Shamsuddin, J.
1. The plaintiff in O. S. No. 10 of 1978 on the file of the Court of the Subordinate Judge of Kasaragod is the appellant.
2. The suit was filed for recovery of money. It is necessary to state briefly the facts which are relevant for determination of the question raised in the appeal.
3. The first defendant who is the proprietor of a firm by name 'Paxwell Printers' was given various financial facilities by the plaintiff-bank under various transactions and as on the date of the plaint, a total of Rs. 5,39,220.93 was due from the first defendant. One such facility was open cash credit facility for a sum of Rs. 50,000 on the strength of a deed of hypothecation and a promissory note. The stock-in-trade and the raw materials which belonged to the first defendant were hypothecated to the plaintiff bank. The first defendant was also given a key shut cash credit facility for a sum of three lakhs of rupees on the pledge of raw materials belonging to him as security. Subsequently, the first defendant also executed a promissory note for the said sum. The first defendant sought a further loan of Rs. 1,80,000 by way of termloan facility on August 14, 1972, and the same was also granted by the plaintiff-bank on the security of equitable mortgage by deposit of title deeds in respect of the properties belonging to the first defendant and by hypothecation of machineries and also by assigning life insurance policies. Thereafter, the open credit facility of Rs. 50,000 granted to the first defendant was enhanced to Rs. 75,000 with effect from January 19, 1973. However, the first defendant was not diligent in repaying the loans and in the circumstances, the plaintiff was contemplating legal steps to realise the amounts. At that stage, the second defendant who is also an industrialist became desirous of starting a printing press at Bangalore and it appears that he contacted the first defendant with the idea of taking over the press of the first defendant. As a result of the understanding reached by them, they approached the plaintiff and it was agreed that in the first instance, the second defendant would be given facility for a sum of Rs. 1,05,000 which would be adjusted towards the amounts due from the first defendant under the key-shut cash credit accommodation and that 32 drums of chinawood oil which were hypothecated by the first defendant in connection with the key-shut cash credit accommodation would be released to the first defendant on the understanding that the sale proceeds of the said chinawood oil amounting to Rs. 1,05,000 would be credited towards the liability of the first defendant. The second defendant agreed to be a guarantor for repayment of the above sum and to execute a hypothecation deed in respect of his lands and building valued at Rs. 2,00,000 and a deed of guarantee guaranteeing the value of the chinawood oil. Exhibit A-16, dated June 17, 1974, is the application sent by the second defendant to the bank regarding the arrangement. In the said application, the bank was requested to grant a loan of Rs. 1,05,000 against the security of the machineries and landed properties belonging to him the book values of which, as on March 31, 1973, was mentioned as Rs. 74,000. It also stated that the loan amount could be credited towards the key-shut cash credit account of the first defendant and against this credit, the chinawood oil held by the bank as part of the security would be released and that a sum of Rs. 1.05 lakhs would be paid within a period of 30 days from the date of release of the goods by the first defendant. Thereafter, the bank would grant a loan of Rs. 2.50 lakhs to the second defendant against the existing machinery of Sri Murughendra Deo, the first defendant which was hypothecated to the bank and also the machineries of the second defendant mentioned in exhibit A-16 and the second defendant would repay the entire loan amount of Rs. 2.50 lakhs in five annual instalments of Rs. 50,000 and would stand as a guarantor to the amount that was payable by the first defendant on account of the chinawood oil that would be released to the first defendant. Exhibit A-17, dated June 17, 1974, is a covering letter sent by the first defendant to the bank along with exhibit A-16 letter. Inexhibit A-17, the first defendant stated that the proposal made in exhibit A-16 was acceptable to the first defendant and he undertook to deposit a sum of at least Rs. 1.05 lakhs within 45 days from the date of release of the china-wood oil and Rs. 10,000 within ten days after release of G. P. paper approximately three tons in weight, held by the bank. Exhibit A-18, dated September 6, 1974, is a letter sent by the plaintiff-bank to the second defendant wherein it was stated that the head office of the plaintiff-bank had agreed in principle to grant a term loan of Rs. 2.50 lakhs to the second defendant subject to the conditions mentioned therein. The conditions stated therein are : (1) the second defendant should hypothecate the machinery items belonging to the second defendant's existing foundry at Kasaragod having a market value of not less than Rs. 2 lakhs and create an equitable mortgage in favour of the bank in respect of land and building offered by the second defendant as security, (2) a sum of Rs. 28,783.63 which was due to the Kerala State Finance Corporation against the aforesaid property should be cleared by the second defendant and evidence should be furnished for having done so, or deposit the actual amount clue to be paid to Kerala State Finance Corporation and the said amount would be remitted to the Corporation directly by the bank, (3) after creation of security by the second defendant in favour of the bank, the G. P. paper valued about Rs. 25,000 should be released to the first defendant against the second defendant's personal guarantee, and the first defendant would in turn arrange to sell the same and deposit a sum of Rs. 10,000 with the bank within a period of 10 days from the date of such release, and (4) that at the time of making such release of chinawood oil, the first defendant would give a letter of undertaking to the bank to the effect that he would credit a sum of Rs. 1,05 lakhs to the bank within 30 days from the date of release and the balance amount of Rs. 15,000 available from out of the sale of G. P. paper should be utilised by the first defendant for carrying the chinawood oil to Bombay for sale. Some other additional conditions are also mentioned in the said letter. Consequently, exhibit A-19 agreement and guarantee letter dated October 23, 1974, were executed by the second defendant in favour of the plaintiff-bank. Exhibit A-19 stated that the guarantor, namely, the second defendant, agreed to indemnify the bank against all loss and to pay and satisfy the bank on demand 'the general balance' due from the borrower and the expression 'general balance' shall be deemed to include all and every sum and sums of money which were then due from the borrower to the bank or under any account whatsoever whether from the borrower solely or from the borrower jointly with any other or others in partnership or otherwise whether as principal or surety or otherwise. The total liability was limited to Rs. 2 lakhs and it was also agreed that the liability which shall be enforceable againstthe guarantor under the guarantee shall not exceed the sum of Rs. 2 lakhs together with interest thereon at 10% per annum above the Reserve Bank of India rate with a minimum of 19% per annum from the date of demand by the bank upon the guarantor for payment. Special mention has to be made to the following Clause contained in exhibit A-19 :
'The guarantor hereby consents to the bank's making any variance that the bank may think fit in the terms of the bank's contract with the borrower, to the bank's determining, enlarging or varying any credit to the borrower to the bank's making any composition with the borrower or promising to give the borrower time or not to sue him and to the bank's parting with any security the bank may hold for the guaranteed debt. The guarantor also agrees that the guarantor shall not be discharged from his liability by the bank's releasing the borrower or by act or omission of the bank the legal consequence of which may be to discharge the borrower or by any act of the bank which would, but for this present provision be inconsistent with the guarantor's rights as surety or by the bank's omission to do any act which, but for the present provision, the bank's duty to the guarantor would have required the bank to do. Though as between the borrower and the guarantor, the guarantor is surety only, the guarantor agrees that as between the bank and the guarantor, the guarantor is the principal debtor jointly with the borrower and accordingly the guarantor shall not be entitled to any of the rights conferred as surety by Sections 133, 134, 135, 139 and 141 or any other relevant provisions of the Contract Act.'
