Capital Meters vs Cimmco International & Others
1998 Latest Caselaw 946 Del

ORDER

Dr. M.K. Sharma, J.

1. The plaintiff filed the present suit seeking for a decree of permanent injunction restraining defendant No.3, State Bank of Patiala from making any payment of any amount from the bank guarantees dated 13th December, 1995, 15th December, 1995, 23rd December, 1995 and 10th May, 1996 furnished by the said bank to defendants 1 and/or 2. Along with the suit the plaintiff also filed an application under Order 39 Rules 1 and 2 which was argued before me and by this order I propose to dispose of the same.

2. The plaintiff in pursuance of the contract and purchase order placed by the defendant No.1 on the plaintiff to purchase a specified quantity of single/three phase kwh. meters supplied to the defendant such meters. It was a condition of the purchase order that the plaintiff was to submit performance bank guarantee of the amount of 10% of the purchase order. In terms of the aforesaid contract and purchase order, the plaintiff supplied the meters but the said supply made by the plaintiff was found to be damaged by the buyer and accordingly the defendant No. 1 the buyer sought to invoke the bank guarantees given by the defendant No.3 on behalf of the plaintiff and hence the present suit. In the injunction application, the plaintiff has sought for issuance of order of temporary injunction re-straining encashment of the bank guarantee.

3. Mr.Singh appearing for the plaintiff submitted that the goods were to be manufactured, packed and sent by the plaintiff on F.O.R.basis to Bombay for onward transmission by defendant No.1 and its agents to their principal in Ghana and thus the responsibility of the plaintiff under the purchase order as also under the contract extinguished when the goods were delivered to defendant No.1 and received by defendant No.1 at Bombay without any demur and / or objection. He further submitted that in pursuance of the requirement of the purchase order the goods manufactured by the plaintiff were also inspected by S.G.S.India Limited on various dates and being satisfied with the quantify, quality, packing and marking on the goods gave their reports approving the said goods and certifying that the same conformed to the conditions of the purchase order and such inspection having been done in presence of the representatives of defendant No.1, the action taken by the defendant 1 in invoking the bank guarantee is without jurisdiction. It was also submitted that the aforesaid meters, on the face of the facts and circumstances of the case, got damaged because of the sea water having entered into the consignment which was due to the negligence of shipping company by which the goods had been shipped by defendant No.1 to Ghana for which, the defendant 1 had also sought to recover the damage suffered by them also from the insurance company and, therefore, there is no liability so far the plaintiff is concerned. It was also submitted that the letter written by defendant No.1 to the State Bank of Patiala is not in conformity with the terms of the bank guarantees furnished by the said company and thus neither the plaintiff nor the State Bank of Patiala has any obligation or any right to pay the amount of the bank guarantees or any part thereof to defendant No.1. He further submitted that a fraud has been committed by the defendant No.1 by suppression of material fact that meters became defective after taking the delivery by the defendant no.1 at Bombay from the plaintiff and as such the plaintiff is entitled to an interim injunction as sought for in the injunction application. The counsel further submitted that if the defendant No.1 is allowed to invoke the bank guarantees as sought to be done by them, it would be a case of undue enrichment. In support of his submission, the learned counsel relied upon the decisions of this court in Harprashad & Co. Ltd. Vs. Sudarshan Steel Mills and Others , Synthetic Foams Ltd. Vs. Simplex Concrete Piles (India) Ltd. and Larsen and Toubro Limited Vs. Maharashtra State Electricity Board and Others . He also submitted that since the insurance claim has also been lodged by the defendant No. 1 it is also admitted position even by the said defendants that the loss caused was during the transit of the goods in the ship and, therefore, the plaintiff is not liable for the damage caused to the aforesaid goods.

4. Learned counsel appearing for the defendants No.1 and 2, however, submitted that the bank guarantees submitted by the plaintiff were in the nature of unconditional bank guarantees and relying upon the contents thereof, he submitted that the invocation letter issued by the defendant DNo.1 on 10th March, 1998 is in accordance with the terms and conditions of the said bank guarantees. He also relied upon the report given by the surveyor appointed by the insurance company to prove his point that there was defect in packing the material by the plaintiff and as such the plaintiff is liable for the damage caused to the supply made by the plaintiff to the defendant No.1.

