IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL CIVIL CIVIL APPELLATE JURISDICTION APPELLATE JURISDICTION APPELLATE JURISDICTION FIRST FIRST FIRST APPEAL NO. 692 OF 1989. APPEAL NO. 692 OF 1989. APPEAL NO. 692 OF 1989. Mula Sahakari Sakhar Karkhana Ltd., ] being a Cooperative Society registered ] under the Maharashtra Cooperative ] Societies Act, 1960, and having it’s ] Registered Office at and Post Sonai, ] .. Appellant Taluka Newasa, District Ahmednagar. ] (Plaintiff) Vs 1. State Bank of India (Dombivli ] Industrial Estate Branch), at and ] post Dombivli Industrial Estate, ] District Thane. ] 2. The State Bank of India, Regional ] Office V, 88/C, Leo House, ] Old Prabhadevi Road, P.B. 19168, ] .. Respondents Bombay. ] ..(Defdt.1 & 2) Shri Prashant Naik for the appellant. Shri Thushar Koopar with Shri Jaychandra for the respondent. CORAM: R.M.S. KHANDEPARKAR & ANOOP V. MOHTA, JJ. DATED: 2ND AUGUST, 2005 ORAL JUDGMENT: [Per Anoop V. Mohta, J.] 1. The appellant-plaintiff has preferred the present appeal against the judgment and order dated 4th February, 1989, passed by the Civil Judge, Senior Division, Ahmednagar, in Special Civil Suit No. 310 of : 2 : 1987, whereby, the Suit was dismissed. 2. The appellants is a Co-operative Sugar Factory, having its registered office at Post Sonai village, Taluka Newasa, District Ahmednagar. By an agreement dated 25th September, 1983, the appellant executed the contract for erection of a paper plant at village Sonai on a turn-key basis to utilise the left over material called "bagasse" of the sugarcane with M/s. Pentagon Engineering Pvt. Ltd. (for short "M/s. Pentagon"). The total value of the contract was Rs.3,40,00,000/-. Time was the essence of the contract. The said Pentagon had guaranteed the performance as agreed. As per clause 15 to 17 of the agreement, the appellants were entitled to retain 10% of the amount and which were to be paid after 3 to 6 months after successful working of the same after it was commissioned. In view of clause 15.2.4 and 15.2.5, the appellant, while making payment against the performance invoice sent by M/s. Pentagon, used to deduct 10% value of the said invoice. This 10% amount corresponds to the amount of 5% which was referred to in clauses 15.2.4 and 15.2.5 of the agreement. However, by letter dated 6th April, 1985, Pentagon requested the appellant-plaintiffs to rescind the term about the retention of the said 10% amount. The appellant agreed to accommodate Pentagon on : 3 : a condition to submit the Bank Guarantee against the release of the amount of Rs.34,00,000/-. The correspondences in that regard is at Exhibit-47 to Exhibit-52 of the Paper Book. The document in question (Exhibit-46) was accordingly executed based on the original agreement between appellant and Pentagon dated 28/9/1983. 3. There arose disputes and differences between the appellant and M/s. Pentagon. By Notice dated 17th July, 1987, the contract was terminated by Pentagon. The appellant raised the claim by Notice in the sum of Rs.3,23,28,209.10 as set out in paragraphs 10 and 11 of the Plaint. Pentagon, however, denied the liability and claimed an amount of Rs.4,66,73,300/- vide their Advocate’s letter dated 18th July, 1987 (Exhibit-53). The appellant, therefore, by letter dated 12th August, 1987 (Exhibit-57) invoked the Bank Guarantee in question. 4. The respondents, by letter dated 13th August, 1987, resisted the said demand and pointed out that at the request of Pentagon, on 4th September 1985, the respondents executed an agreement of indemnity, thereby indemnifying the appellants against all losses, claims, damages, actions and costs which may be suffered as a : 4 : result of payment of Rs.34,00,000/-. The indemnity given was only to cover the claims of the appellants against the said company. Therefore, it was pointed out that unless adjudicated that the appellants had suffered any loss or damage for design, performance, workmanship or against defective material through the competent Court or authority, and the claims, disputes and differences between the parties determined accordingly, the demand of the claim by the appellant was premature and not maintainable. 