Contract Law Case: Swamilal Shrestha vs. Nepal oil corporation NKP 2055, No.6, P.340
Case: Loan Transaction, obligation and liability of guarantors/sureties.
Plaintiff: Nepal oil Corporation
Defendants: Swamilal Shrestha and Mohan Lal Shrestha
Decision No: 6559
The case is related with enforcement of a contractual obligation and liability of guarantors/sureties.
Facts of the case:
On 2026/09/28 B.S., NOC entered into a written agreement with contractors Swamilal Shrestha and Mohan Lal Shrestha. Under the agreement, the contractors were required to supply 600,000 man (मन) of firewood at the rate of Rs. 4.15 per man. NOC provided them with 12 diesel trucks belonging to the Corporation and also gave them Rs. 200,000/- as an advance. It was agreed that after the contractors completed the required work and supplied the agreed quantity of firewood, the 12 trucks would be transferred into their names. However, if they failed to complete the work, the Corporation had the right to confiscate the trucks. The contractors were also responsible for any damage or loss to the trucks. On 2026/11/09 B.S., several persons stood as property guarantors for the obligations of the contractors, while Mahanta Lal stood as a money guarantor. The guarantee covered the value of the trucks and the money involved in the transaction. Despite repeated demands from the Corporation, the contractors failed to complete the contractual work. Additional amounts were also received on behalf of the contractors, and further guarantee documents were executed in connection with those amounts. Ultimately, the Corporation determined that the contractors had failed to perform their contractual obligations. Its Board decided that the Corporation should recover Rs. 246,012/-, representing the value of the 12 trucks, and Rs. 182,336/-, representing the amount remaining payable according to the Corporation’s accounts. On this basis, the Corporation filed a suit seeking recovery of a total amount of Rs. 428,348/- from the contractors and the guarantors.
Plaintiff’s Claim:
NOC claimed that the contractors had received the 12 trucks and Rs. 200,000/- advance under the written contract but failed to complete the agreed firewood-supply work and failed to properly return the trucks. They also failed to pay the outstanding amount shown in the Corporation’s accounts, despite defendants having executed guarantee documents for the contractors’ obligations. Therefore, the Corporation sought to recover Rs. 246,012/- for the 12 trucks and Rs. 182,336/- as the outstanding amount, totaling Rs. 428,348/-, from the contractors and guarantors.
Defendants’ Arguments:
Defendants argued that the guarantors could not be directly sued before the principal contractors, because their liability was secondary. The Corporation should first proceed against Swamilal Shrestha and Mohan Lal Shrestha and their property, and only if the amount could not be recovered should it proceed against the guarantors. They also argued that the claim was barred by limitation and that the case had been filed in the wrong court, as it should have been filed before Zonal Court rather than District Court. The contractors further claimed that the failure to complete the contract was not their fault because the Corporation had failed to provide the required forest plots. They also maintained that the accounts relating to the trucks had already been settled.
Legal Issues:
- Can a creditor directly sue both the principal debtor and the guarantor in the same action without first proceeding against the principal debtor?
- What is the extent of a guarantor’s liability under the law relating to surety?
- What amount was actually recoverable by the plaintiff after accounting for the trucks and amounts payable to the contractors?
Decision of Courts:
Kathmandu District Court: Kathmandu District Court dismissed plaintiff’s suit because it was filed in the wrong court. Court held that, under Section 15(2) of the Corporation Act, 2021, a case involving the NOC should be heard by the competent Zonal Court, not by District Court. Therefore, District Court held that it lacked jurisdiction to hear the case.
Reconsideration: Plaintiff sought reconsideration of the dismissal because the case had been rejected due to a jurisdictional error. A Hukum Pramangi was issued directing that the case be examined by the competent court. The basic reasoning was that a party should not lose its substantive legal right merely because of a procedural or jurisdictional mistake by the court.
Bagmati Zonal Court: Bagmati Zonal Court held that plaintiff was entitled to recover Rs. 428,348/- from the contractors and guarantors. Court also found that the contract existed, the contractors had received the 12 trucks and money, the guarantee documents had been executed, and the contractors had failed to complete their contractual obligations. Therefore, court ordered recovery of the claimed amount of Rs. 428,348/- from defendants.
Patan Appellate Court: Defendants appealed against the decision of the Bagmati Zonal Court. Patan Appellate Court partly reversed the earlier decision and determined that the amount actually recoverable was Rs. 151,054/-, instead of the full amount claimed. The court applied the legal rule concerning the liability of guarantors and held that the principal contractors must first be proceeded against, and only if the amount could not be recovered from them could the guarantors be proceeded against. Therefore, plaintiff could not directly recover the amount from guarantors in the same manner as from the principal debtors, and the earlier judgment was modified accordingly.
Supreme Court Decision: Supreme Court upheld the decision of Patan Appellate Court and dismissed defendants’ appeal. It confirmed that plaintiff was entitled to recover Rs. 151,054/-, but the recovery had to be made according to Section 6 of the Jamani Garneko Mahal, which requires the principal debtors to be proceeded against first and the guarantors only according to the prescribed legal procedure.
Established Principles:
- Principal debtor must be proceeded against first: Under Section 6 of the Jamani Garneko Mahal, when a debt is guaranteed, the creditor must first proceed against the principal debtor and his property.
- Guarantor’s liability is secondary: The guarantor becomes liable only after the legal procedure for recovery from the principal debtor has been followed and the amount remains unrecovered.
- No double recovery for the same property: Since the 12 trucks had already been taken back by the Fuel Corporation, their value could not again be recovered from the defendants. The Corporation could not both retain the trucks and claim their full value as an outstanding amount.
