2006 (7) TMI 669 - SC - Indian Laws

Supreme Court Reclassifies Document as Indemnity Contract, Overturning High Court; Restores Trial Court's Ruling with 12% Interest.

The SC set aside the HC's judgment, determining the document in question was a contract of indemnity rather than a bank guarantee. The HC's interpretation ... Challenged the Order passed by High Court - construing the agreement dated 25.9.1983 to be a Bank Guarantee decreed the suit directing Appellant to to deposit the value of contract with interest @ 14% per annum - Contract of Pentagon terminated by the cooperative society by a notice - claim raised - Bank Guarantee thereafter invoked by the cooperative society - HELD THAT:- The document (Bank Guarantee/Indemnity), in our opinion, constitutes a document of indemnity and not a document of guarantee as is clear from the fact that by reason thereof 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 contain the usual words found in a bank guarantee furnished by a Bank as, for example, 'unequivocal condition', 'the cooperative society would be entitled to claim the damages without any delay or demur' or the guarantee was 'unconditional and absolute' as was held by the High Court. The High Court, thus, misread and misinterpreted the document as on scrutiny thereof, it had opined that it was a contract of guarantee and not a contract of indemnity. The document was executed by the Bank in favour of the cooperative society. The said document indisputably was executed at the instance of Pentagon. We have hereinbefore noticed the surrounding circumstances as pointed out by Mr. Naphade as contained in Clauses 15.2.4 and 15.2.5 of the contract vis-‘-vis the letters exchanged between the parties dated 6.4.1985, 11.4.1985, 16.4.1985 leading to execution of the document dated 07.09.1985 by the First Appellant in favour of the cooperative society. We are, however, unable to accept the submissions of the learned Senior Counsel that the bank guarantee must be construed in the light of other purported contemporaneous documents. A contract indisputably may be contained in more than one document. Such a document, however, must be a subject matter of contract by and between the parties. The correspondences referred to hereinbefore were between the cooperative society and Pentagon. The said correspondences were not exchanged between the parties hereto as a part of the same transaction. The Appellant understood that it would stand as a surety and not as a guarantor. The High Court proceeded on the basis that Section 92 of the Evidence Act would be attracted in the instant case but despite the same it referred to the oral evidence so as to find out the purported circumstances surrounding the transaction, which in our view, was not correct. However, in this case, we have no doubt in our mind that the document in question constitutes a contract of indemnity and not an absolute or unconditional bank guarantee. The High Court, therefore, erred in construing the same to be an unconditional and absolute bank guarantee. Thus, the impugned judgment cannot be sustained which is set aside accordingly. The decree of the trial court is restored. The appeal is allowed with costs. Issues Involved:1. Nature of the document (Indemnity vs. Bank Guarantee)2. Construction of the document by the High Court3. Consideration of oral evidence by the High Court4. Rate of interest awardedDetailed Analysis:1. Nature of the Document (Indemnity vs. Bank Guarantee):The central issue was whether the document dated 4th September 1985 constituted a contract of indemnity or a bank guarantee. The Appellant argued that it was a contract of indemnity, not a bank guarantee. The document stated that the Appellant would indemnify the cooperative society against all losses, claims, damages, actions, and costs. The Supreme Court agreed with the Appellant, noting that the document did not contain typical bank guarantee terms such as 'unequivocal condition' or 'unconditional and absolute.' The Court concluded that the document was indeed a contract of indemnity.2. Construction of the Document by the High Court:The High Court had construed the document as a bank guarantee. The Supreme Court found that the High Court committed a manifest error by misinterpreting the document. The High Court incorrectly treated the operative portion of the document as a preamble and inserted terms that were not present in the original document. The Supreme Court emphasized that a document must be construed based on its terms and conditions without adding any words not used by the author. The High Court's approach was deemed patently wrong.3. Consideration of Oral Evidence by the High Court:The High Court considered oral evidence despite the bar contained in Sections 91 and 92 of the Indian Evidence Act. The Supreme Court criticized this approach, stating that a document should primarily be construed based on its written terms. The High Court's reliance on oral evidence and surrounding circumstances was inappropriate because the document did not suffer from any ambiguity. The Supreme Court reiterated that a bank guarantee must be construed on its own terms and is considered a separate transaction.4. Rate of Interest Awarded:The Appellant contended that the interest rate awarded by the High Court at 14% per annum was contrary to the High Court's earlier order dated 23rd February 1988, which specified an interest rate of 12% per annum. The Supreme Court found this contention incontrovertible and held that the High Court erred in awarding a higher interest rate. The Supreme Court restored the trial court's decree, which aligned with the original interest rate of 12% per annum.Conclusion:The Supreme Court set aside the High Court's judgment, concluding that the document in question was a contract of indemnity and not an unconditional or absolute bank guarantee. The Court restored the trial court's decree and allowed the appeal with costs, assessing the counsel's fee at Rs. 5000/-.