Aapka Consultant Judgment Series- In this series, we are providing case analysis of Landmark Judgments of Hon’ble Supreme Court of India.
State Bank of India & Anr. v. Mula Sahakari Sakhar Karkhana Ltd.
AIR 2007 SC 2361: (2006) 6 SCC 293
JUDGES: S.B. Sinha and P.K. Balasubramanyan
Date of Decision: 06-07-2006
FACTS:-
The respondent is a cooperative society entered into a contract for the installation of a paper plant on turnkey basis with Pentagon Engineering Pvt. Ltd. for a total value of Rs. 3,40,00,000/-. The said contract contained a clause for retention of 10% of the contract price by the cooperative society but Pentagon insisted the respondent to waive the right of retention instead proposed to have a letter of credit so that they can furnish appropriate bank guarantee. Differences arose between the Pentagon and the respondent and the latter invoked the bank guarantee. The demand of the bank guarantee met resistance from the appellant stating that it had executed an agreement of indemnity and not of bank guarantee.
ISSUE:-
Whether the statements in the document constitute a bank guarantee or a contract of indemnity?
JUDGMENT:-
The Hon’ble Supreme Court has observed that a document must primarily be construed on the basis of the terms and conditions contained therein. While construing a document the court shall not supply those words which have not been used by the author. The document in question is a commercial document and does not contain any ambiguity. The High Court itself has said that prima facie the document appears to be a contract of indemnity. Surrounding circumstances are considered to be relevant for the construction of the document only when there any ambiguity exists in the document and not otherwise. The said document in question, as per the Court, is considered to be a contract of indemnity and not a bank guarantee as it is clear from the facts that the appellant was to indemnify the cooperative society against all losses, claims, damages, actions and costs which may be suffered by it. The document does not contains such expressions which a bank guarantee contains like “unequivocal condition” or “the cooperative society would be entitled to claim the damages without any delay or demur” or the guarantee is “absolute and unconditional” as has been held by the High court. The High Court has misread and misinterpreted the document and opined that the document is in the nature of bank guarantee and not a contract of indemnity.
It was clearly stated that the bank guarantee consists of a separate, distinct and an independent contract between the bank and the defendants. The document, in the case before the Court, does not specifically refer to any particular clause of the contract. In fact the contract does not contain any clause requiring Pentagon to furnish any bank guarantee. It is to say that the nature of transaction would be judged together with the surrounding circumstances in a case where a document suffers from any ambiguity but it is also to say that the courts will take recourse if no such ambiguity exists. It is beyond any quibble that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction.
HELD:-
The Court held that the said document in question constitutes a contract of indemnity and not a document of guarantee as it was clear from the facts that the appellant was to indemnify the respondent against all loses, claims, damages, actions and costs which may be suffered by it which consists the nature of document as a contract of indemnity. The Court set aside the impugned judgment of the High court and restored the decree passed by the Trial court. Appeal is allowed with costs.
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