Sec. 145 of Indian Contract Act, 1872 deals with the recovery of the sum of money rightfully paid by the surety. The sum assured by the surety to the creditor being paid is divided into two categories: rightfully paid and wrongfully paid. For example, as per illustration(a) given with the section, when the surety did not pay the sum to the creditor on reasonable grounds, but paid it when the creditor sued him, it is rightful payment. But, as per illustration(b), if there was no reasonable ground for the surety not to pay, then it is considered as wrongful payment.
If the payment of the sum by the surety is rightful, then the surety can recover from principal-debtor the cost as well as the principal debt but if the payment is wrongful, then he can only recover the principal debt.
IS THE USAGE OF THE PHRASE ‘RIGHTFULLY PAID’ AND ‘WRONGFULLY PAID’ JUSTIFIED?
The phrase ‘rightfully paid’ does not seem felicitous in sec.
145. The literal meaning of the phrase ‘rightful’ is just and equitable and that of the phrase ‘wrongful’ is unjust and unlawful. A contract of guarantee is a contract where one person promises to discharge the liability of another in case of default to third person. Therefore, the liability for payment of the promisor arises as soon as the principal-debtor defaults in payment. In this situation, the promisor has two options- either to pay the creditor or give reasonable grounds for not being able to pay. But if creditor files the suit against the surety, he has to pay. If we have a critical approach to the payment in both situations, we find that both of the payments can be considered justified in the eyes of law. It is because the creditor should be paid by the surety at the default of the principal-debtor.
When the liability of the surety arises, it is just on the part of the surety to pay the sum of money lent by the creditor. But if the surety pays after the creditor has filed the suit against him/her, then the surety has to pay the creditor as per the decree of the court. Thus it is again justifiable on the part of the surety to indemnify the creditor. Thus the payment can be held rightful. But, it is evident from Sec.145 of the Indian Contract Act and its illustrations that if the surety does not pay the creditor on unreasonable grounds and the creditor files a suit against the surety, then the payment as per the decree court is to be considered as wrongful payment.
Following the literal meaning of the word ‘wrongful’, it can be inferred that the term is not apt to serve the purpose of Sec.145. In the case of Jawala Singh v. Mt. Raj Kaur and Another , the court said: A payment made after the suit had been instituted and with the object of assisting that suit to reach a successful termination might be held to be a wrongful payment while a payment made before the institution of such a suit might be held to be a rightful payment. In this case, the payment was made after the decree of the lower court and was held ‘wrongful’. But how could any action taken as per the decree of the court be unjust and lawful.
WHAT IS PAYMENT AND TO WHICH EXTENT IT IS CONSIDERED RIGHTFUL UNDER SEC.145?
Under Section 145 of the Contract Act, the respondent would, on payment to the creditor, be entitled to recover the amount from the principal debtor, and the discharge of the latter’s liability to the creditor cannot affect his obligation under the implied covenant to indemnify the respondent. It was said that if the creditor could recover the amount due under the award from the surety and the latter in his turn could recover it from the principal debtor by way of reimbursement. The liability of the principal debtor to pay to the surety whatever sum the latter has rightfully paid under the guarantee will not arise until the creditor has recovered from the surety the amount due under the award . It considered that the sum paid by the surety to the creditor as the liability of the surety arises, is to be taken as rightful and the surety should thus be indemnified by the principal-debtor. In Jawala Singh v. Mt. Raj Kaur , it was said that the surety not having paid any money to the creditor but having only executed the said promissory note sued the defendant (principal-debtor’s wife) for the money.
It was held that the suit was premature, no actual payment having been made by the surety to the creditor. It thereby states that the actual payment is necessary to consider whether any payment is rightful. Execution of promissory note only cannot be considered as payment. Where the creditor merely waives his right of action against the principal-debtor, the debt is not destroyed and the remedy of the surety against the principal-debtor is not thereby impaired; therefore the surety is not discharged. Even if by agreement there is an explicit release of the principal-debtor by his creditor, when that is combined with a reservation of the creditor’s right to proceed against the surety, the agreement does not discharge the surety. Therefore it expressly reserves the right of the surety against the principal-debtor to be indemnified. Payment, giving a right of action to surety must be a payment of money or money’s worth, and would not include cases where the surety has given a promissory note, or a bond to the creditor for the payment, or has acknowledged the liability .
Though the claim of the creditor against the principal debtor might be time-barred, it is open to him to keep the debt alive with a view to get more time for payment of the debt, which he is undoubtedly liable to pay at the time when he paid interest to keep the debt alive. When the surety pays the sum in satisfaction of the decree passed against him in respect of his liability, he makes the payment rightfully under the guarantee, within the meaning of Section 145 of the Indian Contract Act. Thus he is entitled to recover it from the principal debtor, quite independently of the consideration whether the claim of the original creditor is barred against the principal debtor or not. In Hajariwial v. Krishnarav , the court held that though the claim against the principal debtor may be barred, the creditor can enforce his right against the surety.
In this case the effect of the various sections of the Indian Contract Act has been considered with reference to a state of facts under which by operation of law, though the claim against the principal debtor was barred, it was enforceable against the surety. The principal debtor and the surety can each keep his liability alive, though the remedy of the creditor may be barred as against the other on account of limitation. The question whether the payment made by the surety is or is not rightful has, therefore, to be adjudged in the context of the circumstances, in which it is made and not by the solitary circumstance whether on the date of payment the claim against the debtor or against both the debtor and the surety is barred by time.
No doubt if the claim of the creditor is barred by time against both the surety and the debtor, then prima facie the payment made by the surety to the creditor would not be right or just. The observations of the Bombay High Court in Raghavendra v. Mahipat also tend to support this view. In that case the surety had kept the liability alive by bona fide payments of interest within time to the creditor and it was because of these payments of interest within time that the Bombay High Court held that the payment made by the surety to the creditor was not wrongful within the meaning of Section 145 of the Contract Act.
VIEWS OF LAW COMMISSION OF INDIA ON THE PHRASE ‘RIGHTFUL’ AND ‘WRONGFUL’.
The Law commission of India in its 13th report states that keeping in mind what Pollock & Mulla suggests regarding the use of the term ‘rightful’ and ‘wrongful’, it thinks that there is no nuance in the usage of the term. They are of the view that it is quite clear from the language of the text the meaning of the terms. The Law commission of India is of the view that the payment of the debt by the surety which is barred by limitation against the principal-debtor i sot be considered rightful as the rights of the surety arises from the discharge of the liability.
Thus we find that the term ‘rightful’ does not seem appropriate in the Sec.145 but the Law Commission is of the opinion that it is logical and quite evident from the language of the text. It can be concluded that the payment under Sec.145 is considered rightful as long as the liability of the surety is alive and the creditor has not moved to the court to compel the surety to perform his duty.