Hagglunds Drives Ab And Anr. vs National Heavy Engineering ...
2002 Latest Caselaw 142 Bom

JUDGMENT

D.Y. Chandrachud, J.

1. The appellants before the Court impugn an order dated 1st August, 2001 passed by the learned Joint Civil Judge, Senior Division, Pune by which the learned trial Judge has declined to grant an interim injunction, restraining the First Respondent from encashing the proceeds of two Bank Guarantees and restraining the Second Respondent, the Bank of Maharashtra from paying over the proceeds of the Bank Guarantees. The contention of the learned Counsel appearing on behalf of the appellants in the present case is that the Bank Guarantees in question are not unconditional in nature and the Invocation of the Guarantees by the First Respondent was in the circumstances of the case not in terms of the stipulations contained in the Instruments of Guarantee.

2. The first Respondent had a contract with a co-operative sugar factory, known as the Pandavpur Sahakari Sakhar Karkhana for the supply and commissioning of a sugar factory. The First Respondent in turn placed two purchase orders with the Appellants on 4th and 5th July, 1996 for the manufacture and supply of (i) a Hydraulic Drive System and (ii) An Electrical Control Panel, Hydraulic Oils, Electrical Cables etc. Part II of the clause relating to the Terms of Payment under the contract requires the Appellants to furnish a Bank Guarantee in the amount of 10% of the value of the order.

The clause provides as follows :

"Part 11

For the supply of all indigenous equipments 25% of the total value of the order will be payable as an advance if required against the submission to necessary Bank Guarantee for the equivalent amount subject to the confirmation given by us. This Bank guarantee for advance is to be given in a mutually agreed format. Balance 75% payment of the order will be payable against submission of despatch document directly to us subject to your furnishing the Bank guarantee for 10% value of the order towards performance in a mutually agreed formal. If the Bank Guarantee for performance is not furnished, 10% value of the order will be retained towards the performance which will be released only after completion of the satisfactory performance trials at Pandavpura site."

In pursuance of the contractual stipulation, two Bank Guarantees respectively dated 22nd December. 1997 and 29th April, 1998 were furnished by the Bank of Maharashtra, Overseas Branch. Pune for and at the behest of the Appellants, to the First Respondent. The recitals contained in the Bank Guarantees were broadly similar and recorded that (i) The First Respondent had placed a purchase order with the Appellants for the design, supply, transport, erection and commissioning of a Hydraulic Drive System for the factory being set up at Pandavpura S.S.K., Karnataka; (ii) Under the terms of the purchase orders, the Appellants had to furnish a Bank Guarantee in favour of the First Respondent for securing the quality, supply, workmanship and performance of the equipment and to provide services to secure the guarantees in terms of the order and (iii) In terms of the clause on the performance Bank Guarantee contained in the purchase order, the Appellant had agreed to procure, a Bank Guarantee, guaranteeing to pay to the First Respondent on account of the equipment not being of the requisite quality or workmanship or falling to give the required performance. Clauses (a), (b), (c) and (d) of the two Guarantees provide as follows :

"(a) In pursuance of the said Purchase Order the bank hereby guarantees to pay to the NHEC forthwith on first demand with-out demur the sum of SEK, 365,138 (Swedish Kroner Three Hundred Sixty Five Thou-

sand One Hundred Thirty Eight only) in event of the said equipment on order not being of the required quality or workmanship or the failure of the said equipment in achieving the desired performance or in the event of failure of the Supplier in observing and fulfilling any or all of his obligations in terms of the said Purchase Order.

(b) This guarantee shall be valid till 28th February, 1999.

(c) It is expressly agreed and understood that the decision taken by a joint committee consisting of representative of NHEC. Karnataka State Sugar Federation and Hagglunds Drive AB, by majority vote of members of committee as to whether supply/erection of services has been and is of the required quality and workmanship and the said equipment gives desired performance or whether the Supplier has observed/ fulfilled/performed his obligations as mentioned in the said Purchase Order, will be final and binding on the said Bank and the right of NHEC to recover any amount due to NHEC shall not be affected or suspended by reason of the fact that any dispute(s) with regard to the liability under the said Purchase Order or if there are any proceedings pending before any tribunal or arbitrator or Court with regard thereto or in connection therewith that the Bank shall pay to NHEC the sum under the guarantee or any part thereof without demur on first demand and without requiring NHEC to invoke any legal remedy that will be available to them.

