Contract-II Case review of

On
State Bank of India and Ors. vs. Mula Sahakari Sakhar Karkhana Ltd.
(2006) 6 SCC 293

Submitted to

MAHARASHTRA NATIONAL LAW UNIVERSITY, AURANGABAD

Submitted by

RISHI RAJ

B.A. LL.B. (Hons.) Semester-III

Roll No. 2019/BALLB/59

Under the guidance of

Dr. Tanaya Tarai
OSD, MNLU Aurangabad
December
INTRODUCTION
RESEARCH METHODOLOGY

HYPOTHESIS
 LITREATURE REVIEW

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 2801 of 2006 (Arising out of SLP (C) No. 22576 of 2005)

State Bank of India and Ors. vs. Mula Sahakari Sakhar Karkhana Ltd.
(2006) 6 SCC 293

FACTS OF THE CASE:

The Respondent, Mulla Sahakari sakhar Karakhana Ltd. is a cooperative society. The
respondent has a Sugar Factory and entered into a contract with M/s Pentagon Engineering
Pvt. Ltd (herein referred as “Pentagon”). They entered into the contract for the purpose of
installation of a paper plant at village Sonai on turnkey basis so as to enable it to utilise the
leftover material called ‘bargesse’ of the sugarcane. The total value of the contract was Rs 3.4
Crore. And for that Pentagon furnished a performance guarantee in regard to the machinery
supplied by it.

The said contract which was entered by them contained a clause of retention of 10% of the
contract price by the Cooperative society in the following terms:

 15.2.4 after satisfactory commissioning and working of the plant for three months, 5%
of the contract shall be payable.
 15.2.5 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, then 5% shall be payable after 6 months.

Pentagon, however, a letter dated 6-04-1985 suggested a modification in the said clause to
waive its right to retain 10% of the contract price and in turn proposed a letter of credit so
that they can furnish bank guarantee. The Cooperative society accepted the modification,
stating that:

“Pentagon must to submit the performance guarantee at 10% of the contract price, and
if the said guarantee is not received the Karkhana is entitled to recover from the balance
payment.”

Pentagon in response a letter dated 16-04-1985 agreed to the said proposal stating:

“As per the agreement you have to open L/C for retention of 10% which is still not
done by you. As soon as you open L/C, the bank guarantee for retention of money will be
sent to you.”

On or about 04-09-1985, the bank guarantee/indemnity was furnished by the appellant; the
relevant clauses read as:

 The bank guarantee bearing No. 85/17 dated 04-09-1985 issued by SBI, Bombivil
Industrial Esate branch, Dombivil..
  The guarantee is issued in pursuance of our agreement for paper project dated
25.9.1983. The guarantee covers 10% retention amount of Rs. 34 lacs.

 An amount of Rs. 13,76,285/- is retained from the Proforma Invoices of the material
reached at site.

 Kindly release the amount of Rs. 13,76,285/- to be retained by you immediately on

receipt of this guarantee and oblige.

THE DISPUTE

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, 1987.

The Bank Guarantee was thereafter invoked by the cooperative society. The demand of the
cooperative society invoking the said Bank Guarantee met resistance from the Appellant
stating that it had executed an agreement of indemnity pursuant whereto or in terms whereof
only losses, claims, damages, actions and costs which might have been suffered by it, were
covered and the transaction in question does not constitute Bank Guarantee. It was, therefore,
contended that unless the cooperative society proved any loss or damage for design,
performance, workmanship or supply of any defective material through a competent court or
authority, the Appellants were not liable to pay the said amount.

PROCEEDINGS

A suit was filed by the cooperative society in the Court of Civil Judge, Senior Division,
Ahmednagar which was numbered as Special Civil Suit No. 310 of 1987. In addition to this,
an application was also filed by the cooperative society to direct the appellant to deposit the
amount of RS. 34,00,000.
ORDER OF THE COURT

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 thereagainst by the cooperative society
before the High Court. The High Court after analysing the said agreement dated 25.9.1983 to
be a Bank Guarantee decreed the suit directing Appellant (state Bank of India) to pay the said
sum of Rs.34,00,000/- with interest @ 14% per annum.

