Supreme Court of India
CANARA BANK OVERSEAS BRANCH REP. BY SENIOR MANAGERversusARCHEAN INDUSTRIES PRIVATE LIMITED AND ANOTHER
- Citation
- 2026 INSC 247
- Decided
- 17 March 2026
- Disposal
- Dismissed
- Bench
- B PARDIWALA
Holding
The Supreme Court held that Defendant No.1 executed a valid guarantee under Sections 126‑128 of the Contract Act and remains liable, and that Defendant No.2 Bank is liable for its erroneous remittance, affirming the High Court’s judgment.
Summary
The plaintiff, Goltens Dubai, repaired the vessel Master Panos and sought $100,000 from Defendant No.1 (Archean Industries) as part of a freight‑sharing arrangement that was to be paid directly to the plaintiff. Defendant No.1 executed a letter dated 22‑04‑1998 and a "Corporate Guarantee" dated 25‑04‑1998, unequivocally undertaking to pay the sum to the plaintiff, and later instructed Defendant No.2 (Canara Bank) to remit the amount. The bank mistakenly transferred the funds to the vessel owner, leading the plaintiff to obtain a decree against Defendant No.1, while the lower courts granted Defendant No.1 a third‑party decree against the bank. On appeal, the Supreme Court examined whether the documents constituted a valid guarantee under the Contract Act, whether the bank could be held liable despite the alleged lack of RBI approval, and whether the High Court's reasoning warranted interference. The Court held that the guarantee was valid, Defendant No.1 remained liable, the bank erred in its remittance and is liable for the mistake, and the High Court's order was correct. Consequently, both appeals were dismissed.
Issues considered
- Whether the letter and "Corporate Guarantee" executed by Defendant No.1 constitute a valid contract of guarantee under the Indian Contract Act, 1872, and whether Defendant No.1 can be absolved from liability.
- Whether the Division Bench of the Madras High Court erred in its reasoning and in granting a third‑party decree against Defendant No.2 Bank.
- Whether Defendant No.2 Bank can rely on the absence of RBI approval under the Foreign Exchange Regulation Act, 1973 to escape liability for the erroneous remittance.
- Whether the third‑party procedure under Order VIII‑A of the CPC is applicable in the present facts.
Legislation cited
- Contract Act, 1872s. 126, s. 127, s. 128, s. 137, s. 138, s. 140, s. 141
- Foreign Exchange Regulation Act, 1973s. 18(8)
Headnote
Issue for Consideration (i) Whether there is a valid undertaking by way of a guarantee executed by Defendant No.1 and whether Defendant No.1 can absolve from its liability; (ii) Whether the reasons adopted by the Division Bench of the High Court Court. Headnotes† Contract Act, 1872 – ss.126, 127, 128, 137, 138, 140, 141 – Plaintiff-Goltens Dubai carried out extensive repair works on the vessel Master Panos at request of the owner – Defendant No.1 had entered into a Charter Party Agreement dated 09.03.1998 with
Subjects
RemittanceIndemnityContract of guaranteeFreightBank’s liabilityThird-party procedureCo-extensive LiabilityConsideration for GuaranteeBanker’s MandateWrongful RemittanceLetters of UndertakingAdmitted Negligence
Judgment
[2026] 4 S.C.R. 151 : 2026 INSC 247
Canara Bank Overseas Branch Rep. by Senior Manager
v.
Archean Industries Private Limited and Another
(Civil Appeal No. 13861 of 2024)
17 March 2026
[J.B Pardiwala and R. Mahadevan,* JJ.]
Issue for Consideration
(i) Whether there is a valid undertaking by way of a guarantee
executed by Defendant No.1 and whether Defendant No.1 can
absolve from its liability; (ii) Whether the reasons adopted by the
Division Bench of the High Court warrant interference by this Court.
Headnotes†
Contract Act, 1872 – ss.126, 127, 128, 137, 138, 140, 141 –
Plaintiff-Goltens Dubai carried out extensive repair works on
the vessel Master Panos at request of the owner – Defendant
No.1 had entered into a Charter Party Agreement dated
09.03.1998 with the vessel owner for shipment – Under the
said arrangement, it was agreed that out of the freight payable
by Defendant No.1 to the vessel owner, a sum of US $100,000
would be paid directly by the owner to the plaintiff in partial
discharge of the vessel owner’s liability towards repair
charges – Defendant No.1 addressed a letter to its banker,
Defendant No.2, namely Canara Bank, to remit US $ 100,000 by
telegraphic transfer to the account of the plaintiff – However,
instead of remitting the amount to the account of the plaintiff as
instructed, Defendant No.2 erroneously transferred the amount
to the account of the vessel owner – As the amount remained
unpaid, the plaintiff instituted a recovery suit – The Single
Judge of the High Court by judgment dated 18.11.2010 decreed
the suit in favour of the plaintiff and held that Defendant No.1
was liable to pay the suit amount – Aggrieved, Defendant No.1
preferred appeal – The Division Bench allowed the appeal
to the limited extent by granting Defendant No.1 the benefit
of a third-party decree against Defendant No.2 for recovery
* Author
152 [2026] 4 S.C.R.
Supreme Court Reports
of the amount which had been erroneously remitted by the
bank, while affirming the liability of Defendant No.1 towards
the plaintiff – Correctness:
Held: In C.A.No.13862 of 2024 filed by Defendant No.1, a perusal
of the record reveals that Defendant No.1 had executed multiple
documents expressing its commitment to pay the plaintiff including
the letter dated 25.04.1998 styled as a “Corporate Guarantee” – In
the instant case, the owner of the vessel had instructed Defendant
No.1 to pay a sum of US $100,000 to the plaintiff towards discharge
of its liability for the repairs carried out to the vessel – By a letter
dated 22.04.1998, Defendant No.1 addressed the plaintiff assuring
that a sum of US $100,000 would be paid after the cargo was
cleared, in clear and unequivocal terms – The contents of the said
letter also indicate that Defendant No.1 had undertaken to make
the payment and had requested that the arrangement should not
be disclosed to the owner of the vessel – A conjoint reading of the
documents on record, particularly the letter dated 22.04.1998 and
the Corporate Guarantee dated 25.04.1998, clearly establishes that
the undertaking to pay was not merely a freight-sharing arrangement
but an independent guarantee satisfying the requirements of ss.126
to 128 of the Contract Act – Exhibits P10 and P11 constitute a
valid undertaking by Defendant No.1 to discharge the liability of
the vessel owner in the event of its default in payment of the repair
charges – Further, after the cargo had been delivered by the owner
of the vessel, and upon the plaintiff demanding payment, Defendant
No.1, by Exhibit P14, requested Defendant No.2 Bank to transfer a
sum of US $100,000 to the plaintiff – This conduct clearly reflects
the intention of Defendant No.1 to honour the undertaking given by
it – This Court, therefore, concur with the findings recorded by the
High Court – There is a valid undertaking by way of a guarantee
executed by Defendant No.1, and Defendant No.1 cannot absolve
from its liability – Further, the interests of Defendant No.1 are
protected as its right to recover the amount from the owner of
the vessel is preserved u/s.140 of the Contract Act, and the High
Court has also granted a third-party decree in its favour against the
Bank – In CA. No.13861 of 2024 filed by Defendant No.2 Bank, the
Division Bench of the High Court concurred with the findings of the
trial Court that the Bank had been instructed by Defendant No.1
through Exhibit P14 and the accompanying Form A-2 to remit a sum
of US $100,000 to the plaintiff – This Court, is in agreement with the
view taken by the High Court – The facts of the present case reveal
[2026] 4 S.C.R. 153
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
that the Bank, despite clear instructions to remit the US $100,000
to the account of the plaintiff, failed to do so due to an error on its
part – This mistake was also admitted by the Bank – The Division
Bench has carefully considered these aspects – Defendant No.1
was therefore rightly held entitled to a third-party decree against
Defendant No.2 Bank. [Paras 14, 23, 25, 33, 34, 36]
Contract Act, 1872 – ss.126, 127, 128, 137, 138, 140, 141 – A
contract of guarantee:
Held: A contract of guarantee is an undertaking to perform the
promise or discharge the liability of a third person, in case of his
default – It is essentially a voluntary act of taking up the burden
of a third party, who has received or is about to receive some
benefit and has failed to make the payment – The guarantor is
called the “surety” and person in default is called the “Principal
Debtor”. [Para 15.1]
Contract Act, 1872 – ss.126, 127, 128, 137, 138, 140, 141 –
Whether it is necessary for the guarantor to derive any direct
benefit from the transaction:
Held: It is well settled that it is not necessary for the guarantor to
derive any direct benefit from the transaction – It is sufficient if the
principal debtor derives the benefit – The consideration for a contract
of guarantee may be past, present or future – The guarantee is,
in itself, a separate contract and enforceable independently, and
the liability of the surety is co-extensive with that of the principal
debtor unless otherwise provided by the contract – Consequently,
both are jointly and severally liable – The creditor, to whom both
the principal debtor and surety are liable, can sue either or both
of them – In case, the creditor proceeds to recover only from
the surety, the surety is at liberty to recover the same from the
principal debtor as he would have stepped into the shoes of the
original creditor by virtue of the doctrine of subrogation, and all
the attendant remedies available to the creditor are available to
him. [Para 16]
Case Law Cited
Phoenix ARC Private Limited v. Ketulbhai Ramubhai Patel [2021]
1 SCR 1043 : (2021) 2 SCC 799; Maitreya Doshi v. Anand Rathi
Global Finance Limited and Another [2022] 15 SCR 536 : (2023)
17 SCC 606 – held inapplicable.
154 [2026] 4 S.C.R.
