The Supreme Court has held that a company that issued a “corporate guarantee” to pay a creditor cannot escape liability merely because its banker mistakenly remitted the amount to another party. 

The bench of Justice R. Mahadevan has clarified that  once a clear undertaking to pay a third party’s debt is given, the guarantor remains liable even if payment fails due to a bank’s error.

The dispute originated from a commercial arrangement linked to ship repair charges and freight payments. The case arose from repair work carried out on a vessel by Dubai-based marine engineering company Goltens Dubai. The repair work was undertaken between January and March 1998 for the vessel Master Panos, owned by Royal Swan Navigation Co. Ltd. and managed by Pevson Shipping Company S.A.

The total repair bill initially amounted to about US $435,232. After legal proceedings and negotiations following the vessel’s arrest in Dubai, the parties agreed to settle the liability for US $377,562. As part of the settlement, US $100,000was to be paid through a freight transaction connected to the shipment of granite.

Around the same time, Archean Industries had chartered the vessel to transport granite from Chennai to Newark in the United States. Under the arrangement, Archean retained US $100,000 from the freight payable to the vessel owner and undertook to remit the amount directly to Goltens Dubai.

To formalize the arrangement, Archean issued communications acknowledging the retained amount and later executed a document titled “Corporate Guarantee”, assuring payment once the vessel arrived at Newark and cargo discharge began.

After the vessel reached Newark in May 1998, Archean instructed its banker, Canara Bank’s overseas branch in Chennai, to transfer the $100,000 to the creditor’s account in Dubai. The company also submitted the necessary foreign exchange documentation.

However, instead of remitting the funds to Goltens Dubai, the bank mistakenly transferred the money to the vessel owner’s account in the United States. Despite repeated demands, the creditor did not receive the payment, prompting it to file a recovery suit before the Madras High Court.

A single judge of the Madras High Court decreed the suit against Archean Industries, holding it liable to pay the amount with interest. The claim against Canara Bank was dismissed.

On appeal, a division bench upheld Archean’s liability to the creditor but granted the company a third-party decree against the bank, allowing it to recover the amount from the bank since the erroneous transfer caused the loss.

Both Archean and Canara Bank challenged the decision before the Supreme Court.

Before the Supreme Court, Archean argued that the document styled as a “corporate guarantee” was not a legal guarantee under Section 126 of the Indian Contract Act, 1872. According to the company, it merely reflected a freight payment arrangement with the vessel owner and did not create an independent liability.

The company also contended that it had already fulfilled its obligations by issuing remittance instructions to its bank and that the loss occurred solely due to the bank’s mistake.

Canara Bank, on the other hand, argued that the remittance involved foreign exchange and could not legally be processed without approval from the Reserve Bank of India under the then applicable foreign exchange regime.

The Supreme Court rejected Archean’s arguments and held that the documents and correspondence clearly constituted a valid contract of guarantee.

The Court noted that the company had issued written assurances promising payment and had expressly executed a corporate guarantee stating that the amount would be paid upon the vessel’s arrival and commencement of discharge.

According to the Court a guarantee under Section 126 of the Contract Act requires a clear undertaking to discharge the liability of a third party in case of default. The communications issued by Archean showed an unequivocal promise to pay the creditor. The company had also taken steps to implement the guarantee by instructing the bank to transfer the funds.

The Court concluded that the undertaking was not merely a freight arrangement but an enforceable guarantee.

The Supreme Court reiterated the well-established principle that a guarantor’s liability is co-extensive with that of the principal debtor. A creditor is entitled to proceed against the guarantor without first pursuing the principal debtor.

The Court emphasized that the bank’s mistaken remittance could not absolve Archean of its contractual obligation. At most, it gave the company a separate right to recover the amount from the bank.

Archean also argued that the vessel owner should have been made a party to the suit. The Court rejected this contention, holding that the plaintiff is the “dominus litis” and has the right to decide whom to sue unless the absent party is indispensable for adjudication.

The Court observed that the defendants themselves could have invoked the third-party procedure to implead the vessel owner but failed to do so.

The Supreme Court ultimately upheld the High Court’s decision, confirming that Archean Industries remains liable to pay the creditor under the corporate guarantee. The company retains the right to recover the amount from Canara Bank due to the bank’s mistaken remittance through the third-party decree.

Case Details

Case Title: Canara Bank Overseas Branch Versus Archean Industries Private Limited And Another

Citation: JURISHOUR-418-SC-2026

Case No.: Civil Appeal No. 13861 Of 2024

Date: 17/03/2026

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