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 Specific Shipments  (Political Risks) Policy

Export Credit & Guarantee Corpn.Ltd.

… … …

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

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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 BuyerEgyptian  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.

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