(d) That it shall not be open to the bank to know the reasons or to investigate or to go into the merits of the demand or to question or challenge or know any facts affecting the demand or require proof before paying the amount demanded by NHEC under this guarantee."

The First Bank Guarantee was in the amount of Swedish Kroner 365, 138 pay able in Indian Rupees at the prevailing exchange rate, subject to a maximum of 20,08,259/-. The guarantee was to remain valid until 28th February, 1999. A claim or demand under the guarantee was required to be made within a period of 60 days after the validity date falling which the Guarantee would be discharged. The Second Guarantee was issued in the same terms, but the total amount of the Guarantee was Rs.

1,19,600/-.

3. On 8th February 1999, two letters were addressed by the First Respondent to the Issuing Bank calling upon the Bank to extend the validity period of the two Bank Guarantees respectively until 22nd August, 1999 and 28th October. 1999 since, the purpose of the guarantees had not thus far been achieved. The First Respondent then stated that in case the period of the Bank Guarantees was not extended as desired, then in view of the Appellant being in default of its contractual obligations, the letter of the First Respondent should be treated as a claim under the guarantees and the full amount under the guarantees should be remitted to the First Respondent. The two Bank Guarantees were extended until 31st July, 1999 under an advice of the Chief Manager of the Overseas Branch of the Bank of Maharashtra purportedly dated 23rd February 1999. There is a serious dispute as to whether the extension of the Bank Guarantees was in fact issued on the date that it purports to have been issued since the case of the First Respondent is that an extension was forwarded by the Bank of Maharashtra much later, only on 18th August. 1999 which was after the expiry of the extended period of validity. On 10th August. 1999 the First Respondent addressed a letter to the Bank recording that despite its letter dated 8th February, 1999, the Bank had not extended the period of validity of the Bank Guarantees thus far. The First Respondent reiterated that the purpose of the Bank Guarantees had not been served since the performance trial at the Pandavpura Project would be demonstrated now in the next season, Consequently, the Bank was requested to renew or extend the period of validity until 30th May. 2000 falling which it was stated that the Bank should remit the full proceeds of the said Bank Guarantees forthwith in terms of the claim lodged on 8th February, 1999. In reply to the aforesaid letter which was addressed to the Bank, the Appellant in its letter dated 17th August, 1999 stated that it had agreed to extend the validity of the Bank Guarantees until 31st July. 1999 to enable the First Respondent "to check the satisfactory performance of the drives immediately upon recommencing of crushing season for 1999-2000". The Appellant called upon the First Respondent to nominate its representative to visit the Sugar factory so that the satisfactory performance of the

drives could be established. In response thereto, the First Respondent in its letter dated 2lst August, 1999 recorded that until date, no extension of the Bank Guarantees had been issued. The First Respondent then stated that its Project Department had planned to demonstrate the performance trials in the forthcoming season of 1999-2000 and hence, until the completion of those trials of the Hydraulic Drives System, the Appellant was duty bound to keep the Bank Guarantees valid. The letter recorded that a number of problems were observed in the Hydraulic Drives in the first crushing season and the Appellant had taken almost one season to set that right. In these circumstances, the Appellant was requested to keep the Bank Guarantees alive till 30th March, 2000 so that the performance trials could be conducted, in the meantime.