4. Exhibit A-20, dated October 23, 1974, is the covering letter given by the second defendant to the bank stating that the agreement of guarantee was enclosed along with the letter and he would be responsible up to a limit of Rs. 2 lakhs for any credit by way of loans, overdraft, discount of bills or otherwise extended to Paxwell Printers, the first defendant. Exhibit A-21, dated November 19, 1974, is a letter of trust given by the first defendant to the bank, in respect of the chinawood oil that was agreed to be released. Exhibit A-22, dated November 19, 1974, is another letter given by the first defendant in respect of release of chinawood oil and in this letter also, the first defendant undertook to deposit with the bank a sum of Rs. 1.05 lakhs within 30 days from that date. Exhibit A-23 is the letter of release executed by the first defendant in respect of the chinawood oil. It also shows that the chinawood oil was released to the first defendant and the first defendant also acknowledged receipt of the same. Exhibit A-24, dated October 19, 1974, is a letter given by the second defendant to the bank to confirm the deposit of titledeeds on October 17, 1974, relating to the properties of the second defendant, schedule B to exhibit A-24 contains the particulars of the properties and schedule A is the particulars of the sale deed and title deeds of the property. Exhibit A-24 also mentions that B schedule property together with all structures and machinery standing thereon were to be put up in future to secure the facility of loan of Rs. 2.50 lakhs. Exhibit A-25, dated February 25, 1975, is a deed of hypothecation of machinery executed by the second defendant to the bank as security against the financial accomodation up to a maximum term loan of Rs. 2.50 lakhs applied for by the second defendant. The maximum limit of financial accommodation stated therein is Rs. 10 lakhs. The second defendant also hypothecated his machinery described in schedule D to the plaint as per hypothecation deed dated February 25, 1975. Thus, we find that the chinawood oil was released by the plaintiff-bank to the first defendant on the strength of the above documents. After the release of the chinawood oil from out of the security, only a sum of Rs. 25,000 out of Rs. 1.05 lakhs was paid by the first defendant. The defendants did not account for the balance quantity of the chinawood oil, nor did they pay the balance amount of Rs. 80,000 to the plaintiff. It is in these circumstances that the plaintiff filed the suit for recovery of the amounts due from the defendants to the plaintiff.
5. The second defendant, in his written statement, contended that the plaintiff agreed to grant a term loan of two and a half lakhs of rupees and requested the second defendant to hypothecate the machines belonging to him and deposit the title deeds of land and buildings belonging to him and accordingly he deposited the title deeds of lands and buildings belonging to him as security for the said term loan, but the plaintiff did not honour their commitment and sanction the loan. Thereupon, he issued a notice dated July 18, 1977, to the bank requesting it to cancel the deed of hypothecation and also to return the documents deposited by him with the plaintiff-bank but the plaintiff failed to comply with the demand or to send a reply, and was trying to recover the advance made by the bank to the first defendant. He also contended that the chinawood oil having been imported under Actual User's Import Licence, it could not have been sold in the open market and this fact was suppressed by the plaintiff when the alleged deed of guarantee was executed in connection with the release of chinawood oil. He further contended that the obligation of the first defendant to deposit the sale proceeds was varied by the bank without his knowledge by giving time to the first defendant and in the circumstances, he was not liable to pay any amount to the plaintiff-bank. In an additional written statement filed by the second defendant, he further contended that the plaintiff and the first defendantentered into compromise without his consent as per I. A. No. 818 of 1981 in respect of the suit claim, with a view to cause injury to him and that, therefore, the claim against him could not be enforced in law and that he was, discharged from the liability as a surety in view of Sections 154, 135 and 139 of the Indian Contract Act. According to him, he was also entitled to the benefits of Section 141 of the Indian Contract Act.