Supreme Court Reports
Union of India v. Ibrahim Uddin and Another [2012] 8 SCR 35 :
(2012) 8 SCC 148; Ram Sarup Gupta (Dead) by LRs. v. Bishun
Narain Inter College and Others [1987] 2 SCR 805 : (1987) 2
SCC 555; Bank of Bihar Ltd. v. Damodar Prasad and Others
[1969] 1 SCR 620 : MANU/SC/0220/1968; State Bank of India v.
V. Ramakrishnan and Others [2018] 10 SCR 974 : (2018) 17
SCC 394; Asset Reconstruction Co. Ltd. v. Electrosteel Castings
Ltd. [2026] 1 SCR 130 : 2026 SCC OnLine SC 26 : (2026) 264
Comp Cas 11; Mumbai International Airport (P) Ltd. v. Regency
Convention Centre & Hotels (P) Ltd. [2010] 7 SCR 790 : (2010)
7 SCC 417; Rohit Singh & Others v. State of Bihar [2006] Supp.
7 SCR 278 : (2006) 12 SCC 734; Sanjay Tiwari v. Yugal Kishore
Prasad Sao & Others, 2025 LiveLaw (SC) 1097; Kanaklata Das
and others v. Naba Kumar Das and Others [2018] 1 SCR 806 :
(2018) 2 SCC 352 : MANU/SC/0041/2018 – referred to.
List of Acts
Contract Act, 1872.
List of Keywords
Remittance; Indemnity; Contract of guarantee; freight; Bank’s
liability; Third-party procedure; Co-extensive Liability; Consideration
for Guarantee; Banker’s Mandate; Wrongful Remittance; Letters
of Undertaking; Admitted Negligence.
Case Arising From
C I V I L A P P E L L AT E J U R I S D I C T I O N : C i v i l A p p e a l N o .
13861 of 2024
From the Judgment and Order dated 16.08.2021 of the High Court
of Judicature at Madras in OSA No. 423 of 2012.
With
Civil Appeal No. 13862 of 2024
Appearances for Parties
Advs. for the Appellant(s):
Ramakrishnan Viraraghavan, Gopal Jain, Sr. Advs., K. Krishna
Kumar, Dhananjay Kumar, Rajesh Kumar Gautam, Anant Gautam,
Ajay Sharma, Deepanjal Chaudhary, Vibhu Sharma, Ms. Likivi
Jakhalu, Ms. Azal Aekram.
[2026] 4 S.C.R. 155
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
Advs. for the Respondent(s):
Ramakrishnan Viraraghavan, Siddharth Yadav, Sr. Advs.,
K. Krishna Kumar, Dhananjay Kumar, Rajesh Kumar Gautam,
Anant Gautam, Ajay Sharma, Deepanjal Chaudhary, Vibhu Sharma,
Ms. Likivi Jakhalu, Ms. Azal Aekram, Wasim Ashraf, Krishna Ballabh
Thakur, Narender Lodiwal, Narendar Lodiwal, Ms. Rashmi Kumari.
Judgment / Order of the Supreme Court
Judgment
R. Mahadevan, J.
1. Since both the appeals assail the same judgment and involve
interconnected issues, they were heard together and are being
disposed of by this common judgment.
2. The present Civil Appeals arise out of the common judgment and
decree dated 16.08.2021 passed by the High Court of Judicature at
Madras1 in O.S.A. No. 423 of 2012, whereby the Division Bench of
the High Court allowed the appeal to the limited extent of decreeing
the claim of Defendant No. 1 (Appellant in C.A. No. 13862 of 2024)
against Defendant No. 2 (Appellant in C.A. No. 13861 of 2024) under
the third-party procedure as prayed for, while affirming the judgment
and decree dated 18.11.2010 passed by the learned Single Judge
of the High Court in C.S. No. 933 of 1998 in all other respects.
3. The aforesaid Civil Suit was instituted by the plaintiff - Goltens Dubai
(Respondent No. 2 in C.A. No. 13861 of 2024 and Respondent No. 1
in C.A. No. 13862 of 2024) seeking a judgment and decree against
Defendant Nos. 1 and 2 viz., Archean Industries Private Limited
(Appellant in C.A. No. 13862 of 2024) and Canara Bank, Overseas
Branch, Chennai (Appellant in C.A. No. 13861 of 2024) jointly and
severally, for a sum of Rs. 48,26,750/- together with interest at the
rate of 21% per annum on Rs. 43,00,000/- from the date of the
plaint till realisation along with costs. By judgment and decree dated
18.11.2010, the learned Single Judge decreed the suit as prayed
for only against Defendant No. 1 while dismissing the suit insofar
as Defendant No. 2 is concerned, without costs.
1 Hereinafter referred to as “the High Court”
156 [2026] 4 S.C.R.
Supreme Court Reports
4. The Plaintiff is a company engaged in ship repair and marine
engineering services in Dubai. Defendant No. 1 is a company engaged
in the export of granite and had chartered the vessel Master Panos
for shipment of granite from Chennai to Newark in the United States
of America. Defendant No. 2 acted as the banker of Defendant No.
1 and was entrusted with the remittance of the amount in question.
For the sake of convenience, the parties shall hereinafter be referred
to as per their status in the suit.
FACTUAL BACKGROUND
5. The facts giving rise to the present dispute, in brief, are that the
plaintiff - Goltens Dubai, a ship repair company based in the United
Arab Emirates, carried out extensive repair works on the vessel Master
Panos during the period January to March 1998 at the request of its
owner and operator/manager namely M/s. Royal Swan Navigation
Co. Ltd. and M/s. Pevson Shipping Company S.A., respectively.
The cost of the repair works was invoiced at US $ 435,232. As the
payment remained outstanding, the plaintiff initiated legal proceedings
which resulted in the arrest of the vessel at Dubai, thereby causing
additional expenses of US $ 42,330 and raising the total outstanding
liability to US $ 477,562.
5.1. Following negotiations between the plaintiff and the vessel
owner, a Memorandum of Agreement dated 18.03.1998 was
executed whereby the liability was reduced to US $ 377,562
on the condition that the entire amount would be paid on or
before 08.04.1998, failing which the original liability of US $
477,562 would stand revived. Under the said settlement, the
amount was to be paid from various sources, including a sum
of US $ 100,000 which was to be remitted directly to the plaintiff
through the owner Royal Swan.
5.2. In the meantime, Defendant No. 1 had entered into a Charter
Party Agreement dated 09.03.1998 with the vessel owner for
shipment of approximately 2,500 metric tonnes of granite from
Chennai to Newark in the United States of America. Under the
said arrangement, it was agreed that out of the freight payable
by Defendant No. 1 to the vessel owner, a sum of US $ 100,000
would be paid directly by the owner to the plaintiff in partial
discharge of the vessel owner’s liability towards repair charges.
[2026] 4 S.C.R. 157
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
5.3. The vessel owner by communication dated 21.04.1998
addressed to Defendant No. 1, issued instructions to Defendant
No. 1 that the said sum be remitted directly to the bank account
of the plaintiff maintained with Standard Chartered Bank, Deira
Branch, Dubai.
