Puri International (P) Ltd. vs National Building Construction ...
1997 Latest Caselaw 335 Del

JUDGMENT

M.K. Sharma, J.

(1) In the present suit instituted by the plaintiff a decree for permanent injunction is prayed for by the plaintiff against the defendant No.1 restraining it from encashing or seeking to encash or recovering the whole or any part of the amount with respect to the bank guarantees given by the defendant No.2 to the defendant No.1 on behalf of the plaintiff. On or about 5.4.1990 Indian Railway Construction Corporation (in short referred to as IRCON) awarded the contract of construction of Railway Station and Commercial Complex at Belapur to defendant No.l. The defendant No.1 on its part desired to split up the total contract work into smaller parts and give the same on subcontracts. The plaintiff submitted its tender for a part of the works proposed to be sub- contracted by defendant No.1 and in pursuance thereof on or around 14.11.1990 the defendant No.l issued a letter of intent and around 22.11.1990 the defendant No.1 issued a work order to the plaintiff company. In terms of the agreement between the defendant No.l and the plaintiff the plaintiff was entitled to raise mobilisation advance to the extent of 5% of the contract value and the said mobilisation advance was payable to the plaintiff against furnishing of bank guarantees from Nationalised/scheduled bank on the proforma provided by the defendant No.1. In addition to furnishing bank guarantees towards mobilisation advance the plaintiff company also furnished bank guarantees towards security deposit for 2% of the contrail value. The aforesaid bank guarantees were issued by the erstwhile New Bank of India, now Punjab National Bank, defendant No.2.

(2) Subsequently, Ircon terminated the contract of defendant No.l and it is stated that the defendant No.l claiming the contract between the plaintiff and defendant No.1 to be a back to back contract terminated the contract with the plaintiff. This termination, it is alleged by the plaintiff, was illegal. Ircon decided to terminate the contract with defendant No.1 w.e.f. 12.2.1992 and the defendant No.1 terminated its contract with the plaintiff w.c.f. 31.3.1992.

(3) It is slated that from lime to lime the defendant No.1 had been seeking to invoke the bank guarantees, staling inter alia, that the bank guarantees should be extended for a further period failing which the bank guarantees would stand invoked. In view of the aforesaid actions on the part of defendant No.1 the plaintiff has been extending the validity of the bank guarantees. Finally the defendant No.1 issued a letter dated 15.3.1995 purportedly invoking the bank guarantees furnished by the plaintiff. It is contended on behalf of the plaintiff that if the defendant No.1 is permitted to invoke and encash the said bank guarantees the defendant No.1 would be successful in perpetuating a glaring fraud and in that event the plaintiff would suffer irreparable loss and injury. Accordingly, the present suit has been instituted by the plaintiff seeking for the aforesaid relief.

(4) Alongwith the aforesaid suit the plaintiff also Filed an application under Order 39 Rules 1 & 2 which was registered as I.A. 2571/ 1995. By order dated 21.3.1995 this court passed an ex parte ad interim temporary injunction restraining the defendant No.1 from encashing the bank guarantees on condition that the plaintiff would keep the bank guarantee alive. The defendant No.1, on service of summons and notices appeared in the suit and filed its reply to the aforesaid application, contending inter alia, that no ground has been made out by the plaintiff in the application for restraining the defendant No.1 from invoking and encashing the bank guarantees.

(5) I have heard the learned counsel appearing for the partics. Mr. Chandiok appearing for the plaintiff submitted that since the contract of the defendant No.1 with the plaintiff is a back to back contract between the defendant No.1 and 3 therefore, the bank guarantees furnished in pursuance of the present agreement cannot be enforced so long as the bank guarantees furnished in favour of the Ircon by or on behalf of defendant No.1 arc not .encashed. The learned counsel further submitted that the agreement between the plaintiff and the defendant No.1 was terminated as far back as in 1992 and thereafter threats were being issued by defendant No.1 to encash the bank guarantees provided the same were not renewed by the plaintiff, and therefore, the said bank guarantees could not be allowed to be invoked after a delay of about three years and particularly when the defendant No.1 merely desired extension of the validity of the bank guarantees only. His further submission was that action of defendant No.1 towards encashment of the bank guarantees is fraudulent and malafide as the plaintiff is admittedly carrying out the remaining part of the contract directly for IRCON. It is also submitted that there are special equities in favour of the plaintiff in view of the fact that disputes between the defendant No.1 and Ircon are still pending and since the defendant No.1 is claiming certain amount from Ircon for the works done by the plaintiff the aforesaid bank guarantees cannot be enforced. The learned counsel appearing fur the plaintiff also submitted that invocation of the bank guarantees under letter dated 15.3.1995 is not in terms of the bank guarantees furnished on behalf of the defendant No.1 in favour of the plaintiff. Under these circumstances, according to the learned counsel the bank guarantees can neither be invoked nor enforced and therefore, the plaintiff is entitled to a temporary injunction in the nature prayed for in the application,

