Mahalingam Shelly Co. vs Npc Corporation
1990 Latest Caselaw 166 Del

JUDGMENT

S. Duggal, J.

(1) I have given my earnest thought to the matter in the light of the respective contentions canvassed by learned counsel for parties. I find that the basic principle that emerges on reading of all the decisions as cited on both sides, is that the terms of the bank guarantee are the most relevant, and in fact, the sole guiding factor, and further determining point in such a case would be the manner in which the bank guarantee has been invoked by the beneficiary, and in that context the terms of the demand letter assume great relevance as well as significance.

(2) I must record at the outset that in view of the conspectus of the judicial authorities, the question as to the nature and import of a bank guarantee is settled, to the effect that it constitutes an independent contract between the bank and the beneficiary, and the existence of any dispute between the principal contractor and the said beneficiary or even pendency of litigation by way of civil suit or arbitration proceedings in respect thereto, would also not be a deterring factor in the way of the beneficiary to invoke the bank guarantee. Nevertheless, with due deference to the principles laid down in the cases, particularly on which Mr. Pareekh placed reliance, it cannot be said that mere existence of a bank guarantee works out a mechanical formula, and that the courts can in no circumstances entertain the prayer of the contractor or the party on whom ultimately the liability for the obligation under the bank guarantee would devolve; for there is a clear and unmistakable emphasis in all the decisions to the effect that the terms of the bank guarantee are a very relevant factor and that bank's unconditional obligation under the bank guarantee is relatable to the terms of the guarantee, and also dependent on the fact that the conditions of the said bank guarantee have been fulfillled and the same have been invoked in terms stipulated therein. It is further clear from the authorities relied upon by respondents that in these cases the terms of the guarantee were very wide, the obligation undertaken absolute and unconditional, payment was to be on demand without any demur or without any reference to principal contractor and (he decision of beneficiary was agreed to be final. [In paras 21 to 35, the authorities are briefly discussed].

(3) On a resume of the case law discussed above, it becomes thus clear firstly that the terms of the bank guarantee are the sole determining factor and although generally the obligation of the bank under the guarantee is absolute, but if liability of bank under the guarantee is conditional in its terms, then it is incumbent on the beneficiary to satisfy the bank, while invoking the bank guarantee that those terms stand satisfied or conditions exist that entitle it to encash the bank guarantee and that every case is to be decided on its own facts and there can be certain exception to the general rule, such as fraud or misrepresentation or willful suppression of facts and there can be other circumstances giving rise to special equities in favor of a party, seeking a restraint order from the Court against the beneficiary.

(4) Reverting to the facts of this case, against the back-drop of the above principles, I am of my considered view that (he petitioner has been able to make out a case for this Court to intervene and injunct the respondent from encashing the bank guarantee. In the first instance it has to be seen that the bank guarantee in the present case is in no way in absolute terms and thus it cannot be considered to be of irrevocable and unconditional nature. It is certainly of conditional nature and very moderately worded as compared with guarantees in Texmaco Ltd, Premier Tyres, Har- parshad & Co., Npcc & Mah. St. Else. Bd (Supras). Bank guarantee in the instant case(.. )

(5) It is thus manifest that the guarantee is in the nature of performance guarantee but the undertaking of the bank was to indemnify and keep the respondent indemnified for any loss or damage suffered up to the limit of Rs. 19,00,000.00 and the damage or loss contemplated was one suffered by reason of any breach by the said associate, namely, the petitioner herein, of any terms or conditions contained in the said bid or contract or agreement. That being so, apart from the other factors to be presently noticed, even on its own terms, it was incumbent on the respondent to show while making the demand as to what loss or damage had been suffered and quantify the same and also spell out as to on account of what breach on the part of the petitioner, the same had been suffered. The demand letter as produced by the respondent in these proceedings is in very general and vague terms.

(6) There is thus a sweeping allegation that the contractor had failed or neglected to perform the contract in question and was guilty of breach of contract and had become liable to pay large sum, exceeding the sum of the bank guarantee. This, as per ratio of the judgments in the case of Rawla Construction Co. and Banerjee & Banerjee was not sufficient, and it can certainly be said that the bank guarantee had not been invoked in the manner contemplated or that the conditions of the bank guarantee were not satisfied.

(7) On facts, therefore, it is not only a case of invocation of the bank guarantee in breach of its terms, but also a false statement of facts alleging failure on the part of the contractor to perform the contract whereas the fact remains that the same was completed ; allegations of defects or defaults notwithstanding.

