M-S. RAHEE INDUSTRIES LTD. v. EXPORT CREDIT GUARANTEE CORPN. OF INDIA LTD. AND ANR

Citation: [2008] 14 S.C.R. 556

Court: Supreme Court of India

Bench: S.H. KAPADIA, B. SUDERSHAN REDDY

Case summary

M-S. RAHEE INDUSTRIES LTD. v. EXPORT CREDIT GUARANTEE CORPN. OF INDIA LTD. AND ANR.pdf

Judgment text

[2008] 14 S. C. R. 556 ·A M/S. RAHEE INDUSTRIES LTD. ·. ~ v. . EXPORT CREDIT GUARANTEE CORPN. OF INDIA LTD. . AND ANR. . ·. . . . . (Civil Appeal No. 6145 of 2008) · oc1qBER 17, 2008. '·L (S. H. KAPADIA ·AND B.. SUDERSH~N REDDY,• JJ] . r --= Insurance: ·· . Specjfic Shipments (Political Risks) Policy No: 144991 1987 - Export of goods - Balance consideration amount for .. the consignment insured to the extent of 90% under the Policy· - ~xporter not. receiving the balance consideration amount within time. due to political embargo - Export Credit Guarantee Corporationpaying the insured money to the exporter - After lifting of embargo balance consideration amount trans. :. . · · ferred to Bank in India. in foreign currency -:- Appreciation of . the currency due to fluctuation in exchange rate, resulting in increased. recovery - Policy providing ratio of apportionment E.

of recovery as f}O: 10 between the Corporation and exporter· respectively - Exporter cfaiming increased recovery - Held: In view of language of Clause 16 of the Policy; all the sums recovered has to be apportioned in the ratio of 90: 1Obetween the Corporation and the exporter respectively - Exporter hot entitled to the increased recovery. · Policy of insurance... ,.. Interpretation of- Held: Words in a policy are to be understood in their ordinary meaning except where a word has a technical or legal meaning or where the context requires otherwise - Principles of Subrogation to be invoked only in case of doubt and ambiguity in the construe- . tion of Policy Doctrines/Principles: OF INDIA LTD. & ANR. Principle of Subrogation - Applicability of Predecessor of the appellant entered into contract for export of certain goods with a foreign buyer. As pe. r contract, the exporter got 20% of the invoice value as advance.

The balance price of 80%, was covered to the extent of 90% by specific Shipments (Political Risks) Policy No. 14499/1987. The balance amount was not received by the exporter within time because of political embargo. The exporters,, therefore, applied to the Export Credit Guarantee Corporation under the Policy, seeking payment for the risk covered to the extent of 90% of the balance price. Corporation paid the same. Thereafter, the embargo was lifted and the balance amount was transferred to the Bank in India. The amount was received by the Bank in US Dollar. By the time it reached India, it got a·ppreciated and thus resulted in increased recovery. . The exporter filed a suit contending that exporter was ~ entitled to the full i. ncreased recovery and the Corporation was entitled'to only the sum which it had-paid to the exporter. Stand of the Corporation was that the increased . recovery was to be apportioned in the ratio of 90:10 in terms of Clause 16 of the Policy.

During pendency of the suit, the Bank disbursed the recovered sum in the ratio of 90:10 between the Corporation and the exporter respectively. Single Judge of High Court decreed the Suit. In ~,J appeal, Division Bench of High Court reversed the order F. of Single Judge holding that the Corporation was entitled to 9()% of the increased recovery. Hence the present appeal. Dismissing the appeal, the Court HELD: 1. 1 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 techniGal or legal meaning and secondly where the \ ~ context requi res otherwise. 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 l . . 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 prin- . ciples of subrogation as a guide or a controlling authority. [Para 1O] [508-A to D] 1. 2 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. [Para 11] [568-E-F] · Forasol v. Oil and Natural Gas Commission, 1984 (Supp. ) sec 263 - relied on. 1. 3 On reading Specific Shipments (Political Risks) Policy in its entirety, it is found that there is a dichotomy in it. The subject-Policy in this 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 · 0 • 13 contemplates an indemnity aga_inst a percentage of a · loss whereas the second part of the contract commenc- . ing from Clause 14 to Clause 16 conta_ins provisions enabling recoupment of that loss. [Para 13] [569-A-B] 1. 4 Clause 16 of the Policy 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, 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 . MIS. RAHEE INDTS. LTD. v. EXPORT C. G. CORPN. 559 OF INDIA LTD. & ANR. '--:---i I of loss to which the Policy applies".

