G.S. Atwal And Co. (Engineers) ... vs National Projects Construction ...
1987 Latest Caselaw 205 Del

JUDGMENT

S.S. Chadha, J.

1. This appeal under section 10 of the Delhi High Court Act, 1966, is directed against the order dated February 4, 1987, passed by Hon'ble Mr. Justice G.C. Jain, a learned single judge of this court, dismissing an application of the appellant under section 41, read with Schedule II, of the Arbitration Act, 1940, for the grant of interim relief restraining the National Project Construction Corporation Ltd. from enforcing the bank guarantee dated July 25, 1985, furnished by the United Commercial Bank through its branch at Calcutta.

2. The National Hydro Electric Power Corporation Ltd. (for short, called "the NHPC") floated tenders in respect of the construction of one of the component units of the projects known as the "Power House Block". The National Project Construction Corporation Ltd., the respondent, was awarded the work. The appellant was awarded subsequently as a subcontractor the work of "Construction of Protection Block and Stage- II Power House and ancillary work- Salal Project" at an estimated cost of Rs. 3,25,28,330. An additional work was entrusted to the appellant on July 12, 1984, at an estimated value of Rs. 1,87,94,132. A formal contract was executed between the parties. One of the terms of the contract was that a mobilisation advance to the extent of 8% of the total value of the contract would be paid to the appellant on furnishing a bank guarantee.

3. The appellant in his petition under section 41, read with Schedule II of the Arbitration Act for the grant of interim relief states that although a sum of Rs. 41,09,796.96 became payable as mobilisation advance, the respondent paid only a sum of Rs. 26,06,266 and that the appellant had furnished two band guarantees; one in the sum of Rs. 26, 06,266 and other for Rs. 15,03,570. A copy of the bank guarantee is filed. The bank guarantee was effective for a period of one year with effect from July 20, 1985, in the first instance and it was later on renewed from time to time and finally up to July 29, 1987.

4. Certain dugouts arise between the parties in the execution of the sub-contract and were referred to the sole arbitration of Shri B.N. Waghrey of Hyderabad in accordance with the arbitration agreement between the parties. The appellant filed a statement of facts and claims before the arbitrator claiming a total sum of Rs. 2,35,07, 259.08. The respondent filed a counter claim for Rs. 1,40,98,562.52. This includes the mobilisation advance of Rs. 26,06,266 with interest calculated up to December 31, 1986, in all Rs. 35,69,095.27.

5. During the pendency of the dispute before the arbitrator, the respondent invoked the bank guarantee furnished by the United Commercial Bank, Calcutta. Along with the said petition under section 41, the appellant filed a copy of the letter dated January 14, 1987, addressed to the United Commercial Bank, Calcutta, from counsel for the respondent calling upon the bank to pay the amount of the guarantee. The appellant invoked the jurisdiction of this court for the grant of a temporary injunction restraining the respondent from enforcing the bank guarantee dated July 20, 1985. The learned single judge dismissed the petition in liming by the order under appeal.

6. At the time of the admission of the appeal, we were taken through the letter dated January 14, 1987, addressed to the United Commercial Bank, Calcutta. The contention was that the demand made by the respondent was not in terms of the bank guarantee and thus not enforceable. The copy of the demand dated November 19, 1986, was neither before the learned single judge nor on the record of the appeal and we called upon the respondent to place on record a copy of the demand dated November 19, 1986, made by the respondent on the United Commercial Bank. that letter has been placed on the record along with the additional affidavit.

7. It is apposite to reproduce a part of the bank guarantee containing the following terms :

".... We, the United Commercial Bank, 10, Brabourne Road, Calcutta- 7000 001 (hereinafter referred to as "the said bank"), having our registered office at 10, Brabourne Road, Calcutta-700 001, do hereby guarantee the due recovery by the corporation of the said advance along with interest thereon as provided according to the terms and conditions of the contract. If the said contractor fails to utilise the said advance for the purpose of the contract and/or the said advance together with interest thereon as aforesaid is not fully recovered by the corporation, we, the United Commercial Bank, hereby unconditionally and irrevocably undertake to pay to the corporation on demand and without demur to the extent of the said sum of Rs. 26, 06,266 plus interest at 19.5% per annum and any claim made by the corporation on us for the loss or damage caused to or suffered by the corporation by reason of the corporation not being able to recover in full the said sum of Rs. 26,06,266 plus interest as aforesaid.

