Victor Cables Industries Ltd. vs Engineering Projects (I) Ltd. And ...
1995 Latest Caselaw 204 Del

JUDGMENT

Usha Mehra, J.

(1) M/S. Victor Cable Industries Ltd. submitted the tender document, with the respondent M/s. Engineering Projects (1) Ltd. (in short EPI). It was in response to the notice inviting tender issued by respondent Epi for the supply of cables in respect of Rayalseems Thermal Power Project of the Andhra Pradesh State Electricity Board. On account of the deemed export status of the project exemption from payment of excise duty was available to respondent EPI.This was so reflected in the purchase conditions appended to the tender enquiry.The sales tax was to be paid extra at actuals as applicable against the documentaryevidence. The petitioner's tender was accepted on 30/03/1993. The order for supplying power cable at a total value of Rs. 77,04,210.65 paise was placed on the petitioner. Along with the order, terms and conditions of payment were annexed.Delivery was to be made within a period of four to five months. This order was to be followed by a detailed order to be released later on.

(2) It is the case of the petitioner that the total value of the contract amount quoted was at price at Ex-works. It did not include the cost of frieght, excise duty and sales tax because the project had been granted a deemed export status. As per the payment terms appended to the order placed on the petitioner, the petitioner was to furnish two Bank guarantees, namely. Bank guarantee for an amount equivalent to the advance payment received by the petitioner which was to be interest free; and the second bank guarantee for 10% of order value as security. 65%of the order price was to be paid through an irrevocable letter of credit to be established by the respondent buyer in favor of the petitioner / supplier at Delhi.The balance 25% of the order price was to be paid within 30 days of the receipt of the equipment at project site against the performance bank guarantee of 10%) of total value of the project. It is further the case of the petitioner that by the letter furnished subsequently there was a variation in respect of the clauses relating to payment of excise duty. As against the clause in the purchase conditions appended to the tender enquiry, it exempted the excise duty on account of deemed export status of the project. But in the subsequent letter a clause was added changing the earlier clause. By the new Clause it was stated therein that the Epi shall pay excise duty at actuals against documentary proof i.e. gate pass & supplier shall Furnish disclaimer certificate in favor of EPI. The excise duty would be payable by thesupplier, the excise duty and sales tax component constituted as high as 40% of the purchase order amounting to Rs. 30 lakhs. Because of the change in the stipulatedcondition, the petitioner was financially prejudiced. This was protested by the petitioner indicating therein that petitioner was ready and willing to perform the contract provided the bills raised in respect of sales tax and excise duty were paid through a bank in accordance with delivery schedule. This shows it was the EPI who committed breach as a result of which the petitioner suffered irreparable less.Moreover the Epi did not open the letter of credit which was a pre-requisite of the supply of cables. For the approval of technical requirements the Epi caused considerable delay. Under the terms of the bank guarantee, the Epi could only invoke the security guarantee if it could be established that it had suffered any loser damage. Before invoking this guarantee Epi was to specify and quantify the loss/damage suffered by it. So far as Advance Bank Guarantee is concerned, the same was given against manufacture of the material. According to petitioner since,the respondent failed to open the letter of credit which was a condition precedent hence the respondent cannot invoke this bank guarantee also. The very invocation is bad in law.

(3) This application has been contested by the Epi, inter aha, on the ground that banker's liability to honour the guarantee is absolute. No allegation of fraud has been pleaded. Rather it is the petitioner who is guilty of fraud and mis-representation, therefore, not entitled to any relief. The petitioner accepted the order sent by telex which was to be followed by terms of the agreement. The petitioner by accepting the order in fact accepted the terms and conditions which were to be sent subsequently. Petitioner is now estopped from raising any issue against the condition relating to excise duty and sales tax. Failure to make supplies as per the order placed is a patent breach of the contract because of which the respondent is entitled to encash the bank guarantees. The petitioner cannot withhold the interest free advance given by the respondent for manufacturing the material. Since, the petitioner failed to supply the material hence respondent is within its right to invoke the bank guarantee. Even otherwise the contract stood terminated w.e.f. 7/04/1994 and there is no possibility of the same being implemented by the petitioner, therefore, the respondents are entitled to encash the bank guarantees.

