Maihar Cement, Century Textile & ... vs Krishna Gears (P) Ltd., & Anr.
2000 Latest Caselaw 476 Del

ORDER

Manmohan Sarin, J.

1. Appellants have preferred this appeal against the order dated 19.5.1994, passed by Shri G.S. Jugti, Additional District Judge, allowing the application of respondent No.1 under Order XXXIX, Rules 1 & 2 of the Code of Civil Procedure, restraining the appellant from encashing the two bank guarantees till the disposal of the main suit.

2. The learned Additional District Judge allowed the application of respondent No.1, holding that the notice invoking the bank guarantee was not in accordance with the terms and conditions of the bank guarantee and was, therefore, of no legal effect and inoperative. As per the impugned order, the notice did not disclose as to why the bank guarantee was being invoked. It did not mention the alleged non-supply of material or the resultant loss or the extent thereof Besides, he held that the contract was subsisting and had not been rescinded, in the absence of which the bank guarantee could not be encashed. He also held that respondent No. 1 would suffer huge loss on encashment of the bank guarantee.

3. The facts, in brief, leading to the filing of this appeal may be noted:

(i) Appellant, which is a cement manufacturing unit, placed three orders, dated 22.6.90, 25.7.90 and 5.10.90 for the supply of Helical gears and pinions on respondent No.1, M/s. Krishna Gears Pvt. Ltd. Order dated 22.6.1990 was placed for the supply of one Helical gear and two Helical pinions, for a total value of Rs.13.44 lacs. The goods were to be supplied within eight months from the date of the order, viz. 22.2.1991.

(ii) The second and third orders, viz. Orders dated 25.7.1990 and 5.10.1990, for one Helical Pinion each were of the value of Rs. 2.96 lacs each. The second order was to be supplied within four months, i.e. by 21.11.1990 and the third order by 5.2.1991.

(iii) Under the terms of the contract, 25% of the value of the orders was to be paid by the appellant in advance against irrevocable confirmed bank guarantee, to be furnished by respondent No.1. The appellant, on acceptance of the three orders, paid a sum of Rs. 4.84 lacs to respondent No.1, being 25% of the value of the three orders.

(iv) On receipt of the advance amount, respondent No.1 furnished two bank guarantees, viz. Bank guarantee No. 24/90 dated 1.9.1990 for a sum of Rs.4.10 lacs, covering the advance of the first and the second order. A second bank guarantee, viz. 27/90 for Rs.74,000/- covering 25% of the advance paid for the third order placed on 25.10.1990.

(v) Appellant's case is that respondent No.1, after having received the total advance amount of Rs. 4.84 lacs, made no efforts to supply the gears and pinions, either within the stipulated time or the extensions granted. On 17.8.1991, upon appellant's representative's visit, respondent No.1 requested for extension of time till October, 1991, for supply of pinions and for remaining material by December 1991. Vide its letter dated 19.11.1991, appellant notified respondent No. 1 that it (respondent) was still not adhering to the revised committed schedule, as intimated vide its letter of 17.8.1991. Respondent No. 1 had not supplied two pinions, which, even as per the revised schedule, were to be supplied by October 1991. Respondent No. 1 was further notified that no information had been received about the despatch of material despite continuous follow up. Appellants further notified respondent No. 1 that in case no reply was received by 25.11.1991, they shall be constrained to encash the bank guarantees and also claim damages suffered for non-execution of the order. Both the bank guarantees were extended upto 31.3.1992.

(vi) Appellant, vide its letter dated 27.11.1991, addressed to the Punjab National Bank, sought invocation of the bank guarantees. The relevant portion of the said letter is extracted below:

"The above party has failed to comply with the delivery commitments despite our various reminders and personal calls and we are of the firm opinion that the party is not in a position to execute the orders.

We, therefore, request you to please treat this notice for encashment of the above two bank guarantees which are being submitted with this letter and your Demand Draft for Rs. 4,84,000/- (i.e. Rs. 4,10,000/- + Rs. 74,000/-) may please be handed over to our Mr. J.P. Aggarwal, Manager-Purchase, the bearer of this letter.

In this connection, we hereby authorise Mr. J.P. Aggarwal, Manager-Purchase to complete all required formalities on our behalf for obtaining the above payment from you....."

(vii) Despite the above invocation of bank guarantee, the respondent bank did not release the amount. In the meanwhile, respondent No.1 filed a suit, bearing No. 405/91 on 23.12.91 in this Court for injunction, titled M/s. Krishna Gears (P) Ltd., Vs. Punjab National Bank and Others. The suit was transferred to the District Court on increase in the pecuniary jurisdiction of the District Courts. Upon completion of pleadings and hearing of the application, the impugned order was passed by the Additional District Judge, allowing the application and staying the encashment of the bank guarantees.

