CANARA BANK V.
EXPORT CREDIT GAURANTEE
CORPORATION OF INDIA (2010) 5 SSC 757
Author: Yashmita, Student of Guru Gobind Singh Indraprastha University,
Delhi.
To The Point
The landmark supreme court judgment in Canara Bank v. Export Credits
Guarantee Corporation of India (ECGC) (2010) 5 SCC 757 is a pivotal ruling
that clarifies the scope of an indemnity contract, particularly in the context
of export credits insurance. It meticulously delineates the responsibilities of a
bank (the insured) to exercise due diligence and act prudently, even when
covered by an EGC policy, the case undergoes that an indemnity policy is not
a blanket waiver of a bank’s fundamental duty to mitigate risk and prevent
fraud. The court held that if a bank fails to adhere to standard banking
practices or is found negligent, thereby facilitating the loss, the ECGC, as the
indemnifier, may be solved of its liability, especially in instances where the
loss stem from the Banks’s own actions or omissions rather than the insured
risk
Use of Legal Jargon
This article delves into several critical legal concept pertinent to banking and
contract law. Central to the discussion is the contract of indemnity, as
defined under section 124 of the Indian Contract Act, 187, where one party
(indemnifier) promises to save the other (indemnified) from loss caused to
him by the conduct of the promisor himself, or by he any other person, the
principle of subrogation, though more commonly associated with contracts of
insurance ( which are often contracts of indemnity), implies that upon
indemnifying the insured, the indemnifier steps into the shoes of the insured
to recover the loss from the third party responsible.
The judgment extensively examines the concept of due diligence, which
mandates a reasonable level of care and circumspection expected from a
prudent person in a given situation. In banking, this translates to adhering to
standard banking practices, Reserve Bank of India (RBI) guidelines, and
prudent lending norms. The court also grappled with the implications of fraud
perpetrated by the exporter, and whether such fraud, when coupled with
bank’s own negligence or lack of fiduciary duty, can vitiate the indemnity
claim. the distinction between a contract of guarantee (section 126, Indian
Contract Act) and a contract of indemnity is subtly explored, emphasizing
that ECGC policies, while offering protection, don not transform into a
primary guarantee for the borrower’s default irrespective of the bank’s
conduct. The ruling also touches upon the principle of proximate cause,
determining whether the bank’s negligence or the exporter’s default was the
direct cause of the loss.
The Proof
The supreme court’s pronouncements in Canara Bank v. Export Credit
Guarantee corporation of India are firmly rooted in the principles enshrined in
the Indian Contract Act, 1872, and established common law principle
regarding contracts of indemnity and insurance.
1. Section 124 and 125 of Indian Contract Act, 1872 (Contract of
Indemnity): These sections define and elaborate on the indemnified.
The court reiterated that an indemnity contract is not an absolute
guarantee against all those losses, but rather against losses arising
from specific events or conduct. The ECGC’s policy was interpreted as
a contract to indemnity against losses arising from political or
commercial risks to the exported, not against losses caused by the
bank’s own operational deficiencies or failure to follow due diligence.
2. Principle of utmost good faith (uberrimae fidei): while not
explicitly stated as Uberrimae fidei in the context of the bank-ECGC
relationship, the underlying expectation of honesty and full disclosure,
particularly regarding the bank’s adherence to its own operational
protocols and the veracity of information provided for the policy, is
implicit. The bank’s failure to conduct proper due diligence or its
negligence in detecting fraud was seen as a breach of his implied duty.
3. Duty of care of prudence: The Judgment emphasized that’s bank as
custodian of public money, owe a fundamental duty of care and
prudence. This duty is nit extinguished merely because an indemnity
policy is in place. The court implicitly referenced the standard of care
expected from a “prudent banker,” a concept well established in
banking jurisprudence.
4. Causation and mitigation of loss: The court examined whether the
bank’s negligence was the proximate cause of lose. If the loss could
have been prevented by the bank exercising reasonable care, then the
ECGC’s liability could be negated. This aligns with the general principle
that an indemnified party must take reasonable steps to mitigate their
loss.