Rule of conversion or exchange rate as contemplated under Clause 11, is not made applicable in case of "Recoveries" under Clause 16. Clause 16 refers to "any sums recovered" which covered dollars paid belatedly. Under the Policy, there is a difference between currency of account, currency of payment and currency of recovery. Clause 16 refers only to - -i "any sums recovered". That is how the dichotomy, 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 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". [Para 16] [569-G-H; 570 A-D-F- \ -G-H; 571-A] 1.

5 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 -_.... i the ratio of loss agreed to be borne between the Corporation and the Exporter. This is one more reason for saying that "any amount recovered from the buyer in respect of loss to which the Policy applies". Hence, the words "any sums-recovered" in Clause 16 would mean all sums recovered from the buyer to be divided in the proportion of ~J_ 90:10 between the Corporation and the Exporter. [Para 17] [571 8-D] L. Lucas Ltd. and Anr. v. Export Credits Guarantee Department, 1974 (2) All ER 889 - referred to. .

CASE LAW REFERENCE : 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 payrpent has been made and any documents relating thereto and assign and transfer to the Corporation his right and interest in any ~uch goods and documents; (d) upon request assign, deliver up or otherwise trapsfer to the Corporation any negotiable instruments, guarantees or other securities relating to such goods or contracts. ~-. A 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 ariy 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 To Schedule attached to the Specific ship. ments/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 Egyptian national Railways, of the Buyer Over Shoubra Subway, Shoubra, Cairo, Egypt 2. Oescription ofthe contract Supply of clip bolts to Egypt 3. Date of contract 8. 10. 1985 4. Gross invoice value Rs. 76,90,000/- 5. Arriout covered Rs. 71,20,940/- 6. Shipment period Upto July, 1987 Extended ypto 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" r ~ 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 taking steps - -i 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 y 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 . - r-1 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 words "any sums recovered in respect of a loss to which the Policy 'J · 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 'r--requires otherwise. It is not disputed that in a contract of insurande, parties may introduce expres~ terms which are at vari- · . ance 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 pr,inciples of subrogation·as·a guide or a controlling authority. Therefore, at the outset, what · we propose to do is to consider whether the Policy, in this case on its own express terms, provides fotthe allocation of the mon- 'r, eys 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 CO[l:tractual provisions to the contrary} will b~the. rate of exchange between Rupeenmd the foreign currency prevailing at-the date· when fhe 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 ~he 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 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 • · -i 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 agains! 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 ofthe 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 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 'i 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 premium and losses the gross inyoice value of 0 shipments invoiced in ~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 !

n US Dollar wher-eas t~e 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 "arw sums recovered"r. 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 con- ~ tra~t. If loss arises dehors such contract any sums recovered in that regard would notfall 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 recoverec' in respect of loss to which the Policy applies". 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. Ifone 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 shar-. 1 ing 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 J. 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 "ariy sums recovered" in Clause 16 would mean '1' 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 indemnitied the exporter upto 90% of the loss arising out of failed payments for export shipments. The contract also provided that any _ , ,A sums 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 th~t if there is recovery in a subrogated claim higher than the amount of the ! oss, 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 reversed by Hotjse of Lords in the same case. It may be noted that the Court. of Appeal's anafysis of the interplay between Subrogation P'riri,. ciples arid contractual provisions was, however, not disturbed by the House of Lords in its judgment in the same case. In that m·auer the ground for overruling the decision of the Court of Appeal by House of Lords was quite different. The Court was ,, 'tconcerned with the contract of guarantee. One of the arguments advanced was regarding the nature of the contract. According to House of Lords, in the ~ontract 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 Ho_use 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 observa- H . tion 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 provisions with which we are concerned, has not been disturbed by the judgment of House of Lords in the said case of L. LucasLtd. (supra). In our present case we are not concerned with the contract of guarantee. In 8 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.. .. _I 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. K. K. T. ·- Appeal dismissed. "f ~