Bhasin Associates Ltd. vs Hyundai Heavy Industries Co. Ltd. ...
1991 Latest Caselaw 708 Del

JUDGMENT

Sat Pal, J.

(1) This appeal is directed against the order dated 4th April, 1991 passed by a learned Single Judge of this Court in Ia 11649/90 in Suit No. 3908/90.

(2) The facts which are relevant for the purpose of deciding this appeal briefly stated are that respondent No. I entered into correct with Northern Coal Fields limited (hereinafter referred to as NCL), a subsidiary of Coal India Limited, for construction of Dudhichua Coal Handling Plant for a value of over Rs.42.75 crores. Respondent No. 1 in turn entered into two sub-contracts - one with the appellant and the other with M/s. Icb Limited. The sub- contract with the appellant dated 15th December, 1987 comprised, inter alia, of designing, engineering, supplies, civil and structural work of the value of Rs.l2,63,84,800.00 . In terms of the aforesaid sub-contract dated 15th December, 1987, the appellant was required to furnish a performance guarantee in favor of respondent No. I for 10 per cent of the value of the sub-contract and guarantee to cover the mobilisation advance. Accordingly the appellant through respondent No.2 furnished a performance guarantee No. Z/7/301 dated 26th November, 1987 for Rs.l,26,38,440.00 being 10 per cent of the sub-contract value in favor of respondent No. 1. The appellant through respondent No.2 also furnished a guarantee No.Z/7/302 dated 28th November, 1987 for Rs.63.19,220.00 in favor of respondent No. 1 to cover the mobilisation advance given by respondent No. 1. The relevant portion of these bank guarantees are as under :- "Performance Guarantee:

(3) In consideration of the Hyundai Heavy Industries CO. LTD. (hereinafter referred to as the 'Contractor', which expression shall unless repugnant to the context or meaning thereof, include its successores, administrators and assigns) having awarded to M/s Bhasin Associates PVT. LTD. with its head office at 58 Janpath, New Delhi-110001 (hereinafter referred to as the 'Sub-contractor which expression shall unless repugnant to the context or meaning thereof, include its successors, administrators, executors and assigns) the sub-contract valued at Rs.l2,63,84,400.00 for civil and structural works and the sub-contractor having agreed to provide a sub-contract performance guarantee for the faithful performance of the entire sub-contract equivalent to 10% (ten per cent) of the said value of the sub-contract to the Contractor.

(42) We, Banque Indo Suez, 601-603 Raheja Centre, Nariman Point, Bombay 400021, having its hed office at 96 Boulevard Haussmann, 75008 Paris (hereinafter referred to as the 'Bank' which expression shall, unless repugnant to the context or meaning thereof, include its successors, administrators and assigns) do hereby guarantee and undertake to pay to the Contractor, on demand any and all money payable by the Sub-contractor to the extent ofRs.l.26,38,440.00 as aforesaid, at any time up to 5.2.1989 without any demur, reservation, contest, recourse or protest and/or without any reference to the Sub-contractor. Any such demand made by the Contractor on the Bank shall be conclusive and binding notwithstanding any difference between the Contractor and Sub- contractor or any dispute pending before any Court, Tribunal, Arbitrator or any other authority. The Bank undertakes not to revoke this guarantee during its currency without previous consent of the Contractor and further agrees that the guarantee herein contained shall continue to be enforceable till the Contract discharges this guarantee." Mobilisation Guarantee

(5) "IN consideration of the Hyundai Heavy Industries CO. LTD. (hereinafter referred to as the Contractor, which expression shall unless repugnant to the context or meaning thereof, include all successor's, administrators and assigns) having awarded to M/s Bhasin Associates PVT. LTD. with its registered/head office, at 58, Janpath, New Delhi (hereinafter referred to as the 'Sub-contractor' which expression shall unless repugnant to the context or meaning thereof, include its successors, administrators, executors and assigns) a sub-contract valued at Rs.l2,63,84,400.00 (Rupees Twelve crores Sixty-three lacs Eighty-four thousand four hundred only) for civil and structural works (hereinafter called the. 'sub- contract') and the 'Contractor' having agreed to make an advance payment to the Sub-contractor for performance of the above sub- contract amounting to Rs.63,19,220.00 (Rupe.es Sixty-three lacs Nineteen thousand two hundred twenty only) as an advance against bank guarantee to be furnished by the Sub-contractor.

