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 comfort may constitute guarantees in certain circumstances, they must comply with Section 126 of the Contract Act, 1872. The document must be construed as a whole in commercial context, but cannot be altered to impose liability beyond what was undertaken. The court emphasized that nomenclature is irrelevant, but the guarantor's exact binding terms determine liability. Clear contractual terms cannot be modified through interpretation, and broad allegations of commercial misconduct are irrelevant in construction of commercial contracts between sophisticated parties.

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Issues Involved:
1. Litigation Background
2. Overview
3. Parties
4. Chronology
5. Prayers in the Suit & Interim Application
6. Rival Submissions & Findings
7. Submissions of the Other Defendants
8. Jurisdiction
9. Final Order
10. Costs

Issue-wise Detailed Analysis:

A. Litigation Background
On 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. Overview
The 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. Chronology
The 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 Application
YES 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 Defendants
Other 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. Jurisdiction
Jurisdiction 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 Order
The court dismissed the Interim Application, finding it without merit. The factual observations were noted as prima facie.

J. Costs
The 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.

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