Contract of indemnity versus bank guarantee clarified: written terms prevail over surrounding circumstances and oral evidence.

A clear commercial instrument must be construed on its own terms, and extrinsic correspondence or oral evidence cannot change its legal character when the wording is unambiguous. Applying that principle, the document was treated as a contract of indemnity, not an unconditional bank guarantee, because it expressly undertook to indemnify and lacked the usual guarantee language. The direction awarding interest at 14% per annum was also found unsustainable, as the earlier interim order had contemplated repayment with interest at 12% per annum if the suit succeeded.

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Issues: (i) Whether the document dated 7 September 1985 was a contract of indemnity or a bank guarantee. (ii) Whether the High Court was justified in awarding interest at 14% per annum.

Issue (i): Whether the document dated 7 September 1985 was a contract of indemnity or a bank guarantee.

Analysis: The document had to be construed on its own terms, and where the language was clear, surrounding circumstances could not be used to alter its legal character. The operative words undertook to indemnify and keep indemnified the beneficiary against losses, claims, damages, actions and costs, and the document did not contain the usual expressions of an unconditional or absolute bank guarantee. The correspondence relied on by the respondent was between the cooperative society and the contractor, not a part of the tripartite transaction binding the bank, and oral evidence could not be used to vary the written terms of the document.

Conclusion: The document was a contract of indemnity and not an unconditional bank guarantee, in favour of the Appellant.

Issue (ii): Whether the High Court was justified in awarding interest at 14% per annum.

Analysis: The earlier interim order had expressly referred to repayment with interest at 12% per annum in the event of success in the suit. The High Court's direction for 14% per annum was inconsistent with that order.

Conclusion: The award of interest at 14% per annum was unsustainable and was set aside, in favour of the Appellant.

Final Conclusion: The impugned decree was set aside, the trial court's dismissal was displaced by restoration of the trial court decree as directed in the judgment, and the appeal succeeded with costs.

Ratio Decidendi: A clear and unambiguous written commercial instrument must be interpreted from its own terms, and its legal character cannot be altered by extrinsic evidence or surrounding circumstances unless the document is ambiguous.

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