5. The appellants sent several reminders and called upon them to make the payment of Rs.34,00,000/- under the said Bank Guarantee. The appellants, therefore, on 2nd September, 1987, filed the Special Civil Suit No.310 of 1987 against the respondents before the Civil Judge, Senior Division, Ahmednagar. On 9th February, 1988, the trial Court, on an application of the appellants, directed the respondents to deposit an amount of Rs.34,00,000/-, but the said amount remained with the respondent Bank in view of the order dated 9th February, 1988, passed by the Hon’ble Court on appeal filed by the respondent-Bank with condition that the respondent-Bank should pay the amount with interest @ 12% in case appellants succeeds in the Suit. The Suit was transferred to the Additional District Judge, Thane. : 5 : The respondents filed their Written Statement dated 13th September, 1988, and resisted the claim and pleaded that unless and until the disputes get settled they are not liable to pay the said amount. 6. The appellants-plaintiffs led the evidence of four witness viz. Vinayak Vithoba Ambre, Tukaram Rajaram Raut, Anant Vasant Rane and Mohammed Ismail Patel. The respondents led evidence of one Shankar Purshottam Keskar, Bal Anant Vasaikar, Vijay Narayan Gadkari. Both the parties proved documents are exhibited on the record. The learned Judge, after considering the material, as well as, the evidence led by the parties, dismissed the appellants Suit in toto. 7. The learned Judge held that the appellants-plaintiffs proved that the Deed dated 4th September, 1985, was executed by the respondent No.1 (defendant No.1) at Sonai and was delivered to the appellant at Sonai as alleged and, therefore, the Court has jurisdiction to entertain and try the Suit; appellant failed to prove that the document executed on 4th September, 1985, by the respondent No.1 (defendant No.1) was a Bank Guarantee simplicitor for a sum of Rs.34,00,000/- in the capacity of Guarantor or Surety under Section 126 of the Contract Act; respondents : 6 : proved that they were to indemnify the plaintiffs "for the losses caused only on account of design, performance, workmanship and defective material or equipment supplied, as per the agreement between appellants (plaintiffs) and M/s. Pentagon Engineering Pvt. Ltd. and that the deed of indemnity dated 4th September, 1985, was issued by the respondent No.1 (defendant No.1) at the request of the company - M/s. Pentagon to cover final payment by the appellants (plaintiffs) to the said company"; M/s. Pentagon Engineering Pvt. Ltd. was a necessary and proper party and, therefore, the Suit was bad for non-joinder of M/s. Pentagon Engineering Pvt. Ltd.; appellants-plaintiffs failed to prove that the defendants (respondents) are liable to pay to the plaintiffs a sum of Rs.34,00,000/- on first demand or after invocation of the guarantee in question notwithstanding that any dispute between the appellants (plaintiffs) and the said company M/s. Pentagon Engineering Pvt. Ltd. exists or not and that the liability to the respondent No.1 (defendant No.1) to pay to the appellants (plaintiffs) the said amount was absolute and unconditional; the appellants (plaintiffs) failed to prove that M/s. Pentagon Engineering Pvt. Ltd. committed breaches, defaults under the agreement dated 25th September, 1983, and that M/s. Pentagon Engineering Pvt. Ltd. was liable to pay more than a : 7 : sum of Rs.34,00,000/- to the appellants (plaintiffs). The learned Judge, on this foundation, dismissed the Suit. 8. Heard the learned counsel Shri Naik for the appellant who basically contended that Exhibit-46 dated 4th September, 1985, is a duly executed unequivocal Bank Guarantee and, therefore, appellant was entitled for the amount of Rs.34,00,000/- as they had invoked the Bank Guarantee on 27th July, 1987. In absence of any ground of fraud or irretrievable injustice, the said Bank Guarantee ought to have been honoured. He has relied on the Apex Court’s decision in the case of Daewoo Motors Daewoo Motors Daewoo Motors India India India Ltd. Vs. Union of India & Ors. Ltd. Vs. Union of India & Ors. Ltd. Vs. Union of India & Ors. (2003) 4, S.C.C., 690. The Court below has misconstrued and has misapplied the principle of law with regard to the Bank Guarantee by holding that the document in question is a contract of indemnity as contemplated under Section 124 of the Contract Act and not a document of Guarantee within the meaning of Section 126 of the Contract Act. He has further contended that the reading of the document in question dated 7th September, 1985 (Exhibit-46), pre and post correspondence and the evidence led in this behalf by the appellant, basically of the Officers of the Bank, proved the ingredients of the Bank Guarantee and, therefore, entitled for the : 8 : amount as claimed. He further contended that M/s. Pentagon was not a necessary party, as not concerned with and had no say in this matter. 