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IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 6145 OF 2008
(arising out of S.L.P. (C) No. 17369 of 2007)
M/s. Rahee Industries Ltd. ... Appellant(s)
versus
Export Credit Guarantee
Corpn. of India Ltd. and Anr. ... Respondent(s)
J U D G M E N T
S. H. KAPADIA, J.
Leave granted.
2. This civil appeal by grant of special leave petition is
filed against judgment and order dated 17.8.07 passed by the
Division Bench of the Calcutta High Court in APD No.302/2003 in
Suit No.340 of 1992 whereby the Division Bench allowed the
appeal preferred by respondent no.1 Corporation (insurer) and
set aside the judgment and decree dated 4.4.03 passed by the
learned Single judge of the High Court in Suit No.340 of 1992.
3. The short question which arises for determination in this
civil appeal and which revolves around interpretation of clause
16 of the Specific Shipments (Political Risks) Policy dated
27.1.87 is: where the loss, for which the Exporter (insured)
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has been indemnified by the insurer, is quantified and a fixed
sum is set out in the insurer’s policy, being the total
liability of the insurance company to the insured, would the
insurer be entitled to receive anything more than what has been
paid by it to the insured or would it (insurer) be also entitled
to share the increased recovery that the insured may, at the
future date, make from the original contract, to which the
insurer is not a party?
FACTS
4. On 8.10.85 M/s. Ramchander Heeralal (predecessor of the
present appellant) entered into an agreement with the Egyptian
National Railways (foreign buyer) for supply of 20 lakhs clips
bolts for a total value of US$.6,15,200, FOB Calcutta. Under
the said contract 20% of the total value of the contract was
payable as advance against presentation of a letter of guarantee
covering the same amount and 80% of the total contract value had
to be financed for 3 years, to be paid in six equal semi-annual
consecutive instalments with fixed interest at 9% p.a., the
first instalment to be paid after six months from the date of
each shipment. Initially the Exporter got 20% of the invoice
value as advance. The goods were exported on credit for the
balance price of 80% which was covered to the extent of 90% by
Specific Shipments Policy No.14499/1987 (`Policy’, for short).
The consignee duly received the goods and paid the entire
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consideration price by depositing the same with its banker(s) at
Egypt who was supposed to transfer the same to respondent no.2-
HSBC Bank in India. However, because of embargo imposed by the
Egyptian Government the banker(s) of the consignee could not
transfer the moneys to HSBC Bank. Since the Exporter did not
get the balance price within time from its consignee they
applied to the Export Credit Guarantee Corporation
(“Corporation”, for short) under the said Policy to pay for the
risk (cause) covered being 90% of the balance price which was
duly paid by the Corporation. Subsequently, after the embargo
came to be lifted, the Egyptian Bank transferred the money to
HSBC in India. Disputes then started as to who would be
entitled to the said sum and to what extent. Disputes arose
because of fluctuation in the exchange value. The price was
received in US Dollar by HSBC. By the time it reached India the
same got appreciated. The exchange rate of US Dollar resulted
in increased recovery. The Exporter filed the suit. During the
pendency of the suit HSBC disbursed whatever sum recovered after
converting the same in Indian Rupee to the concerned parties in
the ratio of 90:10 between Corporation and Exporter. The
Exporter contended that the Corporation should pay the full
increased recovery to it whereas Corporation contended that the
same should be apportioned in the ratio of 90:10 in terms of
Clause 16 of the said policy. The learned Single Judge decreed
the suit in favour of the Exporter against which the Corporation
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went in appeal by filing APD No.302 of 2003. By the impugned
judgment dated 17.8.07, the Division Bench held that the
Corporation was entitled to 90% of the increased recovery
against which this civil appeal is filed by the Exporter.
ISSUE
5. The short question which arises for determination in this
civil appeal is : whether the insurer (Corporation) was entitled
to 90% of the increased recovery as claimed under the said 1987
Policy?
Relevant clauses of the Policy
6. To answer the above question we quote hereinbelow relevant
clauses of the Policy dated 27.1.87 which are as follows:
"Form No.91A Export Credit & Guarantee
Specific Shipments Corpn.Ltd.
(Political Risks) Policy
... ... ...
AND WHEREAS the Exporter has made a proposal
dated the 23rd day of December, 1985 (hereinafter
called the “proposal’) requesting the Corporation to
insure the Exporter against a percentage of loss which
he may sustain by reason of certain risks involved in
the shipment of goods to Egypt under the said contract.