6. The lower court, after considering the documentary evidence adduced by the parties, found that the chinawood oil could not be sold in the open market without the permission of the Controller of Exports and Imports and, therefore, the contract for release and sale of the chinawood oil in respect of which guarantee was made by the second defendant was void and that, therefore, the guarantee was not enforceable in view of Section 23 of the Indian Contract Act. On the question of the alleged discharge of the guarantee under the provisions of Sections 134, 135 and 139 of the Contract Act, the court below found that the second defendant was concerned only with the release of the chinawood oil and that he had no connection whatsoever with the other transactions entered into between the plaintiff and the first defendant and that since the compromise did not relate to the release of the chinawood oil and guarantee of the second defendant in respect thereof, there was no substance in the contention of the second defendant that he was discharged from the liability as a result of the compromise. The court also rejected the plea of the second defendant that, by reason of the extension of time given by the plaintiff to the first defendant for sale of the oil, he was discharged from the liability in view of Section 139 of the Contract Act. The plea of limitation also was negatived by the lower court on the basis of acknowledgment made by the first defendant under exhibit A-11. In view of its finding that the transaction relating to the release of the oil was illegal and void and consequently, the guarantee executed to secure the payment of Rs. 1,05,000 was also void, the lower court held that the plaintiff cannot enforce the guarantee. In this view, the court below passed a decree against the first defendant to pay a sum of Rs. 1,37,500 with future interest at 18% per annum till the date of realisation and the suit was dismissed as against the second defendant.
7. In this appeal, Sri T.R.G. Warriar, learned counsel for the appellant, contended that the finding of the lower court that the transaction relating to release of the chinawood oil for enabling the first defendant to sell the same was illegal and opposed to the provisions of the Import-Export Control and that the guarantee given by the second defendant for securing the payment of Rs. 1,05,000 which is part of the arrangement is also consequently illegal, is unsustainable in law. Learned counsel submitted that the agreement doesnot in any way spell out an arrangement to sell the chinawood oil in violation of any provisions relating to the import-export thereof. On the other hand, Sri V.R. Venkitakrishnan, learned counsel for the respondent, supported the finding and invited our attention to paragraphs 369 to 375 of the Handbook of Import-Export Procedures, 1980-81, which reads as follows :
'369. Where an actual user is unable to utilise the imported goods for the purpose for which he secured the goods or the imported material is surplus to his needs, he may transfer or loan such imported material to another actual user with the written permission of the sponsoring authority concerned, provided both the buyer and the seller (lender and loanee) actual users, are under the jurisdiction of the same sponsoring authority.
370. Where the respective sponsoring authorities are different, but the contracting actual users are situated in the same State or Union Territory, the (State) Directors of Industries may grant the permission in writing for transfer/loan of the imported material and also monitor it thereafter.
371. In other cases, prior written permission of the licensing authority is mandatory. After agreeing upon the terms of the transfer, the two actual users, i.e., the buyer and the seller, should apply through the sponsoring authority of the buyer actual user.
372. The above provisions will be equally applicable to material imported under Open General Licence or obtained from a canalising agency.
373. No permission is required either of the sponsoring authority or the licensing authority for the transfer of imported material to a public sector agency or a State (Small) Industries Development Corporation. The actual user shall only give an intimation by registered post of such transfer to the sponsoring authority and the licensing authority concerned, within a period of thirty days.
374. The above procedure will apply to the disposal of goods lying with a scheduled bank in a case where (a) it has cleared the goods from the customs as the joint holder of a licence against which the goods had been imported, or (b) the goods imported had been pledged with the bank by the licence holder and the 'licence holder is not in a position to take over the goods in question, provided the bank has acquired a legal right to the sale.
375. In case the STC/MMTC or any other similar agency is not willing to purchase the imported goods from the bank and the bank has not been able to find out any actual user willing to purchase such goods, through the sponsoring authority or through suitable advertisement in the newspapers of repute, the bank can approach the concerned licensing authority for permis-sion to auction the goods provided the licence holder agrees to the sale or the bank has otherwise the legal right to sell the goods under the valid contractual terms.'
8. It is not disputed that identical provisions are contained in the Handbook of Import-Export Procedures, 1974-75, with which we are concerned in the instant case. On the basis of the above provisions, learned counsel for respondent No. 1 argued that the chinawood oil in the instant case was imported under an Actual User's licence and that the same could not be sold without the written permission of the sponsoring authority as provided in paragraphs 369 and 370. In cases not covered by paragraphs 369 and 370, written permission of the licensing authority was mandatory and after agreeing upon the terms of the transfer, the buyer and seller should apply through the sponsoring authority of the buyer as provided in para 372. The imported material was not intended to be transferred to a public sector agency or a small industries corporation and, therefore, the provisions contained in para 373 had no application to the present case. This was also not a case coming under para 374. Learned counsel invited our attention to the pleading in paragraph 6 of the plaint where the plaintiff stated that the release was for the purpose of disposal of the chinawood oil in the market and to pay off the sale proceeds aggregating to Rs. 1,05,000 to the plaintiff, in liquidation of the liability of the first defendant. Learned counsel also submitted that the second defendant was not aware of the above provisions or the illegal way in which the goods were sought to be disposed of. He also placed heavy reliance on Section 23 of the Indian Contract Act which states that the consideration or object of an agreement is lawful unless it is forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law, or is fraudulent or involves or implies injury to the person or property of another or the court regards it as immoral or opposed to public policy. He contended that the object of the agreement was unlawful and void in law and, therefore, the guarantee which was an integral part of the arrangement for the release of the imported material to the first defendant for securing repayment of the sale proceeds estimated at Rs, 1,05,000 cannot be enforced. He also submitted that the arrangement to release the oil for sale was opposed to public policy. In this connection, learned counsel drew our attention to the decisions in Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty and Sons, AIR 1975 SC 1223, Rakurti Manikyam v. Medidi Satyanarayana, AIR 1972 AP 367 and An Arbitration Between Mahmoud and Ispahani, In re [1921] All ER 217. In the above Supreme Court decision, it was held that the contract in that case was void as having been entered into for an object prohibited by the Essential Supplies Act read with the Oil Seeds (Forward Contracts Prohibition) Order,1943, and that, therefeore, it was not enforceable in law. In the Andhra Pradesh decision, Chinnappa Reddy J. (as he then was) held that the agreement to sell paddy above the maximum price fixed under the Maximum Price Control Order was unlawful and void and, therefore, where paddy is delivered in contravention of the Maximum Price Control Order, the acceptance of that delivery would not create a lawful relationship between the parties so as to attract the provisions of Section 70 of the Contract Act. In the third decision cited [1921] All ER 217, it was held that the court will not enforce a contract which is made illegal by a statutory order, even though the question of illegality is raised by the party who has been guilty of it, and even though the other party honestly believed, as a result of statements made to him by the party guilty of the illegality, that no breach of the order was being committed. The principle that, where a contract can b'e performed either lawfully or unlawfully and one party without the knowledge of the other elects to perform it unlawfully, that party cannot plead its illegality does not apply to a case where the contract sought to be enforced is altogether prohibited.