(6) We, Banque Indo Suez, 601-603 Raheja Centre, Nariman Point, Bombay 400021 having our held office at 96, Boulevard Haussmann, 75008 Paris (hereinafter referred to as the 'Bank' which expression shall unless repugnant to the context or meaning thereof, include its successors, administrators, executors and assigns) do hereby guarantee and undertake to pay the Contractor immediately on demand any or all money payable by the Sub- contractor to the extent of Rs.63,19,220.00 (Rupees Sixty-three lacs Nineteen thousand two hundred twenty only) at any time up to 5.2.1989 without any demur, reservation, recourse, contest or protest and/or without any reference to the Sub-contrctor. Any such demand made by the Contractor on the Bank shall be conclusive and binding not with standing any difference between the Contractor and the Sub-contractor or any dispute pending before any Court, Tribunal,

(7) Arbitrator or any other authority. We agree that the guarantee herein confined shall be irrevocable and shall continue to be enforceable till the Contractor discharges this guarantees." These two bank guarantees were invoked by respondent No. I by its letters dated 17th December, 1990 addressed to respondent No.2. The operative portion of these letters reads as Under- Bank Guarantee No.Z/7/301

(8) "OCCASION having arisen to invoke such band guarantee in terms of the aforesaid guarantee, we do hereby make demand on you to remit the guaranted amount to Rs.l,26,38,440.00 (Rupees One Crore Twenty- six lacs, Thirty-eight thousand four hundred forty only). In this connection, we are sending herewith the original Bank Guarantee No. 277/301 dated 26.11.1987/5.2.1988 and the latest amendment died 21.6.1990 issued by you bank." Bank Guarantee No.Z/7/302 "OCCASION having arisen to invoke such bank guarantee in terms of the aforesaid guarantee, we do hereby make a demand on you to remit the guaranteed amount of Rs.63,19,220.00 (Rupees Sixty-three lakhs, Nineteen thousand two hundred twenty only). In this connection we are sending herewith the original bank guarantee No.Z/7/302 dated 28.11.1987/5.2.1988 and the latest amendment dated 21.6.1990 issued by you bank."

(9) It may be relevant to point out here that by letter also dated i7th December, 1990 respondent No. I terminated the contract with the appellant by invoking clause 16 of the sub-contract agreement. In this letter, inter alia, it was stated, "this is without prejudice to our right to claim against you the enormous losses and damages suffered any likely to be further suffered by us." Thereafter the appellant filed Suit No.3908/90 for permanent injunction against invocation of the above mentioned two bank guarantees. In this suit it was alleged by the appellant that the invocation of the bank guarantees was main fide and fraudulent attempt at unjust enrichment and that invocation was also not in accordance with the terms of the bank guarantees.

(10) It was also alleged that invoking the bank guarantee to cover mobilisation advance for whole of the amount of Rs.63,19,220.00 was illegal as the value of the guarantee as existed would be Rs.l6,91,965.00 in view of the recoveries made .by respondent No. I from running bills of the appellant from time to time. The learned Single Judge by his judgment dated 4th April, 1991 held that this was not a case where it could be said that there was any fraud involved in the case or that the appellant would suffer any irretrievable injustice in case the bank guarantees were allowed to be encashed. It was further held that the bank guarantees were invoked as per their terms. The learned Single Judge further held that the mobilisation advance guarantee could not be invoked for the whole of the amount and it would be invoked only to the extent ofRs.l6,91,965.00 which amount still remains to be realised from the appellant. The aforesaid findings of the learned Single Judge have been challenged in this appeal.

(11) The main argument of Mr. V.P.Singh, Senior Advocate, who appeared on behalf of the appellant, is that invocation of the Performance bank guarantee in the present case is not in accordance with the terms of the bank guarantee. He submitted that the performance guarantee was a conditional one and in order to invoke the same, respondent No. I was required to state as to in what manner breach had been committed by the appellant and what was the loss or damages suffered by the respondent on account of said breach entitling to invoke the guarantee. In support of his contention the learned counsel referred to a Division Bench judgment of his Court in M/s. Harprashad & Co. Ltd. v. Sudarshan Steel Mills and others, . From this judgment he relied on the observations, "unless the terms of the bank guarantee were complied with, liability of the bank to pay the amount to the appelant did not arise." The learned counsel submitted that the aforesaid judgment has been followed by Single Bench of this Court in two judgments Ansal Properties & Industries (P) Ltd. v. Engineering Projects (India) Ltd. in 1988(1) Delhi Lawyer 339 and Mis. Som Datt Builders Ltd. v. Mis. Star Industrial & Textile Enterprises and another 1990(3) Delhi Lawyer 369. He, however, did not address any argument regarding invocation of Mobilisation guarantee.

(12) Mr. S.C. Malik, Sr. Advocate, who appeared on behalf of Respondent No. 1 submitted that the bank guarantee in the present case was an unconditional one. He particularly referred to a portion from the performance guarantee which reads as, "We, Banque Indo Suez, do hereby guarantee and undertake to pay to the Contractor, on demand any and all money payable by the Sub- contractor to the extent of Rs.l,26,38,440.00 as aforesaid, at any time up to 5.2.1989 without any demur, reservation, contest, recourse or protest and/or without any reference to the Sub- contractor. Any such demand made by the Contractor on the Bank shall be conclusive and binding notwithstanding any difference between the Contractor and Sub-contractor or any dispute pending before any Court, Tribunal, Arbitrator or any other authority." The learned counsel further submitted that the words, "the Sub- contractor having agreed to provide a sub-contract performance guarantee for the faithful performance of the entire sub-contract equivalent to 10 per cent of the said value of the Subcontract to the Contractor" find place in recital portion only and where the operative part is unambiguous, the recitals have no effect. In support of his contention he referred to Odgers Construction of Deeds And Statutes Fifth Edition pages 149-150. The learned counsel further submitted that even for the sake of argument it is admitted that the recital portion in the present case is material one, the same has been complied with in the letter invoking the bank guarantees. He relied on two judgments of the Supreme Court in U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. and General Electric Technical Services Company Inc. v. M/s. Punj Sons (P) Ltd. and another .

