Unitech Machines Ltd. vs Jagatjit Industries Ltd.
1988 Latest Caselaw 234 Del

JUDGMENT

S.N. Sapra, J.

(1) Along with suit plaintiff filed an application being I.A. 4828/87 under Order 39 Rules 1 & 2 read with 151 Cpc, thereby praying for grant of temporary injunction.

(2) Vide order dated August 25, 1987 notice was issued to defendants No. I and 2 and they were further restrained from terminating the agreement with plaintiff and from encashing the bank guarantee No. 4970/87. After service of stay granted by this court, defendant No. 1 filed an application being I.A. No. 4923 of 1987 under Order 39 Rule 4 Cpc, thereby praying that the order of temporary injunction dated 26th August 1987 be vacated.

(3) For better appreciation of the respective contentions of the learned counsel for the parties, it will be useful to refer to, in brief, the facts of the case.

(4) Plaintiff has been carrying on the business of manufacturing different types of machinery, particularly the machineries required for ghee manufacturing and related equipments. In the plaint it has been alleged by plaintiff that in month of January 1986, defendant No. 2 acting for and on behalf of defendant No. 1 and as its agent, sent an enquiry to plaintiff about the manufacture of certain machineries like cream chiller, butter churn and other items. Plaintiff submitted its offer for manufacture and supply of ghee manufacturing and related equipments to defendant No. 2. In the offer, plaintiff had given the prices of various items of the machinery and also the delivery period which was to be 4-5 months from the date of the order and also the terms of payment.

(5) Pursuant to the aforesaid offer, defendant No. 2 placed an order on March 5,1987 on the plaintiff for manufacturing and supplying the machinery and equipment. The total price of the machinery and equipment wassettledatRs.ll,23,343.00 . All prices were ex-Saharanpur packed and loaded in trucks and the excise duty at the rate of 5% was to be paid to the plaintiff. It was also agreed that an advance payment of Rs. 3,37,000.00 i.e. 30% of the price would be paid on acceptance of the order against irrevocable bank guarantee for an equal amount to be furnished by the plaintiff in favor of defendant No. 1.

(6) Vide letter dated March 9, 1987 plaintiff accepted the aforesaid order on the terms and conditions contained therein and also furnished a bank guarantee from defendant No. 3 in terms of the order and asked defendant No. 1 to release the 30% advance payment of Rs. 3,37,000.00 so that the work for manufacturing the equipment could be started. Defendant No. 1 paid the advance amount of Rs. 3,37,000.00 . It is alleged by plaintiff that soon thereafter plaintiff undertook the manufacturing of the machinery and equipment. After the drawings were approved, a meeting of the representatives of the parties was held on June 12, 1987. The question of delivery of the machinery and equipment was also discussed in the meeting and representatives of defendant No. 1 had asked the managing director of plaintiff that after the drawings were approved immediately when the plaintiff could deliver the equipment. It was suggested by representative of the plaintiff that plaintiff would be able to deliver all the items of machinery and equipments except butter churn by first week of August 1987. It was agreed that the plaintiff would confirm the date of delivery of the butter churn. Another meeting was held on June 20, 1987 between the representatives of the parties.

(7) Plaintiff has further alleged in the plaint that all the machinery except the butter churn had been manufactured and was ready for delivery. Plaintiff wrote a letter dated July 9, 1987 to defendant No. 1 informing about the progress of the work. Homever, defendant No. 2 wrote a letter dated July 21, 1987 and stated that defendant No. 1 would accept the delivery of all the material in one lot as the equipments without butter churn would be of no use to them. Defendant No. 2 also threatened that entire equipment and parts, including butter churn, be supplied within 15 days from the date of letter failing which the order would stand cancelled on the expiry of 15 days.

(8) According to plaintiff, defendants No. 1 and 2 could not refuse to take delivery of the machinery and equipment which had already been manufactured. It was never any term of the agreement that whole machinery and equipment would be supplied in one lot.