(4) I have heard Mr.Arun Jaitley, Senior Advocate for the petitioner andMr.Ashok Aggarwal for the respondent. Admittedly two bank guarantees werefurnished. One bearing number BG-53/93 for Rs. 7,70,500.00 dated 19/05/1993.It was furnished by the petitioner against the advance given by the respondent for manufacturing the goods. The second was performance/ security guarantee bearing number BG-52/93 for Rs. 7,70,500.00 dated 17/05/1993. Both these guarantees were invoked by Epi vide separate letters of the same date i.e. 2 6/10/1993. Reading of these letters would show that the bank guarantees were ordered to be encashed because of non-performance of the contractual obligations by the petitioner. According to respondent the encashment of advance bank guarantee was due to the non-manufacturing of the cables by the petitioner. The petitioner instead of commencing the process of manufacturing insisted that letter of credit be opened which was not a condition precedent for manufacturing of thecables. The advance was given to the petitioner to manufacture the cables and keep them ready for delivery as per schedule. But the petitioner took an arbitrary and illegal stand that it would start production only after the letter of credit is opened.In fact there was no nexus in the opening of the letter of credit and manufacturing of cables. Opening of the letter of credit was never a condition precedent for the manufacturing of cables. The advance was given with the clear stipulation that the petitioner would start manufacturing the cables without delay. However, the inspection done by the respondent revealed that neither the manufacturing process no production started. Therefore, the respondent was justified in invoking this bank guarantee against the advance granted for that purpose. The resplendent issued letters to the petitioner to expedite the supply and the manufactured cables be made available for inspection. In this regard Mr.Aggarwal drew my attention to letters dated 7/07/1993 and 1 6/07/1993 by which the petitioner was supplied the revised technical particulars of PRLS cables duly approved for further necessary action at petitioner's end. After receipt of technical particulars it was for the petitioner to have manufactured the cables. But from the fax messages which have been produced on record show that till 0ctober,1993 cables had not beenmanufactured. Reference can be had to fax message of 16/08/1993, 18thAugust, 1993 and 18t18th 0ctober,1993 respectively. Vide fax messages dated 1 6/08/1993 and 1 8/08/1993 which are reproduced as under, it is clear that the advance of Rs. 7,70,500.00had not been utilised for the purpose of this contract Fax Message (fated 16/08/1993 : Refore Fax Order Dtd 30.3.93 Ref Supply Of Power Cables Forrayalaseema Chp Stop As Per The Order You Were To Supply cables Within 4/5 Months From Date Of Order Stop WE-ON Our part Have Released Ten Percent Advance Against Submission of Data Sheet And Other Docs As Early As JUNE'93 1. L. Almost two And Held Months Back Stop Approval Of Data Sheet has been Communicated Vide Our letter Of 16 Th JULY'93 Stop Platform Us The Detailed Status Of Manufacturing And Expected date Of Inspection Of Cables As Apseb Has Viewed This Delay I supply Very Seriously Stop Reply Per Return Tlx So That PSTN of SUPPLIES Can Be Informed To Apseb Also STOP.

Fax message dated 18/08/1993 :    Refer our Order Dtd 30.3.93 For Supply Of Power Cables account Rayalseema Project (.) As Per The Delivery Clause Of the Po The Total Cables Were To Be Supplied By You Within 4-5MONTHS From The Date Of Telex Order (.) The Advance As Per the Order Was Paid To You In The Month Of June After receiving The Bgs In Order From YOU(.) The Data Sheet Of The CABLE.AFTER Lot Of Comments And Exchange Of The Same Between Epi and You Were Finally Approved By The Consultant And The decision Was Communicated To You Vide Our Letter DATED16.7.93(.) Please Note That No Other Information Is Pending with Epi Except Cable That You Have To Supply The Cables which Is Causing Great Concern To US(.) We Have To Commission The Plant In The Last Week Of SEPT., As Such You are requested To Put Your All Out Efforts And Make Sure That All the Cables Are Delivered To Wpi By End Sept, However This is without Prejudice To The Terms And Conditions Of The P0(.)KINDLY Confirm The MFC.STATUS Of The Cable Per Return FAX(.)REGARDS.  