5.4. Pursuant thereto, Defendant No. 1 by communication dated
22.04.1998, acknowledged that a sum of US $ 100,000 had
been retained from the freight payable to the vessel owner and
confirmed that the amount would be remitted to the plaintiff
upon the vessel reaching the port of Newark. Subsequently, on
25.04.1998, Defendant No. 1 issued a document styled as a
“Corporate Guarantee” in favour of the plaintiff undertaking to
pay the said amount upon the vessel’s arrival at Newark and
commencement of discharge operations.
5.5. The vessel arrived at Newark in May 1998 and Defendant No.
1 informed the plaintiff by communication dated 19.05.1998 that
the remittance was being processed and that approval from
the Reserve Bank of India was being obtained for the foreign
exchange transaction.
5.6. Thereafter, on 21.05.1998, Defendant No. 1 addressed a letter
to its banker, Defendant No. 2, namely Canara Bank, Overseas
Branch, Chennai, instructing it to remit US $ 100,000 by
telegraphic transfer to the account of the plaintiff. Defendant No.
1 also submitted Form A-2 containing the requisite particulars
for the remittance.
5.7. However, instead of remitting the amount to the account of the
plaintiff as instructed, Defendant No. 2 erroneously transferred
the amount to the account of the vessel owner maintained with a
bank in Baltimore, United States of America. The said mistaken
remittance was subsequently acknowledged by Defendant No.
1 in its communication dated 03.06.1998 addressed to the
brokers of the vessel.
5.8. By a further communication dated 12.06.1998, Defendant No.
1 reiterated that the amount had been inadvertently remitted
to the vessel owner and reaffirmed its commitment to make
payment to the plaintiff.
158 [2026] 4 S.C.R.
Supreme Court Reports
5.9. As the amount remained unpaid despite repeated communications
and demands, the plaintiff issued a legal notice dated 29.07.1998
to Defendant Nos. 1 and 2 demanding payment of US $ 100,000
together with interest. Defendant No. 1 replied to the said notice
disputing its liability and contending that the document styled as
a Corporate Guarantee was not a guarantee in law but merely
an acknowledgment of a freight payment arrangement.
5.10. In these circumstances, the plaintiff instituted the aforesaid
recovery suit. Defendant No. 1 contested the suit by filing its
written statement and also raised a third-party claim against
Defendant No. 2 alleging that the erroneous remittance made
by the bank was responsible for the non-payment. Defendant
No. 2 filed its written statement denying liability.
5.11. The parties adduced oral and documentary evidence before the
learned Single Judge of the High Court. Upon appreciation of
the pleadings, evidence and materials on record, the learned
Single Judge by judgment dated 18.11.2010 decreed the suit
in favour of the plaintiff and held that Defendant No. 1 was
liable to pay the suit amount together with interest and costs,
while dismissing the claim against Defendant No. 2. Aggrieved
thereby, Defendant No. 1 preferred O.S.A. No. 423 of 2012
before the Division Bench of the High Court.
5.12. The Division Bench, upon consideration of the submissions of
the parties, allowed the appeal to the limited extent by granting
Defendant No. 1 the benefit of a third-party decree against
Defendant No. 2 for recovery of the amount which had been
erroneously remitted by the bank, while affirming the liability
of Defendant No. 1 towards the plaintiff.
5.13. Aggrieved by the findings of the Division Bench holding it liable
to the plaintiff, Defendant No. 1 has filed C.A. No. 13862 of
2024. Similarly, Defendant No. 2 has filed C.A. No. 13861 of
2024 challenging the direction of the Division Bench permitting
Defendant No. 1 to recover the sum of US $ 100,000 from it
under third-party procedure.
SUBMISSION OF THE PARTIES
6. The learned senior counsel appearing for the Appellant in C.A.
No. 13862 of 2024 / Defendant No. 1 contended that the courts
[2026] 4 S.C.R. 159
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
below erred in fastening liability upon Defendant No. 1 by treating
the communication dated 25.04.1998 as a contract of guarantee. It
was submitted that the said document, described as a “Corporate
Guarantee”, does not satisfy the essential requirements of a valid
contract of guarantee within the meaning of Section 126 of the
Indian Contract Act, 1872. A contract of guarantee necessarily
contemplates the existence of three distinct parties, namely the
creditor, the principal debtor and the surety, wherein the surety
undertakes to discharge the liability of the principal debtor in the event
of default. According to the learned senior counsel, in the present
case, Defendant No. 1 was itself a party to the freight arrangement
under the Charter Party Agreement dated 09.03.1998 and was not
a surety for any debt allegedly owed by the vessel owner to the
plaintiff. The document relied upon by the plaintiff merely records an
arrangement whereby Defendant No. 1 agreed to retain a portion
of the freight payable to the vessel owner and remit the same to
the plaintiff on its behalf.
6.1. The learned senior counsel submitted that the language of
the communication dated 25.04.1998 itself demonstrates that
Defendant No. 1 was acting on behalf of the vessel owner and
under its authority. The arrangement was, therefore, in the nature
of a freight assignment or payment arrangement between the
vessel owner and the plaintiff, and Defendant No. 1 merely
agreed to facilitate the remittance of a portion of the freight to
the plaintiff. It was contended that such an arrangement cannot
be construed as an independent and enforceable guarantee
undertaken by Defendant No. 1.
6.2. It was further contended that the courts below failed to appreciate
that the liability, if any, arose primarily from the underlying
transaction between the plaintiff and the vessel owner and
operator/manager. The vessel owner and the operator/manager
were the alleged principal debtors in respect of the repair charges
for the vessel Master Panos. However, no proceedings were
initiated by the plaintiff against the vessel owner and operator/
manager for recovery of the alleged dues. The learned senior
counsel pointed out that even during the course of evidence,
the witness examined on behalf of the plaintiff admitted that no
legal proceedings had been initiated against the vessel owner.
160 [2026] 4 S.C.R.
Supreme Court Reports
In such circumstances, fastening liability upon Defendant No.
1, who was neither the principal debtor nor a valid surety, was
legally unsustainable.
6.3. The learned senior counsel further submitted that Defendant
No. 1 had duly complied with the arrangement between the
parties by issuing clear instructions to its banker, Defendant
No. 2, for remittance of the amount of US $ 100,000 to the
plaintiff. Defendant No. 1 addressed a letter dated 21.05.1998
to its banker along with the requisite Form A-2 directing the
bank to remit the said amount to the account of the plaintiff.
It was contended that once such specific instructions were
issued, Defendant No. 1 had fulfilled its obligation under the
arrangement. The subsequent remittance of the amount to
the vessel owner occurred solely due to the error committed
by the bank. Instead of transferring the amount to the account
of the plaintiff as instructed, the bank erroneously remitted the
amount to the vessel owner. The evidence on record, according
to the learned senior counsel, indicates that the bank itself
acknowledged that such remittance may have occurred due to
inadvertence on the part of its employee. In these circumstances,
the resulting loss, if any, cannot be attributed to Defendant No. 1.
6.4. The learned senior counsel also submitted that the vessel owner,
who had actually received the remitted amount of US $ 100,000,
was necessary party to the proceedings. The failure to implead
the vessel owner resulted in a situation where the party which
had actually received the amount was not before the Court. It
was contended that such omission caused serious prejudice to
Defendant No. 1 as it was deprived of the opportunity to seek
appropriate reliefs against the vessel owner.
6.5. The learned senior counsel further contended that the Courts
below failed to properly appreciate the nature of the transaction
and the defence raised by Defendant No. 1. According to the
learned senior counsel, the evidence adduced on behalf of
Defendant No. 1 clearly demonstrated that the transaction was
essentially a freight payment arrangement arising out of the
Charter Party Agreement and did not create any independent
contractual liability in the nature of a guarantee in favour of
the plaintiff.
[2026] 4 S.C.R. 161
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
6.6. Reliance was also placed on the documents filed by the plaintiff
in its pleadings, particularly paragraph 4 thereof, which records
that Defendant No. 1 had been instructed by the vessel owner
(Royal Swan) to pay a sum of US $ 100,000 directly to the
plaintiff towards discharge of the owner’s liability. According to
the learned senior counsel, these materials demonstrate that
Exhibit P11 was merely an agency letter authorising payment
on behalf of Royal Swan, and not a guarantee.
6.7. In support of the above submission, reliance was placed on
the decision of this Court in Phoenix ARC Private Limited v.
Ketulbhai Ramubhai Patel2, wherein it was held that the liability
of a surety arises only when there is a clear and unequivocal
undertaking to discharge the debt of the principal debtor upon
default. It was submitted that no such undertaking is present
in Exhibit P11.