(6) In successive decisions the Supreme Court has laid down the law with regard to the enforcement of bank guarantees. Citation of few of such cases are - U.P.Coop. Federation Ltd. Vs. Singh Consultants and Engineers (Pvt.) Ltd.; ; Svenska Handelsbanken Vs. Indian Charge Chrome; reported in (1994) I Scc 502; Larsen & Toubro Ltd. Vs. Maharashtra SEB; ; Hindustan Steel Works Vs. G.S Atwal & Co. (Engineers) Pvt. Ltd.; ; National Thermal Power Corporation Ltd. Vs. Flowmore (P) Ltd.; ; State of Maharashtra Vs. National Construction Company; and Hindustan Steel Works Construction Lid. Vs. Tarapore & Co.; . In a recent decision in U.P.Slate Sugar Corporation , the Supreme Court has set out the summary of law in respect of enforcement of bank guarantees holding that when in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realise such a bank guarantee in terms thereof irrespective of any pending disputes. It is further held that the bank giving such a guarantee is bound to honour as per its terms irrespective of any disputes raised by the customer. It is further held thus:-

"THE very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should therefore, be slow in granting an injunction to restrain the realisation of such a bank guarantee. The existence of any dispule between the parties to the contract is not a ground for issuing an injunction to restrain enforcement of bank guarantees. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned."

From the aforesaid observations made by the Supreme Court, it is crystal clear that ordinarily the court should not issue any injunction against encashment of bank guarantee. However, as against the aforesaid general rule two exceptions have been provided for namely - when there is a fraud or when allowing encashment would result in irretrievable injury to the concerned partics. It is also laid down that the bank giving such a guarantee is bound to honour the guarantee as per its terms. In that context the contention of the learned counsel for the petitioner that the invocation of the bank guarantee in the present case as sought to be done under letter dated 15.3.1995 is not in terms of the bank guarantee. Therefore, in that context the contents of the bank guarantees become relevant. As discussed above, on behalf of the plaintiff the defendant No.2 furnished bank guarantees in favour of the defendant No.1 in respect of mobilisation advance on the basis of the proforma submitted by defendant No.1 itself. The copies of said guarantee bonds having been filed as documents are on record. Relevant portion of such a bank guarantee given in favour of defendant No.1 is extracted below:-

"WE, New Bank of India, Masjid Moth Branch, New Delhi-110 048 a Banking Corporation constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1989 having its Head Office at 1, Tolstoy Marg, New Delhi-110001, 'BANK' which expression shall include its successors and assigns) hereby undertake and guarantee for payment to the National Building Construction Corporation Limited forthwith on demand in writing and without protest or demur or any and all moneys anywise payable by the Sub-Contractor to the National Buildings Construction Corporation Ltd. under and in respect of or in connection with the said Contract inclusive of all the National Buildings Construction Corporation's losses and damages and costs (inclusive between Attorney and Client), charges and expenses and other moneys anywise payable in respect of the above as specified in any notice of demand made by the National Buildings Construction Corporation to the Bank with reference to this guarantee upto the aggregate limit of Rs.3,00,000.00 (Rupees three lakhs only) but restricted to the extent of the actual amount of mobilisation advance made to the contractor and the Bank hereby agree with Nbcc that:"

In respect of the security deposit a separate bank guarantee was furnished in favour of the defendant No.1 on behalf of the plaintiff, the relevant portion of which is extracted below:-

"WE, New Bank of, India, Masjid Moth Branch, New Delhi-.110048 do hereby undertake to pay the amount due and payable under this guarantee without any demur, merely, on demand from the N.B.C.C. slating that the amount is due by way of loss or damage caused to or would be caused to or suffered by N.B.C.C. by reason of any breach by the said Contractor by reason of the Contractor's failure to perform the said Contract. Any such demand made on the Bank shall be conclusive as regard the amount due and payable by the Bank under this Guarantee. However, our liability under this Guarantee shall be restricted to amount not exceeding Rs.7,50,000.00 (Rupees seven lakhs and Fifty thousand only). A perusal of the aforesaid clauses of the bank guarantees would show that the bank undertook to pay the amount due and payable under the guarantee without any demur merely on demand from the defendant No.1 staling that the amount is due by way of loss or damage caused to or would be caused to or suffered by Nbcc by reason of any breach by the said contractor or by reason of the contractor's failure to perform the said contract."

(7) The letter dated 15.3.1995 issued by defendant No.l to defendant No.2 seeking for invoking the bank guarantees furnished on behalf of the plaintiff by defendant No.2 is on record having been filed as documents alongwith the plaint. The said letter stales that 15 bank guarantees mentioned therein amounting to Rs.52.50 lac had been issued by defendant No.2 on behalf of the plaintiff and that the said guarantees arc unconditional and are payable immediately on demand without demur. The other relevant portion of the said letter is extracted below:-

"WE hereby lodge our claim for encashment on above BGs for Rs.52.50 lacs. It is requested to encash these guarantees as these arc payable on demand without protest or demur. An amount of Rs.52.50 lacs be remitted by your bankers' cheque payable to defendant No.1 at New Delhi".

