Contract Law - Supreme Court Quarterly Digest Jan - Mar, 2026

Construction of Documents — Literal Rule vs. Purposive Construction — Supreme Court emphasized that a contract must first be constructed in its plain, ordinary, and literal meaning - If the words are clear, the intention of the parties must be derived directly from the text. Reliance on the ex-post facto conduct of parties (such as the lessor continuing to occupy a portion not demised) is unnecessary and improper when the literal expression is unambiguous – Appeal allowed. [Relied on Associated Hotels of India Ltd. v. R.N. Kapoor, AIR 1959 SC 1262; Paras 15-21] General Secretary, Vivekananda Kendra v. Pradeep Kumar Agarwalla, 2026 LiveLaw (SC) 204 : 2026 INSC 199

Contract Act, 1872 - Error by Bank and Third-Party Decree – Held that the Bank committed a clear breach of duty by unilaterally remitting the amount to the vessel owner despite receiving specific instructions (Form A-2) to remit it to the Plaintiff - The Bank, not being a party to the underlying Charter Party Agreement, could not rely on its terms to ignore the customer's mandate - Under the third-party procedure (Order VIII-A CPC / Order V-A Madras High Court Original Side Rules), the Bank was held liable to indemnify the customer (Defendant No. 1) for this erroneous transfer. [Relied on Bank of Bihar Ltd. v. Damodar Prasad and others (1969) 1 SCR 620; Asset Reconstruction Co. Ltd. v. Electrosteel Castings Ltd. (2026) 264 Comp Cas 11; Mumbai International Airport (P) Ltd. v. Regency Convention Centre & Hotels (P) Ltd. (2010) 7 SCC 417; Paras 35, 36] Canara Bank Overseas Branch v. Archean Industries Pvt. Ltd., 2026 LiveLaw (SC) 252 : 2026 INSC 247 : AIR 2026 SC 1566

Contract Act, 1872 - Liability of Guarantors - Bifurcation of Liability - Supreme Court set aside the High Court's finding that guarantors are either liable for the entire amount or not at all. It held that liability can be bifurcated; sureties are liable to the extent of their original engagement (plus applicable interest) but are not liable for excess amounts permitted to be withdrawn by the creditor in connivance with the principal debtor without the sureties' intimation or consent - The cardinal rule is that a guarantor must not be liable beyond the terms of his engagement – noted that unless there is bad faith, misrepresentation, or a material variation to the prejudice of the surety, the creditor's actions within the contract terms do not automatically discharge the surety – Appeal allowed. [Relied on State of Maharashtra vs. Dr. MN Kaul (D) by his LRs, AIR 1967 SC 1634; Syndicate Bank vs. Channaveerappa Beleri & Ors., (2006) 11 SCC 506; Paras 4-7] Bhagyalaxmi Co-Operative Bank Ltd. v. Babaldas Amtharam Patel, 2026 LiveLaw (SC) 210 : 2026 INSC 205

Contract Act, 1872 - Necessary Parties and Dominus Litis - Supreme Court rejected the contention that the suit was bad for non-joinder of the vessel owner (principal debtor) - It reaffirmed that the plaintiff is the dominus litis and cannot be compelled to sue a person against whom they seek no relief, unless that person is an indispensable "necessary party" without whom no effective decree can be passed. [Paras 27-32] Canara Bank Overseas Branch v. Archean Industries Pvt. Ltd., 2026 LiveLaw (SC) 252 : 2026 INSC 247 : AIR 2026 SC 1566