6.8. The learned senior counsel also relied upon the judgment of
this Court in Maitreya Doshi v. Anand Rathi Global Finance
Limited and another3, wherein it was reiterated that the
existence of a clear undertaking to discharge the liability of
another is a fundamental requirement for a contract of guarantee
under Section 126 of the Contract Act, 1872. According to
the learned senior counsel, the arrangement evidenced in
Exhibit P11 is merely an agency direction for payment and not
a guarantee. In the absence of any unequivocal promise by
Defendant No. 1 to assume liability for the debts of the vessel
owner, Exhibit P11 cannot be treated as a guarantee in law
6.9. The learned senior counsel therefore submitted that both the
learned Single Judge as well as the Division Bench of the High
Court failed to correctly appreciate the legal character of the
document viz., letter dated 25.04.1998 and the surrounding
circumstances in which it was issued. The impugned judgment,
according to the learned senior counsel, proceeds on an
erroneous assumption that Defendant No. 1 had undertaken
an independent guarantee in favour of the plaintiff, whereas in
reality Defendant No. 1 had merely agreed to remit a portion
of the freight payable to the vessel owner.
2 (2021) 2 SCC 799
3 (2023) 17 SCC 606
162 [2026] 4 S.C.R.
Supreme Court Reports
6.10. In the above circumstances, learned senior counsel submitted
that the findings recorded by the Courts below suffer from errors
of law and misappreciation of the nature of the transaction
and therefore warrant interference by this Court.
7. The learned senior counsel appearing for the appellant in C.A. No.
13861 of 2024 / Defendant No. 2 Bank submitted that the decree
passed by the Division Bench fastening liability upon the Bank is
unsustainable both on facts and in law. It was contended that the
High Court failed to properly appreciate the limited role of the Bank
in the transaction and the statutory framework governing foreign
exchange remittances.
7.1. It was submitted that the repairs of the vessel Master Panos
had been carried out by the plaintiff and the primary liability for
payment of the repair charges was that of the vessel owner.
The arrangement subsequently entered into between the vessel
owner and Defendant No. 1 relating to payment of freight
charges was essentially a commercial arrangement between
those parties. According to the learned senior counsel, the Bank
was not a party to that arrangement and had undertaken no
independent contractual obligation either towards Defendant
No. 1 or towards the plaintiff in relation to the alleged payment
of US $ 100,000.
7.2. The learned senior counsel submitted that the Bank was
acting merely in its capacity as an authorised dealer in foreign
exchange and its role was confined to executing remittance
instructions in accordance with the statutory regime governing
such transactions. It was contended that any remittance of
foreign exchange outside India during the relevant period was
governed by the provisions of the Foreign Exchange Regulation
Act, 1973, and the Bank was required to strictly comply with
the statutory restrictions and regulatory directions issued by the
Reserve Bank of India. In particular, reliance was placed upon
Section 18(8) of the Foreign Exchange Regulation Act, 1973,
which regulates the handling of export proceeds and foreign
exchange transactions by authorised dealers.
7.3. It was further submitted that the remittance sought to be effected
by Defendant No. 1 involved diversion of freight payable to
the vessel owner in favour of the plaintiff, who was not the
[2026] 4 S.C.R. 163
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
contracting party to the freight agreement. According to the
learned senior counsel, such diversion of foreign exchange
to a third party could not be effected by an authorised dealer
without prior approval from the Reserve Bank of India.
7.4. The learned senior counsel drew attention to the contemporaneous
correspondence to demonstrate that Defendant No. 1 itself had
acknowledged this regulatory requirement. Reference was
made to the communication dated 19.05.1998 addressed by
Defendant No. 1 to the plaintiff wherein Defendant No. 1 had
stated that the payment of US $ 100,000 was being processed
with the Reserve Bank of India for necessary approval.
7.5. It was further submitted that the said position was clearly admitted
by the witness of Defendant No. 1 during cross examination
before the trial Court, stating that without the permission of the
Reserve Bank of India there could be no question of the Bank
remitting the amount to the plaintiff.
7.6. The learned senior counsel therefore submitted that the Bank,
being an authorised dealer under the foreign exchange regime,
was bound to act strictly within the statutory framework and
the regulatory directions issued by the Reserve Bank of India.
In the absence of the mandatory approval, the Bank could not
lawfully remit the amount to the plaintiff.
7.7. It was accordingly contended that the Bank had merely acted
within the statutory limitations governing foreign exchange
transactions and had not undertaken any independent obligation
towards the plaintiff. The dispute, if any, arose from the private
commercial arrangement between Defendant No. 1 and the
plaintiff, and Defendant No. 2 Bank cannot be made liable for
the consequences thereof.
7.8. The learned senior counsel submitted that the Division Bench
erred in passing a third-party decree against the Bank without
properly appreciating the statutory limitations governing the
Bank’s role as an authorised dealer in foreign exchange. It
was therefore prayed that the civil appeal filed by the Bank be
allowed by setting aside the decree passed against the Bank.
8. Per contra, the learned senior counsel appearing for the plaintiff /
Respondent No.1 in CA. No. 13862 of 2024 and Respondent No.2
164 [2026] 4 S.C.R.
Supreme Court Reports
in CA No. 13861 of 2024, submitted that the liability of Defendant
No. 1 arises from a clear and unequivocal contractual undertaking
given in favour of the plaintiff. It was contended that Defendant No.
1 had expressly undertaken to remit a sum of US $ 100,000 directly
to the plaintiff towards discharge of the liability owed by the vessel
owner for the repair works carried out by the plaintiff. According to the
learned senior counsel, this obligation arose pursuant to a specific
arrangement under which Defendant No. 1 had agreed to retain the
said amount out of the freight payable to the vessel owner and remit
the same directly to the plaintiff.
8.1. The learned senior counsel further submitted that Defendant
No. 1 had issued written communication dated 22.04.1998
acknowledging its obligation to make the payment and had also
executed a Corporate Guarantee by letter dated 25.04.1998
assuring payment of US $ 100,000 to the plaintiff upon the
arrival of the vessel at the port of Newark. The undertaking
was thereafter reiterated through subsequent communications
wherein Defendant No. 1 confirmed that the payment was being
processed and that the amount had been retained specifically
for the purpose of remittance to the plaintiff.
8.2. It was submitted that Defendant No. 1 had also issued
instructions to its banker dated 21.05.1998 for remittance of
the said amount and had submitted the necessary banking
documentation for transfer of funds to the account of the plaintiff.
However, owing to an error on the part of the Bank, the amount
was mistakenly remitted to the vessel owner instead of being
transferred to the plaintiff.
8.3. The learned senior counsel contended that such an erroneous
remittance by the Bank cannot absolve Defendant No. 1 of the
contractual obligation voluntarily undertaken by it in favour of
the plaintiff. At best, such an error may give rise to a separate
claim available to Defendant No. 1 against the Bank, but the
same cannot defeat the independent liability of Defendant No. 1
towards the plaintiff.
8.4. The learned senior counsel further submitted that Defendant
No. 1 attempted to introduce certain defences at the stage of
evidence which were not pleaded in the written statement. It
was argued that portions of the affidavit of evidence filed by
[2026] 4 S.C.R. 165
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
Defendant No. 1’s witness sought to set up an entirely new
case beyond the pleadings. In support of this submission,
reliance was placed upon the decision of this Court in Union of
India v. Ibrahim Uddin and another4, wherein it was held that
evidence without foundational pleadings cannot be considered.
Reliance was also placed upon Ram Sarup Gupta (Dead) by
LRs. v. Bishun Narain Inter College and others5, reiterating
the settled principle that parties cannot travel beyond their
pleadings while leading evidence.
8.5. The learned senior counsel also submitted that the legal position
governing contract of guarantee clearly supports the case of the
plaintiff. It was contended that past consideration constitutes
valid consideration for a contract of guarantee and that even
forbearance to sue the principal debtor amounts to sufficient
consideration in law.
8.6. The learned senior counsel submitted that reliance placed by
Defendant No. 1 on illustration (c) to Section 127 of the Contract
Act is misconceived, as it is well settled that illustrations cannot
control or limit the clear meaning of the substantive provision.
8.7. The learned senior counsel therefore submitted that the
documentary record, including the written undertaking, the
Corporate Guarantee and the subsequent communications,
clearly establishes Defendant No. 1’s liability towards the
plaintiff. Defendant No. 1 cannot escape its liability merely
because the Bank mistakenly remitted the amount to the vessel
owner, particularly when Defendant No. 1 itself had retained
the amount specifically for the purpose of making payment to
the plaintiff.
