A.J. Machine Tools vs Rathi Alloys & Steel Limited
1993 Latest Caselaw 260 Del

JUDGMENT

Dalveer Bhandari, J.

(1) The plaintiff has filed a petition under Section 20 of the Arbitration Act which was registered by this court as Suit on 14.9.1992. Along with this petition, an application under section 41, read with Schedule Ii of the Arbitration Act and Order 39 Rules 1 and 2 of the Code of Civil Procedure. This court, after hearing the counsel directed the defendants not to encash the bank guarantees until further orders.

(2) Mr. B.Mohan, learned counsel for the defendant had filed written statement, and reply to the interim application. Brief facts which are necessary to dispose of this petition are recapitulated as under:-

(3) The parties entered into a contraction 22.12.1989 whereby the plaintiff agreed to manufacture and supply Water Cooled Duct for the Otb Converter Unit Project of the defendants at Alwar (Rajasthan).

(4) The Ducts were to be manufactured according to the specifications and drawings provided by the defendants. Some of the other terms and conditions of the supply were as under:- "I)That the defendants were to pay lump sum amount of . Rs 19,50,000.00 (Rupees nineteen lacs fifty thousand only) ii") The Billing was to be on the pro-rata dispatches. iii) Excise Duty was extra iv) Central Sales Tax was payable by be defendants against the Declaration Forms 'C'. 133 v) Delivery was to be made within six months from the date of the order, subject to force majeure clause. vi) An amount of Rs.19,500.00 was to be paid as advance. Another sum of Rs.2,92,500.00 was to be paid as further advance after two months, subject to verification of the progress of the work vil) Bank guarantee was to be given by the plaintiff for the amount of advance of Rs.l,95,000.00 valid for a period of 12 months from the date of successful commissioning of the equipments or 18 months from the date of dispatch whichever was earlier. viii) The supply was to be guaranteed against good quality as regards material and workmanship for a period of 12 months from the date of successful commissioning or 18 months from the date of last dispatch, whichever was earlier. The plaintiff was to replace or repair free of cost any defective parts that may need replacement or repair by reason of defective workmanship or in case of sub standard materials. The faulty design, was, however, not the responsibility of the plaintiff. ix) The parties were to settle disputes by arbitration.

(5) According to the terms of the agreement, the plaintiff furnished the following bank guarantees as required under the contract which were issued by the State bank of India, Okhla Industrial Estate Branch, New Delhi:- 1.BANKguarantee No.35/91 for Rs.61,510.00 2. Bank guarantee No-88/91 for Rs.64,500.00 3. Bank guarantee No.05/91 for Rs.69,000.00

(6) The bank guarantees were renewed from time to time and they are being kept alive until 30th April, 1993.

(7) There was another agreement on 24th April, 1990 entered into between the parties whereby the plaintiff undertook to manufacture one No. Roll Removal Rig for lifting Hook for 28" Mill for the defendants. The bank guarantee for Rs.35,000.00 was furnished. The learned counsel for the defendant submitted that the bank guarantee is not being encashed. Therefore, no decision on another agreement dated 24.4.1990 is called for.

(8) According to the plaintiff, he has performed his part of the contract as envisaged in the agreement. Therefore, the defendant was not justified in invoking the bank guarantees submitted by the plaintiff company.

(9) Mr. K.N. Kataria who appeared on behalf of the plaintiff has drawn attention of this court to the letter dated 93.1991 in which it is mentioned that all items except item no.15 withstood the hydraulic testing. The letter has been referred to by both the parties and so, the same is set out in toto, as under: "18RAS/14/8913 9th March '91 134 M/s A.J.MachineTools, 2/30-A, Nem Chand Comple-II, Sarai Jullens, Okhla Road, New Delhi 110025 Kind ATTN.: MR.J.L.MANGA Dear Sirs, SUB: Our P.O. N0.83056 dated 22.12.89 for Water Cooled Duct System In view of the problems faced by us in the hydraulic testing of some items at your works at 10Kg/Cm2 pressure, we have tested item no.9,10,10A, 10B and 15 which were earlier dispatched and received at our works. This is to inform you that all items except item no.15 withstood the hydraulic testing. Some leakage has been observed in items no. 15. You are requested to kindly depute your engineer immediately to our Alwar works to rectify the defects in item no. 15 and successfully retest the same at Site. Thanking you, Yours faithfully, for Rathi Alloys & Steel LTD. sd/- K.K.R. Das SR. Manager (CO-ORDINATION)"

(10) The learned counsel has referred to letter dated 30th April, 1991 whereby the plaintiff has demanded a sum of Rs.8,82,480.00 to enable them to dispatch the matter to the defendant. The learned counsel has also placed reliance on the letter dated 8th May, 1991 in which it is mentioned that the defendant had sent a payment of Rs.3 lakhs to the plaintiff against the dispatch of the items ordered by the plaintiff. The learned counsel has also referred to the letter sent by the defendant to the plaintiff on 23rd May, 1991 in which it is accepted by the defendant that all the equipments have reached the site. Therefore, the, plaintiff was requested to send their engineers to carry out the balance jobs, viz. -Welding of all flanges; -Repair of the Leakage points observed at the site during hydro testing -Jointing of item nos. 11 & 12 Any other work included in your scope, which may not have been done, but are necessary.

