IDBI Bank Limited v Axcel Sunshine Limited & Anor

A document described as a letter of comfort may constitute an enforceable guarantee, indemnity, or both. The label is not determinative; the court construes the document objectively, giving effect to promissory language, express obligations, and the surrounding transaction. A party cannot avoid its contractual obligations by relying on its own failure to obtain regulatory permission where permission could have been sought and performance is not necessarily unlawful. The Ralli Bros exception applies only where contractual performance necessarily requires an unlawful act in the place of performance. Foreign-exchange restrictions did not prevent enforcement where payment was to be made in Dubai and Indian law permitted subsequent approval. A contractual warranty that necessary authorisations have been obtained may support damages for breach and misrepresentation. Unjust enrichment may alternatively arise where money advanced in reliance on ineffective security discharges the defendant’s guaranteed liabilities.

IDBI Bank’s DIFC branch advanced USD 67 million under a credit facilities agreement to Axcel Sunshine Limited. Siva Industries and Holdings Limited issued a letter of comfort governed by English law, undertaking to ensure Axcel’s performance, repayment, and the Bank’s indemnification. Axcel defaulted, and the Bank claimed the outstanding debt from Siva.

Siva contended that the letter was merely an unenforceable paper exercise, that it contravened Indian foreign-exchange law, and that enforcement was barred by common law and the Rome I Regulation. The Bank relied principally on the letter and alternatively on breach of warranty, misrepresentation, subrogation, and unjust enrichment. The central issues were the legal character of the letter, the effect of the FEMA Regulations, the place and legality of performance, and the alternative remedies.

1. Disposition. Judgment was entered for the Bank. It was entitled to recover USD 143,669,753.22 under the letter of comfort, with interest at the CFA rate of LIBOR plus 6% to 30 September 2024 and thereafter the statutory rate.
2. There was no agreement or representation that the letter would be merely an optical or paper exercise. The contemporaneous documents, legal advice, board approval, and express contractual wording showed an intention to create binding obligations. Even if an employee had made such a statement, the employee lacked actual or ostensible authority. The requirements for ostensible authority included a representation by the principal and reasonable reliance: Freeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480; Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd (The Raffaella) [1985] 2 Lloyd's Rep 36; Philipp v Barclays Bank [2023] UKSC 25.
3. The label letter of comfort was not determinative. Construed objectively, clause 3 contained a classic guarantee or see-to-it obligation, while clause 11 was an express indemnity. The CFA’s statement that its own guarantee clause was not applicable did not alter the separate obligations in the letter: Associated British Ports v Ferryways [2009] EWCA Civ 189; Kleinwort Benson v Malaysia Mining Corporation [1989] 1 WLR 379; Dragonfly Consultancy v HMRC [2008] EWHC 2113 (Ch).
4. Regulation 3 of the Foreign Exchange Management (Guarantees) Regulations 2000 did not make the letter void or unenforceable. Indian law permitted ex post facto approval, and Siva could not rely on its own failure to seek permission. The indemnity was not within the regulation. Performance was to occur, or could occur, in Dubai, not necessarily India. The Ralli Bros rule therefore did not apply. Nor did articles 3(3) or 9(3) of the Rome I Regulation prevent enforcement.
5. Clause 7 represented and warranted that all legally required authorisations had been obtained. Siva breached that warranty and made a non-fraudulent misrepresentation. If the primary claim had failed, the Bank would also have succeeded in unjust enrichment and would have been entitled to subrogation to the discharged guarantees.