2020 (8) TMI 944 - HC - Indian Laws

Letter of comfort cannot be enforced as guarantee without Section 126 Contract Act compliance

The Bombay HC dismissed an application seeking to enforce a letter of comfort as a guarantee for loan repayment. The court held that while letters of ... Repayment of loan - Letter of Comfort - can that Letter of Comfort be fairly read to be a guarantee by the 1st Defendant to repay a loan that the Plaintiff gave to another entity? - Does it accord with the requirements of a guarantee under Section 126 of the Contract Act, 1872? - Does it contain an unequivocal commitment or assumption by the 1st Defendant to repay the loan on the principal borrower's default? - HELD THAT:- In a given case, a letter of comfort may indeed amount to a guarantee. Not every letter of comfort is ipso facto a guarantee. The nomenclature is unimportant, as is the absence of the word 'guarantee' - The ordinary rules of construction and interpretation relating to contracts apply to LoCs - The document is to be construed as a whole, read in a reasonable commercial sense, and in context of events and associated documents - Yet, to be a guarantee, it must conform to the provisions of Section 126 of the Contract Act. Whether the document in question is a guarantee or not depends upon the exact terms to which the guarantor binds himself. In law, no guarantor is liable for more than what the guarantor has undertaken - Where the terms of a written contract are unambiguous and clear, they cannot be altered by addition or subtraction. The terms of a written guarantee cannot be so altered to foist on a party a liability beyond that which the party has undertaken. The contract cannot be rewritten at the instance of one party - The conduct of the parties is a relevant factor in assessing the construction of any contract. Broad allegations of commercial infidelity, immorality or amorality have no role at all to play in the construction of commercial contracts--especially where parties are well-equipped with legal and financial services (as opposed to an uneducated indigent or individual), and the resultant documentation is complex, and has carefully considered, well-defined provisions. A court will look to the nature of the bargain struck and the role that each of the parties was to play, and when, in what manner, and to what extent. The fact that one or more of the contracting parties are interlinked is not necessarily relevant. The Interim Application is utterly without merit. It should be dismissed - Application dismissed. Issues Involved:1. Litigation Background2. Overview3. Parties4. Chronology5. Prayers in the Suit & Interim Application6. Rival Submissions & Findings7. Submissions of the Other Defendants8. Jurisdiction9. Final Order10. CostsIssue-wise Detailed Analysis:A. Litigation BackgroundOn 30th June 2020, the Plaintiff was denied ad interim relief by a single Judge. The Plaintiff appealed, and the appeals court remanded the matter for a fresh hearing on merits. The matter was listed before the current Judge on 10th August 2020, with comprehensive written submissions from both sides. The hearing was completed on 13th August 2020.B. OverviewThe core issue revolves around a 'Letter of Comfort' (LoC) given by the 1st Defendant to the Plaintiff. The question is whether this LoC can be read as a 'guarantee' under Section 126 of the Contract Act, 1872. The court concluded that the Plaintiff has not made out a case for interim relief and that the suit is possibly misconceived.C. Parties- Plaintiff: YES Bank Ltd.- 1st Defendant: Zee Entertainment Enterprises Ltd.- 2nd Defendant: Managing Director and CEO of Zee.- 3rd Defendant: Father of the 2nd Defendant.- Defendants Nos. 4 to 10: Directors of Zee.- Defendant No. 15: Axis Bank Ltd.- Defendant No. 16: Deloitte Haskins and Sells LLP.- Defendants Nos. 11 to 14: Wholly-owned subsidiaries of Zee.D. ChronologyThe dispute centers on financial transactions involving Veria International Ltd. and its subsidiaries. YES Bank provided a loan to LELM for buying Veria stock, secured by various agreements, including a Put Option Agreement. The contentious document is the LoC dated 31st May 2016, which YES Bank claims is a guarantee by Zee to repay the loan.E. Prayers in the Suit & Interim ApplicationYES Bank sought declarations that the LoC is a binding guarantee and that Zee is liable to repay the loan. They also sought various injunctions to prevent Zee from transferring assets or allowing further sale of its promoter shareholding until the loan is repaid.F. Rival Submissions & Findings- Plaintiff's Argument: The LoC is an unconditional, irrevocable, and absolute guarantee by Zee to repay LELM's loan.- Defendant's Argument: The LoC is not a guarantee but a commitment to support ATL financially. The court found that the LoC does not result in Zee assuming the liability to repay YES Bank's loan directly. The LoC was part of the security for the loan but did not constitute a guarantee under Section 126 of the Contract Act.G. Submissions of the Other DefendantsOther defendants argued that they were needlessly joined to the suit. The court noted that they had not filed any proceedings for their deletion as defendants or for rejection of the plaint.H. JurisdictionJurisdiction was not argued by the Defendants before the current Judge. The court noted that the LoC was executed in Mumbai and that the entire cause of action arose there, thus establishing jurisdiction.I. Final OrderThe court dismissed the Interim Application, finding it without merit. The factual observations were noted as prima facie.J. CostsThe court declined to award costs, noting that YES Bank has enough on its hands and that Zee claims to be flourishing.Conclusion:The court concluded that the LoC does not constitute a guarantee under Section 126 of the Contract Act and dismissed YES Bank's Interim Application for lack of merit. The court also declined to award costs.