4. By a letter dated 30th August, 1999 addressed by the First Respondent to the Bank, with a copy to the Appellant, the First Respondent recorded having received the Bank's forwarding letter dated 18th August, l999 together with photo copies of the extensions of the Bank Guarantees. The First Respondent recorded that the receipt of the aforesaid forwarding letter had taken place after the extended term of the guarantees expired on 31st July, 1999. The First Respondent made a grievance of the fact that the mere photo copies of a purported letter of extension were not acceptable and the Bank must submit an original of the extension on Non-Judicial Stamp Paper together with the Banker's Seal and signature. In the circumstances, the First Respondent once again sought an extension of the validity until 30th March, 2000 failing which, it was stated, the proceeds thereof would have to be remitted by the Bank. There was thereafter, an exchange of correspondence between the parties. The Appellant on its part, by a letter dated 1st September, 1999 recorded that the Guarantees have been extended until 31st July, 1999 to enable the First Respondent to see the satisfactory functioning on the recommencing of the crushing season 1999-2000. The Appellant made a grievance of the fact that the First Respondent had not sent a representative to verify that the drives were functioning well during the then current crushing season 1999-2000. The case of the Appellant is that in the First week of February, 2000, performance trials began, but these were thereafter postponed to the month of August, 2000. On 7th March, 2000, the First Respondent sought an extension of the period of validity of the Bank Guarantees on the ground that the performance trials of the plant had not yet been completed.

5. By a letter dated 6th April, 2000, the First Respondent recorded that at the performance trials which took place on and from 2nd February, 2000 during the second crushing season, all the members of the Committee including the Karnataka State Sugar Federation, the Appellants and the First Respondent were present. The Sugar Factory upon the recommendations of the Karnataka State Sugar Federation had called upon the First Respondent on 5th February, 2000 to postpone the performance trials until the next season and to get the performance Bank Guarantee extended by one year. In the circumstances, the case of the Respondent was that the Bank Guarantees should be kept valid until the period of performance trials was over. In a letter dated 1st November, 2000, the First Respondent informed the Appellant that the performance trials were to take place sometime in the month of November, 2000. The Appellant on its part adopted the position in its correspondence that the Hydraulic Drivers which it had supplied were working adequately. For the sake of completeness, it would be necessary to refer to the alleged Minutes of 24th November, 2000 which are stated to be signed by a representative of the Appellants and of the Sugar Factory. In the said Minutes it is stated that the Hydraulic System of the Mill Drives had been checked and was found to be working satisfactorily. The performance trials had been postponed.

6. In the suit which has been instituted before the trial Court in the present case, the case of the Appellant is that the machinery which has been supplied by the Appellant under the two purchase orders is performing satisfactorily. According to the Appellant, it is the First Respondent and the Sugar Factory which is the client of the First Respondent, who have not been able to provide the required technical support, man power and raw material of the required quality and quantity and have thus delayed the taking up of the performance trials in respect of the machinery supplied by the Appellant. According to the Appellant, it is

ready to give the requisite performance trials of the machinery and it should not be called upon to again renew the Bank Guarantees particularly since (a) the performance trials had commenced, (b) the trials were stopped abruptly without any reason; and (c) the Sugar Factory has shown its satisfaction in regard to the Hydraulic supply by the Appellant. Insofar as the application on the basis of which interim relief has been sought in the proceedings before this Court is concerned,, a reference may be made to the averment in para 20 of the plaint in which it has been stated that it was not open to the First Respondent to seek an extension of the Bank Guarantees unilaterally and the guarantees could not be invoked without compliance with the provisions of Clause 5(c) thereof. According to the Appellant, the First Respondent has not filed any Minutes of the Joint Committee Meeting nor did the First Respondent furnish a copy of any decision of the Joint Committee. Hence according to the Appellant, the invocation of the Bank Guarantees is premature and void.

7. The submissions which have been urged on behalf of the Appellant have not been accepted by the Learned Trial Judge. By an order dated 1st August 2001, the Learned Trial Judge rejected the application for the grant of interim relief.

8. The Learned Counsel appearing on behalf of the Appellant has impugned the order of the Learned Trial Judge by submitting that the Bank Guarantees which were issued in the present case were not unconditional Bank Guarantees. In the submission of the Learned Counsel, the Guarantees were subject to the express condition, contained in Clause 5(c), that the decision taken by the Joint Committee consisting of the representatives of the Appellant, the First Respondent and of the Karnataka State Sugar Federation on whether the supply/ erection or services has been and is of the required quality and workmanship and on whether the said equipment gives the desired performance or on whether the supplier has fulfilled his obligations as mentioned in the purchase order is final and binding on the Bank. In the present case, admittedly there is no decision of the Joint Committee. Consequently, it was submitted that the invocation of the Bank Guarantee itself is improper and the Appellant is entitled to an interim injunction as prayed for. The submissions may now be considered.

