Guarantee clause construction and guarantor liability: default interest survives liability cap and was held payable, appeal dismissed

Construction and harmonisation of contractual clauses: Clause 33 operates to cap the guarantor's maximum liability while Clause 3 independently creates a liability to pay default interest if the guarantor fails to discharge the guaranteed obligation; because the guaranteed amount remained unpaid after invocation, default interest accrues under Clause 3 and cannot be excluded by the liability cap in Clause 33, preventing the guarantor from obtaining the benefit of its own wrong. The appellate challenge to this construction was dismissed for lack of merit.

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Issues: Whether, in the guarantee agreement, Clause 33 which caps the guarantor's liability at Rs.25,00,00,000 excludes or limits the default interest payable under Clause 3 arising from the guarantor's failure to pay after invocation.

Analysis: The Court examined the contractual scheme where Clause 33 operates as a cap on the guarantor's liability under the guarantee while Clause 3 separately creates liability to pay default interest if the guarantor fails to discharge the guaranteed amount after invocation. The provisions operate in different fields: Clause 33 limits the principal liability under the guarantee; Clause 3 imposes default interest for the guarantor's failure to pay within the contractual time. Reading the clauses together, and to avoid rendering Clause 3 otiose or granting the guarantor a benefit arising from its own default, the default interest that accrues after invocation is payable and is not excluded merely because the principal liability is capped by Clause 33.

Conclusion: The NCLAT's construction harmonising Clauses 3 and 33 and holding that default interest under Clause 3 is payable in addition to the capped principal liability is correct; appeal dismissed (decision in favour of Respondent).

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