Bank of Bihar v. Damodar Prasad (1969)

Bank of Bihar v. Damodar Prasad (1969) is a landmark case on Section 128 of the Indian Contract Act, 1872. It clearly explained the purview of section 128. Before moving forward, we have to understand what section 128 of the Indian Contract Act says. It says: 

"The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract."

Let's understand it in detail. Principal debtor is a person who has taken some debt. Creditor is the person from whom the debt has been taken. Surety is the person who guarantees to repay the debt in case principal debtor make any default.

So, now if we come to section 128, it says that the liability of the surety is co-extensive with that of the principal debtor i.e., both are liable at the same peroid of time. The Creditor can grant debt from either party unless there is a saparate provision mentioned in the contract which has mentioned a hierarchy.

Now, we will look at the facts of the case.

Facts of Bank of Bihar v. Damodar Prasad (1969)

In 1951, Damodar Prasad took a loan of Rs. 12,000 from Bank of Bihar. Dr. Paras Nath Sinha was the guarantor on behalf of Damodar Prasad. On the date the suit was filed, neither the debtor (Damodar) nor the surety (Paras) paid. The Bank sued both of them in 1959 for recovery of the debt. The lower court said that the bank has to use all possible ways to sue principal debtor before suing the surity. The Bank challenged the decision in Bombay High Court but the decision was upheld there as well. After attaining a certificate, the bank filed an appeal in the the Supreme Court which was accepted.

Issue

Can a creditor, under Sections 128 and 140 of the Indian Contract Act, 1872, enforce a guarantee without first exhausting all its remedies against the principal debtor? In other words, does the law allows the creditor to file a suit against the surety before proceeding against the the principal debtor?

Bank of Bihar v. Damodar Prasad Judgment

The Supreme Court of Indian gave the decision in 1968 and put forth that it is not mandatory to sue principal debtor first and then the surety. Once the debtor makes a default, the surety is immediately liable to be sued as the liability of both are co-extensive.  The Court also cited the 1869 case Lachhman Joharimal v. Bapu Khandu where Bombay High Court opined a surety could be sued even before the principal debtor.

Rationale

The Court came up with a practical rationale: in banking practice, guarantees serve as vital collateral security. If courts routinely protect sureties by forcing creditors to exhaust other remedies, the value of guarantees would be “useless”.

Conclusion

The judgment’s strengths lie in its clarity and fidelity (loyalty) to contract principles. It decisively rejects any “hierarchy of remedies,” aligning with the text and spirit of Section 128 of the Indian Contract Act. This ensures there is no escape or blaim-game possibility between the surety and the principal debtor.