NOW, THEREFORE, in consideration of the premium
of Rs.81,891/- (Rupees eighty one thousand eight
hundred ninety one only) paid by the Exporter to the
Corporation (receipt of which is hereby acknowledge),
the corporation herby insures the Exporter in
accordance with the terms and subject to the
conditions hereto against a percentage of the amount
of any loss as hereinafter defined which may be
sustained by the Exporter in respect of shipment of
goods from India made under the above contract due to
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the following causes (hereinafter called the `Risks
insured’).
7. Percentage of loss payable: The percentage of the
amount of any loss which the Corporation hereby agrees
to pay shall be 90.
8. Amount of loss : The amount of loss shall be
(B) in all other cases
(a) in regards goods delivered to and accepted by the
buyer, be the gross invoice value of those goods less
(i) the amount which on the date at which the loss is
ascertained the buyer would have been entitled to take
into account by way of payment, credit, set off or
counter claim or which the exporter is entitled to
appropriate in whole or in part payment of the price
of the goods; and
(ii) any expenses saved by the non-payment of agent’s
commission or otherwise; and
(b) as regards goods not delivered to the buyer, the
gross invoice value thereof, less
(i) any expenses saved by the non-fulfilment of the
contract for the sale of those goods.
(ii) any sums which, at the date at which the loss is
ascertained, the Exporter has recovered from any
sources including realization of any security, resale
of any goods or materials and any sums of credits in
his possession which the Exporter is entitled to
appropriate as or towards payment of the purchase
price, or any part thereof provided that the sums so
recovered or realized by any security or resale of any
goods or materials shall be the sum less all expenses
of recovery, realization or resale, the godown charges
and brokerages and commissions if any.
9. Time for Ascertainment of loss: Subject to the
submission by the Exporter of a claim supported by
evidence which in the opinion of the Corporation, is
sufficient and by a verification of the cause of loss,
the Corporation will pay to the Exporter at Bombay the
amount of loss hereby insured immediately after the
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loss has been ascertained and such loss shall be
ascertained.
(a) where the loss is due to the prevention of or
delay in the transfer of payments from the buyer’s
country to India in circumstances outside the control
of both the Exporter and for the buyer, four months
after the due date of payment by the buyer provided an
irrevocable deposit is made by the buyer within 30
days from the due date:
10. Payment of loss: The Exporter shall, as a
condition precedent to the payment of the amount of a
percentage of any loss as herein defined procure and
deliver to the corporation a writing from the Bank
which holds the Documents pertaining to the shipment
concerned acknowledging and agreeing (i) that the bank
holds the same in trust for the corporation (ii) that
the Bank shall, upon demand by the corporation,
deliver them upto the Corporation and (iii) that if
the Bank shall receive any payments against such
documents the Bank shall make payments thereof
according to the directions of the Corporation in
writing.
11. Rate of Exchange: All payments under this policy
shall be made in Indian Rupee at the Head Office of
the Corporation and for the purpose of payment of
premiums and losses, the gross invoice value of
shipments invoiced in a foreign currency shall be
converted into Indian Rupees at the Bank buying rate
of exchange at Bombay on the date of the relative
shipment.
PROVIDED THAT, if devaluation of the currency in
which the buyer has to pay takes place before the
claim is paid, the amount claimed in Indian currency
shall be based on the devalued rate.
13. The total liability of the Corporation under this
policy shall be limited to Rs.64,08,846/-
RECOVERIES
14. Action after payment of claim : Upon payment by
the Corporation of the amount due hereunder to the
Exporter, the Exporter shall:
(a) take all steps which may be necessary or
expedient or which the Corporation may at any time
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require to effect recoveries whether from the buyer or
any other source from whom such recoveries may be made.
(b) upon request assign and transfer to the
Corporation his rights under the contract in respect
of which such payment has been made including his
right to receive any monies payable under such
contract or his right to damages from any breach
thereof;
(c) upon request deliver up to the Corporation any
goods in respect of which such payment has been made
and any documents relating thereto and assign and
transfer to the Corporation his right and interest in
any such goods and documents;
(d) upon request assign, deliver up or otherwise
transfer to the Corporation any negotiable
instruments, guarantees or other securities relating
to such goods or contracts.
16. Recoveries: Any sums recovered by the Exporter
or the Corporation in respect of loss to which this
policy applies after the date on which the loss is
ascertained from the buyer or any other source shall
be divided between the Corporation and the Exporter in
the proportion of 90 and 10.