(9) Plaintiff wrote a letter dated August, 1, 1987 telling therein that contents of letter dated 21st July, 1987 were not correct and there was no justification for defendants in refusing to take delivery of the equipments offered by the plaintiff. Plaintiff also disputed the right of the defendants to terminate the contract.

(10) Defendant No. 1 sent a letter to defendant No. 3 on or about August 20, 1987 thereby invoking the bank guarantee. Plaintiff's case is that vital condition of the bank guarantee was that it could be enforced only in case there was breach of contract on the part of the plaintiff. As there was no breach of contract on the part of the plaintiff, so defendant No. 1 had no right to invoke the bank guarantee. Plaintiff had manufactured the equipment and machinery and offered the same for delivery 19 out of 20 items within the delivery period. It is further alleged that the time was never the essence of the contract and that defendants have nowhere proved what was the injury caused to them if the machinery and equipment were supplied to them a little late.

(11) Defendants No. 1 and 2 have disputed the allegations made by plaintiff. They have alleged that plaintiff has not made out any case of fraud justifying interference with the unconditional obligation to pay under the bank guarantee. Bank guarantee is in unconditional terms and in so far as defendant bank is concerned, it cannot be restrained from making payment under the guarantee.

(12) Vide letter dated August 19, 1987, defendant No. 1 wrote to defendant No. 3 that plaintiff had not supplied the equipment on order as per the purchase order conditions inspite of the opportunity having been given to plaintiff. Plaintiff committed breach of purchase order and in view of this purchase order was cancelled. Defendant No. 2 presented bank guarantee and requested defendant No. 3 to make payment of Rs. 3,37,000.00 . During the pendency of the suit and with the permission of the court, defendant No. I placed another letter dated September 22, 1987 on record. This letter was written to the manager of defendant No. 3. In this letter reference has been made to the earlier letter dated August 19, 1987.

(13) Mr. K.N. Kataria, learned counsel for plaintiff, has contended that the letters dated August 19, 1987 and September 22, 1987 are not in conformity with the terms of the bank grarantee. As such the payment under the bank guarantee could not be made by the bank to defendant No. I. He has further urged that merely staling that loss had been suffered was not sufficient compliance of law as laid down in case M/s. Harprashad and Co. Ltd. v. Sudarshan Steel Mills and Others, Air 1980 Delhi 174. No where it is stated as to what breach of the terms of the primary agreement between plaintiff and defendants No. 1 and 2 was committed by plaintiff. Machinery was ready for delivery. While deciding the question with regard to encashing of the bank guarantee, the court is to look into the terms of the primary agreement between plaintiff and defendants No. 1 and 2.

(14) Mr. Kataria has placed reliance on the judgments in case M/s. Banwari Lal Radhe Mohan v, Punjab State Co-operative Supply and Marketing Federation Ltd., ; Shiv Ispat Udyog Private Ltd. v. M/s. , Indus Valley, ; M/s. Arul Murugan Traders v. Rashtriya Chemicals and Fertilisers Ltd. Bombay and another, ; Jainson Cloth Corp. v. State Trading Corpn., 1986 R.L.R. 566 and M/s. J.R. Enterprises and others v. M/s. State Trading Corporation of India Ltd., .

(15) Mr. R.K. An and, learned counsel for defendants No. 1 and 2, has relied upon the decisions in cases Banwari Lal Radha Mohan v. The Punjab State Co-operative Supply and Marketing Federation Ltd., Air 1983 Delhi 86; Acc Babcock Limited v. Straw Products Limited, Air 1985 Delhi 237, M/s. Escorts Limited v. M/s. Modern Insulators Ltd. and another, 1.A. No. 3748/87 in Suit No. 1154/87 decided by B.N.Kirpal, J. on December 2, 1987 and U. P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., Civil Appeal No. 3054/87 decided by the Supreme Court on November 19, 1987.