9. The Bank Guarantees which were issued by the Bank of Maharashtra for and at the behest of the Appellant to the First Respondent contain in Clause (a), a stipulation that the Bank Guarantees to pay the First Respondent on first demand without demur, in the event of the equipment on order not being of the required quality or workmanship, or the failure of the said equipment in achieving the desired performance, or in the event of a failure of the Supplier/Contractor in observing and fulfilling any or all of his obligations in terms of the purchase order. Clause (c) of the Guarantee stipulates that the decision taken by a Joint Committee consisting of the representatives of the Appellant, the First Respondent and the Karnataka State Sugar Federation by a majority vole of members on whether the supply has been of the required quality and workmanship; on whether the equipment gives the desired performance, or on whether the supplier has fulfilled his obligations under the purchase order will be final and binding on the Bank. Clause (c) also stipulates that the right of the First Respondent to recover the amount due under the Guarantee shall not be affected or suspended by any dispute with regard to the liability under the said purchase order or the pendency of any dispute before a Court or Arbitrator. The Bank has agreed that it shall pay to the First Respondent the sum due under the guarantees or any part thereof without demur on first demand and without requiring the First Respondent to invoke any legal remedy that is available. Clause (d) stipulates that it shall not be open to the Bank to know the reasons for or to investigate or to go into the merits of the demand, nor can the Bank for that matter require proof before paying the amount demanded by the First Respondent under the Guarantee.

10. The material clauses of the Bank Guarantees demonstrate that it is not a condition precedent to the invocation of the Bank Guarantees that there should be a prior decision of the Joint Committee holding the Appellant liable on account of a failure of quality or workmanship; a failure in achieving the desired performance; or a failure to fulfill the obligations under the purchase order. In Clause (c) of the Bank Guarantees there is a stipulation which renders

the decision of the Joint Committee final and binding on the Bank. Therefore, once there is a decision of the Joint Committee holding that the Appellant was or was not guilty of a breach of the contractual obligations referred to in Clause (c) of the Guarantee that decision of the Joint Committee would bind the Bank. If the Joint Committee came to the conclusion that the Appellant is not as a matter of fact in breach of its contractual obligations that would necessarily bind the Bank and there would then be no question of the Bank being required to pay any proceeds of the Bank Guarantee. Similarly, if the Joint Committee arrived at the conclusion that the Appellant was as a matter of fact in breach of one or more of the obligations referred to in Clauses (a) and (c) of the Bank Guarantees that would equally bind the Bank and the Bank would necessarily have to pay the amount demanded by the beneficiary of the Bank Guarantees viz., the First Respondent. But, what is important is that the lodgment of a demand under the Bank Guarantees or the invocation of the Bank Guarantees by the First Respondent is not made conditional upon there being a prior determination by the Joint Committee. The determination of the Joint Committee Impinges upon the liability of the Bank to pay under the Bank Guarantees in respect of a demand which has been lodged by the First Respondent. The Appellant is therefore, not correct in contending that in the absence of a determination by the Joint Committee, the Invocation is improper.

11. A determination by the Joint Committee is ex facie, on a plain reading of the two Bank Guarantees, not a condition precedent to the entitlement of the First Respondent to invoke the guarantees. The submission which has been urged on behalf of the Appellant, as already noted earlier, is that an Injunction ought to have been granted by the Learned Trial Judge on the ground that the invocation was Improper. There is no merit in the submission that the invocation in the present case was not in terms of the Bank Guarantees. The case of the First Respondent is that the performance trials which were to take place to establish whether the machinery and equipment meets the contractual parameters have not been concluded. The fact that the performance trials have not been concluded until date is an admitted position. The First

