Case: State Bank Of India  Vs. Mula Sahakari Sakhar Karkhana Ltd

The Respondent is acooperative society. It has a sugar factory. It entered into a contract for installation of a paper plant at village Sonai on turnkey basis so as to enable it to utilize the left over material called bagasse of the sugarcane with M/s. Pentagon Engineering Pvt. Ltd. (for short Pentagaon). The total value of the contract was Rs. 3,40,00,000/-. Pentagon furnished a performance guarantee in regard to the machinery supplied by it. The said contract contained a clause for retention of 10% of the contract price by the cooperative society in the following terms:15.2.4. 5% of the contract price shall be payable after satisfactory commissioning and working of the plant for three months that is three months from the achievement of the performance guarantee as stipulated in clause no. 8 and 9 above, by a separate letter of credit15.2.5. 5% of the contract price shall be paid after six months after satisfactory commissioning of the plant and continuous successful working of the plant during the period i.e. six months working of the plant as per clause 8 and 9 above, by a separate letter of creditPentagon, however, by a letter dated 6th April, 1985 suggested for a modification 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 guaranteePentagon 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 thereafterThe 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, DombivliThe guarantee is issued in pursuance of our agreement for paper project dated 25.9.1983. The guarantee covers 10% retention amount of Rs. 34 lacsAn amount of Rs. 13,76,285/- is retained from the Proforma Invoices of the material reached at siteKindly release the amount of Rs. 13,76,285/- to be retained by you immediately on receipt of this guarantee and obligeDisputes and differences arose by and between the cooperative society and Pentagon. The contract of Pentagon was terminated by the cooperative society by a notice dated 17th July, 1987. A claim of Rs.3,23,28,209.10 was also raised. Pentagon not only denied and disputed its liability to pay the said sum but also, on the other hand, asserted that an amount of Rs.4,66,73,300/- was due and owing to it by a letter dated 18th July, 1987Cooperative society thereafter filed a suit in the Court of Civil Judge, Senior Division, Ahmednagar which was numbered as Special Civil Suit No. 310 of 1987. An application was filed by the cooperative society in the said suit for a direction upon the Appellant to deposit the amount of Rs.34,00,000/-The matter relating to passing of an interim order went upto the High Court. The High Court by an order dated 23rd February, 1988 directed that the said amount be retained by the Appellant subject to the condition that in the event, the suit is decreed the said amount would be paid with interest @ 12% per annum. The suit was dismissed. An appeal was preferred the reagainst by the cooperative society before the High Court. The High Court construing the said agreement dated 25.9.1983 to be a Bank Guarantee decreed the suit directing Appellant to pay the said sum of Rs.34,00,000/- with interest @ 14% per annumThe Appellant is, thus, before us

Court's reasoning:
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 contracts 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 societyWe 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 hereto as a part of the same transaction. The Appellant understood that it would stand as a surety and not as a guarantorIn P.L. Bapuswami (supra), relied upon by Mr. Naphade, this Court was concerned with a question as to whether Ex.1 therein was a transaction of mortgage by conditional sale or a sale with a condition ofr in the light of Section 58(c) of the Transfer of Property Act. We are not concerned with such a case hereIt 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 existsThe said decision, in the facts and circumstances of the case, cannot be said to have any application here. 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 whatsoeverHowever, in this case, we have no doubt in our mind that the document in question constitutes a contract of indemnity and not an absolute or unconditional bank guarantee. The High Court, therefore, erred in construing the same to be an unconditional and absolute bank guarantee.