M/s. Rahee Industries Ltd. vs Export Credit Guarantee Corpn. of India Ltd. and Anr.

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) 2

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 3

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 4

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 5

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 6

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 7

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 8

To

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 - 700 001

PARTICULARS 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 9

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 10

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 11

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 12

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 13

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 14

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".

15 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 16

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 17

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 18

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.