M/S. National Telecom Of India ... vs Union Of India And Another
2001 Latest Caselaw 162 Del

ORDER

Anil Dev Singh, J

1. This is an appeal against the order of the learned Single Judge dated December 16, 1999. By that order the learned Single Judge vacated the interim order restraining the second respondent bank from encashing the bank guarantee.

2. The facts giving rise to the appeal are as follows:-

3. The first respondent-Ministry of Communication, Government of India, on February 20, 1997 invited tenders for supply of 2-34 Mb/s Optimux with Regenerator. In response thereto the appellant herein submitted its tender on December 1, 1997. The first respondent placed an advance purchase order of the total value of Rs.2,27,07,850.91 paise on the appellant. The supplies were required to be completed by March 15, 1998. As per terms and conditions thereof, the appellant was required to furnish a performance bank guarantee of Rs.11,36,000/- within twenty days from the receipt of the advance purchase order. The appellant on December 11, 1997 accepted the advance purchase order and requested the first respondent to grant ten days time to furnish the performance bank guarantee. The appellant, however, was able to furnish the performance bank guarantee, being bank guarantee No. 24 dated January 20, 1998 for a sum of Rs.11,36,000/- issued by the second respondent- State Bank of Indore, Dadar, West Mumbai, to the first respondent only on January 21, 1998. One year later, on March 23, 1999, the first respondent invoked the bank guarantee on the ground that the appellant was not able to supply the goods even within the extended delivery period. The appellant thereupon filed a civil suit for declaration and injunction before a learned Single Judge of this Court for seeking the following reliefs:-

(i) a decree of declaration that the purported Purchase Order dated 13th February, 1998 is void and unenforceable and that no concluded and binding contract under tender No. MM(OF)/021997/000095 dated 20th February, 1997 and Advance Purchase Order dated 1st December, 1997 was entered into between Plaintiff and Defendant No.1;

or

In the alternative, a decree of declaration that there was no agreed and binding delivery schedule with regard to the quantities of goods to be supplied in terms of the Purchase Order dated 13th February, 1998;

(ii) a decree of declaration that the Performance Bank Guarantee BG No. 24 dated 20th January, 1998 issued by Defendant No.2 for Rs.11,36,000/- in favor of Defendant No.1 is void and unenforceable;

(iii) a decree of permanent injunction restraining Defendant No.1 from seeking to encash the Performance Bank guarantee being No.24 dated 20th January, 1998 issued by Defendant No.2 in favor of Defendant No.1 for Rs.11,36,000/-;

(iv) a decree of permanent injunction restraining Defendant No.2 from making payment under the Performance Bank Guarantee being No. 24 dated 20th January, 1998 issued by Defendant No.2 in favor of Defendant No.1 for Rs.11,36,000/- or any amounts under the said guarantee to Defendant No.1;

(v) award costs of the suit; and

(vi) pass such other or further order(s)/decree as this Hon'ble Court may deem fit and proper in the facts and circumstances of the case."

4. Along with the suit an application for interim injunction under Order 39 Rules 1 and 2 read with section 151 of the Code of Civil Procedure, 1908, was also filed. On September 7, 1999 the learned Single Judge passed an interim order directing maintenance of status quo in respect of the encashment of the bank guarantee. However, subsequently on December 16, 1999 the interim order was vacated by the learned Single Judge. The appellant being aggrieved of the order passed by the learned Single Judge has filed the instant Letters Patent Appeal.

5. We have heard learned counsel for the parties at length. Mr. Nayar, learned senior counsel appearing for the appellant submitted that the performance bank guarantee was not invoked according to the terms and conditions of the bank guarantee itself. Elaborating his arguments he submitted that the bank had undertaken to pay to the first respondent an amount not exceeding Rs.11,36,000/- against any loss or damage caused to the Government by reason of any breach by the appellant of any terms and conditions contained in the advance purchase order. Learned counsel invited our attention to the letter of invocation dated March 23, 1999 and submitted that the performance guarantee has not been invoked on the ground of any loss or damage caused to the Government by reason of any breach by the appellant of any terms and conditions contained in the advance purchase order. He also invited our attention to the letter of the first respondent dated November 25, 1999 addressed to the second respondent bank requesting it to encash the bank guarantee immediately. Mr Nayar highlighted the fact that it was the condition of the bank guarantee that the same could be invoked only if the amount claimed is due by way of loss or damage caused to or would be caused to the Government, by reason of breach by the appellant of the terms and conditions contained in the underlying agreement or by reason of the appellant's failure to perform the said agreement. According to him, a perusal of the letters dated March 23 1999 and November 25, 1999 of the first respondent to the bank show that the bank guarantee was invoked not on the ground that the first respondent has suffered any loss or damage due to failure to complete the supply against the purchase order, or due to breach committed by the appellant of the underlying agreement, but simply on the ground that the appellant failed to complete the supply against the purchase order despite extension in delivery period. The learned senior counsel contended that the first respondent cannot invoke the bank guarantee without stating the fact that as a result of failure to complete the supply the Government suffered loss or damage. Learned counsel in support of his submission relied upon the decision of the Supreme Court in Hindustan Construction Co. Ltd. v. State of Bihar and others, . On the other hand, learned counsel for the first respondent submitted that the bank guarantee has been invoked in accordance with the terms and conditions contained therein.