9. The learned counsel for the respondent-Bank Shri Koopar resisted the above contentions and made his submissions in support of the impugned judgment and order. He has relied upon the Apex Court’s judgment in Hindusthan Hindusthan Hindusthan Construction Company Limited Vs. State of Construction Company Limited Vs. State of Construction Company Limited Vs. State of Bihar Bihar Bihar & Ors. & Ors. & Ors., (1999) 8, S.C.C., 436; New India New India New India Assurance Assurance Assurance Company Ltd. Vs. Kusumanchi Kameshwara Rao & Company Ltd. Vs. Kusumanchi Kameshwara Rao & Company Ltd. Vs. Kusumanchi Kameshwara Rao & Anr., Anr., Anr., (1997) 9, S.C.C., 179; Daewoo Motors Vs. Union Daewoo Motors Vs. Union Daewoo Motors Vs. Union of of of India & Ors., India & Ors., India & Ors., (2003) 4, S.C.C., 690. In addition to the above, he contended that the document in question, whether the indemnity or the guarantee could be invoked only after the determination of the liability of M/s. Pentagon, in appropriate legal proceedings. He has also relied on the Apex Court’s decision in Punjab National Punjab National Punjab National Bank Bank Bank Vs. Shri Vikram Cotton Mills & Anr. Vs. Shri Vikram Cotton Mills & Anr. Vs. Shri Vikram Cotton Mills & Anr., (1970), 1, S.C.C., 60 and Union of India Vs. Raman Iron Foundry Union of India Vs. Raman Iron Foundry Union of India Vs. Raman Iron Foundry, (1974) 2, S.C.C., 231. He further supported the judgment in all respects and prayed for the dismissal of the appeal. 10. Heard the respective learned counsel. The questions which are underlying in the appeal in question : 9 : are crystallized as follows - 1) Whether the document/deed (Exhibit-47) dated 4th September, 1985, executed by the respondents in favour of the appellant is a contract of indemnity or is a contract of guarantee.? - It is a contract of guarantee. 2) Whether appellant is entitled for an amount of Rs.34,00,000/-, with interest, as claimed, based on the said guarantee.? - Yes, with interest @ 14% p.a. 3) Whether the Suit was bad for non-joinder of necessary parties i.e. principal debtor M/s. Pentagon Engineering Pvt. Ltd.? - No. 4) What Order.? - Suit is decreed as per order in the appeal. 11. ISSUE NO.1 : The relevant Sections under the Contract Act are Section 124 and 126 which are reproduced thus: "124. "124. "124. "Contract of indemnity" defined - "Contract of indemnity" defined - "Contract of indemnity" defined - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity." 126. 126. 126. ‘Contract of guarantee’, ‘surety’, ‘Contract of guarantee’, ‘surety’, ‘Contract of guarantee’, ‘surety’, ‘principal ‘principal ‘principal debtor’ and ‘creditor’ - debtor’ and ‘creditor’ - debtor’ and ‘creditor’ - A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is : 10 : called the ‘creditor’. A guarantee may be either oral or written. 12. The relevant clauses of the document/deed in question are as under: IT IS FURTHER AGREED BY THE BANK AS FOLLOWS: 1. The liability of the Bank under this Guarantee in any event shall not exceed Rs,34,00,000/- (Rupees Thirty Four Lacs only). 2. The liability of the Banker under this guarantee shall not be impaired or discharged by any extension of time, or concession or indulgence allowed or granted by Mula Sahakari Sakhar Karkhana Ltd. to the Supplier. 3. Mula Sahakari Sakhar Karkhana Ltd. will be at liberty to make and effect changes in the said order without the Bank’s consent provided that such changes do not have the effect to increase in burden and/or liability of the banker under this agreement. 4. This guarantee shall remain in force and ceases to have effect on expiry of 24 months covering the period from 4th September, 1985. NOTWITHSTANDING anything herein before contained, our maximum liability under this guarantee is restricted to Rs.34,00,000/- (Rupees Thirty Four Lacs only). This guarantee shall remain in force upto 3rd September 1987 unless a suit of action to enforce claim under this guarantee is filed against us on or before 3rd September 1987 all your rights under this guarantee shall be forfeited and we shall be relieved and discharged from all liabilities hereunder." : 11 : There is no dispute that the document in question, as reproduced above, is the document based upon which the appellants claimed the amount of Rs.34,00,000/- by treating the said document as an unequivocal and unconditional Bank Guarantee. The Suit was filed as, inspite of invocation of the said Bank Guarantee, the respondents refused to honour the same by submitting that the said document was never intended or never instructed by the Company (M/s. Pentagon) to be a document of Bank Guarantee. It was throughout intended to be a contract of indemnity. There was no objection of any kind referred to or placed on 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 : "BEFORE THIS BANK GUARANTEE is made in favour of Mula Sahakari Sakhar Karkhana