Contract Act, 1872 – Section 74 – Liquidated Damages – Public Utility Projects – Proof of Actual Loss –In projects involving public utility or public interest (such as solar power projects under the National Solar Mission), it is not mandatory to prove actual loss for the award of liquidated damages - The delay in commissioning such a utility itself constitutes a loss to the public. The burden shifts to the party in breach to prove that no loss was caused - Key Findings held – i. Admitted Breach - The Solar Power Developer (SEL) admitted to delays in commissioning the 20 MW project (two months for the first 10 MW and five months for the balance); ii. Public Interest - The project, executed under the Jawaharlal Nehru National Solar Mission (JNNSM), was a public utility activity aimed at promoting green energy; thus, the strict proof of financial loss by the nodal agency (NVVNL) was unnecessary; iii. Jurisdictional Error by Division Bench - The Division Bench, acting under Section 37, erred by recalculating and reducing the compensation from 50% of the contractual claim (as awarded by the Single Judge) to a lower amount, as this amounted to a merits-based substitution of a plausible view. [Relied on Gayatri Balasamy vs. ISG Novasoft Technologies Limited (2025 INSC 605); AC Chokshi Share Broker Private Limited vs. Jatin Pratap Desai and another (2025 INSC 174); Paras 12-18] Saisudhir Energy Ltd. v. NTPC Vidyut Vyapar Nigam Ltd., 2026 LiveLaw (SC) 112 : 2026 INSC 103 : AIR 2026 SC 850

Contract Act, 1872 - Sections 126, 127, 128, and 140 - Code of Civil Procedure, 1908 - Order VIII-A – Key Issues – i. Whether a "Corporate Guarantee" issued by a charterer (Defendant No. 1) to a ship repairer (Plaintiff) to pay outstanding dues from freight amounts constitutes a valid, independent guarantee under Section 126 of the Contract Act; ii. Whether a bank is liable to indemnify its customer under third-party procedure when it erroneously remits funds to the wrong party contrary to express customer instructions – Held that the "Corporate Guarantee" (Exhibit P11) and related communications (Exhibit P10) constituted a valid, independent contract of guarantee under Section 126 of the Contract Act - It was not merely a freight-sharing arrangement as contended by the Appellant – Noted that a guarantee is a voluntary act of taking up the burden of a third party who failed to make payment - Under Section 128, the liability of the surety is co-extensive with that of the principal debtor - The creditor is entitled to proceed against the surety without first exhausting remedies against the principal debtor. [Paras 21-25] Canara Bank Overseas Branch v. Archean Industries Pvt. Ltd., 2026 LiveLaw (SC) 252 : 2026 INSC 247 : AIR 2026 SC 1566

Contract Act, 1872; Section 133 - Discharge of surety by variance in terms of contract - The Supreme Court held that any variance made in the terms of the contract between the principal debtor and the creditor without the surety's consent discharges the surety only as to transactions subsequent to the variance - The discharge of the surety is not absolute; they remain liable for the original amount for which they stood as guarantee before the unauthorized variance occurred. Bhagyalaxmi Co-Operative Bank Ltd. v. Babaldas Amtharam Patel, 2026 LiveLaw (SC) 210 : 2026 INSC 205

Contract Law – Apartment Buyers' Agreement – Dominant Position and Fraud – The High Court's finding that flat owners were made to "sign on the dotted line" due to the developer's dominant position was held to be conjectural – Held - In the absence of foundational pleadings alleging fraud, misrepresentation, or coercion at the time of execution, a decade-old registered agreement cannot be disregarded or held to be executed under misrepresentation. [Paras 61, 62] Raj Singh Gehlot v. Amitabha Sen, 2026 LiveLaw (SC) 72 : 2026 INSC 77

Contract Law - Interpretation of Contracts – Admissibility of Extrinsic Evidence – Sections 92 and 94 of the Indian Evidence Act, 1872 – Supreme Court emphasized that when the language of a contract is plain and applies accurately to existing facts, evidence cannot be given to show it was not meant to apply to such facts - under Section 92, factual context and correspondences between parties can be used to make ambiguous terms certain. [Paras 21-22] WB State Electricity Distribution v. Adhunik Power & Natural Resource, 2026 LiveLaw (SC) 213 : 2026 INSC 202 : AIR 2026 SC 1340

Contract Law - Procedural Prerequisites and Waiver - A party at fault cannot be permitted to set up a bar of non-performance of prerequisite obligations to exclude the operation of an arbitration clause - If a party's conduct such as failing to adhere to strict timelines for Engineer decisions or Adjudicator recommendations disables preceding steps, those procedural prerequisites are deemed waived. [Relied on M.K. Shah Engineers & Contractors vs. State of M.P. (1999) 2 SCC 59; ASF Buildtech Private Limited vs. Shapoorji Pallonji & Company Private Limited (2025) 9 SCC 76; State of Goa v. Praveen Enterprises (2012) 12 SCC 581; Paras 16-20] Bhagheeratha Engineering Ltd. v. State of Kerala, 2026 LiveLaw (SC) 31 : 2026 INSC 4