2. We, the United Commercial Bank, further agree that the corporation shall be the sole judge of and as to whether the said contractor has not utilised the said advance or any part thereof for the purpose of the contract and the extent of loss or damage caused to or suffered by the corporation on account of the said advance together with interest not being recovered in full and the decision of the corporation that the said contractor has not utilised the said advance or any part thereof, for the purpose of the contract and as to the amounts of loss caused to or suffered by the corporation shall be final and binding on us."

8. The demand made by the respondent on the United Commercial Bank involving the bank guarantee is contained in the letter dated November 19, 1986. In that letter, the respondent makes as demand in the sum of Rs. 26,06,266 plus interest at the rate of 19.5% per annum calculated up to October 31, 1986, amounting to Rs. 9,07,898, totaling Rs. 35,14, 164 against the bank guarantee No. 193 of 1985, dated July 25, 1985, issued by the United commercial Bank in favor of the respondent at the request of G.S. Atwal and Co. (Engineers) Pvt. Ltd., appellant- herein. The letter further states :

"We hereby certify that the said contractor has neither completed the work in respect of which the mobilisation advance was given to him nor has paid back the sum of Rs. 26,06,266 with interest to date. This is in resulting loss to us."

9. The notice dated January 14, 1987, by counsel for the respondent makes a demand against mobilisation advance stated to be outstanding as on December 31, 1986, for the sum of Rs. 25,79,592.68. After adding the interest as mentioned in the notice, a total demand of Rs. 36,29, 261.23 is made. It is then stated that :

The main submission of Mr. Daljit singh, learned counsel for the appellant, is that the obligation of the bank under the bank guarantee arises only if the appellant had failed to utilise the mobilisation advance for the purpose of the contract. He urges that the appellant had executed the total works of the value of Rs. 2,92,31,382 even according to the admission of the respondent contained in the pleadings before the arbitrator and only a sum of Rs. 71,62,424 had been paid to the appellant after adjusting certain amounts of recovery. Our attention is invited to clause 11.1 of the contract between the parties to urge that under the terms of the contract the mobilisation advance was to be recovered from the running bills of the appellant. It is contended that the entire amount of mobilisation advance of Rs. 26,06,266 together with interest that had accrued due, had been recovered by the respondent from the running bills of the appellant. The submission is that the invoking of the bank guarantee by the respondent is fraudulent act for recovering the mobilisation advance twice over. Reliance is placed on Arul Murugan Traders v. Rashtriya Chemical and Fertilisers Ltd. , to show that there can be exceptional circumstances against allowing a party to enforce the bank guarantee "that is where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of facts which to his knowledge are untrue. The exception for fraud, on the part of the beneficiary seeking to avail himself of the credit, is a clear obligation of the maxim ex turpi causa non orator actio or, if plain English is to be preferred "fraud unravels all". The courts will not allow their process to be used by a dishonest person to carry out a fraud". Reliance is also placed on Banerjee and Banerjee v. Hindusthan Steel Works Construction Ltd., wherein it was held that if a guarantee is enforced by fraud, misrepresentation, deliberate suppression of material facts, or the like, that will give rise to a special equity in favor of the contractor who will then have a right to stop its enforcement by obtaining an order from the court.

10. The law relating to the enforcement of the bank guarantee is well settled now. One of us (S.S. Chadha J.) had an occasion to consider the question in Rawla Construction Co. v. Union of India, , wherein it was observed (at page 207):

"The bank guarantee, therefore, constitutes an agreement between the bank and the Government under which there is an absolute obligation on the bank to make the payment to the Government merely on a demand from the Government. The bank is prohibited under the guarantee from raising any objection. Any demand made on the bank in accordance with the eventualities mentioned in clause 2 is conclusive as regards the amount due and payable by the bank. There may be disputes between the petitioner and the Government about the amount claimed by way of loss or damage caused to or that would be caused to or suffered by the Government by reason of any breach by the petitioner of any of the terms and conditions contained in the contract agreement but so far as the bank is concerned, it has to make payment on demand without any demur. The bank guarantee is a definite undertaking on the part of the bank and constitutes an engagement of the bank to pay to the Government merely on demand. The bank has assumed the liability and responsibility to satisfy directly the claim of the Government. Thus, an independent contract has been created between the bank and the Government by reason of the bank undertaking to the Government in consideration of the government having agreed not to retain Rs. 4 lakhs out of the reserve or the retention money as provided under the said contract agreement, to pay up to Rs. 4 lakhs without any demur merely on demand from the Government. Such bank guarantees have assumed great significance in the present commercial system and in contracts between the Government and the contractors. An elaborate system has been built on the footing that the banks would always honour without any objection the obligation under the guarantee and on that assurance the reserve or retention money is not retained by the government. Such contracts have to be respected and not interfered with."