(11) Learned counsel has also drawn attention of this court to letter dated 20th September, 1991 sent by the plaintiff to the defendant. Therefore, the learned counsel referred to the terms of the agreement, according to which, the bank guarantee was to be provided for Rs. 19,50,000.00 by the plaintiff. The bank guarantee would be valid for a period of12 months from the date of successful commissioning or 18 months from the date of last dispatch, whichever was earlier.

(12) It is also mentioned in the agreement that the Water Cooled Duct to be supplied against this order will be of good quality and as per technical inspection defined in various annexures to the order. According to clause 12.3, the defendant was under an obligation to carry out the repairs or replace the items. According to clause 17.1 of the agreement, the plaintiff was under an obligation to provide the services of an engineer and a welder during hot commissioning, free of cost for a period of 3 to 4 days so that any defect in the material or workmanship can be attended to swiftly.

(13) Learned counsel also invited attention of this court to clauses 5, 6 and 7 of the performance bank guarantee. They are also set out as under: "5.We, State Bank of India, Okhla Industrial Estate, New Delhi-110020 shall pay the amount demanded by the said Purchaser without any demur and delay even if any Civil Suit or Court Case is pending regarding the performance of the aforesaid Water Cooled Duct System or otherwise. 6. Notwithstanding anything to the contrary contained here in avob, liability under the guarantee is restricted to Rs.69,000.00 (Rupees sixty nine thousand only). Our guarantee shall remain in force until 12 (twelve) months from the date of successful commissioning of the Water Cooled Duct System or 18 (eighteen) months from the date of dispatch of the last consignment against the above said Purchase Order of the said Purchaser. 7. The Decision regarding successful commissioning of the Water Cooled Duct System confirmed by the said Purchaser will be final and binding on us."

(14) Learned counsel also invited attention of the court to letter dated 23.6.1992 sent by the plaintiff to the defendant. The relevant portion is set out as under:- "WE are enclosing herewith our Debit Note No.AJMT 38, dated 23.06.92 for Rs.3,00,000.00 (Rupees three lakhs only) in respect of additional price agreed by us for fabrication, testing and supply of Water Cooled Duct System, complete in all respects in accordance with you P.O. No.B3016 dated 22.12.89." 5. The plaintiff has sent to the defendant Debit Note which is set out as under:- Debit Note Ref. No-AJMT 384 Date: 23.06.92 CUSTOMER'S P.O. NO. & DATE: CUSTOMER'S C.S.T.NO. B3016 dated 22.12.1989 CSTN0. 3497 ALWAR/CENTRAL Dated. 27.2.75 TO: M/s Rathi Alloys & Steel Ltd. 204 Matsya Industrial Area, Jhareda village Alwar (Rajasthan) S.No. Description Amount Rs. P. 1. Additional price (in full & final settlement) for fabrication, testing and supply ;of Water Cooled Duct System, complete in all respects in respects in accordance with P.O. No. B3016 dated 22.12.89. 3,00,000-00 Total 3,00,000-00 (Rupees three lakhs only) Payment already received vide D/D N0.007119 dated 6.5.91 Payable Nil for A. J. Machine Tools sd/- J.L.MANGA,"

(15) On the strength of the aforesaid documents, learned counsel for the plaintiff submits that since the plaintiff has performed his part of the agreement, and there has been no lapse whatsoever on his part, therefore, the defendants cannot legitimately and legally invoke the bank guarantees. The letter by which the defendant has invoked the bank guarantees is entirely illegal and contrary to the terms and conditions of the agreement. Therefore, the defendant be restrained from encashing the bank guarantees mentioned above.

(16) Mr. B.Mohan, learned counsel for the defendant, submitted that the invocation of the bank guarantees in terms of the agreement and for performance of the bank guarantees, lt was further submitted by learned counsel that in view of the settled position of law, this court can issue injunction from encashing the bank guarantees only in extremely exceptional cases which broadly fall under two categories. 1) Where fraud has been alleged, pleaded and established; 2) In cases of special equities. This case does not fall in the category of those exceptional cases. Therefore, no injunction be granted against encashment of the bank guarantees.