Respondent in these circumstances, sought an extension of the period of validity of the Bank Guarantees. The original period of validity of the Bank Guarantees was to expire on 28th February. 1999. The Appellant, it must be noted, initially agreed to the extension of the Bank Guarantees which were accordingly extended upto 31st July, 1999. The First Respondent has a serious grievance of the manner in which the Bank Guarantees were actually extended for. It is their contention that the extension of the Bank Guarantees until 31st July, 1999 was communicated by a forwarding letter of the Bank much later after that period was over, on 18th August, 1999. Be that as it may what is Important for the present purpose are the two letters of the Appellant dated 17th August, 1999 and 1st September, 1999 in which the Appellant set out the reasons why it agreed to an extension of the Bank Guarantees in the first instance. In the first of the said letters, the Appellant recorded that it agreed to extend the validity of the Bank Guarantees to enable the First Respondent "to check the satisfactory performance of the drives immediately upon the recommencing of the crushing season for 1999-2000 (paragraph 2 of a letter dated 17th August, 1999). In the subsequent letter, the Appellants state that "we agreed to extend these further till 31-7-99, to enable you (the First Respondent) to see the satisfactory functioning on the recommencing of crushing for the season 1999-2000". From the term of the Bank Guarantees, there can be no doubt that the guarantees were performance guarantees, The Appellant by its conduct and in the aforesaid two letters accepted the aforesaid position as also the fact that the performance of the machinery was still to be established which necessitated the extension of the Bank Guarantees. The Appellant declined to renew the Bank Guarantees beyond 31st July, 1999. Even now before this Court, a suggestion was made on behalf of the First Respondent that the Appellant may agree to renew the Bank Guarantees until the completion of the performance trials which are expected to take place shortly hereafter. The Learned Counsel appearing on behalf of the Appellant stated that there was no question of the Appellant renewing the Bank Guarantees any further. In the circumstances the Appellant declined to renew the Bank Guarantees after the extended

period of validity expired on 31st July, 1999. The First Respondent has in the circum-stances invoked the Bank Guarantees. Having regard to the facts and circumstances of the case, therefore, though prima facie at this stage, the invocation must be held to be proper. The claim or demand was lodged within the terms of the guarantees and even. If regard is had to the last of the invocations of 10th August 1999, that was according to the tenor of the guarantees. The claim was lodged as required within six months of the extended period of validity.

12. Insofar as the question of the grant of an Injunction against the encashment of a Bank Guarantee is concerned, the law on the subject is settled by several judgments of the Supreme Court. The issuing Bank is bound to observe and honour the terms of the guarantee. The beneficiary of a Bank Guarantee cannot be restrained from invoking the Bank Guarantee, and the issuing Bank cannot be injuncted from paying over the proceeds of the Bank Guarantee save and except in the case of fraud which vitiates the entire underlying transaction or in a case where irretrievable injustice would be caused by the invocation or the encashment of the Bank Guarantee. The issuing Bank is not concerned with the terms of the underlying transaction between the beneficiary of the Bank Guarantee and the person at whose behest the Bank Guarantee was issued by the issuing Bank. The Bank Guarantee is a bipartite contract between the issuing Bank and the beneficiary. The Bank is not a party to the underlying contract between the beneficiary and the person at whose behest the Bank Guarantee is issued. The Bank Guarantee in that sense is regarded in law as independent of the underlying transaction. Disputes which arise between the beneficiary of the guarantee and the person at whose behest the Bank Guarantee has been issued by the issuing Bank are of no concern to the Bank. Where the Bank assumes an obligation to pay on demand without demur, without reference to the underlying dispute, if any, between the parties, it must honour the terms of its obligation. Oil and Natural Gas Ltd. v. SBI, Overseas Branch, Bombay, ; Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P.) Ltd.. ; Hindustan Steelworks Construction Ltd. v. Tarapore and Co., ; State of Maharashtra v. National Construction Co., ; Ansal Engineering Corpn. Ltd., ; U. P. State Sugar Corpn. v. Sumao International Ltd., ; National Thermal Power Corpn. Ltd. v. Flowmore (P.) Ltd., ; Larsen and Toubro Ltd. v. Maharashtra S.E.B.. and Hindustan Steel Works Construction Ltd. v. G. S. Atwal and Co. Engineering Pvt. Ltd., .