(viii) The goods in question had not been supplied till the date of invocation of bank guarantee or for that matter till the filing of the suit for injunction by respondent No.1.

4. Counsel for the parties were heard and have also filed written synopsis.

The main plank of the respondents case is that the invocation of the bank guarantee did not meet the requirement of conditions of the bank guarantee. Further, the invocation letter did not relate to both the bank guarantees. Respondent urged that this was a case where the delivery schedule fixed was tentative and time was not the essence of the contract. The respondent had spent considerable money out of the amount received in advance in having the castings prepared. It was appellant, who made frequent changes in the technical and other specifications, which resulted in the delay in the manufacture of the equipment. The appellants were fully posted of the developments and delay entailed.

In nutshell, respondent urges that there is sufficient correspondence on record to show that the appellant had amended the terms and conditions of supplies and, of necessity, the agreed delivery schedule, had to be changed. As per respondent No.1, the variations in the terms of contract, which have been detailed and brought out in the correspondence exchanged, was duly agreed to by respondent No.1 and the appellant. Learned counsel for respondent No.1, therefore, urged that the invocation of the bank guarantee was bad since it was sought to be invoked even without waiting for completion of the revised delivery schedule, so agreed. The bank guarantees stood discharged on account of the variation of the contract. The invocation also did not suggest or specify that any loss had been sustained by the appellant and as such, was not enforceable. Learned counsel also contended that the bank guarantee was conditional and not unconditional. The bank guarantee was enforceable only for indemnifying the appellant against any loss or damage caused on account of non-supply of material as per the agreement. The variations in the contract were of such a nature that it almost amounted to novation. These were subsequent to the issuance of the bank guarantees and without the consent of the bank. Accordingly, the bank stood discharged from performing the obligations of encashing the bank guarantee.

5. Learned counsel for respondent No.1 contended that respondent had a good case in equity as it would cause irreparable and irretrievable loss if, for no fault of respondent No.1, the bank guarantees were to be encashed, without even conforming to its terms and conditions. The bank itself has taken this position that the encashment of the bank guarantees is not as per its terms and, hence, the plea that respondent No.1 has no locus to challenge the encashment is devoid of merit.

6. Learned counsel for the parties have referred to a number of decisions at the bar. However, it would not be necessary to advert to them as they would not be applicable to the facts of the present case. Based on the pronouncements of the Supreme Court, the legal position with regard to encashment of bank guarantees is fairly well-settled. Reference may usefully be made to the decision of the Apex Court in Svenska Handelsbanken Vs. Indian Charge Chrome & Others, (1994 (1) SCC 502). The Court, after noticing the earlier decisions, summed up the position as under:

"......in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud..."

".....irretrievable injustice which was made the basis for grant of injunction really was on the ground that the guarantee was not encashable on its terms..."

"......there should be prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of bank guarantee."

7. The Supreme Court in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engg. Works (P) Ltd., deprecated the tendency of not applying settled principles with regard to the legal position on encashment of bank guarantees. The Court in the said case had rejected the bald allegation of fraud made against the beneficiary in the injunction application with a view to obtain an order of injunction. The Court held that in the absence of established fraud the court would not grant an injunction relating to the bank guarantee.

8. Having recorded the salient facts and the respective contentions of the parties, which are necessary for the disposal of this appeal, let us first consider if the bank guarantees in question are conditional, as contended by the respondent and whether their invocation was in accordance with the terms of the bank guarantee? The two bank guarantees in question, viz. 24/90 and 27/90, are identical and appear on pages 31 and 34 of the paper book. It is a bilateral agreement. Parties to the agreement are the appellant and the Punjab National Bank. The recital clauses, i.e. after Clause No. (2), set out the details of the under lining contract for which the bank guarantees were furnished. The next clause is also in the nature of recital, which gives the maximum liability of the bank under the guarantee and also spells out the purpose of furnishing the bank guarantee, stating that the appellant shall be indemnified against any loss or damage caused due to the nonsupply of material by respondent No.1. The relevant covenant of the guarantee between the parties, i.e. "The bank agreed that the amount hereby guarantee shall due and be payable to the firm within one month of the firm's serving notice requiring the payment of the amount and such notice shall be deemed to have been served on the bank either on actual delivery thereof to the bank or by discharge thereof to the bank of registered post at the address of the bank."

