Corporate guarantee enforceable: Supreme Court holds clear undertaking to pay creates liability despite bank’s mistaken remittance

Held: The Supreme Court held that a corporate guarantee containing a clear and unequivocal undertaking to discharge the liability of a third party constitutes a valid and enforceable contract of guarantee under Sections 126–128 of the Indian Contract Act, 1872, and such liability is independent and co-extensive with that of the principal debtor. The Court further held that once a party undertakes to make payment to a creditor, it cannot evade liability on the ground of erroneous remittance by its banker, as such error may at best give rise to a separate claim for indemnity but does not extinguish the primary contractual obligation.

Summary: The dispute arose from non-payment of repair charges for a vessel, where the defendant company had undertaken, through communications and a document styled as a “Corporate Guarantee”, to remit US $100,000 to the plaintiff out of freight payable to the vessel owner. Despite issuing instructions to its banker for remittance, the bank erroneously transferred the amount to the vessel owner instead of the plaintiff. The Trial Court held the company liable but exonerated the bank, while the Division Bench upheld the company’s liability and granted it a third-party decree against the bank. The Supreme Court examined whether the corporate guarantee constituted a valid contract of guarantee and whether the bank could be held liable. It held that the guarantee contained a clear promise to discharge the liability of the vessel owner, satisfying statutory requirements under the Contract Act, and that such obligation was independent of the underlying arrangement. The Court rejected the contention that the document was merely a payment arrangement, noting that the conduct of the parties and subsequent communications demonstrated an unequivocal undertaking. It also held that the bank, having acted contrary to specific remittance instructions, was liable under third-party procedure, and could not justify its conduct by relying on contractual arrangements to which it was not a party or on unpleaded regulatory constraints.

Decision: The Supreme Court dismissed both appeals, affirmed the liability of Archean Industries Pvt. Ltd. towards the plaintiff under the corporate guarantee, upheld the third-party decree entitling Archean Industries to recover the amount from Canara Bank for the erroneous remittance, and disposed of all pending applications without costs.