9. After going through the provisions contained in paragraphs 369 to 375 of the Handbook of Import-Export Procedures, we are unable to hold that the arrangement to release the imported material to the first defendant is tainted with any illegality. There is no total prohibition on selling material imported under an Actual User's licence and the only requirement is compliance with the provisions contained in the procedure before sale is effected. It is the actual user who has to apply for the required permission. With the materials available in the case, we are unable to attribute to the bank any knowledge or any intention on the part of the first defendant to sell the oil in violation of the provisions contained in the procedure relating to the sale of the imported articles. We have carefully gone through the correspondence between the parties, the deed of trust executed by the first defendant and the agreement of guarantee executed by the second defendant before the chinawood oil was released to the first defendant and are unable to find any material to suggest that the bank intended the disposal of the oil released to the first defendant otherwise than in accordance with the provisions contained in the Handbook of Import-Export Procedures. Nor are we impressed by the argument of learned counsel for the first respondent that the pleading in paragraph 6 of the plaint that the material was released to the first defendant for the purpose of disposal of the same 'in the market' is indicative of any suggestion to dispose of the article in violation of the aforesaid provisions. That being the position, we are unable to hold that the contract was either forbidden by law or was of such a nature that, if permitted, it would defeat the provisions of any law; or was fraudulent or involved or implied injury to the person or property ofanother, or was immoral or opposed to public policy. Therefore, the decisions cited above have no application to the instant case. It follows that the finding of the lower court that the contract was tainted and was unlawful and, therefore, the guarantee cannot be enforced is not correct.
10. Learned counsel for the second defendant next submitted that even if the finding of the lower court on the question of legality of the contract is wrong, it would still be open to him to support the judgment and decree on the basis of the findings which were found against him. Since the suit was dismissed against the second defendant, it was not necessary for him to file an appeal or cross-objection against the decree and it would be open to the second defendant to sustain the decree by showing that the findings of the lower court which were decided against him are wrong and illegal in view of the provisions contained in Order XLI, Rule 22 of the Code of Civil Procedure. (See the decisions in State of West Bengal v. B.K. Mondal, AIR 1962 SC 779, Panna Lal v. State of Bombay, AIR 1963 SC 1516 and Virdhachalam Pillai v. Chaldean Syrian Bank Ltd., AIR 1964 SC 1425.
11. Counsel for the second defendant submitted that the suit was barred by limitation, that his liability as surety was discharged in view of the provisions contained in Sections 135, 136, 139 and 141 of the Indian Contract Act and that the finding of the lower court to the contrary is unsustainable.
12. Dealing with the question of limitation, learned counsel for the second defendant submitted that the suit was filed on October 23, 1979, beyond three years from the date of guarantee and was, therefore, barred. Learned counsel for the appellant supported the finding of the lower court on limitation on the basis of acknowledgments made by the first defendant in respect of the amount guaranteed. He also contended that the relevant article in the case is Article 55 of the Limitation Act, and that the limitation would start against the second defendant only on demand being made to pay the amount guaranteed.
13. Exhibits A-7, A-11 and A-15 are acknowledgments made by the principal debtor. Exhibit A-11 is an acknowledgment relating to the key-shut cash credit accommodation which is covered by the guarantee. On the basis of these acknowledgments, it is argued that an acknowledgment made by the principal debtor when the debt is alive and not extinguished is binding on the surety and it is not open to the surety to contend that it is without his knowledge that the acknowledgment is made by the principal debtor and that it is not binding on him. This is what is held by this court in Popular Bank Ltd. v. United Coir Factories [1961] KLT 434 and Wandoor Jupiter Chits (P.) Ltd. v. K.P. Mathew [1979] KLT 566. A contrary view has been taken in Diyalu Mal v.Nandu Shah Dev Raj, AIR 1931 Lah 691, Federal Bank of India v. Som Dev Grover, AIR 1946 Punj 21, Gopal Daji Sathe v. Gopal Bin Sonu Bait [1904] ILR 28 Bom 248, Brojendra Kissore Roy Chowdhury v. Hindustan Co-operative Insurance Society Ltd., AIR 1918 Cal 707, Vaiyapuri Pandaram v. Seetharama Chettiar, AIR 1934 Mad 639 and Suwalal Vemichand v. Fazle Hussain Rajabali Bohra, AIR 1939 Nag 31. In the view we are taking as regards the Article that would apply in respect of a guarantee, we do not think that it is necessary to pronounce finally upon this question.
14. Learned counsel for the appellant contended that it is Article 55 of the Limitation Act, 1963, that would be applicable to the present case. It is not disputed that if it is so, there is no bar of limitation. Exhibit A-19 is the agreement of guarantee executed by the second defendant in favour of the first defendant and it is a continuing guarantee and what is agreed upon by the second defendant thereby is to indemnify the bank against all loss and to pay and satisfy the bank on demand of 'general balance' due from the borrower up to a limit of Rs. 2 lakhs. Therefore, the cause of action against the second defendant will arise only on demand and the period of limitation of three years will start only when a breach in respect of the contract to pay on demand occurs under Article 55 of the Limitation Act,
15. The Supreme Court had occasion to consider a similar question in Mrs. Margaret Lalita Samuel v. Indo-Commercial Bank Ltd. [1979] 49 Comp Cas 86. The Supreme Court said (page 92 of 49 Comp Cas) :
'The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Article 115 of the Schedule to the Indian Limitation Act, 1908.'
