inequality of bargaining power between the Bank and the Guarantor that the Bank can cause economic duress to the Borrower and/or Guarantor; secondly, the personal guarantee agreement is always drawn up one-sidedly, not limited to, but including the mischievous forced waiver of certain provisions of the Contract Act; thirdly it results in inference that the personal guarantee agreement is not based upon a real consent, it is rather an imposition upon a needy person, hence the Court would regard it as opposed to public policy, therefore void under section 23 of the Contract Act; fourthly,  therefore the presumption of undue influence is bound to arise between the Bank and the Guarantor while executing the personal guarantee agreement.

17.1 The consent of the Guarantor having obtained by undue influence by the Bank, the personal guarantee agreement is voidable at the option of the Guarantor under section 19-A of the Indian Contract Act, 1872.

17.2   Section 16 of the Contract Act provides-

a. vide Sub-section (1) A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.      

b. Vide Sub-section (3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of other.”

c. Therefore, the Guarantor is entitled to submit before DRT that the personal guarantee agreement is not based upon a real consent, but was induced by undue influence by the Bank.

17.3 Further, the Guarantor can claim discharge under Sections 139 and can also claim his other rights under Sections 140 and 141 of the Indian Contract Act, 1872. However, admittedly no declaratory relief can be granted by the Tribunal to the Guarantor, because as detailed above, DRT is not a court having appropriate jurisdiction. By necessary implication, the logical conclusion is that the Tribunal shall have no jurisdiction to proceed for enforcement of the guarantee against the Guarantor.

(18) Section 22 of the Act provides that the Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, therefore, DRT is not obliged to undertake a full-fledged trial in terms of the provisions of the Code of Civil Procedure and/or the Evidence Act. Therefore, the Guarantor would be deprived of his right in relation to the procedural mechanism as contained in the Code as also the Evidence Act. Further, before the Tribunal no declaratory relief can be sought for by the Guarantor.

18.1In Dhulabhai v. State of M.P.[ (1968) 3 SCR 662 ] a five judge Constitution Bench of hon’ble Supreme Court has opined:-

“The result of this inquiry into the diverse views expressed in this Court may be stated as follows:

 “(1)  Where  the statute gives a finality  to the orders of the special tribunals the  Civil Court’s  jurisdiction  must  be  held  to be excluded if  there is adequate remedy to do what  the Civil Courts would normally do in  a  suit….”  

However, as detailed above, in the scheme of the Act there is no adequate remedy to do what  the Civil Courts would normally do in  a  suit, hence DRT is not a court having appropriate jurisdiction, consequently DRT has no jurisdiction to proceed for enforcement of the guarantee against the Guarantor (END).

Note: The views expressed are my personal and a view point only.

Author:

Narendra Sharma

Consultant (Business Laws)

E-mail: nkdewas@yahoo.co.in