IMPORTANT POINT
A document must primarily be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author there of did not use.

Headnote:Evidence Act, 1872 — Sections 91 and 92 — Bank Guarantee/Indemnity — Construction of — Admissibility of oral evidence — Respondent society having a sugar factory entered into a contract for installation of a paper plant on turnkey basis with M/s Pentagon — M/s Pentagon furnished a performance guarantee in regard to the machinery supplied by it — Contract contained a clause for retention of 10 of the contract price by the cooperative society — M/s Pentagon for modification of the said payment clause proposed to have a letter of credit so that they can furnish appropriate bank guarantee to which the cooperative society accepted — Bank Guarantee/Indemnity was thereafter furnished — Termination of contract by the cooperative society as disputes and differences arose between the parties — Demand of cooperative society invoking the said Bank Guarantee — Appellant stating that it had executed an agreement of indemnity pursuant whereto only losses, claims, damages, actions and costs which might have been suffered by it, were covered — It was alleged that the transaction in question did not constitute Bank Guarantee — Cooperative Society filed a suit for a direction upon appellant to deposit the amount of Rs. 34,00,000/ — Suit dismissed — High Court construing the said agreement to be a Bank Guarantee decreed the suit — Whether High Court was justified in holding the document as a contract of guarantee and not a contract of indemnity — (No) — That document constituted a document of indemnity.
       Held : The said document, in our opinion, 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 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" as was held by the High Court. The High Court, thus, misread and misinterpreted the document as on scrutiny thereof, it had opined that it was a contract of guarantee and not a contract of indemnity. The document was executed by the Bank in favour of the cooperative society. The said document indisputably was executed at the instance of Pentagon. (Paras 23 to 25)
       We 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 guarantor. (Para 27)
       The High Court proceeded on the basis that Section 92 of the Evidence Act would be attracted in the instant case but despite the same it referred to the oral evidence so as to find out the purported circumstances surrounding the transaction, which in our view, was not correct. (Para 29)
       However, 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.(Para 41)

JUDGMENT

S.B. Sinha, J. — Leave granted.

BACKGROUND FACTS

The Respondent is a cooperative 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 credit.

15.2.5 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 credit."

2. Pentagon, 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 guarantee."

3. Pentagon 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 thereafter."

4. The 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, Dombivli.

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

5. Disputes 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, 1987.

6. 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

7. Cooperativ

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2006 Supreme(SC) 579

IMPORTANT POINTA document must primarily be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author there of did not use.

Cases Referred (8)

IMPORTANT POINT
A document must primarily be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author there of did not use.