Ltd. by State Bank of India (Dombivli Industrial Estate Branch) agreed security the Sate Bank of India (Dombivli Industrial Estate Branch) hereby agrees and undertake subject to the terms and conditions set forth in this agreement to indemnify and keep indemnified Mula Sahakari Sakhar Karkhana Ltd. against all losses claims, damages actions and cost in respect of such sums which the Supplier shall become liable to pay as the terms of : 12 : the said order." Therefore, in view of the above preamble, it is clear that by this document, respondents had agreed to indemnify and keep indemnified the appellants, against all losses, claims, damages, actions and costs in respect of such sums which the supplier shall become liable to pay as per the terms of the said order. The term "said order" here, as contended by the appellants, is nothing but the document in question. There is no dispute that the document in question was executed, based upon the agreement dated 25th September, 1983, for purchase of paper plant on turn-key basis with M/s. Pentagon Engineering Pvt. Ltd., the supplier. This document, therefore, as duly signed only by the respondent-Bank in favour of the appellants on 4th September, 1985, was accepted without any demur and, therefore, became final between the appellants and the respondents, including the terms and conditions agreed to in the document irrespective of the clauses of the main agreement dated 25th September, 1983. 13. As M/s. Pentagon Engineering Pvt. Ltd. had proposed and as the appellants had agreed, the condition of 10% retention was waived and it was agreed by letter dated 6th April, 1985, to provide the Bank Guarantee of : 13 : the said 10% amount. 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. 14. It is well settled, and, as rightly observed by the learned Judge, that the oral evidence cannot prevail over the written and agreed document. This document remained unchallenged till the invocation of the Bank Guarantee in question. The subsequent document and oral evidence, therefore, in the facts and circumstances of the case, cannot prevail over the clauses of the written document in question (Exhibit-46). 15. In this background, the respondents, by their letter dated 13th August, 1987 (Exhibit-58), in reply to the appellants letter dated 4th September, 1985, of invoking the alleged Bank Guarantee in question, informed as under: "The true facts are that we had at the request of Pentagon Engineering Pvt. Ltd., executed on 4th September, 1985 an agreement of indemnity for Rs.34 lacs thereby indemnifying you against all losses, claims, damages actions and costs which you may suffer as a result of payment by you of the sum of Rs.34 lacs, in accordance with the terms of the Agreement; entered into by you with the Pentagon Engineering Pvt. Ltd., on : 14 : 25th September 1983. It was, we are advised, never the intention that the indemnity given by us should cover all your claims against the said Company. The recital in the said Agreement dated 4th September, 1985 restricts the scope of the indemnity to cover your claim in respect of final payment of Rs.34 lacs in connection with the design, performances, workmanship and against defective materials of the equipments supplied to you." "Unless and until the claims disputes and differences between you and the company are adjudicated upon and determined by competent court or authority and until is established that you have in fact suffered any loss or damage for design, performance, workmanship or against defective materials, the question of our making any payment to you does not arise. Your claim is premature and not maintainable in law. We, therefore, regret our inability to make any payment, which please note." 16. In view of the provision of Section 91 of the Evidence Act, the oral evidence cannot be utilised to disconnect the surrounding circumstances and or object and intention to interpret a document. There is no bar for resorting to external aids to interpret any writing in case of conflict or confusion or uncertainty, but not otherwise. In our view, the wordings in the document in question are clear and unambiguous and as the document in question remained unchallenged till the invocation of the Bank Guarantee, the intrinsic oral evidence or earlier correspondence, executed between the appellants and the company cannot be resorted to, to bring in the : 15 : intention of the document as sought to be contended by the respondents by treating the said document as a contract of indemnity and not a Bank Guarantee. 