(8) A reference to the contents of the said letter would indicate that the defendant No.1 did not indicate in the said letter of demand of defendant No.l that the amount claimed therein is due by way of loss or damages caused to or to be caused to or suffered by defendant No.1 by reason of any breach by the contractor by reason of the contractor's failure to perform the said contract. None of the aforesaid conditions has been mentioned in the said demand letter issued by the defendant No.l to the defendant No.2 seeking to invoke the bank guarantee. Now the question that arises for my consideration is as to whether under those circumstances it could be said that the defendant No.1 invoked the bank guarantee as per its terms and if not, what would be its effect.

(9) A similar question came up for consideration before this court in the case of M/s. Bhasin Associates Vs. U.P.Jal Nigam & others; in I.A.8627/1991 connected with Suit No-2217/1991. This court by order dated 30.9.1992 held that commercial instruments like the bank guarantee or Letter of Credit have to be seen as per their terms. While laying down the aforesaid proposition this court noticed the decisions of the Supreme Court and also of this Court holding that such documents ought to be allowed to be honoured as per their terms and tenor and the Courts should not interfere in their enforcement except in exceptional circumstances which have also been largely spelled out. After noticing the aforesaid observations of the Supreme Court it was held by this court that it is well accepted that such documents have to be enforced as per their terms and that the language of the instrument has always enjoyed a position of primacy and that in other words the enforcement of an instrument has to be as per its tenor and terms. The learned Judge has also quoted the language of the bank guarantees involved in those case and on perusal thereof I find that the stipulations in the said bank guarantee are almost similar to the one in hand. On consideration of the aforesaid contents of the bank guarantee involved in the said case the learned Single Judge held that the letter of invocation in that case failed to meet most of the requirements of the bank guarantees inasmuch as not a word is there about loss or damages caused or to be cause much less the extent of loss or danrage. In that case in the letter invoking the bank guarantee atleast breach of contract was alleged which was held by the learned Single Judge as enough. In the present case in the letter invoking the bank guarantee even such a breach is not alleged. On consideration of the entire facts and circumstances the learned Judge held that when no loss or damage is slated the invocation of the bank guarantee was not in accordance with the requirements of the bank guarantee and therefore, the bank guarantee could not be permitted to be encashed on the basis of the letter of invocation. In this regard reference may also be made to another decision of this court in M/s. Ansal Properties and Industries Ltd. Vs.Union of India; Omp No.180/1993 decided on 22.3.1994. In the said case also the issue that arose for the consideration of the court was whether the bank guarantee in question could be allowed to be enforced. The contents of the said bank guarantee were also set out in the body of the judgment, on perusal of which, I find that the relevant clause is similar to the clause of the bank guarantee in hand. The court, after considering the various judgments of the Supreme Court and this Court came to the following conclusion:-

"FROM this it is clear that the letter of invocation must include an averment that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Government by reasons of breach by the said Contractor of any of the terms or conditions contained in the said agreement or by reason of the said Contractor's failure to perform the said Agreement. From the letter invoking the bank guarantees, I, however, find that there is no averment that the amount claimed is due by way of loss or damage caused to or would be caused or suffered by the Government. The only averment is that the plaintiff had failed to execute the contract as per terms of the contract. Since both the bank guarantees have not been invoked in accordance with the terms of the bank guarantees, the bank guarantees cannot be permitted to be encashed."

(10) On careful consideration of the legal principles laid down by the aforesaid decisions I find that the principles laid down therein arc applicable to the facts and circumstances of the present case. Relevant clauses of the present bank guarantee are similar to the one of those decided cases. In the present letter issued by the defendant No. 1 to the defendant No.2 seeking to invoke the bank guarantee there is also no averment that the amount claimed is due by way of loss or damage caused to or would be cause or suffered by the defendant No.1. Even it has not been stated that there is any breach of the contract by the plaintiff. Now under such circumstances there cannot be any other conclusion but to hold that the invocation of the bank guarantee by defendant No.1 in the present case is not in accordance with the requirements of the bank guarantee. In U.P.Stale Sugar Corporation (Supra) it has been held that the bank giving such a guarantee is bound to honour as per its terms irrespective of any disputes raised by its customer. In my considered opinion the aforesaid observation of the Supreme Court would also mean that in case the bank guarantee is not invoked in accordance with the terms or the requirements of the bank guarantee no invocation and/or encashment of the same is permissible under the law. Accordingly, I hold that since the bank guarantees in question have not been invoked in accordance with the terms of the bank guarantees, therefore, the bank guarantees cannot be permitted to be encashed.

(11) Since in the present case I have held that the bank guarantees have not been invoked as per terms mentioned in the bank guarantees, it is not necessary for me to consider the other issues raised by the plaintiff and also the question as to whether there was any fraud in the instant case and/or any case of irretrievable injury has been made out by the defendant No.1 or not.

(12) In view of the above discussion, the application stands allowed and the defendants are restrained from encashing the bank guarantees furnished by defendant No.2 in favour of defendant No.1 on behalf of the plaintiff. This shall however, be subject to the condition that the plaintiff keeps alive the said bank guarantees till the award given by the arbitrator is made a Rule of the Court.