5. The counsel appearing for defendants 1 and 2 submitted that the defendant No.1 has so far invoked the three bank guarantees out of the four and the last bank guarantee dated 10th May, 1996 has not yet been invoked and sought to be enforced. In support of his submission the learned counsel relied upon the decisions in I.T.C.Limited Vs. Debts Recovery Appellant Tribunal and Others , U.P.State Sugar Corpn. Vs. Sumac International Ltd. , State of Maharashtra and Another Vs. National Construction Co.Bombay and Another , General Electric Technical Services Co.Inc. Vs. Punj Sons (P) Ltd. and Another and Centex India Ltd. Vs. Vinmar Impex Inc. In the case of Centex India Ltd. ( supra ) the Supreme Court held that the obligation of the Allahabad Bank under the letters of indemnity countersigned by the appellant was absolute and upon a demand being made by the shipping company i.e. the beneficiary, the Bank was liable to honour the same regardless of any controversy between the parties i.e. the appellantbuyer and respondent-sellers, as to whether the contract of sale had been performed. It was also held that the appellant took the risk of unconditional wording of the letters of indemnity executed by its bankers, the Allahabad Bank and there is really no equity in favour of the appellant.

In U.P. State Sugar Corporation's case (supra) it was held by the Supreme Court that when in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The said decision recognised that the courts have carved out only two exceptions, namely, a fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee and 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. In the present case the plaintiff has pleaded only fraud and not the second exception which relates to irretrievable harm or injustice to one of the parties concerned.

6. The contents of the bank guarantee in the case in hand provided by the State Bank of Patiala on behalf of the plaintiff would disclose that the same are an unconditional bank guarantee and under the said bank guarantee the bank bound themselves unconditionally and irrevocably that in the event of any default or any violation on the part of the plaintiff to observe all or any of the conditions of the contract/purchase order, the bank would on first demand without protest, demur or proof and without reference to the plaintiff and irrespective of and notwithstanding any contestation by the company or the existence of any dispute whatsoever between the plaintiff and the defendant No.3 and the company pay the sum mentioned in the bank guarantee which the defendant No.1 might demand. It is thus clear that the bank guarantees provided were unconditional bank guarantees. The plaintiff, as is disclosed from the arguments of the counsel, has sought to raise dispute about the liability of the plaintiff for the damages caused to the supplies made. The obligation of the State Bank of Patiala under the aforesaid bank guarantee was absolute and upon a demand being made by defendant No.1, the bank was liable to honour the same regardless of any controversy between the parties. The disputes as sought to be raised herein are matters relating to the merit of the controversy which is required to be resolved through another proceeding. I am at this stage concerned as to whether the defendant No.1 could be restrained by issuance of an order from enforcing the same.

7. During the course of a commercial transaction when an unconditional bank guarantee is given or accepted, the beneficiary is entitled to get such a bank guarantee invoked and realised in terms thereof irrespective of any pending dispute. The aforesaid principle is recognised by the various decisions of the Supreme Court as referred to above. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer, otherwise the very purpose of giving such a bank guarantee would be frustrated and/or defeated. The courts have held that this general principle recognises only two exceptions, namely, fraud and irretrievable injury. In the present case a case of irretrievable injury has not been pleaded. Therefore, the only aspect which is to be dealt with in the present case is to scrutinise and find out whether any fraud has been committed which would disentitle the customer from invoking the bank guarantee. Under the contract between the parties, it was the obligation of plaintiff to pack the goods in seaworthy material. The survey report of the surveyor which is placed on record, prima facie, indicates that it was the quality of timber used for packing which was responsible for the damage inasmuch as unseasoned wood containing large amount of moisture was used for packing the material which was found to be the primary cause for damage. The aforesaid conclusion was arrived at by the surveyor after carrying out detailed examination of all the three consignments despatched by the plaintiff. Thus, prima facie, it appears that there was a default and/or violation of the terms and conditions of the contract. The beneficiary is seeking to invoke the bank guarantee as there has been a default/violation of the terms and conditions of the contract on the part of the plaintiff as would be apparent form the letter of defendant No.1 dated 10th March, 1998 written to the State Bank of Patiala invoking the bank guarantees. The bank guarantee given by the State Bank of Patiala stipulates that in the event of any default or on failure on the part of the company to observe all or any of the conditions of the agreement, the bank would be liable unconditionally and irrevocably to pay the amount under the bank guarantee to the beneficiary. The bank on behalf of the plaintiff also bound itself that on the first demand of the defendant No.1 the amount stated therein in the said bank guarantee would be paid to the defendant No.1 without protest, demur or proof and without reference to the plaintiff or existence of any dispute whatsoever. The invocation of the bank guarantee by the defendant No.1 in the instance case, therefore, is in terms of the bank guarantee and, therefore, in my considered opinion, the ratio of the decision of this court in Harprashad & Co.'s case (supra) is not applicable inasmuch as in the said case the bank guarantee was sought to be invoked by the beneficiary not in accordance with the terms of the bank guarantee. There could be a dispute between the plaintiff and the defendant No.1 with regard to materials used in the packing. Whether the said packing done by the plaintiff in which the goods were despatched to the defendant No.1 was seaworthy or not is not a matter which does not concerns the bank nor the bank is entitled to ask the parties to resolve their disputes before making payment of the bank guarantee. The bank is bound by the terms and conditions of the bank guarantee so is the plaintiff. The bank must pay according to the tenor and terms of bank guarantee on demand without proof or condition.