16. Article 55 of the Schedule to the Limitation Act, 1963, corresponds to Article 115 of the Schedule to the 1908 Act.
17. Under Section 126 of the Contract Act, a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default and, therefore, the cause of action against the guarantor can arise only when the principal debtor fails to perform his promise or to discharge his liability and a demand is made to the guarantor to discharge the liability.
18. The Indian Contract Act is based on the English common law principles and we have adopted most of the principles of English law in enacting our law of limitation. The English law as to limitation to the action against a guarantor has been summarised in Paget's Law of Banking, ninth edition, at pages 520, 521 and 522, as follows :
'As to the effect of the Limitation Act on a continuing guarantee, in Hartland v. Jukes [1863] 1 H & C 667, it was contended that the six years began to run in favour of the guarantor as soon as the principal debtor became indebted to the bank, inasmuch as there was then a right of action against the guarantor ; but Pollock C.B.I, said : 'It was contended before us that the statute began to run from the 31st of December, 1855, by reason of the debt of 179 : 1 : 11 then due to the bank; but no balance was then struck, and certainly no claim was made by the bank upon the defendant's testator (the guarantor) in respect of that debt ; and we think the mere existence of the debt, unaccompanied by any claim from the bank, would not have the effect of making the statute run from that date.'
19. On the other hand, in Parr's Banking Co. Ltd. v. Yates [1898] 2 QB 460, the Court of Appeal appear to have taken the opposite view. It is true that in that case the account, so far as drawing on it went, had been practically closed more than six years prior to the commencement of the action, but the court treated the statute as beginning to run in respect of each item on the debit side from the date it came into account. Vaughan Williams L. J. said that the right of action on each item of the account arose as soon as that item became due and was not paid, and the statute ran from that date in each case, in favour of both principal and surety.
20. Hartland v. Jukes [1863] 1 H & C 667 is cited with approval in Bradford Old Bank Ltd. v. Sutcliffe [1918] 2 QB 833, 839. Parr's Banking Co. Ltd. v. Yates [1898] 2 QB 460 was quoted by Swinfen Eady J. in Ascherson v. Tredegar Dry Dock and Wharf Co. Ltd. [1909] 2 Ch 401, 406.
21. There can be little doubt but that Hartland v. Jukes [1863] 1 H & C 667 is the better authority ....
22. The view taken in Parr's Banking Co. Ltd. v. Yates [1898] 2 QB 460 is altogether inconsistent with the intention and effect of a continuing guarantee. The object of such guarantee is the extension of a working credit to the principal debtor. There could be no right of action against the guarantor unless there was also one against the principal debtor and the guarantee would be meaningless if the creditor could demand and enforce repayment of every overdraft within twenty-four hours or less from the time it was granted.
23. Lord Herschell said in Rouse v. Bradford Banking Co. [1894] AC 586, 596 (HL) :
'It is obvious that neither party would have it in contemplation that when the bank had granted an overdraft, it would immediately, without notice, proceed to sue for the money ; and the truth is that whether there were any legal obligation to abstain from so doing or not, it is obvious that, having regard to the course of business, if a bank which had agreed to give an overdraft were to act in such a fashion, the results to its business would be of the most serious nature. (Clough, In re : Bradford Commercial Banking Co. v. Cure [1885] 31 Ch D 324, 326 per North J.).'
24. There is another consideration which makes the question one of little practical importance. In Bradford Old Bank ltd. v. Sutcliffe [1918] 2 KB 833, it was pointed out that the contract of the surety was a collateral, not a direct one and that in such case, demand was necessary to complete a cause of action and set the statute running. Moreover, guarantees, invariably, specify that the liability of the surety is to pay on demand, and in this connection, the words are not devoid of meaning or effect, even with reference to this statute, as is the case with a promissory note payable on demand, but make the demand a condition precedent to suing the surety, so that the statute does not begin to run till such demand has been made and not complied with. This in no wise, runs counter to the decision in Joachimson v. Swiss Bank Corporation [1921] 3 KB 110 indeed, the principle is fully recognised there.
25. Payment of interest or on account of principal by the debtor does not keep alive the liability of the surety, not being made on his behalf (see Bradford Old Bank Ltd. v. Sutcliffe [1918] 2 QB 833).'
26. Here also, exhibit A-19 agreement guarantees payment on demand :
'This agreement witnesseth that, in consideration of the premises, the guarantor doth hereby agree to, indemnify the bank against all loss and to pay and satisfy to the bank on demand 'the general balance' due from the borrower . . . .'
27. The foregoing discussion would show that the finding of the lower court that the suit is not barred by limitation is correct.
28. We shall now deal with the contentions raised by learned counsel for the second defendant on the basis of Sections 134, 135, 139 and 141 of the Contract Act. Section 134 says that the surety is discharged by any contract between the creditor and the principal debtor by which the principal debtoris released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. Section 135 lays down that a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract. Section 139 says that if the creditor does any act which is inconsistent with the right 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. Section 141 says that 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.