(5) It was the term of the bank guarantee that it the sub-contractor failed to utilize the said advance for the purpose of this contract then the said advance with interest thereon becomes recoverable by Epi and the bank would pay this amount without demur. Inspite of these telexes when the petitioner did not utilise this advance for the contract as is apparent from petitioner's own letter dated 8th0ctober,1993 which is reproduced as under.     

 VCIL/C-918/93/8/10/1993M/s. Engineering Projects (1) Ltd.,"KAILASH" Building,K.G.Marg,New Delhi - 110001Dear Sirs,Kind Attn.: Mr. Jameel Ahmed Project ManagerSub: Your P.O. DLI/MMD/199/415/Powerdated 24.9.1993 for LTcable.forRayalseema CHP.We refer to your fax dated 24.9.1993 on the following references:EPI VICTOR  

1. Enquiry No. DLI/MMD/199/415 Offer No. VCIL/OR. dated 23.10.1992 0063/92 dt 6.11.922. Letter DLI/MMD/199/415 Letter VCIL/QR.0063 dated 21.12.1992 /93 dtd. 5.1.19933. Mon dtd. 28.1.93 offer dtd. 7.1.934. Discussions dtd.23.2.93 offer VCIL/QR.0063/ 18.3.93 93 dtd. 29.1.935. Tlx order No. DLI/MMD/ offer dated 23.2.93 199/145/Pnwpr dt303 93  

IT appears that all the correspondences made after 23.2.1993 has not been referred in your above fax. We would like to refer only one letter of ours bearing reference No. VCIL/C-918/93 dated 6/07/1993, a copy of which is being enclosed herewith for your ready reference.We are still awaiting clarification from your side. you will appreciate that without having a properly established payment terms including the payment of excise duty and sales tax and also refixation of delivery period, we are not in a position to take up the order in our production plant. Kindly expedite as we are very keen to start manufacturing cables against this order.Thanking you and assuring you of our best attention at all times.Yours faithfuly,for Victor Cables Industries LTD.(A.K.SANYAL)CHIEF Executive (MKTG)   

(6) The Epi was left with no alternative but to issue final warning vide fax dated18th 0ctober,1993 which is reproduced as under.Fax message dated 18/10/1993 :     

 Refer Fax Order NO.DLI/ MMD/ 199/415/POWER DTD. 30.3.93REG Power Cables For Rayalaseema Chp Stop We Hv Recvd Yr latest Ltr NO.VCIL/C/918/93 DTD. 8/10/1993 STOP.  

 P1 note We Hv Released An Advance Of RS.7.70 Lakhs DURINGJUNE'93 To Enable You Go Ahead With Manufacturing Which Is the Contractual Purpose Of Advance Of This Large Magnitute stop Give Inspection Call For The Power Cables Within Next 2/3 Days As The Same Is Urgently Needed At Site Stop If We Do not receive The Satisfactory Response From Your End We Shall be asking Your Bankers To Encash The Advance Bg STOP.  

(7) Even after this fax message when the advance was found not to have been utilised the Epi had no alternative but to invoke the advance bank guarantee. As per the terms of this advance bank guarantee, the bank is under obligation to pay the amount. Supreme Court in similar circumstances in the case General Electric Technical Services Company Inc. v. M/s. Punj Sons (P) Ltd.,  heldthat:    "THE bank could not be restrained by Court from making payment as per undertaking given by it in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. Therefore, the encashment of the bank guarantee could not be refused on the ground that the contractor has failed to make a reference to mobilisation advance in the letter seeking encashment of the bank guarantee and it amounted to suppression of material facts, in the sense that the mobilisation advance was under the contract to be recovered from the running bills. Secondly, the bank is not concerned with the outstanding amount payable by the contractor under the running bills. The right to recover the amount under the running bills has no relevance to the liability of the bank under the guarantee. The liability of the bank remained in tact irrespective of the recovery of mobilisation advance orthe non-payment under the running bill."  

