FACTS:

 In an auctioned contract between the forest department and Jagath Ram of a block of felled
trees, the terms of the contract requires payment to be made in four instalments i.e; a total
amount of 12,100. The first instalment was to be paid on acceptance of the auction bid.
Jagath Ram paid the first installment and signed the contract.
 The contract incorporated provisions of the forest contract rules. NathuRam and Kaluram
stood as surety to the contract. The felled timber was specific and deliverable.
 According to the terms of contract, ownership had been transferred to Jagath Ram on the
signing of the Contract. However, the removal of timber from the couple area was subject to
several restrictions and requirements under forest rule .
 The most important part of the contract was when the consideration payable to the
government under the forest contract is payable in instalments and the divisional forest
officer at any time before the last instalment is paid, considers that the value of the forest
produced removed by the contractor exceeds the amount of the instalments already paid,
the divisional forest officer may stop further removal until the contractor has paid such
further sum as may, in his opinion be sufficient to cover such excess provided that if in the
opinion of any forest officer not below the rank of range officer, it is necessary to take
immediate action to prevent a breach of contract of this rule. If the forest officer sounds
that all the terms and conditions of the contract is not followed then, on behalf of the
government the officer may terminate the contract at any time and conduct an auction to
the forest produce.
 Jagath Ram removed the entire quantity of trees sold to him but did not pay the remaining
three instalments. The forest department proceeded against the sureties to recover the
unpaid amount then the sureties contended that the forest department had created a
security for itself on the timer, not letting the contractor take it out without due payment.
Further, as it let go the security, the security stood discharged from their obligations.

ISSUES:

1) Whether the surety ie; Kaluram is liable to pay compensate the Government of Madhya
Pradesh as a surety to the contract?

RULE OF LAW

ANALYSIS

1. The Government of Madhya Pradesh pleaded on behalf of the Forest Department that in a
Special Contract between Creditor as Forest Department and Principal Debtor as Jagath Ram,
Surety as KaluRam and NathuRam, that when Principal Debtor has failed to pay the contractual
amount in terms of remaining three instalments to the creditor i.e; forest department, then it is
liability of surety(Kaluram) to compensate the loss suffered by the forest department.

2. According to Rule8 of the terms of the contract which is mentioned in the contract- When the
consideration payable to the Government under a forest contract is payable in instalments and
the divisional forest officer at any time before the last instalment is paid, considers that the value
of the forest produce removed by the contractor exceeds the amount of instalment already paid,
the divisional forest officer may stop further removal until the contractor has paid such further
sum as may in his opinion be sufficient to cover such excess. Kaluram contended that the above
mentioned rule is one of the most essential and important terms of the contract which is not
followed by PD and creditor. Kaluram also contended that if (i) in case there are alterations or
changes to the contract without bringing it to the knowledge of the surety or his consent, then the
surety is discharged of his liability.(ii)If there is negligence of creditor, then the surety is
discharged of his liability. So, he(Kaluram) is nowhere liable to compensate on behalf of Pd to the
Creditor

3. The Supreme Court noted Sec.83 of Indian Forest Act within which the rules where made, it
reads as follows:

1)When any such money is payable for or in respect of any forest-produce, the amount thereof
shall be deemed to be a first charge on such produce and such produce maybe taken possession of
by a forest officer until such amount has been paid

2)If such amount is paid when due, the forest officer may shall such produce by public auction and
the proceeds of the sale shall be applied first in discharging such amount.

The Supreme Court opined that neither of the above mentioned rules were followed by the forest
department and even noted that the forest department allowed JagthRam to remove the entire
quantity contracted, the security was entirely lost. Thus, the surety was discharged from his
obligations to pay nde the contract.