An appeal was made against the order of the High Court before the hon’ble Supreme Court of
India.

SUBMISSIONS

The learned solicitor general appearing on behalf of the appellants submitted that:

 On the close scrutiny of the document dated 04-09-1985 it would be seen that the
same is a contract of indemnity not guarantee.
 The hon’ble High court committed a manifest error in considering the oral evidence
adduced by the parties.
 Interest awarded @ 14% per annum is contrary to and inconsistent with the directions
of the High court on its order dated 23-02-1988.

Learned senior counsel appearing on behalf of the cooperative society humbly submitted that:

 The matter should be gathered in the backgrounds of the events in which the bank
guarantee was furnished. The terms of the contract must not be gathered from one
document but from other circumstances too.
 An agreement was made on 29-03-1985 between the cooperative society and
Pentagon, to purchase the paper plant on turnkey basis. Further, it was also stated that
the final payment could be made to the supplier only after furnishing a bank
agreement to the cooperative society.
 In addition to this Pentagon was the client of the appellant and had approached to
furnish the bank guarantee.
The above argument which was presented by the learned counsel put a strong reliance on S.
Chattanatha Karayalar v. The Central Bank of India and Ors. (AIR 1965 SC 1856) and P.L.
Bapuswami v. N. Pattay Gounder (AIR 1966 SC 902)

A letter dated 07-09-1985 states that:

This bank guarantee is made in favour of Mula Saakahari Kahkhana by State Bank of
India hereby agrees to all terms and conditions set forth in this agreement to indemnify the
mula Sakhari Karkhana against all losses, claims, damages action.

Further the letter also reads:

Our maximum liability under this guarantee is limited to Rs. 34,00,000 and it shall
remain in force upto 03-09-1987.

The learned counsel humbly submitted tha the Hon’ble high court made a manifest error in
interpreting the agreement and opined that the agreement was of a contract of guarantee not
of Indemnity. Further, the Hon’ble court also inserted few words which was not there in the
agreement such as in paragraph 31 of the impugned judgment it added the term "unequivocal
condition" which term did not find place in the original document.

DECSION OF THE SUPREME COURT

The Hon’ble Supreme Court held that the bank guarantee must not be construed in the in the
light of other purported documents and cannot be accepted. A contract indisputably may be
contained in more than one document. Such document, however, must be a subject matter of
contract of contract by and between the parties.

CONCLUSION

However, in this instant case, the question arises between the cooperative society and
Pentagon while the contract in question (whether of indemnity or guarantee) was between
Pentagon and the appellant. The Said correspondences were not exchange between the parties
hereto, the appellant and the respondent cooperative society, as a part of the same transaction.
The appellant understood that it will stand as a surety and not as a guarantor.

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 suggested by the respondent co-
operative society that the bank and it must be construed in the light of other purported
contemporaneous documents is to be accepted, it would be also open to a Banker to put
forward a case that an absolute and unequivocal bank guarantee should be read as conditional
one having regard to circumstances.

In the present case, the document in question whether a contract of indemnity or guarantee
does not specifically refer to any particular clause of the contract between the cooperative
society and Pentagon. In fact, the contract between cooperative society and pentagon does not
contain any clause requiring Pentagon to furnish any bank guarantee but it was contract of
indemnity.

BIBLIOGRAPHY

 Pollock & Mulla, Indian contract and Specific Relief Act, Lexis Nexis,
2013 (14th Edition)
 www.manupatra.com
 www.scconline.com
 www.casemine.com
 Avtar Singh, Law of Contracts and Specific Relief Act, Eastern Book
Company, 2013 (12th Edition)
 Anson’s Law of Contract (29th Edition), Oxford University Press.