(8) MR.ARUN Jaitley appearing for the petitioner tried in vein to refute the fact that the advance given for manufacturing purposes had not been utilised by the petitioner. According to him the petitioner vide his letter dated 31/05/1993clearly indicated that the cables had in fact been manufactured. I am afraid the reading of this letter does not support this argument, rather by a subsequent letter of 8/10/1993, the petitioner conceded that he had not started the process of manufacturing the cables and he would not do so unless and until the terms of payment were settled. Without first getting the terms settled, he would not execute the work. Further he insisted that the letter of credit be opened first and until that is done he would not be in a position to supply the requisite material. Therefore, in view of the subsequent stand taken by the petitioner as is clear from his letter,Mr.Jaitley's reliance on the letter dated 31/05/1993 is irrelevant. The subsequent exchange of letters between the parties clearly disprove the case of Mr.Jaitleythat the petitioner had manufactured the cables. In fact from the reading of various letters quoted above, it is clear that the petitioner had not utilised the advance for the purpose of this contract. As regards the terms of payment, the relevant clause is 16.2. Clause 16.2 of the terms and conditions (Annexure '1) ideals with the scope of supplies and price conditions. It reads that 65% of the order price was to be paid on presentation of invoice, inspection reports and proof of dispatch against the letter of credit. But so far as the manufacturing process was concerned, neither the settlement of payment schedule nor the letter of credit was a pro-condition. The bank guarantee nowhere stipulated that advance was to be utilised only when terms of payment were settled. Reading of clauses 16.1 and 16.2, prima facie show that the letter of credit could be a pre-condition for the purpose of dispatch or delivery of cables, but not for the purpose of manufacturing of cables. Since the petitioner failed to prove that the cables had in fact been manufactured by him and the advance had been utilised for the purpose of this contract, therefore, to mymind, the Epi was within its right to invoke the bank guarantee. The petitioner has failed to make out any case of restraining the bank and or the respondent from encashing the bank guarantee No. 52/93 dated 17/05/1993 for Rs. 7,70,501).00

(9) Now turning to'the performance guarantee bearing No. BG-53 of 1993 forRs.7,70,500.00date 17/05/1993, we have to see what it stipulated. One of the terms of 1:1-1 guarantee reads as under :- "WE the Indian Overseas Bank, Pusa Road Branch, New Delhi-110 008 (hereinafter referred as the said Bank') a company under the Companies Act,1956and having our Head Office at 762, Anna Salai, Madras do hereby unconditionally and irrevocably undertake and agree to indemnify and keep indemnified the EPl from time to time to the extent of Rs. 7,70,500.00 (Rupees Seven Lacs seventy thousand five hundred only) against any loss or damage, costs,charges and expenses caused to or suffered by or that may be caused or suffered by EPI by reason of any breach or breaches by the said contractor of any of the terms and conditions contained in the said contract and or any amount becoming due for non-performance and/ or penalty as assessed by EPI and to unconditionally pay the amount claimed by EPI on demand and without demur."

(10) In order to invoke this bank guarantee called the performance guarantee it was for the respondent/EPI to prima facie prove that the petitioner had committed a breach of the contract and consequent thereto it has suffered losses and damages. The Supreme Court in General Electric Technical Services CompanyInc. (supra) has considered the law on the invocation of the performance guarantee.Apex Court laid down the guidelines on the basis of which the Court would be justified in restraining the bank from paying under the bank guarantee. These guidelines have been laid in the case of U.P. Cooperative Federation Ltd. v. Singh Consultants And Engineers (P)Ltd., wherein Sabyasachi Mukherji,(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 theparties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operations will get jeopardised". It is only in exceptional case that is to say in case of fraud or in case of irretrievable injustice, the Court shouldinterfere. The demand by the party is under the bank guarantee and as per the terms thereof. The bank has to pay and the bank cannot be restrained by the Court at the instance of a party in the absence of fraud or special equities in the form of irretrievable injustice between tile parties. Therefore, keeping this principle of law in view and also the decision of the Supreme Court in the case of Centax (India) Ltd. v. Vinmar Impex Inc. & Ors., , wherein it was held that bank'sliability under letter of guarantee or indemnity is absolute. We have to appreciate the facts of this case.