9. It would be seen from the foregoing that the operative covenant only requires serving of a notice of demand and nothing more from the beneficiary. It does not require that the notices itself should stipulate that the loss or damage had occurred to the beneficiary or is likely to occur nor does it require the beneficiary to quantify any such amount of loss or damage. The loss or damage would be deemed to have been incurred upon the service of notice by the beneficiary to the bank. In this view of the matter, it would not be necessary for a valid invocation of the bank guarantee that the notice stated about the loss or damage suffered. Nevertheless, it may be noticed that the letter dated 27.11.1991 did record that respondent No.1 had failed to comply with the delivery schedule. The recital clauses cannot be read into the operative clause so as to convert an unconditional bank guarantee into a conditional one. Reliance by the respondent on Harpal Vs. Sudershan Steel Mills, ; E & M Associates Vs. DDA, ); Mahalingam Vs. NPCC (1990 (3) Delhi Lawyers 110); Dewan Vs. Central Bank of India (1992) (4) Delhi Lawyer 17) would not advance the respondent's case at all. These are cases where the bank guarantee contained express stipulation that the amount would be due and payable under the guarantee on demand from the beneficiary stating that the amount claimed was due by way of demand/damage caused by the breach of the terms and conditions of the agreement and, as such, loss had occurred or was likely to occur by reason of the contractor's failure to perform the agreement. It is therefore, held that the bank guarantee was not a conditional one and its invocation has been as per the terms of the bank guarantee. Respondent's argument that the invocation of the bank guarantees by letter of 27.11.1991, was premature in as much as part of the material wasto be supplied by December, 1991 is not tenable. The appellant had, vide its letter of 19.11.1991 notified the respondent No.1 that it had failed to adhere to the extended delivery schedule requested by it and if no confirmation regarding despatches was received by 25.11.1991, it shall invoke the bank guarantees. In these circumstances, appellant was justified in invoking the bank guarantee in the absence of any reply. Besides, the material in question had not been delivered at all even till the date of institution of the suit.

10. The next question to be considered is whether the bank guarantee was not enforceable on account of the alleged variation of the terms and conditions of the contract by the appellant, as alleged by respondent No. 1. Assuming for the sake of argument that the contention of the respondent that appellant had changed specifications of the equipment and other terms, resulting in delayed production and change in delivery schedule are correct, these would, at best, support respondent's case of there being breach by appellant or non-performance by the appellant. In any case, these cannot come in the way of denying the beneficiary of the bank guarantees of its right to receive the money on invocation of the bank guarantee as per its terms. It is settled by a catena of judicial pronouncements that bank guarantee is an autonomous contract and the obligations arising under the bank guarantee are independent of the obligations arising out of the specific contract between the parties. The bank guarantee cannot be qualified by the underlined transactions and the primary contract between the parties, on whose instance the bank guarantee was given. A bank guarantee imposes an absolute obligation on the bank to fulfill its terms to pay the amount guaranteed on the happening of the contingency or at the occurrence of which the guarantee becomes enforceable. Reference may be invited to Syndicate Bank Vs. Vijay Kumar, .

11. The Courts, by a series of judicial pronouncements, as noted earlier, have held that an irrevocable commitment, either by a confirmed bank guarantee or irretrievable letter of credit, cannot be interfered with by the courts, otherwise the whole purpose of bank guarantee would get negatived. There are two exceptions carved out of this, firstly, the 'fraud of an egregious nature' which would vitiate the very foundation of such bank guarantee and the beneficiary seeks to take advantage of the situation. The nature of fraud referred to is egregious, so as to vitiate the entire underlined transaction. It is the fraud of the beneficiary and not anyone else. The second exception carved out is if allowing encashment of the bank guarantee would result in irretrievable harm or injustice to the concerned party. In the present case, except for a bald averment of the respondent No.1 suffering irreparable loss, no other factor or circumstance has been urged which would bring the case within the ambit of the above exceptions.

12. The trial court, while passing the impugned order, observed that "leaving aside the merits of the main case, I am convinced, for the time being, that defendant No. 2 (appellant) is not entitled for encashment of the bank guarantees involved in the present suit." The Additional District Judge misread and misinterpreted the bank guarantee, holding that encashment of the bank guarantee is not in accordance with the terms of the bank guarantee and that the appellant is not entitled to their encashment. The impugned order does not give any justification for the same.

13. In view of the foregoing discussion, the impugned order, granting stay of encashment of bank guarantee, cannot be sustained and is liable to be set aside and is, accordingly, set aside. The appellant is entitled to encashment of the bank guarantees without any further delay as it already has been deprived of the amounts due in terms of the bank guarantee for an unduly long period. The appeal is allowed with costs quantified at Rs. 2,500/-.