GRATIAEN J.—Damhadeni Hatpattu Co-operative Stores Union, Ltd. 327
Present; – Gratiaen J. and Sansonl J.
DAMBADENI HATPATTU.;. CO-OPERATIVE STORESUNIOX, LTD.,. Appellant j and Y. P. A. YAGODA et al.,Respondents
S, Q. 367—D, C. Kurunegaia, 5,634
Guarantee:—Fidelity bond—MiA^bavfcylf. qf employee—Duty qf -employer to inform
guarantor about it wiwtgdjtofo tfo-fiperaiivc Societies.
In the ease oi a continuing guarantee for the honesty of a servant there shouldbe read into the contract “ an implied term between the employer and thefidelity guarantor that ttys former will inform the latter of such cases of dis-honesty in the servant as trill entitle the employer to dismiss him and that thesurety is then entitled to 'eall upon• the employer either to dismiss the servantor to discharge him (the surety) from further liability ”,
By a bond dated January 14/1948, the 1st, 2nd and 3rd defendants boundthemselves jointly and severally in a sum of Rs. 4,000 to indemnity a registeredCo-operative Society against the loss of its property or monies through defalca-tion or other breach of duty on the part of the 1st defendant during the periodof his stewardship as Manager of the Society’s Wholesale Department. OnMarch 21. 1046, a shortage <jfRs. 1,000 was detected for which the 1st defendantwas unable to account.'' The offence was, however,'Condoned upon thereplacement of the money -within a week. Subsequently, on. June 30, 1047,it was discovered that let defendant had been committing a series of mis-appropriations to the latent of . Be. 13,701 • 52 between March 21, 1946, andJune 30, 1047. The Co-operative Society thereupon sued all three defendantson the bond dated January .14, 1046, for the recovery of Rs. 4,000.
Held, that the conduct, of the,Co-operative Society in condoning, withoutthe knowledge or approval of the 2nd and 3rd defendants, the misappropriationbrought to light in March, 1946, had the effect of discharging the 2nd and 3rddefendants from liability to 1 indemnify the Society in respect of subsequentacts of dishonesty.“ ■
_^^PPEAL from a judgment oif the District Court, Kurunegaia.
N. E. Weerasooria, Q.O„ with : W. D. Ounasekera, for the plaintiff'appellant. 11
11. W. Tambiah, with A. I. Rajasingham, for the 2nd and 3rd defendant-respondents.
Cur. adv. vult.
February 24, 1955. Gratiaen J.—
The plaintiffs, a Co-operative Stores Union duly registered under theCo-operative Societies Ordinance, employed the 1st defendant as theManager of its Wholesale Department on 1st June, 1945. His dutiesinvolved the handling of large sums of money and the custody of consider-able quantities of stores belonging to the Union. Accordingly, the 1st
328 QRATIAEN J.—Dambadeni Hatpattu Cooperative Stores Union, Ltd.
•defendant was called upon to furnish security in a sum of Rs. 4,000 for thefaithful discharge of his duties. By a bond dated 14th January, 1040the 1st defendant, together with the 2nd and 3rd defendants (describedas “ sureties ”) bound themselves jointly and severally to indemnify theUnion against the loss of its property or monies through defalcation orother breach of duty on the part of the 1st defendant during the periodof his stewardship.
On 21st March, 1946 (about two months after the execution of tho bond)the Assistant Registrar of tho Co-operative Department checked the cashbalance in the department and detected a shortage of Rs. 1,500 for whichtho 1st defendant was unable to account. This discovery took placein the presence of the President and two Committee members of the Union.The -1st defendant offered an explanation which did not satisfy theAssistant Registrar who threatened to hand the matter over to the Policeunless the money was replaced within a week. This officer also sent acopy of his notes of inquiry to the Committee and “ took the office-bearersto task for allowing this kind of thing to go on”.