(11) The question which arises for consideration is whether any fraud or any irretrievable injustice has been caused to the petitioner by any act of the respondentEPl. It is in that circumstance that the bank can be restrained otherwise the respondent would be within its right to recover the bank guarantee and the bank has no right to object to the same.

(12) Mr. Arun Jaitley, appearing for the petitioner contended that since the respondent changed the terms and conditions of the contract unilaterally after the acceptance of the contract and after placing the order for supply of the cables, it amounts to committing fraud by the Epi on the petitioner. As per the tender document i.e. the purchase conditions. Clause 8.0 indicated that excise duty was not applicable in this supply order as the same was exempted for deemed exportcontract. Clause 12.3 of this very purchase conditions stipulated that the price quoted was not including the component of excise duty on finished products as the same was exempted from payment of excise duty for deemed export products.The term of payment in this document find mention at Clause 14.0 and 14.1. Clause14.3 deals with dispatch of equipment from the manufacturer's work. It stipulated that 65% of the ordered price was to be made on presentation of invoice, inspection report and proof of dispatch against the L/C payment. It also stipulated that EPI was to establish an irrevocable letter of credit in favor of the petitioner at Delhi New Delhi. Mr. Jaitley contended that both these terms i.e. excise duty on account of the benefit under the deemed export contract and the terms of payment were unilaterally changed by the Epi after having placed the order of supply on the petitioner. This unilateral change worked against the financial interest of the petitioner. It not only amounted to fraud by Epi but also delayed the execution of the work. Because of this unilateral action of the Epi, petitioner's right which had accrued stood deprived. Thus if accepted this changed condition would have suffered huge financial losses. Hence equity demanded that the agreed term be not changed unilaterally after acceptance of the offer by EPI. In order to support his contentions that there was a unilateral change in the terms of the contract after the order was placed, Mr. Jaitley drew my attention to a letter dated 6/11/1992. In this letter the petitioner specifically pointed out to the Epi that no excise duty shall be payable as the equipment is required for a project which enjoys deemed export status and that the Epi should issue necessary exemption certificate for the same. lt was also made clear in Clause/of this letter that the dispatch would be against the L/C confirmed on petitioner's bankers. This was followed by a letter dated 31/05/1993. lt was mentioned in this letter to the Epi to establish L/C for execution of the aforesaid order and that the validity of the L/C which was coming to an end on August, 1993 be extended. Mr. Jaitley, therefore, contended that in order to show his bonafide and also to prove that the petitioner was ready and willing to perform the contract he wrote an other letter on 5/06/1993. Vide this letter Technical Data was submitted for approval. After the technical data sheet for the ordered cable was submitted and when no reply was received a reminder was issued on 15/06/1993 seeking early approval of the data. This shows that it was the respondent who had been taking time in according the approval. As a result of this delay the delivery period could not be adhered to. Vide letter dated 30/06/1993, a reminder to the Epi was asked intimating that almost two months had elapsed when technical data sheet was submitted for approval but no reply had been received. Vide letter dated 6/07/1993, it was brought to the notice e" the project Manager, Epi that since Epi was not issuing the exemption certificate topetitioner, excise duty became payable by the Epi Along with the sales tax. Hence payment terms automatically imply that 65% of the ex-works value of the goods Along with 100%i excise and sales tax shall be made available to the petitioner against the said letter of credit confirmed on their bankers. Vide this letter the petitioner pointed and raised an issue with the Epi that 65% ex-works value of the order must include sales tax as per their offer. Since now according to Epi excise duty is also become payable, the same shall also be incorporated in the 65% of thevalue. This was reiterated vide their letter dated 8/04/1993 and asked the EPI to confirm the same. It was made clear vide this letter that in the absence of anyreply, the petitioner would not be in a position to carry out the contract. It was further made clear that the payment should be made available to the petitioner against the excise duty and sales tax preferably under the letter of credit. The 65%value of goods plus 100% excise duty and sales tax or alternatively a co-operation from their side was a must. It was asked that the excise duty and sales tax be paid immediately against the documents negotiated through bank within seven days from the date of submission of such documents. It was also indicated that the component of excise duty and the sales tax worked out to 40% of the value of the goods and, therefore, payment of the same was necessarily required to be ensured.Further the delivery period on account of non-settlement of these important issues could not be adhered hence period of delivery be extended. Moreover technical data sheet submitted on 11/05/1993 for approval had in fact not been received till 6/07/1993. Therefore, it was pointed out that in view of the arbitrary stand taken by the respondent it became necessary for the petitioner to get clarification on these points from Epi and that Epi should confirm that 100% of the sales tax amount shall be paid to the petitioner while 65%) ex-works value of the goodssupplied. That delivery period of five months be counted from the date of confirming this request, and that an irrevocable site clear L/C against the order be made available. Mr.Jaitley states that these points were never cleared nor answered by the respondent. These points raise very serious dispute. These points go to the root of the contract. The component of sales tax and excise worked out to 40% and if the change as suggested by the respondent has not been clarified the petitioner would suffer huge financial losses. It amounted to fraud on the part of the respondent. Having placed the order, Epi could not change unilaterally those clauses which had a financial remefication. Having done so it committed fraud upon the petitioner. If without getting clarification goods had been supplied, the petitioner would have suffered an irretrievable injustice. The special equity is also in favor of the petitioner. Petitioner vide its letter dated 8/10/1993 written to the Epi made it clear that without having a properly established payment terms including the payment of excise duty and sales tax and also refixing deliveryperiod, the petitioner was not in a position to take up the order in their productionplant. Inspite of these reminders, the respondent failed to clarify the position.Instead issued a telex dated 18/10/1993 asking for the inspection of the goods without first confirming and clarifying the points raised. Hence Epi is not justified in invoking the bank guarantee.

