A contract of guarantee is an independent, voluntary undertaking to discharge a third party's liability. The surety's liability is co-extensive with the principal debtor's. A bank is bound by its customer's specific remittance instructions, and failure to comply renders it liable to indemnify the customer for resulting losses.

Headnote:(A) Indian Contract Act, 1872 - Sections 126, 127, 128, 140 - Contract of guarantee - Essential ingredients - Existence of principal debt, default by principal debtor, and promise by surety to discharge liability - Guarantee is a separate contract enforceable independently - Liability of surety is co-extensive with that of principal debtor - (Paras 15, 16, 21)

(B) Code of Civil Procedure, 1908 - Order VIII-A - Third-party procedure - Purpose is to avoid multiplicity of proceedings by enabling all connected claims to be adjudicated in the same suit - Defendant can claim contribution or indemnity from co-defendant - (Paras 29, 30)

(C) Civil Procedure - Dominus litis - 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 - (Paras 27, 32)

(D) Banking Law - Duty of banker - Bank is bound to act in accordance with instructions issued by its customer - Unilateral transfer of funds contrary to specific instructions constitutes a breach of duty - (Paras 35, 36)

Facts of the case:
A ship repairer sought recovery of outstanding dues from a charterer and its banker. The charterer had issued a document styled as a corporate guarantee to pay the repairer from freight proceeds. The charterer instructed its banker to remit the funds to the repairer, but the banker erroneously transferred the funds to the vessel owner. The trial court decreed the suit against the charterer but dismissed the claim against the bank. The appellate court affirmed the liability of the charterer but allowed a third-party decree against the bank for the erroneous remittance.

Findings of Court:
The court held that the document executed by the charterer constituted a valid contract of guarantee. The charterer's liability to the repairer remained independent of the bank's error. The bank, having failed to follow the specific instructions of its customer, was liable to indemnify the charterer under the third-party procedure.

Issues: Whether the document constituted a valid contract of guarantee; whether the charterer was absolved of liability due to the bank's error; whether the plaintiff was required to implead the vessel owner; and whether the bank was liable to the charterer under third-party procedure.

Ratio Decidendi: A contract of guarantee is a voluntary undertaking to discharge the liability of a third party. The charterer's commitment was an independent guarantee. The plaintiff, as dominus litis, cannot be forced to implead parties. The bank's failure to follow clear instructions makes it liable to indemnify the customer.

Result: Appeals dismissed.

Table of Content
1. establishing the factual history and origin of the dispute regarding unpaid shipping vessel repairs and subsequent misdirected remittance. (Para 1)

R. MAHADEVAN, J.

1. Since both the appeals assail the same judgment and involve Signature Not Verified interconnected issues, they were heard together and are being disposed of by VISHAL ANAND Date: 2026.03.17

14:07:44 IST Reason:

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 Madras, Hereinafter referred to as “the High Court” 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.

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

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2026 Supreme(Online)(SC) 584

SUPREME COURT OF INDIAR. Mahadevan, J.B. Pardiwala, JJCanara Bank – AppellantVersusArchean Industries Private Limited – RespondentCIVIL APPEAL NO. 13861 of 2024 | CIVIL APPEAL NO. 13862 of 2024

Cases Referred (9)

SUPREME COURT OF INDIA
R. Mahadevan, J.B. Pardiwala, JJ
Canara Bank – Appellant
Versus
Archean Industries Private Limited – Respondent
CIVIL APPEAL NO. 13861 of 2024 | CIVIL APPEAL NO. 13862 of 2024