17. The learned Judge has considered the Apex Court judgments in Bhaskar Waman Joshi Vs. Shrinarayan Bhaskar Waman Joshi Vs. Shrinarayan Bhaskar Waman Joshi Vs. Shrinarayan Rambilas Rambilas Rambilas Agarwal (deceased) & Ors. Agarwal (deceased) & Ors. Agarwal (deceased) & Ors., AIR 1960, S.C., 301; Ramkishorelal Ramkishorelal Ramkishorelal Vs. Kamalnarayan Vs. Kamalnarayan Vs. Kamalnarayan, AIR 1963, S.C., 890; S. S. S. Chattanatha Karayalar Vs. The Central Bank of India Chattanatha Karayalar Vs. The Central Bank of India Chattanatha Karayalar Vs. The Central Bank of India Ltd. Ltd. Ltd. & Ors. & Ors. & Ors., AIR 1965, S.C., 1856; P.L. Bapuswami Vs. P.L. Bapuswami Vs. P.L. Bapuswami Vs. N. N. N. Pattay Gounder Pattay Gounder Pattay Gounder, reported in AIR 1966, S.C. 902; Sundaram Sundaram Sundaram Finance Ltd. Vs. State of Kerala Finance Ltd. Vs. State of Kerala Finance Ltd. Vs. State of Kerala, AIR 1966, S.C., 1178; Modi Co. Vs. Union of India Modi Co. Vs. Union of India Modi Co. Vs. Union of India, AIR 1969, S.C., 9; and, The Godhra Electricity Co. Ltd. & Anr. The Godhra Electricity Co. Ltd. & Anr. The Godhra Electricity Co. Ltd. & Anr. Vs. Vs. Vs. The State of Gujarat & Anr. The State of Gujarat & Anr. The State of Gujarat & Anr., AIR 1975, S.C., 32, in support of his reasoning that an agreement has to be interpreted as a whole by giving natural meaning to the words used therein. A contract cannot be interpreted in abstract as a legal doctrine, but it has to be interpreted in relation to the realities of the situation in which it is entered into. The surrounding circumstances, therefore, permissible to look into. The external aids in interpretation could be resorted to if there are ambiguities and in such case, even subsequent interparties document, statements and conduct may be useful and relevant. : 16 : 18. After scanning, we noted that the Managing Director of the appellants PW1-Vinayak deposed in support of their pleading that as per clause 15.2.4 and 15.2.5 of the agreement the company was to retain 10% of the contract value and that comes to Rs.34,00,000/-. He further deposed that there was no provision in the original agreement to pay this amount of Rs.34,00,000/- after taking Bank Guarantee before the plaint was commissioned. The covering letter dated 7th September, 1985, with the Bank Guarantee in question executed by the respondents was received by one Prabhu at their factory at Sonai on 7th September, 1985, based on which, the amount was paid by the demand draft. There was no format of the Bank Guarantee stipulated. They had accepted the Bank Guarantee without any demur or objection, as it was found to be correct. He further deposed that the document (Exh.46) was furnished after considering the agreement dated 25th September, 1983, and the same was a Bank Guarantee and not an indemnity bond. He deposed that the Bank Guarantee was not restricted to 10% amount, but it was comprehensive and was enforceable before 8th September, 1987. M/s. Pentagon could not have received this 10% amount in absence of the said Bank Guarantee. The Bank Guarantee covers everything. However, he was unable to give the : 17 : details of the amount payable to M/s. Pentagon out of the 10% amount to be retained. He deposed that they invoked the Bank Guarantee on 27th July, 1987. M/s. Pentagon had nothing to do with the Bank Guarantee as the agreement was between the Bank and the appellants-plaintiffs. The dispute between the plaintiffs and M/s. Pentagon was in no way concerned with the bank. He has, therefore, deposed that the Guarantee did not provide for only the balance due after adjusting claims of M/s. Pentagon but it is only for claims against M/s. Pentagon. Therefore, while invoking the Bank Guarantee they had made the respondents aware that more than Rs.34,00,000/- were recoverable from M/s. Pentagon. Therefore, M/s. Pentagon could not instruct the Bank not to pay. In the cross-examination, he admitted that "Exhibit-46 does not bear endorsement about the person who brought it to us or the inward number. They have not asked the respondent-Bank why they furnished the Bank Guarantee without having asked by them. He further admitted that "Bank Guarantee Exhibit-46 is not concerning clause 17.3". He denied the suggestion that the claim against the defendants was improper, premature and contradictory to Exhibit-46." 19. Another witness of the appellant, PW2, Tukaram : 18 : who was a permanent employee of the appellants and, at the relevant time, was the Chief Accountant, deposed about the monetary transaction with M/s. Pentagon. However, nothing was deposed about the nature of the document in question, except existence of Exhibit-46. 20. Another witness PW3 Anant Rane was also unable to throw much light on the nature of the document Exhibit-46