Contract Law - Shortfall in Tapering Linkage – Indemnity Clauses – Supreme Court set aside the compensation awarded for the period prior to the coal block cancellation (pre-25.08.2014) - It held that Article 2.5 of the PPA/PSA acted as an indemnity clause, stipulating that if coal was procured from alternative sources (e-auction/import) to meet shortfalls in tapering linkage before the captive source became operational, such coal would be deemed to be from the captive source with no separate cost escalation allowed. [Paras 19-23, 25-26] WB State Electricity Distribution v. Adhunik Power & Natural Resource, 2026 LiveLaw (SC) 213 : 2026 INSC 202 : AIR 2026 SC 1340

Contract Law — Unconscionable Agreements — "Lion and Lamb" Analogy - While the Court is cautious with concurrent findings, it can interfere under Article 136 if findings are perverse, disregard statutory provisions, or result in substantial and grave injustice – Noted that an appellant must demonstrate exceptional circumstances for such review - Where a "mighty" State (the lion) contracts with an individual job seeker (the lamb), the inequality is structural - Clauses barring claims for regularization in such standard-form contracts are unconscionable if the employee had no meaningful choice but to "sign on the dotted line." - Acceptance of such terms does not amount to a waiver of fundamental rights - Continuous service for over a decade, supported by repeated extensions and satisfactory performance, nurtures a legitimate expectation of recognition - The bar against this doctrine for contractual workers only applies if the initial appointment lacked a proper selection process - directed the respondent-State to forthwith regularize the services of all the appellants against the sanctioned posts to which they were initially appointed - The appellants shall be entitled to all consequential service benefits accruing from the date of this judgment. [Relied on State of Karnataka v. Umadevi (2006) 4 SCC 1; Central Inland Water Transport Corpn. v. Brojo Nath Ganguly (1986) 3 SCC 156; Chandra Singh v. State of Rajasthan (2003) 6 SCC 545; Army Welfare Education Society v. Sunil Kumar Sharma (2024) 16 SCC 598; Jaggo v. Union of India, 2024 SCC OnLine SC 3826; State of Karnataka v. Uma Devi, (2006) 4 SCC 1; Paras 11-14] Bhola Nath v. State of Jharkhand, 2026 LiveLaw (SC) 95 : 2026 INSC 99

Contractual Interpretation – Harmonious Construction – Clauses 3.20 and 3.22 – Supreme Court noted that a widely worded arbitration clause (Clause 3.22) must be read in conjunction with restrictive default clauses (Clause 3.20) - Clause 3.20, which accorded finality to the Administration's decision and barred legal proceedings, was interpreted to apply only where liability is admitted and only the quantification is at issue - Where liability is disputed, the matter falls within the ambit of the arbitration clause. [Relied on State of Karnataka v. Shree Rameshwara Rice Mills Thirthahalli, (1987) 2 SCC 160; J.G. Engineers Private Limited v. Union of India, (2011) 5 SCC 758; Sri Vedagiri Lakshmi Narasimha Swami Temple v. Induru Pattabhirami Reddi, 1966 SCC OnLine SC 243; Paras 25-38] ABS Marine Services v. Andaman and Nicobar Administration, 2026 LiveLaw (SC) 287 : 2026 INSC 274

Contractual Interpretation — Subsequent Legislation Clause: In contracts where the bid was submitted before the actual implementation of the BOCW machinery in a specific State, the introduction of cess collection via subsequent State Notifications/Rules qualifies as "subsequent legislation." - Contractors could not have factored in the 1% cess component in their bids when no mechanism for collection existed at the time of submission (28 days prior to the bid deadline). [Relied on A. Prabhakara Reddy and Company vs. State of Madhya Pradesh and others (2016) 1 SCC 600; Paras 38, 51, 52] National Highways Authority of India v. Gammon Atlanta (JV), 2026 LiveLaw (SC) 71 : 2026 INSC 76