The exporter shall pay all sums so recovered to
the Corporation forthwith upon their being received by
him or any person on his behalf, the Exporter hereby
acknowledging and declaring that until such payment is
made to the Corporation he receives and holds such
sums in trust for the Corporation.”
7. Apart from the relevant clauses, a Schedule giving
particulars of shipment covered was also annexed to the said
Policy which reads as under:
“THE EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD.
BOMBAY
8To
Schedule attached to the Specific shipments/Political
Risks) Policy No.14499/87 issued to M/s. Ramchander
Heeralall, 138, Biplabi Rash Behari Basu Road,
Calcutta – 700 001PARTICULARS OF SHIPMENT COVERED
1. Name and address of the Buyer
Egyptian national
Railways, Over Shoubra
Subway, Shoubra, Cairo,
Egypt
2. Description of the contract Supply of clip bolts to
Egypt
3. Date of contract 8.10.1985
4. Gross invoice value Rs.76,90,000/-
5. Amount covered Rs.71,20,940/-
6. Shipment period Upto July, 1987
Extended upto 31.10.1987
7. Terms of payment 20% advance payment
80% Deferred payment in 6
half yearly instalments
8. Security Guarantee from National
Bank of Egypt
9. Maximum liability Rs.64,08,846/-
10. Premium Rs.81,891/-
Dated this 27th day of January, 1987
Sd/-
For Chairman cum Managing Director"
CONTENTIONS
8. According to Shri G.E. Vahanvati, Solicitor General of
India, appearing on behalf of the Corporation, the words “in
respect of loss” mentioned in Clause 16 are descriptive.
According to learned counsel the said expression “in respect of
loss” identifies the amounts recoverable under the Policy.
According to learned counsel, Clause 14 refers to Exporter’s
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taking steps to effect recoveries from the buyer whereas Clause
14(b) talks about the Corporation taking steps as assignee to
recover moneys payable under the contract. According to learned
counsel, in this case Clauses 14(a) and 14(b) do not apply
because in this case Clause 16 alone applies. According to
learned counsel, Clause 16 refers to recoveries made by the
Exporter or the Corporation. According to learned counsel,
Clause 14 refers to steps to be taken by the Corporation or the
Exporter for enforcement of rights under the contract against
the foreign buyer whereas Clause 16 comes in only in cases where
the sum stands recovered. In other words, according to learned
counsel, once a recovery is made Clause 16 comes into play.
That clause provides for a formula of apportionment/ratio of
division of any sum being recovered between the Corporation and
the Exporter in the ratio of 90:10.
9. Shri Uday U. Lalit, learned senior counsel, appearing on
behalf of the Exporter, on the other hand, contended that every
word in Clause 16 must be given its due weightage. According to
learned counsel, Clause 16 specifically stands confined to sums
recovered “in respect of loss to which the Policy applies” and
consequently it cannot be said that the said words “in respect
of loss to which the Policy applies” should be read as
descriptive. According to learned counsel, the words “any sums
recovered” in Clause 16 should be read in juxtaposition with the
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words “any sums recovered in respect of a loss to which the
Policy applies” and if so read the word “loss” in Clause 16
would stand restricted to the words “any sums recovered”. In
support of his above contention learned counsel placed his
reliance on the judgment of the House of Lords in the case of L.
Lucas Ltd. (supra).
Rules of Interpretation as applicable to Policy of Insurance
10. In this case the entire controversy revolves around
interpretation of Clause 16 of the Policy. It is well-settled
rule of construction that words in a contract (Policy herein)
are to be understood in their ordinary meaning. However, this
ordinary meaning will not prevail in two cases, namely, where a
word has technical or legal meaning and secondly where the
context requires otherwise. It is not disputed that in a
contract of insurance, parties may introduce express terms which
are at variance from or in conflict with the ordinary principles
of subrogation. Hence, the correct approach is to consider the
policy of insurance by reference to its terms. If, however,
there is some doubt or ambiguity in the construction of the
policy only then it would be correct to invoke the principles of
subrogation as a guide or a controlling authority. Therefore,
at the outset, what we propose to do is to consider whether the
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Policy, in this case on its own express terms, provides for the
allocation of the moneys between the Exporter and the
Corporation.
11. One more principle is required to be kept in mind in a
matter of this type in which we are concerned with the value of
Rupee in terms of US Dollar. If a debt in a foreign currency is
sued for, the judgment must be in terms of Rupee and the rate of
exchange (subject to express contractual provisions to the
contrary) will be the rate of exchange between Rupee and the
foreign currency prevailing at the date when the debt becomes
payable [See: Forasol v. Oil and Natural Gas Commission – 1984
(Supp.) SCC 263] i.e. immediately on the US Dollar having been
received in India.
