Canara Bank Overseas Branch v. Archean Industries Pvt. Ltd. & Anr.

A corporate guarantee undertaking payment to a creditor, even arising from a freight arrangement, constitutes a valid contract of guarantee enforceable against the promisor; a bank acting on customer instructions is liable for erroneous remittance contrary to mandate.

Background

The plaintiff sought recovery of USD 100,000 for ship repair charges. Defendant No. 1 issued a “Corporate Guarantee” undertaking payment from freight. Defendant No. 2 Bank, despite instructions, mistakenly remitted the amount to the vessel owner. The High Court held Defendant No. 1 liable to the plaintiff and granted it a third-party decree against the Bank.

Issues Framed

  1. Whether the document dated 25.04.1998 constituted a valid contract of guarantee under s. 126 ICA.

  2. Whether Defendant No. 1 remained liable despite the Bank’s erroneous remittance.

  3. Whether the Bank was liable under third-party procedure for wrongful transfer.

Court’s Reasoning

1. Nature of “Corporate Guarantee” (s. 126 ICA)

  • A guarantee requires an undertaking to discharge liability of a third party upon default.

  • The Court held that the letters (22.04.1998) and guarantee (25.04.1998) showed a clear, unequivocal promise to pay the plaintiff.

  • The arrangement was not merely a freight payment mechanism, but an enforceable guarantee satisfying ss. 126–128 ICA.

2. Liability of Guarantor

  • Liability of a surety is co-extensive with the principal debtor (s. 128 ICA) and enforceable independently.

  • Defendant No. 1 could not evade liability merely because:

    • payment was routed through a bank; or

    • the principal debtor (vessel owner) was not sued.

  • The Court reaffirmed that creditor may proceed directly against the surety (Bank of Bihar v. Damodar Prasad).

3. Effect of Bank’s Erroneous Remittance

  • Defendant No. 1 had issued clear instructions to remit funds to the plaintiff.

  • The Bank acted contrary to mandate by transferring funds to the vessel owner.

  • Even if RBI approval was required, the Bank should have withheld funds or sought clarification, not unilaterally redirected payment.

4. Third-Party Liability (Order VIII-A CPC)

  • The Madras High Court correctly applied third-party procedure to avoid multiplicity.

  • Defendant No. 1 was entitled to recover the wrongly remitted amount from the Bank.

Decision 

  • Both appeals dismissed.

  • Defendant No. 1 liable to plaintiff.

  • Defendant No. 1 entitled to recover the amount from Defendant No. 2 Bank.

Ratio

A written undertaking promising payment to a creditor out of funds held on behalf of a third party constitutes a valid contract of guarantee under s. 126 ICA, rendering the promisor directly liable, and a bank that transfers funds contrary to explicit customer instructions is liable to indemnify the customer under third-party procedure.

Case Details

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