TMI Blog2006 (7) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odification as regards the said payment clause regulating the cooperative society to waive its rights to retain the said 10% of the contract price, and in its turn proposed to have a letter of credit so that they can furnish appropriate bank guarantee; to which the cooperative society accepted stating: You have also to submit the performance guarantee at 10% of the contract price, if the same guarantee is not received the karkhana is entitled to recover it from the balance payment and accordingly we have deducted it for want of performance guarantee. Pentagon in response thereto by its letter dated 16th April, 1985 agreed to the said proposal stating: As per agreement you have to open separate L/C for 10% retention which is still not done by you. As soon as you open L/C, we will give you Bank Guarantee for the retention money within 10 to 15 days thereafter. 4. The Bank Guarantee/Indemnity was thereafter furnished by the Appellant herein on or about 7th September, 1985; the relevant clauses whereof read as under: Please find enclosed herewith the bank guarantee bearing No. 85/17 dated 4th September, 1985 issued by State Bank of India, Dombivli Industrial Estate Branch, Dombivli. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uit directing Appellant to pay the said sum of ₹ 34,00,000/- with interest @ 14% per annum. The Appellant is, thus, before us. 8. SUBMISSIONS 8.1. Mr. G.E. Vahanvati, learned Solicitor General appearing on behalf of the Appellants submitted that: (i) On a true construction of the document dated 4th September, 1985, it would be seen that the same is a contract of indemnity and not a Bank Guarantee. (ii) The High Court committed a manifest error in considering the oral evidence adduced by the parties in construing the said document dated 4th September, 1985. (iii) Interest awarded @ 14% per annum is contrary to and inconsistent with the directions of the High Court as contained in its order dated 23rd February, 1988. 8.2. Mr. Naphade, learned Senior Counsel appearing on behalf of the cooperative society, on the other hand, submitted that: (i) the substance of the matter must be considered in the backdrop of events in which the Bank Guarantee was furnished by the Appellant and for that purpose surrounding circumstances were relevant. As the terms of contract need not necessarily be gathered from one document, the relevant circumstances could also be considered, they being:- (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the record by the appellants. The Officer of the Bank stated before the Court that the document in question was intended to be a contract of guarantee and not a contract of indemnity. The written document (Exhibit-46) as quoted above lays emphasis on the preamble as under Yet again, in the said paragraph, the operative portion of the document was erroneously described as a preamble stating: The preamble of the document in question creates an impression that the said document is a contract of indemnity and not a contract of guarantee. 9.4. The High Court, furthermore, inserted some words in the said document which in fact were not there, as for example, in paragraph 31 of the impugned judgment it added the term unequivocal condition which term did not find place in the document in question. Similarly, in paragraph 34, it was stated: The appellants are entitled to their claimed money without any delay or demur. The nature and need of such commercial contracts and documents need to be respected by the parties concerned Yet again, it was stated: If the terms and conditions of the Bank Guarantee are unconditional and absolute, the respondents have no choice but to honour the same (Emph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contain any ambiguity. The High Court itself said that ex facie the document appears to be a contract of indemnity. Surrounding circumstances are relevant for construction of a document only if any ambiguity exists therein and not otherwise. The said document, 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. 9.7. We have hereinbefore noticed the surroun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58(c) of the Transfer of Property Act. We are not concerned with such a case here. It is one thing to say that the nature of a transaction would be judged by the terms and conditions together with the surrounding and/or attending circumstances in a case where the document suffers from some ambiguities but it is another thing to say that the court will take recourse to such a course, although no such ambiguity exists. [See Bishwanath Prasad Singh v. Rajendra Prasad and Anr. [(2006) 2 SCALE 699] It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction. If a construction, as was suggested by Mr. Naphade, is to be accepted, it would also be open to a banker to put forward a case that absolute and unequivocal bank guarantee should be read as a conditional one having regard to circumstances attending thereto. It is, to our mind, impermissible in law. 9.10. In New India Assurance Company Ltd. v. Kusumanchi Kameshwara Rao and Another [(1997) 9 SCC 179], it is stated: It is obvious that when such guarantee bonds are reduced to writing the express terms of this writing containing the guarantee bond would be the repository ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and without any right of objection, but these expressions are immediately qualified by following: ... in the event that the obligations expressed in the said clause of the above- mentioned contract have not been fulfilled by the contractor giving the right of claim to the employer for recovery of the whole or part of the advance mobilisation loan from the contractor under the contract. This condition clearly refers to the original contract between HCCL and the defendants and postulates that if the obligations, expressed in the contract, are not fulfilled by HCCL giving to the defendants the right to claim recovery of the whole or part of the advance mobilisation loan , then the Bank would pay the amount due under the guarantee to the Executive Engineer. By referring specifically to clause 9, the Bank has qualified its liability to pay the amount covered by the guarantee relating to advance mobilisation loan to the Executive Engineer only if the obligations under the contract were not fulfilled by HCCL or HCCL has misappropriated any portion of the advance mobilisation loan . It is in these circumstances that the aforesaid clause would operate and the whole of the amount covered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank guarantee. Therefore, the Bank has no case to resist the encashment of the bank guarantee. Inasmuch as we have held that the bank guarantee is an unconditional bank guarantee, the case of Hindustan Construction Co. Ltd. v. State of Bihar is of no avail to the appellant. The said decision, in the facts and circumstances of the case, cannot be said to have any application here. 9.15. We are not oblivious of the decisions of this Court where, save and except the cases of fraud or irretrievable evil, the Bank has been held liable to pay the guaranteed amount without any demur whatsoever. In an instructive judgment, M. Jagannadha Rao, J. in Federal Bank Ltd. v. V.M. Jog Engineering Ltd. and Others [(2001) 1 SCC 663] referring to Uniform Commercial Practice of Documentary Credits and a catena of decisions of this Court as also the English Courts, dealt with a case where a fraud was alleged and observed: Thus, not only must fraud be clearly proved but so far as the bank is concerned, it must prove that it had knowledge of the fraud. In United Trading Corpn. S.A. v. Allied Arab Bank it was stated that there must be proof of knowledge of fraud on the part of the bank at any time before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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