INTERPRETATION OF CLAUSE 16
12. Keeping in mind the above two principles we are now
required to interpret Clause 16 of the said Policy.
13. As stated above, Clause 16 of the Policy begins with a head
note titled “Recoveries”. Three words/expressions are required
to be interpreted, namely, “any sums recovered”, “loss” and the
expression “amount of loss” which finds place in Clause 9 of the
Policy. On reading the Policy in its entirety, we find that
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there is a dichotomy in it. The subject-Policy in this civil
appeal is a contract. By nature it is an indemnity. The
contract is in two major parts. The first part which commences
from Clause 1 to Clause 13 contemplates an indemnity against a
percentage of a loss whereas the second part of the contract
commencing from Clause 14 to Clause 16 contains provisions
enabling recoupment of that loss.
14. In this case the invoice value as on 8.10.85 was US$
6,15,200/-. Out of which 20% was paid by the Egyptian buyer
upfront. Therefore, amount due from the Egyptian buyer was US$
5,59,696.14 (80% of US$ 6,15,200). The equivalent of US$
5,59,696.14 was Rs.71,20,940/- which got increased within 5
years to Rs.1,57,82,876/-. This was on account of the fall in
the external value of the Indian Rupee as against US Dollar.
15. The question before us is : whether Clause 16 of the Policy
entitles the Corporation to retain 90% of the Recoveries.
16. On a bare reading of Clause 16 on its own terms, we find
that the said clause falls under a separate chapter of
“Recoveries”. That chapter deals with recoupment of the loss.
Clause 16 unequivocally states that any sums recovered from the
buyer after the date on which the loss is ascertained shall be
divided between the Corporation and the Exporter in the
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proportion of 90:10. As stated above, the outstanding
receivable was US$ 5,59,696.14 equivalent to Rs.71,20,940/-.
However, on account of belated payment and fall in the value of
Rupee against US Dollar the value of US$ 5,59,696.14 stood
increased to Rs.1,57,82,876/- resulting in increased recovery.
Clause 16, in our view, refers to sums recovered from the buyer.
That recovery can only be on the date when the foreign currency
entered India. The foreign currency entered India only after
the loss stood ascertained in terms of Clause 9 which refers to
the “amount of loss”. Therefore, in our view, the dollars paid
belatedly would fall within the words “any sums recovered” from
the buyer after ascertainment of the amount of loss under Clause
9. Clause 16, however, refers to the words “any sums recovered
in respect of loss to which the Policy applies”. According to
the Exporter, the words “in respect of loss” restrict the first
three words of Clause 16, namely, “any sums recovered”.
According to the Exporter, if so read, the words “any sums
recovered” would cover an amount of only Rs.64,08,846/- and not
Rs.1,57,82,876/-. We do not find any merit in this argument
advanced on behalf of the Exporter. As stated above, the policy
is in two distinct parts. The first part deals with
indemnification against a percentage of loss. In that part we
have Clause 11 which refers to “rate of exchange”. It states
that all payments shall be made in Rupee terms at the head
office of the Corporation and for the purpose of payment of
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premium and losses the gross invoice value of shipments invoiced
in a foreign currency shall be converted into Rupee at the
bank’s buying rate of exchange. However, such rule of
conversion or exchange rate is not made applicable in case of
“Recoveries” under Clause 16. Clause 16 refers to “any sums
recovered” which covered dollars paid belatedly. It is
important to note that under the Policy there is a difference
between currency of account and currency of payment. The
currency of account is in US Dollar whereas the currency of
payment of loss and premium is in Indian currency applying the
conversion formula in Clause 11 of the Policy. Such conversion
rate is not there in Clause 16 which refers to “Recoveries”.
Therefore, there is a difference between currency of account,
currency of payment and currency of recovery. Clause 16 refers
only to “any sums recovered”. That is how the dichotomy, as
stated above, comes in. Further, the expressions “any sums
recovered” and “in respect of loss to which the Policy applies”
if read together meant that the sums recovered must be in
respect of loss which arises from the subject-matter of the
contract. If loss arises dehors such contract any sums
recovered in that regard would not fall in Clause 16. In our
view, in view of the ordinary use of language used in Clause 16
the US dollars paid belatedly would certainly fall within the
expression “any sums recovered in respect of loss to which the
Policy applies”.