8.8. It was further pointed out that the Division Bench of the High
Court, while affirming the decree in favour of the plaintiff, had
granted a third-party decree in favour of Defendant No. 1
against the Bank, thereby safeguarding Defendant No. 1’s right
to recover the amount from the Bank in view of the mistaken
remittance.
4 (2012) 8 SCC 148
5 (1987) 2 SCC 555
166 [2026] 4 S.C.R.
Supreme Court Reports
8.9. In these circumstances, learned senior counsel submitted that
the findings recorded by the learned Single Judge, as affirmed
by the Division Bench, are based on a proper appreciation of
the pleadings, documentary evidence and settled principles of
law governing contractual liability and guarantees. The learned
senior counsel therefore prayed that the concurrent findings of
the Courts below be affirmed.
9. By way of reply, the learned senior counsel for Defendant No. 1
submitted that the bank’s own admission shows that the remittance
was effected due to inadvertence on the part of its employee.
According to the learned senior counsel, this clearly establishes
negligence in the discharge of Bank’s duties.
9.1. It was further submitted that the Bank’s reliance on the Charter
Party Agreement is wholly misplaced, as the Bank was not
a party to the said agreement. The obligations of the Bank
arise solely from the mandate issued by its customer. Once
instructions were issued by Defendant No. 1, the Bank was
dutybound to act strictly in accordance with those instructions.
Even assuming that the Bank had reservations regarding
regulatory approval, it ought to have sought clarification or
declined to process the transaction. Instead, the Bank unilaterally
remitted the amount to the vessel owner without authorisation,
which was impermissible.
9.2. The learned senior counsel for Defendant No. 1 therefore
contended that the unilateral act of the Bank in debiting
Defendant No. 1’s account and remitting the amount to the
vessel owner, contrary to the specific instructions issued by
Defendant No. 1, constitutes a clear breach of duty and cannot
be justified in law.
DISCUSSION AND FINDINGS
10. We have considered the submissions made by the learned senior
counsel appearing for the parties and perused the materials available
on record.
11. This Court by order dated 20.10.2022 in SLP (C) No. 18106 of 2022
out of which Civil Appeal No. 13861 of 2024 arises, granted an
interim stay of the judgment passed by the High Court. Further, by
[2026] 4 S.C.R. 167
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
order dated 28.08.2023 in SLP (C) No. 19275 of 2023, out of which
Civil Appeal No. 13862 of 2024 arises, this Court directed that the
execution proceedings shall not be precipitated.
12. The challenge in the present civil appeals is to the judgment dated
16.08.2021 passed by the Division Bench of the High Court in O.S.A.
No. 423 of 2012. C.A. No. 13862 of 2024 filed by Defendant No. 1
is confined to the finding holding it liable to pay the plaintiff. On the
other hand, C.A. No. 13861 of 2024 filed by Defendant No. 2 Bank
assails the direction of the Division Bench requiring it to indemnify
Defendant No. 1 in the third-party proceedings.
13. The sum and substance of the submissions advanced on behalf
of Defendant No. 1 is that the document in the form of letter dated
25.04.1998 executed by it does not constitute an undertaking or
guarantee, but merely reflects a freight payment arrangement. It is
further contended that Defendant No. 1 had issued clear instructions
to the Bank to transfer the funds to the plaintiff and that the mistaken
remittance occurred solely due to an error committed by the Bank.
Hence, according to Defendant No. 1, no liability can be fastened
upon it.
13.1. The contention of the Bank, against whom a decree has
been passed under the third-party procedure, is that though
instructions were issued to remit the amount to the plaintiff, no
approval had been obtained from the Reserve Bank of India
and therefore, the remittance could not have been effected in
favour of the plaintiff. It is further submitted that the Bank was
not a party to the inter se arrangement between the parties and
consequently, no decree could have been passed against it.
Civil Appeal No. 13862 of 2024 filed by Defendant No. 1
14. We shall first deal with the appeal filed by the appellant / Defendant
No.1. A perusal of the record reveals that Defendant No. 1 had
executed multiple documents expressing its commitment to pay the
plaintiff including the letter dated 25.04.1998 styled as a “Corporate
Guarantee”.
15. Chapter VIII of the Indian Contract Act, 1872 deals with the law
regarding “Indemnity and Guarantee”. The relevant provisions are
extracted hereunder, for better appreciation:
168 [2026] 4 S.C.R.
Supreme Court Reports
“126. “Contract of guarantee”, “surety”, “principal
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 called the “creditor”. A guarantee
may be either oral or written.”
“127. Consideration for guarantee.—Anything done, or
any promise made, for the benefit of the principal debtor,
may be a sufficient consideration to the surety for giving
the guarantee.”
“128. Surety’s liability.—The liability of the surety is
co- extensive with that of the principal debtor, unless it
is otherwise provided by the contract.”
“137. Creditor’s forbearance to sue does not discharge
surety.—Mere forbearance on the part of the creditor to
sue the principal debtor or to enforce any other remedy
against him does not, in the absence of any provision
in the guarantee to the contrary, discharge the surety.”
“138. Release of one co-surety does not discharge
others.—Where there are co-sureties, a release by the
creditor of one of them does not discharge the others;
neither does it free the surety so released from his
responsibility to the other sureties.”
“140. Rights of surety on payment or performance.—
Where a guaranteed debt has become due, or default
of the principal debtor to perform a guaranteed duty has
taken place, the surety upon payment or performance of
all that he is liable for, is invested with all the rights which
the creditor had against the principal debtor.”
“141. Surety’s right to benefit of creditor ’s
securities.—A surety is entitled to the benefit of every
security which the creditor has against the principal debtor
at the time when the contract of suretyship is entered
into, whether the surety knows of the existence of such
[2026] 4 S.C.R. 169
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
security or not; and if the creditor loses, or, without the
consent of the surety, parts with such security, the surety
is discharged to the extent of the value of the security.”
15.1. A reading of the aforesaid provisions indicates that a contract
of guarantee is an undertaking to perform the promise or
discharge the liability of a third person, in case of his default. It
is essentially a voluntary act of taking up the burden of a third
party, who has received or is about to receive some benefit and
has failed to make the payment. The guarantor is called the
“surety” and person in default is called the “Principal Debtor”.
16. It is well settled that it is not necessary for the guarantor to derive
any direct benefit from the transaction. It is sufficient if the principal
debtor derives the benefit. The consideration for a contract of
guarantee may be past, present or future. The guarantee is, in itself,
a separate contract and enforceable independently, and the liability
of the surety is co-extensive with that of the principal debtor unless
otherwise provided by the contract. Consequently, both are jointly
and severally liable. The creditor, to whom both the principal debtor
and surety are liable, can sue either or both of them. In case, the
creditor proceeds to recover only from the surety, the surety is at
liberty to recover the same from the principal debtor as he would
have stepped into the shoes of the original creditor by virtue of the
doctrine of subrogation, and all the attendant remedies available to
the creditor are available to him.
17. In this context, reference may be made to the judgment of this Court
in Bank of Bihar Ltd. v. Damodar Prasad and others6, wherein it
was held that the creditor is entitled to proceed against the surety
without first exhausting the remedies against the principal debtor.
The relevant paragraphs are usefully extracted below:
“3. The demand for payment of the liability of the principal
debtor was the only condition for the enforcement of the
bond. That condition was fulfilled. Neither the principal
debtor nor the surety discharged the admitted liability of
the principal debtor in spite of demands. Under Section
128 of the Indian Contract Act, save as provided in the
6 [1969] 1 SCR 620 : MANU/SC/0220/1968
170 [2026] 4 S.C.R.
Supreme Court Reports
contract, the liability of the surety is co-extensive with that
of the principal debtor. The surety became thus liable to
pay the entire amount. His liability was immediate. It was
not deferred until the creditor exhausted his remedies
against the principal debtor.
4. Before payment the surety has no right to dictate
terms to the creditor and ask him to pursue his remedies
against the principal in the first instance. As Lord Eldon
observed in Wright v. Simpson, [1802] 6 Ves Jun. 714 ;
31 E.R. 1272 “But the surety is a guarantee ; and it is
his business to see whether the principal pays, and not
that of creditor.” In the absence of some special equity
the surety has no right to restrain an action against him
by the creditor on the ground that the principal is solvent
or that the creditor may have relief against the principal
in some other proceedings.
….
6…… But the solvency of the principal is not a sufficient
ground for restraining execution of the decree against the
surety. It is the duty of the surety to pay the decretal amount.
On such payment he will be subrogated to the rights of
the creditor under Section 140 of the Indian Contract Act,
and he may then recover the amount from the principal.