(16) Mr. R.K. Anand contended that the amount which was being claimed now by defendant No. 1 under the bank guarantee was paid to plaintiff by way of advance. In case of failure to supply machinery by plaintiff, the loss was implied. Guarantee, according to him, covered advance as well as loss. Both the letters dated August 19, 1987 and September 22, 1987 were in conformity with the terms of the bank guarantee. It is not necessary to mention the word 'loss' though the same has been mentioned. Bank guarantee is an unconditional undertaking.

(17) In Mfs. Harprashad and Co. Lid. (supra), a Division Bench of this Court held as under : "GENERAL propositions do not solve concrete cases. Justice Holmes has said. While the law generally stated is that liability arising out of the unilateral contracts of commercial credits, such as letters of credit, bank guarantees and performance bonds is absolute, the intention of the parties as gathered from a reasonable construction of the language of the particular contract must ultimately govern the decision of the court as to the arising of the liability there under. The terms of a particular document may even constitute an exception to the general rule".

(18) The Division Bench of this court in Jainson Cloth Corpn. (supra) observed:

"OBVIOUSLY the purpose of the Bank Guarantee is to meet the liability which result from a breach of the contract by the supplier, i.e. the present appellant. As it is the case of the S.T.C. itself that there is no loss and there is no claim under the back to back contract by the Abu Dhabi Municipality, we fail to see how the Bank Guarantee can be encashed in the present case."

"IT can be stated at once that a Bank Guarantee is in the nature of an irrevocable letter of credit to pay in certain circumstances. But those circumstances must exist in fact as well as in law before the payment can be physically made. As pointed out by the learned single Judge, there are two conditions for the encashment of the guarantee'(a) non-performance by the contractor and (b) a demand by the Stc based on that non-performance. If the nonperformance is the result of frustration, then it is not a case of non-performance, but a case in which performance is excused by law. In such circumstances, the Bank Guarantee cannot be invoked. Again, even if there is non-performance, there may be cases in which the non-performance does not lead to any right to claim damages for breach. Even in such a case, it is difficult to see how the Bank Guarantee can be encashed."

(19) The Division Bench further held that as there was no loss to State Trading Corporation and no claim by Abu Dhabi Municipality and as such the bank guarantee could not invoked.

(20) In Acc Babcock Limited (supra) this court held that the bank guarantee as the various clauses showed was irrespective of the considerations of failures under the original contract and thus was an independent contract between the bank on the one hand and the purchaser on the other, even though this guarantee contract had come into being on account of a provision in the original contract of supply. Such a bank guarantee was fused with autonomy on its own without recourse to the underlying original contract of supply and the Bank must honour its obligations as per the bank guarantee. The obligation of the bank was absolute and irrevocable on demand for payment of the guaranteed amount by the purchaser and was not dependent upon the correct decision of the disputes between the parties under the original contract in regard to the performance guarantee.

(21) The Supreme Court in United Commercial Bank v. Bank of India and others, , laid down rule that the bank issuing or confirming a letter of credit or a bank guarantee, was not concerned with the underlying contract between buyer and seller. The bank guarantee constitutes an independent contract between the bank and the party in whose favor the bank guarantee is issued at the instance of the contractor. It imposes an absolute obligation to pay. This was followed by Division Bench of this Court in case Mis. G.S. Atwal and Co. (Engineers) Pvt. Ltd. v. National Projects Construction Ltd.,

(22) In U.P. Cooperative Federation Ltd. (supra) their Lordships of the Supreme Court were considering the effect of a performance bank guarantee. It has been held that the principles on which the bank guarantee could be invoked or restrained were well settled. It has been further held that an irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit could not be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice having been made out.

(23) The law is well settled with regard to the bank guarantees and irrevocable letters of credit. Bank Guarantee is an independent contract between the beneficiary and the bank. Bank is under an absolute obligation to honour its bank guarantee irrespective of the disputes and differences between the parties under the primary agreement. The beneficiary should invoke the bank guarantee in accordance with its terms and conditions. The jurisdiction of the Courts is very limited with regard to the interference with the encashment of bank guarantee. The Court interferes in case of fraud and/or irretrievable injustice. Coming to the facts of the present case, the first question which arises for consideration is, as to whether plaintiff has made out any prima facie case or not.