8. In U.P. State Sugar Corporation's case (supra) it was held by the Supreme Court that the first exception is a case where there is a clear fraud which the bank has noticed and that such fraud must be of an egregious nature such as to vitiate the entire underlined transaction. The fraud pleaded and argued before me by the counsel appearing for the plaintiff is allegation of fraud not at the time of issuance and submission of the bank guarantee but subsequent thereto. The allegation of the plaintiff is that fraud has been committed by the defendant No.1 by suppressing the material facts that the meters became defective after taking delivery. The aforesaid allegation of fraud being relatable to a period subsequent to furnishing of the bank guarantee and there being no pleading and argument that it was of egregious nature vitiating the underlying contract, the first exception also is not attracted in the present case. Besides, the aforesaid allegation of the plaintiff that fraud was committed by the defendant No.1 by suppression of fact that the meters became defective after taking delivery, is a mere allegation at this stage. The defendant No.1 has categorically denied the aforesaid allegation and has placed on record certain documents including the survey report to indicate that the packing material used by the plaintiff was substandard and unseasoned wood containing large amount of moisture was used for packing the material because of which sea water could permit through and damaged the meters in spite of the layers of the packing used by the plaintiff.

9. Thus, I am prima facie satisfied that the plaintiff has failed to make out any case of fraud being committed by the defendant No.1 in invocation of the bank guarantee. I am also satisfied that the bank guarantee is sought to be invoked by the defendant No.1 in accordance with the terms of the bank guarantee. I am thus left with to decide the last issue raised by the learned counsel for the plaintiff that if the defendant No.1 is allowed to invoke the bank guarantee, the same would lead to a case of unjust enrichment. On the facts and circumstances of the case, I am not persuaded to hold so. The plaintiff was required to furnish a bank guarantee in terms of the contract and in terms thereof a valid bank guarantee was furnished for due performance of the contract. When there is noncompliance and/or default and violation of the terms and conditions of the contract the defendant No.1 is entitled to seek for invocation of the bank guarantee in terms thereof and in doing so it cannot be said that the said action would lead to a case of unjust enrichment.

In my considered opinion, none of the principles laid down by the decisions of this court relied upon by the counsel appearing for the plaintiff are applicable. Thus, I am of the considered opinion that the plaintiff has failed to make out any case for grant of a temporary injunction in the present case for restraining the defendant No.1 from invocation of the bank guarantee. The application filed by the plaintiff under Order 39 Rules 1 and 2 CPC is without any merit and is dismissed accordingly. The interim order passed on 3rd April, 1998 stands vacated with immediate effect. The application stands disposed of. It is made clear that all findings and views recorded herein are my tentative views and shall not be treated as final opinion on the issues arising in the suit.

S.No.630/98

Pleadings are complete. List before the Joint Registrar for admission/denial of documents on 6th January, 1999.