29. Learned counsel for the first respondent submits that after filing the suit, the plaintiff-bank compromised with the first defendant relating to relief No. 2 sought in the plaint. Under that relief, the plaintiff prayed for a decree against the first defendant for a sum of Rs. 4,01,711.73 with interest thereon at 18% per annum from the date of suit till recovery and also on the charge of sale of 'A' schedule machineries. According to counsel, this compromise discharged the second defendant from the liability of the relief sought against him. In this connection, counsel submitted that the suit was for a total amount of Rs. 5,39,220.93. This is clear from para 5 of the plaint also. Particulars of the amounts due from the first defendant are shown as in schedule E to the plaint. Rs. 5,39,220.93 is made up of the amount due as per ledger towards principal Rs. 3,15,016.93 and the interest thereon at 18% per annum from July 1, 1975, to October 16, 1978, amounting to Rs. 2,24,204. The amounts due from defendents Nos. 1 and 2 is shown as Rs. 1,37,509.20, made up of Rs. 80,000 towards principal and interest thereon at 18% per annum from December 19, 1974, up to January 16, 1978, amounting to Rs. 57,509.20. In the relief portion, the amounts due from both defendants Nos. 1 and 2 are separately shown and a decree is sought against both defendants under relief No. 1. The lower court negatived the contentions raised by the second defendant based on Sections 134, 135 and 139 of the Contract Act on the ground that the second defendant was concerned only with the release of chinawood oil to the first defendant for sale and that he had no connection whatsoever with the other transactions entered into between the plaintiff and the first defendant, that regarding the claim on account of the release of chinawood oil, the first defendant by the compromise entered into between him and the plaintiff, submitted to a decree as prayed for and that, therefore, there is no substancein the contention of the second defendant that the compromise between the plaintiff and the first defendant would discharge him from the liability under Section 134 of the Contract Act. The decree passed against defendant No, 1 made a charge on A schedule machinery hypothecated by the first defendant in regard to relief. The compromise effected did not seek to release the properties hypothecated by the first defendant in respect of relief No. 1 with which the second defendant was concerned. Therefore, the second defendant's right as surety has not been impaired in any way and on the facts of this case, the finding of the lower court is correct. This apart, such a contention is not available to the second defendant in view of the terms of the guarantee which we have already extracted above. In exhibit A-19, the second defendant, the guarantor consents to the bank's making any variance in the terms of the bank's contract with the borrower, to the bank's determining enlarging or varying any credit to the borrower, to the bank's making any composition with the borrower, or promising to give the borrower time or not to sue him and to the bank's parting with any security the bank may hold for the guaranteed debt. The guarantee also states that the guarantor agrees that as between the bank and the guarantor, the guarantor shall not be discharged from his liability by the bank's releasing the borrower or by act or omission of the bank the legal consequence of which may be to discharge the borrower or by any act of the bank which would, but for this present provision be inconsistent with the guarantor's rights as surety or by the bank's omission to do any act which but for the present provision, the bank's duty to the guarantor would have required the bank to do. He also agreed in exhibit A-19 that he would be the principal debtor jointly with the borrower and accordingly he will not be entitled to any of the rights conferred as surety by Sections 133, 134, 135, 139 and 141 or any other provisions of the Contract Act. If these provisions are valid in law, the bank had an unfettered right to enter into a compromise with the first defendant and it was not open to the second defendant to contend that by reason of such compromise he was discharged. Similarly, there is no substance in the contention of the second defendant that the extension given by the plaintiff to the first defendant for sale of the chinawood oil and permission given for sale of oil at a lower price would absolve him. from the liability as surety as those acts on the part of bank are permitted in the guarantee. In this connection, we may refer to exhibit A-26, a letter sent by the second defendant to the bank pointing out that there were no lucrative buyers at a higher rate to cover the payment of Rs. 1.05 lakhs. Exhibit B-7 is a letter dated June 3, 1975, sent by the second defendant to the plaintiff where he stated that the first defendant went to Bombay and had to return to Bangalore without disposing of the oil and that the study of the then market made it clear that there were no lucrative buyersto cover up the payment of Rs. 1.05 lakhs. In exhibit A-43 letter dated June 18, 1975, addressed to the plaintiff, the first defendant stated that the market was not favourable to dispose of the oil. These facts and the attendant circumstances would indicate that the price of the oil was going down and that the second defendant was very well aware of the downward trend in the market and that under those compelling circumstances no other course was open to the bank but to permit the first defendant to sell it at a lower price. In any event the bank cannot be found fault with for the failure of the first defendant to dispose of the oil expeditiously and deposit the amount of Rs. 1.05 lakhs.
30. Learned counsel for the first respondent, however, submitted that the provisions in the agreement exhibit A-19 enabling the bank to vary the terms are opposed to public policy. He submitted that the second defendant was not having an equal bargaining power with the bank, and in those circumstances, the enabling provisions for variance contained in exhibit A-19 cannot be given effect to, as being opposed to public policy.
31. We may at once state that the pleadings in the written statement of the second defendant in this regard are very meagre and do not set out specifically or precisely the facts which would constitute the grounds for claiming discharge under Sections 134, 135, 139 and 141 of the Contract Act. However, learned counsel for the first respondent contended that neither the right of the bank to vary the terms of the contract nor the waiver by the second defendant of his rights under Sections 134, 135 and 141 of the Contract Act has been pleaded by the plaintiff. The second defendant claimed the discharge under Section 141 only in the additional written statement when the claim under relief No. 1 in the suit was compromised between the plaintiff and the first defendant. The only averment made in the additional written statement was that because of the compromise he was discharged from the liability under Section 141 of the Act.
32. The expression 'public policy' has not been defined in the Contract Act and is incapable of a precise definition. A beautiful exposition of the iaw as to public policy can be found in the judgment rendered by His Lordship Justice K.K. Mathew who spoke for the Bench in Murlidhar Agarwal v. State of Uttar Pradesh, AIR 1974 SC 1924 (at page 1929) :
'The courts have often repeated Mr. Justice Burrough's metaphor about public policy being an unruly horse. Some judges appear to have thought it more like a tiger and have refused to mount it at all, perhaps because they feared the fate of the young lady of Riga. Others have regarded it like Balsam's ass which would carry its rider nowhere. But none, at any rate at the presentday, has looked upon it as a Pegasus that might soar beyond the momentary needs of the community. There is nothing remarkable in this because the topic itself is so elusive. See Percy H. Winfield, Public Policy in English Common Law, 42, Harward Law Rev. 76.