13. In the present case, the Bank Guarantees provide that a decision of the Joint Committee consisting of the representative of the Appellants, the First Respondent and the Karnataka State Sugar Federation on whether, the supply/erection had been of the required quality and workmanship; on whether the equipment gave the desired performance; and on whether the supplier had performed his obligation as mentioned in the purchase order would be final and binding on the Bank. In the present case, the admitted fact Is that there is no decision of the Joint Committee. The performance trials which were scheduled to take place earlier were postponed. There are conflicting positions which have been adopted by the parties in the present case. On the one hand, the case of the Appellant as set out in the plaint is that the First Respondent and its client, the Sugar Factory, had not been able to provide the required technical support, skilled man-power and appropriate raw material of the required quality and quantity and. therefore, had delayed in taking performance trials of the machinery supplied (paragraph 15 of the plaint). The Appellant avers in paragraph 12 of the plaint that the performance trials which were fixed on 5th February. 2000 were postponed to August. 2000 without assigning any reason. The case of the Appellant is that the performance trials were stopped abruptly and the Sugar Factory had shown its satisfaction insofar as the functioning of the Hydraulic Drives supplied by the Appellants was concerned (para 16). On the other hand, the contention of the First Respondent in paragraph 15 of the reply is that the machinery and equipment which was supplied by the Appellant was not functioning

properly and in October. 2000 one of the parts of the machinery had to be replaced after keeping one unit closed and non-functional for almost one month, causing loss to the end beneficiary. The First Respondent has in the letter dated 21st August, 1999 also recorded its complaint that problems were observed in the Hydraulic Drives in the first crushing season and almost the whole season was taken to set the same right.

14. These are thus disputes between the con trading parties. Such disputes are not uncommon in the execution of civil contracts. However, it is a settled principle of law that the existence of such underlying disputes is not a sufficient ground for restraining the encashment of a Bank Guarantee. Such disputes do not establish a case of fraud much less of irretrievable injustice. In fact, in fairness, it must be noted that it has not been submitted before this Court by the Learned Counsel appearing on behalf of the Appellant that there was any fraud or, for that matter irretrievable injustice. No such submission was urged. Insofar as the Issuing Bank in the present case is concerned, on a demand being raised by the beneficiary of the Bank Guarantee -- the First Respondent -- the Bank would have to regard a determination by the Joint Committee consisting of the Appellant, the First Respondent, and the Karnataka State Sugar Federation as final and binding. Therefore, if a determination had been arrived at by the Joint Committee on the question as to whether there was a breach of performance, that determination necessarily would bind the Bank. The admitted position is that there is no such determination by the Joint Committee as a result of the disputes which have arisen between the parties. Both the Appellant and the First Respondent are members of the Joint Committee. The First Respondent and the Bank cannot be injuncted by the Court from encashing the guarantees and from honouring the obligation thereunder, respectively. The underlying disputes which have led to there being no determination of the Joint Committee, of which both the Appellants and the First Respondent are members cannot be a tenable ground for the grant of an injunction. The underlying disputes do not establish either fraud or irretrievable injustice. In the absence of a determination by the Joint Committee, the Bank is bound to honour its obligation. The

Appellant has declined to extend or renew the Bank Guarantees. Insofar as the issuing Bank is concerned, in the absence of a determination by the Joint Committee, the Bank is bound to honour its obligation to pay under the terms of the Bank Guarantee. The obligation is one which arises on first demand without demur (Clause (a)). The obligation is independent of any dispute. The obligation is not to be affected or suspended by reason of the fact that any dispute with regard to the liability under the purchase order has arisen. (Clause c). The guarantees provide that it shall not be open to the Bank to know the reasons for or to investigate or to go into the merits of the demand or to quest ion or challenge or know any facts affecting the demand or require proof before paying the amount demanded by the First Respondent under the guarantee (Clause (d)).

15. In these circumstances, I am of the view that in view of the well settled position in law laid down by the Supreme Court, it would be impermissible to grant an injunction as prayed for. The Appellant has failed to establish that the invocation of the Bank Guarantee was improper. There is no case of fraud or irretrievable injustice. In the circumstances, I find that there is no merit in the Appeal from Order and the Learned Trial Judge was in the present case right in declining to grant an interim injunction. The Appeal from Order is accordingly dismissed.