STATE BANK OF INDIA AND ANR. versus MULA SAHAKARI SAKHAR KARKHANA LTD.

Citation: [2006] SUPP. 3 S.C.R. 320 · Decided: 06-07-2006 · Supreme Court of India · Bench: S.B. SINHA · Disposal: Appeal(s) allowed
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Judgment (excerpt)

A 
STATE BANK OF INDIA AND ANR. 
v. 
MULA SAHAKARI SAKHAR KARKHANA LTD. 
JULY 6, 2006 
B 
[S.B. SINHA AND P.K. BALASUBRAMANYAN, JJ.] 
Contract: 
C 
Contract of indemnity and bank guarantee-Distinction between-
Contract for purchase of paper plant-At the instance of supplier, Appel/an/-
bank executed document in favour of purchaser by reason whereof it kept the 
purchaser indemnified against all losses, claims, damages, actions and costs 
which may be suffered by it-Document did not contain usual words found in 
a bank guarantee such as .. unconditional" and "absolute "-Nature of the 
D document-Held: Document constituted a contract of indemnity and not a 
bank guarantee-Evidence Act, 1872-Sections 91 & 92. 
Respondent entered unto a contract for purchase of paper plant. At 
the instance of the supplier (Mis Pentagon), Appellant-bank executed a 
E document in favour of Respondent undertaking to indemnify it against 
all losses, claims, damages, actions and cost in respect of such sums which 
the supplier shall become liable to pay in terms of the said contract. 
Disputes and differenc:es arose between Respondent and the supplier, 
on which Respondent terminated the contract and raised money claim 
F against the supplier which however denied and disputed its liability. 
Respondent construing the :said document as a Bank Guarantee sought to 
invoke it but Appellant-bank resisted the same contending that the 
document constituted a contract of indemnity and not a Bank Guarantee. 
The question which arose for consideration in the present appeal is 
G whether the document executed by Appellant-Bank in favour of the 
Respondent was a contract of guarantee or a contract of indemnity. 
Allowing the appeal, the Court 
HELD: 1.1. A document must primarily be construed on the basis 
H 
320 
ST A TE BANK OF INDIA v. MULA SAHAKARI SAKHAR KARKHANA LTD. 
3 2 J 
of the terms and conditions contained therein. While construing a A 
document the Court shall not supply any words which the author thereof 
did not use. Surrounding circumstances are relevant for construction of 
a document only if any ambiguity exists therein and not otherwise. 
1328-C, DI 
1.2. The document in question is a commercial document. lt does not B 
on its face contain any ambiguity. The said document 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 C 
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". 1328-D-Ff 
1.3. The High Court erred in construing the document in question D 
to be an unconditional and absolute bank guarantee. The approach of the 
High Court on construction of the said document was patently wrong. It 
committed a manifest error in terming the operative portion of the 
document as a preamble. It had inserted terms and expressions which did 
not find place in the document in question. The High Court furthermore 
considered the oral evidence adduced by the parties despite the bar E 
contained in Sections 91 and 92 of the Indian Evidence Act. 
\327-D, E; 333-Hf 
S. Chattanatha Karayalar v. The Central Bank of India and Ors., 11965] 
3 SCR 318; P.L. Bapuswami v. N. Pattay Gounder, 11966( 2 SCR 918 and F 
Daewoo Motors India Ltd. v. Union of India and Ors., 12003( 4 SCC 690, 
distinguished. 
Bishwanath Prasad Singh v. Rajendra Prasad and Anr., (2006) 2 
SCALE 699, relied on. 
New India Assurance Company Ltd. v. Kusumanchi Kameshwara Rao 
and Anr., 11997( 9 SCC 179; Hindustan Construction Co. Ltd. v. State of Bihar 
and Ors., (1999( 8 SCC 436; Federal Bank Ltd. v. VM. Jog Engineering Ltd. 
G 
and Ors., (2001 ( 1 SCC 663; Dwarikesh Sugar Industries Ltd. v. Prem Heavy 
Engineering Works (P) ltd. and Anr., (1997( 6 SCC 450 and Mis. BSES Ltd. 
(Now Reliance Energy Ltd.) v. Mis. Fenner India Ltd. & Anr., JT (2006) 2 H 
322 
SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R. 
A SC 192, referred to. 
B 
c 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 280 I of2006. 
from the Judgment and Order dated 2.8.2005 of the High Court of 
Bombay in First Appeal No. 692/1989. 
G.E. Vahanvati, SG, Tushad Cooper, Rajiv Nanda, Ramni Taneja,
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