The very object of the guarantee is defeated if the creditor
is asked to postpone his remedies against the surety. ..”
18. In State Bank of India v. V. Ramakrishnan and Others7, this Court
reiterated the essential attributes of a contract of guarantee and the
nature of the liability of a surety. In doing so, reliance was placed
on the recommendations of the Insolvency Law Committee, one of
which reads as under:
“5.9. A contract of guarantee is between the creditor,
the principal debtor and the surety, whereunder the
creditor has a remedy in relation to his debt against
both the principal debtor and the surety [National Project
Construction Corporation Limited v. Sandhu and Co. MANU/
7 (2018) 17 SCC 394
[2026] 4 S.C.R. 171
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
PH/0072/1990 : AIR 1990 P&H 300]. The surety here may
be a corporate or a natural person and the liability of such
person goes as far as the liability of the principal debtor.
As per Section 128 of the Indian Contract Act, 1872, the
liability of the surety is co-extensive with that of the principal
debtor and the creditor may go against either the principal
debtor, or the surety, or both, in no particular sequence
[Chokalinga Chettiar v. Dandayunthapani Chattiar MANU/
TN/0285/1928 : AIR 1928 Mad 1262]. Though this may
be limited by the terms of the contract of guarantee, the
general principle of such contracts is that the liability of
the principal debtor and the surety is co-extensive and is
joint and several [Bank of Bihar v. Damodar Prasad MANU/
SC/0220/1968 : AIR 1969 SC 297]. The Committee noted
that this characteristic of such contracts i.e. of having
remedy against both the surety and the corporate debtor,
without the obligation to exhaust the remedy against one
of the parties before proceeding against the other, is of
utmost importance for the creditor and is the hallmark of
a guarantee contract, and the availability of such remedy
is in most cases the basis on which the loan may have
been extended.”
19. Similarly, in Phoenix ARC Private Limited (supra), while
considering the scope of a guarantee in the context of enforcement
proceedings, this Court underscored that a contract of guarantee
is a guarantee “to perform the promise or discharge the liability
of third person in case of his default”. The Court noted that the
expressions “perform the promise”, and “discharge the liability”, as
used in Section 126 of the Indian Contract Act, 1872, necessarily
relate to the obligation undertaken by the surety in respect of the
liability of a third person.
20. Further, in Maitreya Doshi (supra) this Court delineated the distinction
between a contract of indemnity, a contract of guarantee and a
pledge. The relevant paragraph reads as under:
“34. It is true, as argued by Mr. Vishwanathan that contract
of indemnity, contract of guarantee and pledge are not
one and the same. The contract of indemnity is a contract
by which one party promises to save the other from loss
172 [2026] 4 S.C.R.
Supreme Court Reports
caused to him by the conduct of the promisor himself or by
the conduct of any other person. In a contract of indemnity,
a promisee acting within the scope of his authority is
entitled to recover from the promisor all damages and all
costs which he may incur. A contract of guarantee, on the
other hand, is a promise whereby the promisor promises
to 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 the principal debtor and the person
to whom the guarantee is given is the creditor. Anything
done or any promise made for the benefit of the principal
debtor may be a sufficient consideration to the surety for
giving the guarantee. On the other hand, the bailment of
goods as security for payment of a debt or performance
of a promise is a pledge”.
21. Recently, in Asset Reconstruction Co. Ltd. v. Electrosteel Castings
Ltd.8 this Court had occasion to consider the scope and ambit of
Section 126 of the Contract Act and the essential ingredients of a
contract of guarantee. The following paragraphs are apposite:
“17. We have given our thoughtful consideration to the
rival submissions and have carefully perused the records.
Section 126 of the Act defines a “contract of guarantee”,
as a contract to perform promise, or discharge the liability,
of a third person in case of his default. The essential
ingredients of a guarantee, therefore, are (a) existence
of principal debt, (b) default by the principal debtor and
(c) a promise by the surety to discharge the liability of the
principal debtor upon such default. Thus, a guarantee is a
promise to answer for the payment of some debt, or the
performance of some duty, in case of failure of another
party, who is in the first instance, liable to such payment
or performance [Conley, In re; Ex parte the Trustee v.
Barclays Bank Ltd. [1938] 2 All ER 127, at 130-131 (CA).].
A guarantee is a security in the form of right of action
against a third party. In order to constitute a guarantee,
there has to be a specific undertaking or unambiguous
8 2026 SCC OnLine SC 26 : (2026) 264 Comp Cas 11
[2026] 4 S.C.R. 173
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
affirmation to discharge the liability of a third person in
case of their default.
18. A guarantee is governed by principles of construction
generally governing other documents [Raja Raghunandan
Prasad Singh v. Raja Kirtyanand Singh Bahadur1932 SCC
OnLine PC 3; AIR 1932 PC 131, Eshelby v. Federated
European Bank Ltd. (1932) 1 KB 254 and Kamla Devi v.
Takhatmal Land1963 SCC OnLine SC 131; (1964) 2 SCR
152; AIR 1964 SC 859.]. A guarantee being a mercantile
contract, the court does not apply to it merely technical rules
but construes it so as to reflect what may fairly be inferred
to have been the parties’ real intention and understanding
as expressed by them in writing and to give effect to it
rather than not [Halsbury’s Laws of England, Volume 49,
fifth edition and Perrylease Ltd. v. Imecar AG[1987] 2 All
ER 378 (QBD).] .
20. For an obligation to be construed as a guarantee
under section 126 of the Act, there must be a direct and
unambiguous obligation of the surety to discharge the
obligation of the principal debtor to the creditor. The clause
neither records an undertaking to discharge the debt owed
to the creditor nor does it contemplate payment to the
lender in the event of the default. The clause contains a
promise, not to the creditor to pay the debt upon default,
but to the borrower to facilitate compliance with the financial
covenants. An undertaking to infuse funds into a borrower,
so that it may meet its obligations cannot, by itself be
equated with the promise to discharge the borrower’s
liability to the creditor. A mere covenant to ensure financial
discipline or infusion of funds does not satisfy the statutory
requirements of section 126 of the Act.
22. Section 126 of the Act mandates a guarantor to
“perform a promise” or “discharge the liability” of a third
person which necessarily implies a direct performance
or discharge. A “See to it” guarantee in English common
law refers to an obligation upon the guarantor to ensure
that principal debtor itself, performs its own obligation and
174 [2026] 4 S.C.R.
Supreme Court Reports
the guarantor, therefore, is in breach as soon as principal
debtor fails to perform. However, a “see to it” guarantee
does not include an obligation to enable the principal
debtor to perform its own obligation. Such an arrangement
would not be a guarantee under section 126 of the Act.”
22. In the present case, Defendant No. 1 has relied upon the decisions
of this Court in Phoenix ARC Private Limited and Maitreya Doshi
to contend that there must be a clear and unequivocal undertaking
to make payment, which is absent in the present case. We have
carefully perused the said judgments. In our view, the decisions do
not advance the case of Defendant No. 1. The judgments merely
reiterate the requirements necessary to constitute a valid contract
of guarantee and explain the difference between contracts of
guarantee, indemnity and pledge. To constitute a valid guarantee,
the requirement is an undertaking or promise to make a payment
to the creditor upon the default of the principal debtor for a benefit
received by principal debtor.
23. Juxtaposing the aforesaid principles with the facts of the present
case, it emerges from the record that the owner of the vessel had
instructed Defendant No. 1 to pay a sum of US $ 100,000 to the
plaintiff towards discharge of its liability for the repairs carried out
to the vessel. A further perusal of the record reveals that by a letter
dated 22.04.1998, Defendant No. 1 addressed the plaintiff assuring
that a sum of US $ 100,000 would be paid after the cargo was
cleared, in clear and unequivocal terms. The contents of the said
letter also indicate that Defendant No. 1 had undertaken to make
the payment and had requested that the arrangement should not
be disclosed to the owner of the vessel. The relevant portion of the
letter is extracted below for ease of reference:
“You may be rest assured, we will fulfill this obligation as we
are constrained to adopt this procedure only to safeguard
our interest. The cargo on board has a substantial worth and
we would not like to fail in any of our obligations towards
the cargo. We would like to assure you that the money is
safe with us and by this fax we are advising you that we
would remit this money directly to your goodselves and
would only like to ensure that the vessel reaches destination
[2026] 4 S.C.R. 175
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
and commences discharge. …..…..Please feel free to
contact us any time and As discussed, would advise you
to keep owners out of this understanding between us as
otherwise they could insist on remittance of the money to
them directly as it forms part of freight.