11. The Supreme Court in United Commercial Bank v. Bank of India, has laid down the rule that the bank issuing or confirming a letter of credit or a bank guarantee is not concerned with the underlying contract between the buyer and seller. The bank guarantee constitutes an independent contract between the banker and the party in whose favor the bank guarantee is issued at the instance of the contractor. It imposes an absolute obligation to pay.

12. The terms of the bank guarantee in this case impose an absolute obligation on the banker to pay the amount of the guarantee in accordance with its terms. We have reproduced the two clauses of the bank guarantee to show that the obligation of the bankers is absolute. The bank is not concerned with any dispute between the appellant at whose instance the bank guarantee is issued and the respondent. There are two conditions mentioned in the terms of the bank guarantee, namely, (1) if the contractor fails to utilise the said advance for the purpose of the contract, and/or (2) the said advance together with interest thereon as aforesaid is not fully recovered by the respondent. Clause 3 of the bank guarantee further provides that the decision of the responded that the said contractor has not utilised the said advance or any part thereof for the purpose of the contract and as to the amount of loss/damage caused to or suffered by the respondent shall be final and binding on the bank. It is true that neither the demand letter dated November 19, 1986, nor the notice of counsel for the respondent dated January 14, 1987, stated that the contractor has failed to utilise the mobilisation advance for the purpose of the contract. The demand is permissible under either of the terms. Both these letters, and particularly the demand letter dated November 19, 1986, in specific terms, stated that the appellants have neither completed the work in respect of mobilisation advance so given to them nor have paid back the sum of Rs. 26,06,266 with interest to date and this is resulting in loss to the respondent. In our view, the conditions that the mobilisation advance has not been recovered by the respondent contained in the bank guarantee is clearly fulfillled in the demand letter dated November 19, 1986. This demand letter is in exact compliance with the terms of the bank guarantee.

13. That takes us to the consideration of the question whether there is any convincing material on the record to show that the entire mobilisation advance with interest accrued due had been adjusted or recovered by the respondent. There is a difference between the qualification of the mobilisation advance in the demand letter dated November 19, 1986, and the demand through the advocate of the respondent in the notice dated January 14, 1987, and it did cause some confusion. During the hearing of the appeal, we gave an opportunity to the parties to explain this discrepancy. The respondent has filed an affidavit on record stating that a sum of Rs. 26,407 was recovered against the mobilisation advance in the advance bill prepared by the respondent for the April, 1986, to May, 1986, and that this advance bill was accepted and signed on behalf of the appellant. The appellant has not been able to produce on record any prima facie evidence of the deduction of any further amount or adjustment towards the mobilisation advance against the running bills. An affidavit has been filed in court today together with a statement in tabulated form showing the gross value of the work executed, deduction on account of recoveries towards price of material, income-tax and security deposit, the net amount payable under the running bills, the amount actually paid by the respondent on ad hoc basis and the net amount still outstanding against the respondent. The counsel urges that the amount withheld against each bill is more than 8% of the gross value and, that, therefore, it must be inferred that the mobilisation advance was duly recovered. We are unable to accept this affidavit.

14. Mr. A.N. Parekh, learned counsel for the respondent, produced in court a number of running bills and in none of those bills there was a recovery of any amount towards the mobilisation advance. They were put to the counsel for the appellant yesterday and he was given an opportunity to produce in court the office copies of the bills submitted to the respondent in which the recoveries towards the mobilisation advance had been shown. Non has been produced in court today. Even in the case of Banerjee and Banerjee, , relied upon by counsel, it is held that for obtaining an order from the court, a very strong prima facie arguable case in support of the contention that there is a fraud or special equity must be made out and the courts will not interfere with the enforcement of unconditional or conditional bank guarantees or letters of credit on the mere allegation of fraud or special equity. There is mere allegation without any prima facie proof that the entire amount of mobilisation advance has been recovered by the respondent and that the respondent by his fraudulent act is recovering the amounts twice over.

15. We have not made reference to the arguments addressed at the Bar about the extent of the dispute between the parties or the claims or the counter-claims made as these matters are extraneous in considering the question of the enforcement or otherwise of the bank guarantee. A contract of bank guarantee is an independent contract between the banker and the respondent and has to be worked out independently of the disputes arising out of the work agreement between the parties to this petition.

16. We have taken a prima facie view on the question about the recovery/adjustment of the mobilisation account. Of course, the arbitrator will go into the merits of the question about the recovery or otherwise of the mobilisation advance and any opinion expressed by us will not prejudice either of the parties before the arbitrator.

17. For the above reasons, the appeal fails and is dismissed with costs. The interim injection is hereby vacated.