5. The term and condition of the policy: the court meticulously
analyzed the specific clauses of the ECGC policy. It highlighted that the
policy contained conditions requiring the bank to adhere to prudently
banking practices and to ytake all necessary steps to prevent and
minimize losses. Non-compliance wit these conditions was deemed a
valid ground for the ECGC to repudiate the claim.
Abstract
This article analyzes the supreme court’s decision Canara Bank v. Export
Credits guarantee corporation of India, a landmark judgement case
elucidating the contour of indemnity contract in export credit insurance. The
judgement critically examines the interplay between bank’s duty of due
diligence and the liability of the ECGC as an indemnifier. The court held that
an indemnity policy doses not absolve a bank of its primary responsibility to
exercise prudence, adhere to standard banking practices, prevent fraud. It
established that if a loss occurs due to the bank’s negligence, failure to
follow RBI guidelines, or lack of proper verification, the ECGC can legitimately
deny the claim. The ruling reinforces the principle that indemnity cover
specific risk, not losses attributable to the insured’s own operational lapses,
thereby significantly impacting risk assessment and claims management in
export finance.
Case Laws
United India insurance Co. Ltd. v. Pusphpalya Printers (2003): This
case, while dealing with fire insurance, reiterates the principle that an insurer
can repudiates a claim if there is a breach of a fundamental condition of the
policy or if the loss is caused by the insured’s own negligence that amounts
to a breach of the contract.
Oriental Bank of Commerce v. Export Credits Guarantee Corporation
of India Ltd. (2012): This later case, also involving ECGC, further solidified
the principle laid down in Canara bank, emphasizing the bank’s responsibility
to adhere to the terms and conditions of policy and exercise due diligence.
Conclusion
The judgment in Canara Bank v. Export Credits Guarantee Corporation of
India stands as a crucial precedent in Indian banking and insurance law. It
unequivocally clarifies that an indemnity contract, particularly in the realm of
export credit insurance, does not absolve the indemnified party (the bank)
from its inherent and statutory duty to exercise due diligence and adhere to
prudent banking practice. The supreme court’s ruling reinforces the principle
that while ECGC policies provide a vital safety net against genuine
commercial and political risks in international trade, they are not a substitute
for the bank’s own robust risk management, verification processes, and
vigilance against fraud.
The decision has far-reaching implication for the banks engaged in export
finance, urging them to strengthen their internal controls, enhance their due
diligence mechanisms, and ensure strict compliance, with RBI guidelines and
the specific terms of ECGC policies. For ECGC the judgment validates its right
to repudiate claims where the loss is demonstrably linked to the bank’s
negligence or failure to mitigate risks. Ultimately, the case promotes a more
responsible and accountable approach to export financing, ensure that the
burden of loss is appropriately allocated based on the principles of causation,
contractual obligations, and the fundamental duty of care
FAQs
Q1: how does this judgment impact the relationship between banks and
ECGC?
The judgement strengthens ECGC’s positions, allowing it’s to repudiate
claim where banks have failed to exercise reasonable care, it encourages
banks to be more vigilant in their lending and monitoring processes for
exports finances, fostering a relationship built on shared responsibility and
adherence to established norms, rather than solely relying on the indemnity
cover.
Q2: what is the primary takeaway from the Canara Bank v. ECGC judgement
for banks?
The primary takeaway is that an export credits insurance policy from ECGC
does not relieve banks of their fundamental duty to exercise due diligence
and adhere to standard banking practices. If a loss occurs due to the bank’s
own negligence or failure to verify transaction and prevent fraud, ECGC may
not be liable to indemnity the bank.
Q3: what specific duties of a bank were highlighted as crucial in this case?
This case highlighted the bank’s duties to:
A) Exercise due diligence in verifying the genuineness of export orders
and the creditworthiness of overseas buyer.
B) Adhere to standard banking practices and RBI guidelines for sanction
and monitoring credits facilities.
C) Take all necessary steps to prevents and mitigate losses, including
detecting and preventing fraud.