Trust I have clarified the position and would deeply
appreciate your co-operation in the interest of all parties
concerned. We are a well recognised export House based
in Madras and have a good track record in fulfilling various
business obligations and enjoying dependable reputation.”
24. Defendant No. 1, in furtherance of its undertaking for payment, gave
a corporate guarantee on 25.04.1998 by Exhibit P11, which reads
as under:
“By this payment guarantee made on 25th April 1998 by
us, we agree to hold at your disposal a sum of money
not exceeding USD 100,000 (U.S. Dollars One Hundred
Thousand only) from freight on behalf of the owners - Pevson
Shipping Co., S.A., 73, Notara Street, 18535 Piraeus,
Greece for repair work carried out on vessel “Master Panos”.
This is being done on authority from Owners of vessel.
This guaranteed sum will be paid to you upon first written
demand after vessel’s arrival and commencement of
discharge at Newark.
This guarantee will be valid till the entire amount of USD
100,000/- is settled to your account subject to Charter Party
dated 9th March 1998, conditions and amendments. The
ETA of the vessel at Discharge Port, Newark is 17thMay
1998.”
25. A conjoint reading of the documents on record, particularly the letter
dated 22.04.1998 and the Corporate Guarantee dated 25.04.1998,
clearly establishes that the undertaking to pay was not merely a
freight-sharing arrangement but an independent guarantee satisfying
the requirements of Sections 126 to 128 of the Contract Act. Exhibits
P10 and P11 constitute a valid undertaking by Defendant No. 1 to
discharge the liability of the vessel owner in the event of its default
in payment of the repair charges. Further, after the cargo had
been delivered by the owner of the vessel, and upon the plaintiff
176 [2026] 4 S.C.R.
Supreme Court Reports
demanding payment, Defendant No. 1, by Exhibit P14, requested
Defendant No. 2 Bank to transfer a sum of US $ 100,000 to the
plaintiff along with the requisite Form A2. This conduct clearly reflects
the intention of Defendant No. 1 to honour the undertaking given
by it. Furthermore, during cross examination, DW- 1 deposed that
Exhibit P11 was a conditional guarantee letter, thereby acknowledging
that the letter dated 25.04.1998 was in the nature of a guarantee,
as was expressly stated by him in his testimony. We therefore,
concur with the findings recorded by the High Court and reject the
contention of Defendant No. 1 that the document merely reflects a
freight payment arrangement.
26. Yet another submission of the learned senior counsel for Defendant
No. 1 is that the letter dated 25.04.1998 was expressly made subject
to the Charter Party conditions and amendments which, under Clause
30, contemplated payment of freight to Royal Swan, and that the
said Charter Party was never amended so as to enable payment
to the plaintiff.
26.1. Significantly, Defendant No. 1 itself did not treat the said
purported condition as mandatory. On the contrary, it proceeded
to act upon the arrangement despite the absence of any
amendment to the Charter Party Agreement by processing
the necessary papers for approval from the Reserve Bank
of India and issuing instructions to Defendant No. 2 Bank
for remittance of the said amount to the plaintiff. A reading
of the letter dated 25.04.1998 in its entirety, coupled with
the subsequent communications and the specific remittance
instructions issued by Defendant No. 1 to the Bank clearly
indicates that Defendant No. 1 had unequivocally undertaken
to arrange payment of US $ 100,000 to the plaintiff out of the
freight payable. In such circumstances, the Division Bench
rightly held that having acted upon the letter dated 25.04.1998,
Defendant No. 1 is estopped by its conduct from contending
that Clause 30 of the Charter Party Agreement was never
amended and that no liability had consequently arisen.
27. The next contention advanced on behalf of Defendant No. 1 is that
the owner of the vessel ought to have been impleaded as a party
to the suit and that, had such impleadment been made, Defendant
No. 1 could have sought appropriate relief against the said party.
[2026] 4 S.C.R. 177
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
We are unable to agree with the said contention.
27.1. It is well settled that the plaintiff is the dominus litis and it is for the
plaintiff to determine the cause of action and the parties against
whom the suit is to be instituted. In Mumbai International
Airport (P) Ltd. v. Regency Convention Centre & Hotels
(P) Ltd.9, this Court reiterated that a plaintiff cannot ordinarily
be compelled to sue a person against whom he does not seek
any relief, unless such person is shown to be a necessary party
whose presence is indispensable for the effective adjudication
of the dispute. The following paragraphs are pertinent:
“13. The general rule in regard to impleadment of
parties is that the plaintiff in a suit, being dominus
litis, may choose the persons against whom he
wishes to litigate and cannot be compelled to sue a
person against whom he does not seek any relief.
Consequently, a person who is not a party has no right
to be impleaded against the wishes of the plaintiff. But
this general rule is subject to the provisions of Order
1 Rule 10(2) of the Code of Civil Procedure (“the
Code”, for short), which provides for impleadment
of proper or necessary parties. The said sub-rule is
extracted below:
“10. (2) Court may strike out or add parties.—
The court may at any stage of the proceedings,
either upon or without the application of either
party, and on such terms as may appear to
the court to be just, order that the name of any
party improperly joined, whether as plaintiff or
defendant, be struck out, and that the name
of any person who ought to have been joined,
whether as plaintiff or defendant, or whose
presence before the court may be necessary
in order to enable the court effectually and
completely to adjudicate upon and settle all the
questions involved in the suit, be added.”
9 (2010) 7 SCC 417
178 [2026] 4 S.C.R.
Supreme Court Reports
14. The said provision makes it clear that a court may,
at any stage of the proceedings (including suits for
specific performance), either upon or even without
any application, and on such terms as may appear to
it to be just, direct that any of the following persons
may be added as a party: (a) any person who ought
to have been joined as plaintiff or defendant, but not
added; or (b) any person whose presence before
the court may be necessary in order to enable the
court to effectively and completely adjudicate upon
and settle the questions involved in the suit. In short,
the court is given the discretion to add as a party,
any person who is found to be a necessary party or
proper party.
15. A “necessary party” is a person who ought to
have been joined as a party and in whose absence
no effective decree could be passed at all by the
court. If a “necessary party” is not impleaded, the
suit itself is liable to be dismissed. A “proper party”
is a party who, though not a necessary party, is a
person whose presence would enable the court to
completely, effectively and adequately adjudicate
upon all matters in dispute in the suit, though he
need not be a person in favour of or against whom
the decree is to be made. If a person is not found
to be a proper or necessary party, the court has no
jurisdiction to implead him, against the wishes of the
plaintiff. The fact that a person is likely to secure a
right/interest in a suit property, after the suit is decided
against the plaintiff, will not make such person a
necessary party or a proper party to the suit for
specific performance.
22. Let us consider the scope and ambit of Order
1 Rule 10(2) CPC regarding striking out or adding
parties. The said sub-rule is not about the right of a
non-party to be impleaded as a party, but about the
judicial discretion of the court to strike out or add
parties at any stage of a proceeding. The discretion
under the sub-rule can be exercised either suo motu or
[2026] 4 S.C.R. 179
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
on the application of the plaintiff or the defendant, or on
an application of a person who is not a party to the suit.
The court can strike out any party who is improperly
joined. The court can add anyone as a plaintiff or as
a defendant if it finds that he is a necessary party or
proper party. Such deletion or addition can be without
any conditions or subject to such terms as the court
deems fit to impose. In exercising its judicial discretion
under Order 1 Rule 10(2) of the Code, the court will
of course act according to reason and fair play and
not according to whims and caprice.
23. This Court in Ramji Dayawala & Sons (P)
Ltd. v. Invest Import [(1981) 1 SCC 80] reiterated in
SCC p. 96, para 20 the classic definition of “discretion”
by Lord Mansfield in R. v. Wilkes [(1770) 4 Burr 2527 :
98 ER 327 : (1558-1774) All ER Rep 570] (ER p.
334) that “discretion”
“when applied to a court of justice, means sound
discretion guided by law. It must be governed
by rule, not by humour: it must not be arbitrary,
vague, and fanciful; but legal and regular.”
25. In other words, the court has the discretion to
either to allow or reject an application of a person
claiming to be a proper party, depending upon the
facts and circumstances and no person has a right to
insist that he should be impleaded as a party, merely
because he is a proper party.”