(24) It will be appropriate to reproduce the relevant terms of the Bank Guarantee which read as under :

"WE,Bank of Tokyo Limited, JeevanVihar, Parliament Street, New Delhi, do hereby undertake to pay the amount due and payable under this guarantee without any demur merely on a demand from the Purchaser staling that the amount claimed is due by way of loss or damaged caused to or would be caused to or suffered by the Purchaser by reason of any breach by the said supplier of any of the terms and conditions contained in the Purchase Order or by reasons of the Supplier's failure to perform the said Purchase order, any such demand made on the Bank shall be conclusive as regards the amount due and payable by the bank under this guarantee."

Xxxxxx Xxx XX

"WE,Bank of Tokyo Limited, Jeevan Vihar, Parliament Street, New Delhi, further agree that the guarantee herein contained shall remain in full force and effect during the period that would be taken for the performance of the said purchase order and that it shall continue to be enforceable till all the dues of the Purchaser, under, or by virtue of the said purchase order have been fully paid and its claims satisfied or discharged or till the purchaser satisfied that the terms and conditions of the said Purchase Order have been fully and properly carried out by the said supplier and accordingly discharges the guarantee."

it is to be seen whether defendant No. 2 has invoked the bank guarantee in accordance with its terms and conditions. It must be borne in mind that the bank guarantee was furnished by plaintiff to secure an advance, which was paid by defendant No. 1 to plaintiff. Vide letter dated August 19, 1987, defendant No. 1 presented the bank guarantee in question and requested defendant No. 3 for its encashment. The relevant contents of this letter are reproduced as under:- "M/S.Unitech Machines Ltd. have not supplied the equipment on order as per the purchase order conditions. In spite of further opportunity given to them, they have failed to deliver the equipment on order. Thus M/s. Unitech Machines Ltd. have committed breach of purchase order condition. In view of this, the above said Purchase Order has been cancelled. We hereby present your guarantee No. 4970/87 dated 9-3-1987 and request you to kindly pay Rs. 3.37,000.00 (Rupees Three lakhs thirty seven thousand only), the amount of the said Guarantee issued in our favor, through a demand draft favoring Canara Bank a/c. Jagatjit Industries Ltd., payable at New Delhi."

(25) This letter is very vague and does not indicate whether the amount was being claimed on account of any loss or damage caused to or would be caused to or suffered by purchaser by reason of any breach by supplier of any of the terms and conditions contained therein. However, defendant No. 2 wrote another letter dated September 22, 1987. In this letter, it has been alleged, that the amount of Rs. 3,37,000.00 was due to defendant No. 1 by way of loss, caused to them by reason of breach of the terms and conditions contained in the purchase order. In the first letter, it has been clearly stated that in spite of further opportunity given to plaintiff, plaintiff failed to deliver the equipment on order. The second letter now clearly states that the amount was being claimed due to the loss, caused to defendant No. 1 by reason of breach on the part of plaintiff. I am of the view that the bank guarantee has been invoked inaccordance with its terms and conditions.

(26) Mr. Kataria has contended that the time was not essence of the contract and it is defendant No. 1 who committed the breach of the terms and conditions. In my view, these are the disputes between the parties and it is not for this Court to make any comment on the same.

(27) The contention of Mr. Kataria that plaintiff had already manufactured the machinery and this would be a very hard case as far as plaintiff is concerned. No doubt, there is some force in this argument But as the law that stands today, plaintiff has to make out either a case of fraud or an irretrievable injustice. To my mind, plaintiff has not made out such a case.

(28) Under the circumstances, 1. A. 4848/87 is dismissed. Stay granted on August 25, 1987 stands vacated. I.A. 4923/87 also stands disposed off.