'Public policy' has been defined by Winfield as 'a principle of judicial legislation or interpretation founded on the current needs of the community'. (See Percy H. Winfield, Public Policy in English Common Law, 42 Harward Law Rev. 76). Now, this would show that the interests of the whole public must be taken into account ; but it leads in practice to the paradox that in many cases what seems to be in contemplation is the interest of one section only of the public, and a small section at that. The explanation of the paradox is that the courts must certainly weigh the interests of the whole community as well as the interests of a considerable section of it, such as tenants, for instance as a class as in this case. If the decision is in their favour, it means no more than that there is nothing in their conduct which is prejudical to the nation as a whole. Nor is the benefit of the whole community always a more tacit consideration. The courts may have to strike a balance in express terms between community interests and sectional interests. So, here we are concerned with the general freedom of contract which everyone possesses as against the principle that this freedom shall not be used to subject a class to the harassment of suits without valid or reasonable grounds. Though there is considerable support in judicial dicta for the view that courts cannot create new heads of public policy, see Gherulal Parekh v. Mahadeodas Maiya [1959] Supp 2 SCR 406 at page 440 ; AIR 1959 SC 781, there is also no lack of judicial authority for the view that the categories of heads of public policy are not closed and that there remains a broad field within which courts can apply a variable notion of policy as a principle of judicial legislation or interpretation founded on the current needs of the community (See Dennis Lloyd, Public Policy, (1953), pp. 112-113.)
Public policy does not remain static in any given community. It may vary from generation to generation and even in the same generation. Public policy would be almost useless if it were to remain in fixed moulds for all time.
If it is variable, if it depends on the welfare of the community at any given time, how are the courts to ascertain it The judges are more to be trusted as interpreters of the law than as expounders of public policy. However, there is no alternative under our system but to vest this power with judges. The difficulty of discovering what public policy is at any given moment certainly does not absolve the judges from the duty of doing so. In conducting an enquiry, as already stated, judges are not hidebound by precedent. Thejudge must look beyond the narrow field of past precedents, though this still leaves open the question, in which direction he must cast his gaze. The judges are to base their decision on the opinions of men of the world, as distinguished from opinions based on legal learning. In other words, the judges will have to look beyond the jurisprudent and that in so doing, they must consult not their own personal standards or predilections but those of the dominant opinion at a given moment, or what has been termed customary morality. The judges must consider the special consequences of the rule propounded, especially in the light of the factual evidence available as to its probable results, . . . .'
33. The Supreme Court again considered the concept of public policy in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly [1986] 60 Comp Cas 797. The court held (at page 859) :
'The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts take the place of old transactions which were once considered against public policy are now being upheld by the courts and similarly where there has been a well-recognised head of public policy, the courts have not shirked from extending it to new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy.'
34. In English law, a contract to vary the rights of the surety has always been upheld. The assent of the surety to variation has been discussed at page 90 of Rowlatt's Principal and Surety, fourth edition. It says :
'A surety will not be discharged by a variation to which the creditor (on whom the onus lies) can show he assented, (i) General Steam Navigation Co. v. Rolt [1858] 6 CB (NS) 550 or which is provided for in the guarantee, (ii) British Motor Trust Co. v. Hyams [1934] 50 TLR 230 ..... where the surety takes any active part in the transaction constituting the variation, he is clearly not discharged ; as where solicitors, who were sureties, prepared documents referable to the variation, (iii) Woodcock v. Oxford and Worcester Ry. [1853] 1 Drew 521. Similarly, if the surety permits the creditor to think he has assented. (iv) Hollier v. Eyre [1840] 9 C & F 52 .... A surety is not discharged by a variation to which he assents afterwards, even though there may be no fresh consideration for the assent, (v) Mathew v. Crickett [1818] 2 Swanst. 185 ; Smith v. Winter [1838] 4 M & W 454.
35. We are unable to find anything in exhibit A-19 agreement which can be termed as being opposed to public policy. Sections 134, 135, 136 and 141 clearly indicate that the party can contract for waiving rights under the aboveprovisions by employing expressions such as 'unless the surety assents to such contract' (Section 135) or 'in the absence of any provision to the contrary', (Section 137) and 'without the consent of the surety' (section 141). No doubt Section 139 does not contain any such expression. But it has to be noticed that what Section 139 speaks of is an act by the creditor which is inconsistent with the right of the surety, or omission 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 rights of the surety being subject to contract to the contrary the second defendant cannot complain that his right is impaired, or that what is provided in the guarantee is inconsistent with his right. When a statute itself provides a provision enabling variation of the contract or waiver of the rights conferred by the Act, in our view, no question of violation of any public policy can possibly arise.
36. In Radha Thiagarajan v. South Indian Bank Ltd. [1985] KLT SN 43 ; [1988] 63 CompCas 61, a Division Bench of this court to which one of us (Dr. Kochu Thommen J.) was a party considered the nature of the liability of the sureties and the circumstances under which the surety shall be discharged from the obligation under the guarantee. The Division Bench observed (at page 66) :
'The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract (section 128 of the Contract Act). Where there is no principal, there can be no surety. 'As a general rule, a voluntary discharge of the principal discharges the surety also, yet the surety may, by express stipulation in the guarantee, agree to remain liable, even after the discharge of the principal debtor': De Colyar's Law of Guarantees and of the Principal and Surety, third edition, page 417.
Where there is an absolute release of the principal debtor, the remedy against the surety is gone, because the debt itself is extinguished. It would be a fraud on the principal debtor to profess to release him and then to sue the surety who in turn might sue the principal debtor. On the other hand, if the creditor, at the time he releases the principal debtor, reserves his remedies against the surety, such release merely amounts to a covenant not to sue, but does not discharge the surety. (See George W. Brandt The Law of Suretyship and Guarantee, Chicago,' 1905, volume I, para. 165).'
