Bank Cannot Rely on Charter Party Agreement to Justify Remittance Contrary to Customer's Instructions: Supreme Court

"Once Clear Instructions Were Issued by Its Customer, the Bank Was Required Either to Comply or Seek Clarification — It Could Not Unilaterally Remit the Amount to a Third Party", Supreme Court has held that a bank which remits funds to a party other than the one specifically named in its customer's instructions cannot escape liability by relying on a commercial agreement to which it was not a party.

A bench of Justice J.B. Pardiwala and Justice R. Mahadevan dismissed both cross-appeals arising from a recovery suit involving the erroneous remittance of US $1,00,000 by Canara Bank, Overseas Branch, affirming the liability of granite exporter Archean Industries under a corporate guarantee and the bank's liability to indemnify Archean under the third-party procedure.

Background

Goltens Dubai, a ship repair company based in the UAE, carried out extensive repairs on the vessel Master Panos during January to March 1998 at the request of its owner. The repair cost was invoiced at US $4,35,232. When payment remained outstanding, the plaintiff arrested the vessel at Dubai, raising the total liability to US $4,77,562.

Following negotiations, the liability was settled at US $3,77,562. Part of this settlement involved a sum of US $1,00,000 to be remitted to the plaintiff directly from freight payable by Archean Industries — a granite exporter who had chartered the vessel — to the vessel owner.

Archean Industries, by letter dated 22.04.1998, confirmed to the plaintiff that US $1,00,000 had been retained from the freight and would be remitted directly. On 25.04.1998, Archean executed a document styled "Corporate Guarantee" undertaking to pay the amount upon the vessel's arrival and commencement of discharge at Newark.

The vessel arrived at Newark in May 1998. Archean then issued clear written instructions to its banker, Canara Bank, along with the requisite Form A-2, directing it to remit US $1,00,000 to the plaintiff's account at Standard Chartered Bank, Dubai.

Instead, Canara Bank erroneously transferred the amount to the vessel owner's account in Baltimore, USA. The mistake was subsequently acknowledged by both Archean and the bank. Despite repeated demands, the plaintiff remained unpaid. A recovery suit was filed. The Trial Court held Archean liable but exonerated the bank. The Division Bench affirmed Archean's liability and additionally granted a third-party decree against the bank. Both appealed to the Supreme Court.

Was the Corporate Guarantee a Valid Guarantee Under the Contract Act?

Archean's principal defence was that the document dated 25.04.1998 was not a guarantee in law but merely a freight payment arrangement — that it was merely facilitating payment on behalf of the vessel owner and had assumed no independent liability.

The Court examined Sections 126 to 128 of the Indian Contract Act, 1872 in detail. Under Section 126, a contract of guarantee is an undertaking to perform the promise or discharge the liability of a third person in case of default. The surety's liability is co-extensive with that of the principal debtor.

"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," the Court held.

Relying on Bank of Bihar Ltd. v. Damodar Prasad, (1969) 1 SCR 620, the Court reiterated that the creditor is entitled to proceed against the surety directly without first exhausting remedies against the principal debtor.

Reading the letter dated 22.04.1998 and the Corporate Guarantee dated 25.04.1998 together, the Court found a clear and independent undertaking. Critically, Archean's own witness had admitted in cross-examination that Exhibit P11 was "a conditional guarantee letter." The Court held: "A conjoint reading of the documents on record 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."

Estoppel by Conduct: You Cannot Blow Hot and Cold

Archean had argued that the guarantee was expressly made subject to Charter Party conditions and that Clause 30 required freight to be paid to the vessel owner. Since the Charter Party was never amended, no liability arose.

The Court rejected this contention by applying estoppel by conduct. Archean had itself processed papers for RBI approval and issued remittance instructions to the bank directing payment to the plaintiff — all without insisting on any amendment to the Charter Party.

"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," the Court held.

Plaintiff Cannot Be Compelled to Implead the Vessel Owner

Archean argued that the vessel owner — who had actually received the mistakenly remitted amount — was a necessary party and ought to have been impleaded.

The Court dismissed this squarely. Relying on Mumbai International Airport (P) Ltd. v. Regency Convention Centre, (2010) 7 SCC 417, the Court reiterated the settled principle of dominus litis.

"The plaintiff being dominus litis is entitled to choose the parties against whom relief is sought and cannot be compelled to implead a party against whom no relief is claimed unless such party is a necessary party without whose presence an effective decree cannot be passed," the bench held.

The Court further noted that Archean itself had failed to invoke the third-party procedure to bring the vessel owner before the court. "The failure of the defendants to implead other potentially liable parties cannot, therefore, be used to defeat the claim of the plaintiff," it said.

The Bank's Liability: Clear Instructions Cannot Be Ignored

On Canara Bank's appeal against the third-party decree, the Court was equally firm.

The bank had argued that remitting the amount to the plaintiff would have required prior RBI approval under the Foreign Exchange Regulation Act, 1973, and that without such approval, the remittance could not lawfully have been made to the plaintiff.

The Court rejected this on two grounds.

First, the RBI approval plea had not been raised in the bank's pleadings at all. "No amount of evidence can be looked into in the absence of proper pleadings," the Court held, relying on Union of India v. Ibrahim Uddin, (2012) 8 SCC 148.

Second, and more significantly, the Court held that the bank had no business remitting the amount to the vessel owner contrary to its customer's express mandate.

"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. The Bank could not have unilaterally remitted the amount to the vessel owner," the Court declared.

The Court further held that the bank could not rely on the Charter Party Agreement — a document to which it was not a party — to justify its deviation from Archean's instructions. "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," the bench said.

The bank's own admission that the erroneous remittance may have been due to inadvertence by its employee, and its failure to respond to the communication pointing out the wrong transfer and requesting retrieval of the funds, sealed its fate.

Decision

The Supreme Court dismissed both appeals, affirming the concurrent findings of the Single Judge and Division Bench of the Madras High Court. Archean Industries remains liable to pay the plaintiff the suit amount. Canara Bank remains liable to indemnify Archean under the third-party decree. The Court preserved Archean's right to recover from the vessel owner under Section 140 of the Contract Act by subrogation. No order as to costs was made.

Date of Decision: March 17, 2026