(17) The learned counsel also invited the attention of the court to the letter dated 30.4.1991. This letter sent by the plaintiff to the defendant is set out in toto:- Ref. AJMT/RASL/91/ Date: 30.4.1991 M/s Rathi Alloys & Steel Limited, 3-A, Vandhna, 11, Tolstoy Marg, New Delhi-110001. Kind Attn. Mr. Rajesh Rathi 137 Dear Sir, In furtherance to our letter No. even dated 3rd April, 1991 and the subsequent discussions held with you on 29th April 1991 and as decided therein, the matter will be referred for arbitration in accordance with the relevant clause of your Purchase Order, we would in the meantime request you to kindly give us a payment of Rs.3.00 lacs (Rupees three lacs only) over and above the balance amount payable against the total order value of Rs.19.50 lacs to enable us to arrange the dispatches. This amount will be adjusted in accordance and after receipt of award of the arbitration. Thanking you, Yours faithfully, for A.J. Machine Tools sd/- J.L.MANGA,"

(18) In this letter, the plaintiff has requested the defendant to give them the payment of Rs. 3 lakhs for referring the matter for arbitration in accordance with the relevant clause. The learned counsel has also pointed out that in the Proforma Invoice issued on 30.4.1991, it is mentioned that the amount of Rs. 3 lakhs is shown against part payment of our claim for excess weight of the items subject to arbitration. The learned counsel has also drawn the attention of the court to the receipt issued by the plaintiff to the defendant in which it is mentioned that Rs.2,99,975.00 is towards the price increase. The learned counsel has also submitted that this amount was taken by the plaintiff that the matter would be referred to arbitration in accordance with the relevant clause and in the meanwhile requested the defendant to pay a sum of Rs. 3 lakhs which was paid for that purpose, but the plaintiff illegally had adjusted this amount towards the additional price for fabrication testing and supply of Water Cooled Duct System. Mr. Mohan also invited the attention to the Debit Note of 23rd June, 1992 in which it is mentioned in column 'Description', additional price (in full and final settlement) for fabrication, testing and supply of Water Cooled Duct System complete in all respects in accordance with the Purchase Order No.B3016 dated 22.12.89 and against the amount of Rs.3 lakhs. The learned counsel submitted that the amount which was taken for a different purpose could not have been adjusted against the additional price by the plaintiff.

(19) The learned counsel submitted that the items which were supplied by the plaintiff were defective and the plaintiff has neither rectified the defect nor replaced those items. Therefore, the defendant was justified in invoking the bank guarantees given by the plaintiff. Learned counsel further submitted that the plaintiff was under an obligation to commission Water Cooled Duct System successfully according to clause (7) of the performance Guarantee dated 4.1.1991 and till date, he has not successfully commissioned the Water Cooled Duct System.

(20) Learned counsel for the defendant has also invited the attention of the Court to U.P.Cooperalive Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd., , the principles of law have been crystallized by the Supreme Court with regard to grant of injunction by the courts to bank guarantee matters, In para 28 of this judgment, it is 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 facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardized. The learned Judge has also relied upon paragraphs 34, 35, and 36 of the Judgment. In the Judgment, it is mentioned that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases, that is to say in case of fraud or in case of irretrievable injustice, the court should interfere. In paras 34 and 35, the court has observed that this is not a case where irretrievable injustice would be done by enforcement of bank guarantee. This is also not a case where a strong prima facie case of fraud in entering into a transaction was made out. If that is the position, then the High Court should not have interfered with the bank guarantee. In this case, Shetty, J. has given concurring judgment. At the outset, Shetty, J observed that the crux of the matter relates to the obligation assumed by the bank under a performance guarantee. Whether the obligation is similar to the one arising under a letter of credit? Whether the court could interfere in regard to such obligation and if so, under what circumstances? In para 43, , it is mentioned that the question of examining the prima facie case or the balance of convenience does not arise if the court cannot interfere with unconditional commitment made by the bank in the guarantees in question. In the concluding portion of the Judgment in para 55, the court has mentioned that the sound banking system may, however, require more caution in the issuance of irrevocable documentary credits. It would be for the bank to safeguard themselves by other means and generally not for the court to come to their rescue with injunctions unless there is established fraud. In another judgment of the Supreme Court General Electric Technical Services Company Inc. vs. M/s Punj Sons (P) Ltd and another, , strong reliance has been placed by the court on its earlier judgment of U.P.Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., , and the relevant portion is quoted as under:- "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 independent, 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 Gas to vitiate the entire underlying transaction". It is fraud of the beneficiary, not the fraud of somebody else."

(21) In the concluding portion of para 10, the court has observed as under:- "The Bank has to pay and the Bank was willing to pay as per the undertaking. The Bank cannot be interdicted by the Court at the instance of respondent I in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. The 139 High Court in the absence of prima facie case on such matters has committed an error in restraining the Bank from honouring its commitment under the Bank guarantee."

(22) Reliance has been placed on the judgment in the case of Varanasaya Sanskrit Vishwavidyalaya and another vs. Dr. Rajkishore Tripathi and another, . In this case also, the court relied on earlier decision in Bishundeo Narain and another vs. Seogeni Rai and others, (supra). The court in para 9 has mentioned that it is not enough to state in general terms that there was "collusion" without more particulars. The court has further observed that the court can take notice of the fraud and only when it is specifically pleaded.

(23) Learned counsel has also drawn my attention to the case of Syndicate bank v. Vijay Kumar and others, , and placed reliance on paras 10 to 14. The court has dealt with various English and Indian Judgments and came to the conclusion that the