37. The Division Bench finally held that discharge of the principal debtor will not discharge the surety where it is not brought about by the voluntary act of the creditor, but by the operation of law or where there is a contract to the contrary. If the intervention of substantive law destroys rights and obligations wholly or partly, the surety will be discharged to the extent of such extinguishment.
38. The above discussion would show that it is open to the surety to agree to remain liable even after the discharge of the principal debtor.
39. Learned counsel for the first respondent heavily relied on the decision of the Supreme Court in State Bank of Saurashtra v. Chitaranjan Ranganath Raja [1981] 51 Comp Cas 618, where the Supreme Court held that the guarantor is entitled to the benefit of Section 141 in a case where security of the pledged goods was lost on account of the negligence of the creditor. In that case, Clauses 5, 7 and 13 of the letter of guarantee were pressed into service by the bank to sustain the action taken against the guarantor notwithstanding the loss of the hypothecated goods due to the negligence of the bank. Clause 5 conferred a right upon the creditor bank to grant any time or indulgence in payment of the debt or to determine, enlarge or vary its credit and to vary, exchange or take other securities or release any other securities held by the bank, but such an act on the part of the bank would not have the effect of discharging the surety or in any manner affecting his liability under the letter of guarantee. Clause 7 provided for non-discharge of the surety even if the creditor bank entered into a composition with the principal debtor and the surety would nonetheless be liable even if the bank had other guarantees, securities or remedies from the principal debtor. Clause 13 provided for continuing the guarantee where the principal debtor is an association of persons and for continuance of the guarantee in the event of death, retirement, etc., of one of such association of persons or the guarantee remaining intact and effective and legally enforceable irrespective of some defect arising from the internal management of such association of persons. Interpreting the effect of the above provisions in the guarantee, the Supreme Court made the following observations (page 629) :
'It is difficult to entertain a contention that Section 141 would not be attracted and the surety would not be discharged even if it is found that a creditor has taken more than one security on the basis of which advance was made and the surety gave a personal guarantee on the good faith of other security being offered by the principal debtor which itself may be a consideration for the surety offering his personal guarantee and the creditor by its own negligence lost one of the securities. Acceptance of such a contention would tantamount to putting a premium on the negligence of the creditor to the detriment of the surety who is usually described as a preferred debtor. Should a court by its construction of such letter of guarantee, enable the creditor to act negligently and yet be not in any manner accountable Was the guarantee a guarantee against proper performance of the contract evidencing advance of loan and methods of its repayment, or a guarantee coveringthe bank's utter disregard of its responsibility or to use the words of the High Court, the bank's utter negligence in failing to exercise the care of a prudent man which one would expect in the management of one's own affairs ?'
40. In the instant case, there was no release or loss of any goods pledged by the creditor except the release of the chinawood oil and it was precisely for the release of chinawood oil that the guarantee was given. In the circumstances, the Supreme Court decision relied on by learned counsel for the first respondent has no application to the facts of this case.
41. Learned counsel also relied on a Division Bench ruling of the Andhra Pradesh High Court in Varada Bongar Raju v. Kirthali Avatharam, AIR 1965 AP 86, where the court held that a statute having been enacted solely for the benefit of the tenants who, having regard to the lack of adequate accommodation, were at the mercy of the landlords, it was not open to the tenant to contract himself out of the rights conferred on him by the enactment. This ruling also cannot have any application, since Sections 134, 135 and 141 enable the parties to contract waiving or varying the rights conferred by the aforesaid provisions.
42. The Supreme Court in Lachoo Mal v. Radhye Shyam, AIR 1971 SC 2213, held that a provision is enacted for the benefit of a section of people and there is nothing which precludes them from waiving the benefit so provided unless a question of 'public policy' is involved. In the instant case, no question of public policy is involved and the statute itself confers power upon the parties to contract waiving the benefits and, therefore, the decision in Murlidhar Agarwal v. State of Uttar Pradesh, AIR 1974 SC 1924, which laid down that in a case where public policy is involved, the parties cannot contract out of statute, is not applicable to the facts of this case. There, the Supreme Court clearly found that the provisions in the U.P. (Temporary) Contract of Rent and Eviction Act, 1947, were intended to protect the weaker class in the community from harassment by a frivolous suit and the protection was based on public policy. Further, here, no question of contracting out of the statute arises inasmuch as the statute itself provides for variation and waiver.
43. Lastly, learned counsel argued that if, for any reason, this court finds that the guarantee is enforceable, the decree should provide that the first defendant and the securities provided by him should be proceeded against first before the second defendant is proceeded against and in support of that contention, he invited our attention to the decision in Union Bank of India v. Manku Narayana [1987] 62 Comp Cas 1 (SC). In that case, the Supreme Court held that where a decree in execution is a composite decree, personally against the defendants and also against the mortgaged property, the decree-holder bank has to proceed against the mortgaged property first and then proceed against the guarantor. This decision has not held that the principal debtor must be proceeded against first before proceeding against the guarantor. On the other hand, the Supreme Court in Bank of Bihar Ltd. v. Dr. Damodar Prasad [1969] 39 Comp Cas 133 has held that the surety has no right to restrain execution against him until the creditor exhausted his remedies against the principal. However, in the light of the decision in Union Bank of India's case [1987] 62 Comp Cas 1 (SC), we direct that in execution, the property hypothecated by defendants Nos. 1 and 2 may be proceeded against first before proceeding personally against the second defendant.
44. In the result, we allow the appeal, modify the judgment and grant a decree against both defendants Nos. 1 and 2 for recovery of Rs. 1,37,509.20 with interest at 18% per annum till recovery on the charge and by sale of A and D schedule machinery and movable properties and also on the charge and by sale of C schedule immovable property. In other respects, the decree and judgment of the lower court are confirmed. The appellant is entitled to costs from the second defendant.