(8) There are also peculiar circumstances in this case which call for court's intervention, because it is not merely a case where disputes are pending before the arbitrator, but a case where the contract was handed over after completion according to the petitioner in 1986 ; disputes certainly arose in 1987 and even the deference was made in January 1980 and although the bank guarantee has been in operation although, at no point of time, even an attempt was made to invoke this bank guarantee, and it is only when the arbitrator, as shown by the petitioner had gone on with the adjudication proceedings for about a year, and had given four consecutive dates of hearing from 26.1.89 to 29.12.89. indicating that the proceedings were to be concluded ; that the respondent thought of invoking the bank guarantee on 22.12.89. There is thus justification in the plea of the petitioner that this is an apparent attempt to overreach the arbitrator and defeat the purpose of adjudication and that it is a case of abundant mala fide conduct on the part of the respondent to have invoked the bank guarantee at the last stage of the arbitration proceedings, when the award was expected to be made in the very near future.

(9) The above mentioned facts certainly give rise to special equities in favor of the petitioner,

(10) The Court cannot lose sight of the fact that although Bank Guarantee is an independent contract, and in certain cases it has been equated with irrevocable letter of credit but there is a distinction as noticed by D.B. of Calcutta High Court in M.M.T.C. vs. Suraj Balaram 74 Cwn 991, to the effect that payment under an irrevocable letter of credit does not depend upon performance of an obligation on the part of the seller except those which the letter of credit expressly imposes, and the obligation of the bank is to the beneficiary and no third party comes into the picture, whereas in the case of a bank guarantee by definition, third party is always on the scene because unless there is some act of omission or commission on the part of the third party, payment under a bank guarantee does not become due and to that extent a bank guarantee does not enjoy the autonomy of an irrevocable letter of credit. The D.B. in the case of Texmaco Ltd. (supra) has not differed from this view expressed in (he aforesaid case and there is approval of the law laid down to the effect that where a performance guarantee can be invoked by the beneficiary will depend upon the terms of the performance guarantee itself.

(11) The D.B. of this Court in Mfs. Premier Tyres Ltd. (supra) also recognised this position by observing that in a contract of guarantee surety takes an obligation on the request, express or implied of the principal debtor and the obligation of the surety depends substantially on the principal default. That being so, the petitioner cannot be reduced to a status where it cannot be even allowed to approach the Court and show the existence of certain facts which disentitle the respondent from enforcing the bank guarantee. The bank in this case has without any objection and without any delay, honoured the demand raised by the respondent, even when the bank guarantee did not so stipulate, inasmuch as whereas the letter of demand was written only on 20.12.89 (there being no indication when it was received by the Bank), but as per assertion of the respondent, the bank drafts were issued on 6.1 90 and received by the respondent on 6.1.90. The bank has shown this promptness because of the assurance of effecting recovery from the petitioner, as indicated by their letter dated 23.12 89, addressed to the petitioner by Vijaya Bank directing them to remit them the whole amount of Rs. 19,00,000.00 immediatdy, so as to enable them to remit the same to the beneficiary.

(12) The above is the unmistakable indication of intention of the parties in this case, to the effect that the petitioner was very much involved, even in the matter of discharge of obligation by the bank, and if is not that tope of case where the bank find understood its obligation to be Got ion to be but they have made it a point to first call upon the petitioner to remit the amount of the bank guarantee to them, and only then make payment to the bank. It is another matter that they proceeded to send the bank drafts in the meantime to the respondent covering the amount of the bank guarantee.

(13) This type of conduct has been adversely commented upon by a D.B. of this Court in Mjs. Harpra'ihad & Co. \s. Sudunhwi Steel Mills , where the Court censured the conduct of the bank and held that it has a duty to satisfy whether the demand by the beneficiary under the bank guarantee is made in accordance with the terms of the bank guarantee, and to see as to whether such notice was in accordance with the terms of the bank guarantee, and whether it discloses that the beneficiary had arrived at a judgment that the obligations under the bank guarantee have arisen and that a reference to it some breach of a particular obligation should be made, and merely saying that the contractor a has failed to carry out and fulfill any of the obligations under the contract would be . unintelligible, and that the bank had a duty to perform and not be too willing to pay the amount of the bank guarantee on a mere demand simply because its customer who has got the bank guarantee issued in favor of the other party to the contract, has secured the bank against any loss that may be caused by the recovery of the amount of the bank de guarantee from the bank by the other party under the contract. an sti

(14) The case before the Supreme Court in au the matter of United Commercial Bank (Supra) the was entirely on different facts, as the main we principle decided there was that of the obligation of the banks inter se, holding that the de Courts usually refrain from granting injunction ref arising out of letter of credit or bank guarantee dec between one bank and another ; the consideration being that if such temporary injunction were granted---, the whole banking system in the country would fail and it should be in exceptional cases that the court should interfere with irrevocable obligations of Banks as commitments of Banks are on a different level and they must be allowed to be honoured free from Courts interference.

(15) For all the reasons as discussed above the present is a case where the Court ought to intervene, and restrain the respondent from encashing the bank guarantee, subject of course to ihe condition that the petitioner shall keep the bank guarantee alive, till the making of the award, and thereafter till the same is made a rule of the court.