28. In the present case, the owner of the vessel was admittedly not
impleaded as a party to the suit. Even assuming that the vessel owner
had been impleaded as a defendant, Defendant No. 1 could not have
ordinarily maintained a counterclaim against another defendant, as
a counterclaim is directed primarily against the plaintiff [See: Rohit
Singh & Others v. State of Bihar10 and Sanjay Tiwari v. Yugal
Kishore Prasad Sao & Others11].
10 (2006) 12 SCC 734
11 2025 LiveLaw (SC) 1097
180 [2026] 4 S.C.R.
Supreme Court Reports
29. However, there is an exception to the above settled position where
the third-party procedure contemplated under Order VIII-A of the Code
of Civil Procedure is applicable, wherever such procedure has been
introduced by the High Courts through appropriate amendments. The
Madras High Court has incorporated such a procedure. Order VIII-A
of CPC enables a defendant to claim contribution or indemnify from a
third party or even from a co-defendant by issuing a third-party notice.
30. The Madras High Court in its Original Side Rules under Order VA
has incorporated the third-party procedure under Order VIII-A CPC.
Rules 1 to 5 of Order VIII-A deal with issuance of notice to the third
party and the consequences of default in appearance. Rule 6 speaks
about the grant of leave to defend the suit. Rules 8 and 9 speak about
contribution from co-defendant and issuance of a third-party notice
by a person who himself has been issued a third-party notice. The
procedure contemplated under order VIII-A is essentially summary
in nature and is intended to avoid multiplicity of proceedings by
enabling all connected claims to be adjudicated in the same suit.
31. Defendant No. 1, in the instant case, claimed contribution only
from the co-defendant Bank and did not take recourse to the third-
party procedure by issuing notice to the owner of the vessel for the
purpose of claiming contribution from them. We may hasten to add
that either of the defendants could have taken steps to issue notice
to the owner of the vessel under third party procedure, particularly
Defendant No. 2 bank, which committed the mistake. Defendant No.
1, having conveniently failed to invoke available procedural remedy
under law, cannot now shift the burden upon the plaintiff, which
being the dominus litis, was entitled to choose the parties against
whom the relief was sought. The failure of the defendants to implead
other potentially liable parties cannot, therefore, be used to defeat
the claim of the plaintiff.
32. Reference in this regard may also be made to the judgment of
this Court in Kanaklata Das and others v. Naba Kumar Das
and others12, wherein it was reiterated that the plaintiff cannot be
compelled to implead a third party unless such party is shown to
be a necessary party without whose presence the dispute cannot
be effectively adjudicated. The following paragraphs are pertinent:
12 (2018) 2 SCC 352 : MANU/SC/0041/2018
[2026] 4 S.C.R. 181
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
“17. Fourth, the Plaintiff being a dominus litis cannot be
compelled to make any third person a party to the suit, be
that a Plaintiff or the Defendant, against his wish unless
such person is able to prove that he is a necessary party to
the suit and without his presence, the suit cannot proceed
and nor can be decided effectively.
18. In other words, no person can compel the Plaintiff to
allow such person to become the co-Plaintiff or Defendant
in the suit. It is more so when such person is unable to
show as to how he is a necessary or proper party to the
suit and how without his presence, the suit can neither
proceed and nor it can be decided or how his presence is
necessary for the effective decision of the suit. (See-Ruma
Chakraborty v. Sudha Rani Banerjee and Anr., MANU/
SC/0919/2005 : 2005(8) SCC 140)
19. Fifth, a necessary party is one without whom, no
order can be made effectively, a proper party is one in
whose absence an effective order can be made but whose
presence is necessary for a complete and final decision on
the question involved in the proceeding. (See-Udit Narain
Singh Malpaharia v. Additional Member Board of Revenue,
Bihar and Anr. MANU/SC/0045/1962 : AIR 1963 786)”
33. The other contention that without the clearance of RBI, the payments
cannot be made to the account of the plaintiff, also does not merit
acceptance. As rightly held by the High Court, the said plea was not
raised in the pleadings. It is a settled principle that no amount of
evidence can be looked into in the absence of proper pleadings. The
Judgments relied upon by the plaintiff in Union of India v. Ibrahim
Uddin (supra) and Ram Sarup Gupta v. Bishun Narain (supra)
are squarely applicable in this regard. It is relevant to note here that
Defendant No. 1 itself had communicated by letter dated 19.05.1998
(Exhibit P13) that necessary documents were being processed with
the Reserve Bank of India. In any case, as evident, there is a valid
undertaking by way of a guarantee executed by Defendant No. 1,
and Defendant No. 1 cannot absolve from its liability. Further, the
interests of Defendant No. 1 are protected as its right to recover the
amount from the owner of the vessel is preserved under Section 140
of the Contract Act, and the High Court has also granted a third-party
182 [2026] 4 S.C.R.
Supreme Court Reports
decree in its favour against the Bank. Therefore, we find no reason
to interfere with the impugned judgment of the High Court and the
appeal filed by Defendant No. 1 is liable to be dismissed.
CA. No. 13861 of 2024 filed by Defendant No. 2 Bank
34. We now turn to the appeal filed by Defendant No. 2 Bank. No
evidence was brought on record to show that the approval of the
Reserve Bank of India had been obtained or that the Bank had
sought any clarification in that regard. The Division Bench of the
High Court concurred with the findings of the trial Court that the Bank
had been instructed by Defendant No. 1 through Exhibit P14 and
the accompanying Form A-2 to remit a sum of US $ 100,000 to the
plaintiff. We are in agreement with the view taken by the High Court.
35. The communication regarding the processing of documents with the
Reserve Bank of India (Exhibit P13) was not addressed to the Bank.
Once clear instructions had been issued by its customer, the Bank was
required either to comply with those instructions or to seek clarification
regarding the necessity of regulatory approval and whether such
approval had been obtained to facilitate the remittance. The Bank
could not have unilaterally remitted the amount to the vessel owner.
According to the learned senior counsel, the Bank had no discretion
in the matter and could only act in accordance with the mandate
contained in the Charter Party Agreement dated 09.03.1998, which
provided that freight payment was to be made by Defendant No. 1
to the vessel owner. However, as rightly held by the Division Bench,
the Bank, not being a party to the Charter Party Agreement, cannot
rely upon the terms thereof to justify the remittance made to Royal
Swan in the face of the express instruction issued by Defendant No.
1 directing payment to the plaintiff. The Bank was bound to act in
accordance with the instructions issued by Defendant No. 1. In any
event, the role of the Bank was confined to honouring the instructions
of its customer, namely Defendant No. 1. Even in the absence of
any RBI approval, the Bank ought to have withheld the amount and
awaited further instructions from its customer or sought the requisite
clarification. The funds in question belonged to the customer, and
the Bank could not have acted contrary to the mandate given by it.
Therefore, the act of the Bank in transferring the funds to the owner
of the vessel, who had clearly instructed the Defendant No. 1 to remit
the money to the plaintiff, cannot be sustained.
[2026] 4 S.C.R. 183
Canara Bank Overseas Branch Rep. by Senior Manager v.
Archean Industries Private Limited and Another
36. The Division Bench reversed the decision of the trial Court insofar as
it had denied a decree under the third-party procedure and proceeded
to grant a decree in favour of Defendant No. 1 which had raised a
specific plea in its written statement. We have already discussed in
detail the scope and applicability of the third-party procedure under
Order VIII-A of the CPC. The suit was instituted in the year 1998 under
the Original Side Jurisdiction of the Madras High Court. Order V-A
of the Original Side Rules, wherein the provisions of Order VIII-A of
CPC are incorporated comes into operation automatically. The facts
of the present case reveal that the Bank, despite clear instructions
to remit the US $100,000 to the account of the plaintiff, failed to do
so due to an error on its part. This mistake was also admitted by
the Bank. Exhibit P17 was a communication addressed to the Bank
pointing out the erroneous transfer and requesting retrieval of the
amount and its remittance to the account of the plaintiff. The Bank
did not respond stating that the remittance could not be effected for
want of approval from the Reserve Bank of India. The Division Bench
has carefully considered these aspects and rendered its findings
in paragraphs 27 to 30 of its judgment, which we fully endorse.
Defendant No.1 was therefore rightly held entitled to a third-party
decree against Defendant No.2 Bank.
37. We find no infirmity in the reasoning adopted by the Division Bench
of the High Court warranting interference by this Court.
CONCLUSION
38. In view of the foregoing discussion, both the appeals fail and are
accordingly dismissed. There shall be no order as to costs.
39. Pending application(s), if any, stand disposed of.
Result of the case: Appeals dismissed.
†
Headnotes prepared by: Ankit Gyan
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