The 1st defendant replaced the money within the stipulated time.He has explained in evidence how he solved his immediate problem.Having borrowed the sum required from some friends, and by this meansavoided his prosecution and summary dismissal, he repaid them out ofhis daily collections. Further misappropriations followed, and, as henaively says, “ I went on * rolling ’ until finally the day came (i.e. 30thJune 1947) when I got caught …. then I went on a pilgrimage ”.In point of fact, this “ pilgrimage ” ended at the Welikade jail whercrhc isnow serving a term of imprisonment for criminal breach of trust ofRs. 13,701 '52. The offence was committed on various dates between 21stMarch, 1946 (when the first irregularity was detected and condoned) and30th June, 1947 (when the “ pilgrimage ” commenced).
The Union has sued all three defendants on the bond dated 14th.January, 1946, for the recovery of Rs. 4,000 out of the sum embezzled aspreviously described. The 1st defendant, while still in prison, consentedto judgment, but the decree against him is clearly valueless. The<£ sureties ” disclaimed liability on various grounds only ono of whichneed be discussed for the purposes of this appeal. In my opinion thelearned Judge has correctly decided that the Union’s conduct incondoning, without the knowledge or approval of the 2nd and 3rddefendants, the misappropriation brought to light in March, 1946 had theeffect of discharging the 2nd and 3rd defendants from liability toindemnify the Union in respect of any subsequent acts of dishonesty.
This special defence is no doubt governed by the Roman-Dutch Law,but it is convenient in the first instance to examine the English law onthe subject.
“In a case of a continuing guarantee for the honesty of a servant, ifthe master discovers that the servant has been guilty of acts of dishonesty
GRATIAEX J. Danibadeni HcUpaitu Co-operatioe Stores Union, "Ltd. 320
in the course of his service, to which the guarantee relates, and if, instead,of dismissing the servant, as he may do at once and without notice, hechooses to continue in his employ the dishonest servant without theconsent of the surety, express or implied, he cannot afterwards haverecourse to the surety to make good any loss which may arise from thedishonesty of the servant during the subsequent service Phillips v.Foxhall *. The guarantee, at its inception, was founded on the trust-worthiness of the servant, so far as was known to both parties ; so t hat,as soon as his dishonesty is subsequently discovered by the master (butnot communicated by the master to the guarantor) the whole foundationfor the continuance of the contract fails. “ It seems to us, in accordancewith the plainest principles of equity and fair dealing, that the mastershould, on making such discovery, either dismiss the servant, or, if hechooses to continue him in his employ without the knowledge or assentof the surety, he must himself stand the risk of loss arising from anyfuture dishonesty Smith v. The Bank of Scotland 2.
I reject the argument that this requirement of “fair dealing’’ ispeculiar to the English law. Wes sell a’ Law of Contract in South Africaii, page 1109 para. 4020 regards it as fundamental to all contracts forcontinuing guarantees of this nature that there should be read into them“ an implied term between the employer and the fidelity guarantorthat the former will inform the latter of such cases of dishonesty in (heservant as will entitle the employer to dismiss him and that the suretyis then entitled to call upon the emplo3'er either to dismiss the servantor to discharge him (the surety) from further liability The continuingobligation undertaken by the guarantor calls for continuing good faithon the part of the employer who must not wilfully conceal subsequent,frauds of the employee ; nor must the employer during the period coveredby the guarantee be guilty of negligence “ so gross as to be equivalentto a wilful shutting of the eyes to the fraud which the employee is aboutto commit ”. Dawson v. Lawes 3.
In this case, the Union officials were at least guilty after 21st March,1946 of callous indifference to the obvious risk of further dishonesty onthe part of the 1st defendant; this conduct constitutes “gross negligence ”of the kind condemned in Dawson v. Lawes (supra).
It was suggested that these principles protect only a surety and not aperson who (like the 2nd and 3rd defendants) lias undertaken the liabili-ties of a principal debtor. I disagree. The more onerous the liabilityundertaken by the fidelity guarantor, the greater is the degree of good faithwhich the employer must observe. I would dismiss the appeal withcosts.
Sansoni J.—1 agree.
1 11ST-J) L. It. 7 Q. B. G66.* / Ooiv. 272 li f.
a (1S54) 69 B. R. 119.
DAMBADENI HATPATTU CO-OPERATIVE STORES UNION.LTD , Appellant, and Y. P. A. YAGOD
GRATIAEN J.—Damhadeni Hatpattu Co-operative Stores Union, Ltd. 327