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17. One more aspect needs to be mentioned. Clause 16 provides
for a formula of apportionment in the ratio of 90:10 between the
Corporation and the Exporter. If one reads the Policy in its
entirety and even if one is to go by contextual interpretation
of the Policy one finds a reason for this ratio of division
between the Corporation and the Exporter. The extent of sharing
the amount recovered from the buyer has a direct nexus with the
ratio of loss agreed to be borne between the Corporation and the
Exporter. In other words, the ratio of division of Recoveries
contemplated in Clause 16 has a direct nexus with the ratio of
division of losses agreed to be shared between the Corporation
and the Exporter under Clause 7 of the Policy. This is one more
reason for saying that “any amount recovered from the buyer in
respect of loss to which the Policy applies”. In our view, the
words “any sums recovered” in Clause 16 would mean all sums
recovered from the buyer to be divided in the proportion of
90:10 between the Corporation and the Exporter.
Judgments of English Courts
18. In L. Lucas Ltd. and another v. Export Credits Guarantee
Department – (1974) 2 All ER 889, an exporter entered into a
contract of guarantee under which the guarantor indemnified the
exporter upto 90% of the loss arising out of failed payments for
export shipments. The contract also provided that any sums
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recovered by the exporter/guarantor “in respect of a loss to
which the guarantee applies” would be divided between the
parties in the ratio 90:10. A loss occurred. The guarantor
indemnified the exporter. The exporter later on succeeded in
recouping the payment but in the mean time almost two years
elapsed and during those two years changes in the exchange rates
resulted in the payment in terms of pound sterling became
significantly larger on conversion. The guarantor contended
that it was entitled to 90% of the increased recovery while the
exporter contended that the guarantor was only entitled to what
it had paid out as indemnified. The Court of Appeal recognized
the contract as one of indemnity and treated it like a policy of
insurance. Before the Court of Appeal, the exporter contended
that if there is recovery in a subrogated claim higher than the
amount of the loss, the excess goes to the insured and,
therefore, the guarantor is not entitled to recover out of the
proceeds more than it had paid out. The Court of Appeal ruled
that the correct approach was to consider the contract by
reference to its terms and, only if some real doubt or ambiguity
in its construction was evident only then it would be proper to
invoke the general principles of Subrogation as a guide or
controlling authority. Going by the contract and the words used
in Clause 17 the Court of Appeal held that the guarantor was
entitled to 90% of the increased recovery as Clause 17 of that
contract so provided. This decision of the Court of Appeal was
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reversed by House of Lords in the same case. It may be noted
that the Court of Appeal’s analysis of the interplay between
Subrogation Principles and contractual provisions was, however,
not disturbed by the House of Lords in its judgment in the same
case. In that matter the ground for overruling the decision of
the Court of Appeal by House of Lords was quite different. The
Court was concerned with the contract of guarantee. One of the
arguments advanced was regarding the nature of the contract.
According to House of Lords, in the contract of guarantee in
that case there was no provision made entitling the guarantor to
90% of the increased recovery which was described as fortuitous
profit. It was held in that case by House of Lords that the
subject-policy was a contract of guarantee which never intended
that the guarantor would be entitled to 90% of fortuitous
profit. According to House of Lords, if the contract intended
to give this benefit to the guarantor it would have explicitly
said so. According to the said judgment, if the contract would
have provided for 90% of the fortuitous profits to be given to
the guarantor then the nature of the contract of guarantee in
that case would have ceased to be one of indemnity against a
percentage of loss and in that event it would become a profit
sharing contract. This observation has been made by Viscount
Dilhorne at page 898 of the report. However, as stated above,
the analysis, made by the Court of Appeal in the said case, of
the interplay between subrogation principles and contractual
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provisions with which we are concerned, has not been disturbed
by the judgment of House of Lords in the said case of L. Lucas
Ltd. (supra). In our present case we are not concerned with the
contract of guarantee. In the present case we are concerned
with the Policy of insurance dated 27.1.87. By its very nature
it was a contract of indemnity. In the present case, the nature
of the contract is not in issue. It was in issue in the case of
L. Lucas Ltd. (supra). In the circumstances, we do not wish to
express any opinion on the correctness of the judgment of the
House of Lords in L. Lucas Ltd. (supra).
19. For the aforestated reasons, this civil appeal filed by the
Exporter stands accordingly dismissed with no order as to costs.
……………………………………………J.
(S.H. Kapadia)
……………………………………………J.
(B. Sudershan Reddy)
New Delhi;
October 17, 2008.