(13) The law as to the contractual obligation under the Bank guarantee is now well sellted. In U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., , Sabyasachi Mukharji, J. (as his Lordship then was) observed that "in order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima fade case of fraud and special equities in the form of preventing irretrievable injustice between the parties." In the concurring opinion K.. Jagannatha Shetty, J. observed that whether it is a traditional bond or performance guarantee, the obligation of the Bank appears to be the same. If the documentary credits are irrevocable and indepdent, the Bank must pay when demand is made. Since the Bank pledges its own credit involving its reputation, it has no defense except in the case of fraud. The Bank's obligations of course should not be extended to protect the unscrupulous party, that is, the party who is responsible for the fraud. But the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an "egregious nature as to vitiate the entire underlying transaction." It is fraud of the beneficiary, not the fraud of somebody else."

(14) These observations have been again reiterated by the Supreme Court in its recent judgment in the case of General Electric Technical Services Company (supra). In General Electric Technical Services Company (supra) the Supreme Court has set aside the judgment of a Division Bench of this Court in M/s. Punj Sons (P) Ltd. v. Hong Kong & Shangi Banking Corporation & Another. 1991(1) Delhi Lawyer 61. In this case there was a composite bank guarantee for mobilisation advance and performance bond. In terms of para 5 of the said bank guarantee, first of all the bank guarantee was to provide a cover for recovery of liquidation of the mobilisation advance which was to be adjusted from the running bill accounts and it was only to that extent the recovery of mobilisation advance had been effected, that it was to be treated towards performance guarantee. The learned counsel for the Sub-contractor contended before the Division Bench that the invocation was not in accordance with the terms of the bank guarantee. Relying on the judgment in the case of Shri Har Pershad (supra) the Bench held that the Bank was obliged to pay the full amount only after being satisfied as to what was the position about mobilisation advance. It was, therefore, held that the letter seeking encashment of bank guarantee was not in terms of the bank guarantee and did not disclose full and relevant facts. Accordingly the

(15) Bench while setting aside the order of the learned Single Judge dated 11th July, 1989 ordered that till the disposal of the suit filed by the Sub-contractor the encashment of the bank guarantee shall remain stayed. The judgment passed by this Court was challenged in the Supreme Court and the Supreme Court while setting aside this judgment observed that the bank was not concerned with the outstanding amount payable by the beneficiary under the running bills and the right to recover the amount under the running bills had no relevance to the liability of the bank under the guarantee. It was further observed that the failure on the part of the beneficiary to specify the remaining amount in the letter for encashment of bank guarantee was of little consequence to the liability of the bank under the guarantee. It was also observed that the bank cannot be interdicted by the court at the instance o.f Sub-contractor in the absence of fraud or special equities in the form of preventing irretrievable injustice between the pities.

(16) As will be seen from the performance guarantee, the liability of respondent No.2 to pay the amount of bank guarantee to respondent No. I was without any demur, reservation, contest, recourse or protest and/or without any reference to the Sub-contractor. Further in terms of the bank guarantee the demand made by respondent No. I on the bank shall be conclusive and binding. In terms of the law laid down by the Supreme Court, respondent No.2 cannot be interdicted in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. As there is no allegation of fraud, or irretrievable injustice in the present case, respondent No.2 cannot be restrained from honouring its commitment under the bank guarantee.

(17) Even it for the sake of argument it is admitted that the recital portion contains material terms of the bank guarantee, contention of the learned counsel for the appellant that the invocation is not in accordance with the terms of the bank guarantee has no force. In the said recital portion the Sub-contractor had greed to provide this guarantee for the faithful performance of the entire sub-contract. The letter of invocation clearly mentions the words, "occasion having arisen to invoke such guarantee in terms of aforesaid guarantee". In our opinion the terms mentioned in the recital portion of the bank guarantee are fully complied with by the aforesaid words. In his rejoinder arguments, the learned counsel for the appellant raised a new point that the bank guarantee was in the nature of tripartite agreement, covered by section 126 of the Contract Act, and that the obligation of the guarantor depends substantially on the principal debtor's default and accordingly the bond becomes enforceable upon default. The argument raised by the learned counsel has no force as there is no such clause in the bank guarantee. Besides, the bank guarantee is an independent contract in terms of the law laid down by the Supreme Court.

(18) In view of the above discussion we see no reason to interfere with the judgment of the learned Single Judge. The appeal is accordingly dismissed with no order as to costs.