(13) Mr. Aggarwal on the other hand appearing for the Epi contended that these clarifications were given vide letter dated 7/07/1993. It was pointed out that Epi had not taken two months time in approving the data sheet. It was made clear that the petitioner should expedite the supply. This was followed by telex of 16th August & 18th August, 1993 and a letter dated 17/09/1993. In all these communications, petitioner was made aware that since contractual obligations had not been completed, therefore, petitioner should arrange to get the bank guarantees extended,

(14) After hearing the Counsel for the parties and perusing the documentaryevidence, at least one thing which clearly emerge is that after placing the order for supply of cables, the Epi changed the conditions qua the excise duty and the term of payments. Admittedly in the telex message dated 30/03/1993 vide which order was placed it had been mentioned that detailed order shall be released lateron, but that by itself would not give any right to the Epi to alter the essential terms of the agreement which had a financial remefications. No new term could beaddedunilaterally. As already observed above, the petitioner had quoted the rates keeping in view that the price shall not include the component of excise duty on finished products. If by specific order, the respondent changed the condition it naturally worked out to be a financial detriment to the petitioner. To my mind,petitioner has made out a prima fade case of special equity in his favor. It amounts to special equity because no essential term of the tender document could be changed unilaterally particularly when it had financial repercussions. Even the querries raised by the petitioner as quoted above were never replied by the respondent. For the delay in the approval of the technical data sheet the period of delivery had also not been extended, which request was repeatedly made by the petitioner. Therefore, keeping all these factors in view, I am of the considered view that prima fade case of special equity has been made out by the petitioner.Accordingly the respondent cannot be allowed to encash the bank guarantee. It isa fit case where the bank can be injuncted and restrained from encashing the performance guarantee bearing No. BG-53/93 for Rs. 7,70,500.00 dated 17/05/1993 subject of course to the condition that petitioner shall keep this bank guarantee alive till the disposal of the suit.With these observations, the application stands disposed of.