Loan Repayment Not Contingent On Third-Party Performance, Unless Agreed: Calcutta High Court

The Calcutta High Court has held that a borrower cannot avoid repayment of a loan on the ground that a third party failed to perform its obligations, ruling that such liability flows from the contract between the borrower and the lender.

Justice Ajay Kumar Gupta, while dismissing the writ petition filed by Jayanti Karmakar, rejected her contention that she should not be saddled with liability due to the alleged default of the supplier.

“The contention of the petitioner that she should not be saddled with the liability to repay the loan on account of the alleged default of the supplier cannot be accepted. The liability to repay a loan arises out of the contract between the borrower and the lender, and is not contingent upon the performance of a third party, unless specifically provided for.” the court said.

The case arose after Karmakar, proprietor of United Re-Rolling Mills, secured a loan of Rs. 4,39,530 from the West Bengal State Cooperative Agriculture and Rural Development Bank in August 2005 for setting up a Bell Metal rolling mill. The loan amount was disbursed directly to the supplier, Jagannath Engineering, based on quotations furnished by her.

Karmakar contended that she could not commence operations due to non-supply of machinery and had requested the bank to take steps to ensure delivery. She therefore sought relief including a direction that no interest be charged until the machinery was supplied and that action be taken against the supplier. The bank and the supplier disputed these claims, relying on a delivery challan bearing her signature to assert that the machinery had been supplied.

Rejecting the plea, the court held that the bank was merely a lender and had no nexus with the supplier, noting that the cheque had been issued in favour of the supplier at the petitioner's own request and based on her quotations.

“In the absence of any material to demonstrate that the Bank had undertaken responsibility for ensuring delivery of the machinery or had acted in breach of any statutory or contractual obligation, no direction can be issued restraining the Bank from recovering its dues,” the court said.

The court further found that no arbitrariness or illegality could be attributed to the bank, observing that it had sanctioned and disbursed the loan in terms of the petitioner's own request, with its role confined to that of a lender.

“Insofar as the respondent Bank is concerned, this Court does not find any arbitrariness or illegality in its actions. The materials on record indicate that the Bank had sanctioned the loan in favour of the petitioner and disbursed the amount in terms of the quotation and request furnished by the petitioner herself. The Bank's role was thus confined to that of a loan amount.”

The court also noted that the dispute regarding the supply of machinery involved seriously disputed questions of fact, which could not be adjudicated in writ jurisdiction.

It held that if the petitioner's grievance was against the supplier, she was free to pursue appropriate remedies in accordance with law.

Accordingly, the writ petition was dismissed.