6. We have considered the submissions of the learned counsel for the parties. The main question for determination is whether the invocation of the bank guarantee is as per the terms and conditions contained therein. In order to appreciate the controversy raised by learned counsel for the parties it will be convenient to set out the relevant terms of the bank guarantee :-

" XX XX XX

We, State Bank of Indore do hereby undertake to pay the amounts due and payable under this guarantee without any demur, merely on a demand from the Government stating that the amount claimed is due by way of loss or damage caused to or would be caused to, suffered by the Government by reason of breach by the said Contractor(s) of any of the terms and conditions contained in the said Agreement or by reason of the Contractor(s) failure to perform the said Agreement. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the Bank under this Guarantee where the decision of the Government in these counts shall be final and binding on the bank. However, our liability under this Guarantee shall be restricted to an amount not exceeding Rs.11,36,000/-.

We undertake to pay the Government any money so demanded notwithstanding any dispute or disputes raised by the Contractor(s)/supplier(s) in any suit or proceeding pending before any court or tribunal relating thereto our liability under this present being absolute and unequivocal. The payment so made by us under this bond shall be valid discharge of our liability for payment there under and the Contractor(s)/Supplier(s) shall have no claim against us for making such payment.

                 XX                  XX                   XX       " 

 
 
 

7. A perusal of the aforesaid conditions show that the State Bank of Indore undertook to pay the amounts due and payable under the guarantee without any demur merely on demand from the respondent. The respondent, however, while invoking the bank guarantee is required to state the existence of one or both of the following conditions:- 
 
  

1. The amount claimed is due by way of loss of damage caused to or would be suffered by the government by reason of breach by the appellant of any terms and conditions contained in the purchase order. 
 
 

2. That the amount is claimed by reason of the appellant's failure to perform the said agreement. 
 
 

8. Even if one of the aforesaid requirements for invoking the bank guarantee is satisfied, the demand made by the first respondent to the bank is to be considered conclusive as regards the amount due and payable by the bank under the guarantee. The decision of the government in respect of the satisfaction of the aforesaid conditions has been made final and binding on the bank. The letter of invocation dated March 23, 1999 clearly states that the supplies against the purchase order have not been completed despite extension of delivery period granted to the appellant which obviously means that the bank guarantee was invoked by reason of the contractor's failure to perform the agreement. This position was further clarified by the first respondent in its subsequent letter dated November 25, 1999 to the bank where it was unequivocally stated that the bank was required to make payment of Rs.11,36,000/- on account of the failure of the appellant to perform the agreement. Even during the pendency of the present appeal the first respondent by its letter dated November 7, 2000 again wrote to the second respondent bank that the amount is due to the Government by way of loss caused to it on account of breach of the appellant to perform the agreement. This letter was placed on record by the first respondent on November 20, 2000. It appears to us that the bank guarantee was properly invoked by the first respondent in accordance with its terms and conditions. The bank guarantee specifies the amount of liquidated damages for failure of the appellant to perform the contract. The second respondent having given irrevocable bank guarantee at the instance of the appellant to the first respondent whereby in unequivocal terms it bound itself to pay the amounts claimed by the first respondent, it is bound to honour its commitment especially when the demand made on the bank by the first respondent has been made conclusive as regards the amount due and payable by it under the bank guarantee. Besides, as already noticed above, the bank guarantee makes the decision of the first respondent as final and binding on the bank notwithstanding the fact that a dispute is raised by the appellant in any suit or proceeding pending before any court or Tribunal relating to its liability. The decision of the Supreme Court in Hindustan Construction Co. Ltd. (supra) cited by the learned senior counsel for the appellant supports the proposition that the liability of the bank to pay the amount claimed by the beneficiary arises only when the bank guarantee is invoked in accordance with the terms and conditions laid down therein. But this decision is of no avail to the appellant as the bank guarantee has been invoked in consonance with the conditions specified in the bank guarantee itself.

9. Learned senior counsel for the appellant sought to raise the dispute with regard to the tenability of the demand of the first respondent under the bank guarantee on the ground that no amount is due and payable to the first respondent from the appellant. Such a dispute cannot be raised in these proceedings as the bank has undertaken to pay to the first respondent money claimed by it under the bank guarantee notwithstanding the dispute(s) raised by the appellant.

10. It has time and again been emphasised by the courts that bank guarantees play an important role in trade and commerce. They are the life and blood of the trade. The banks must honour the bank guarantees executed by them in favor of the beneficiaries as otherwise national and international trade will suffer. It is on the basis of the bank guarantees and the letters of credit that traders deal with each other with confidence that the money due to them under the bank guarantees shall be paid to them by the banks. It is well settled that in cases of a confirmed and irrevocable bank guarantees the courts generally do not interfere with the invocations thereof. It is only in case of fraud or irretrievable injustice or special equities or when the bank guarantee is not invoked in terms of the bank guarantee that the court will interfere.

11. In State Trading Corporation of India Ltd. v. Jainsons Clothing Corporation and another, , the Supreme Court relying upon its earlier decision in U.P. Cooperative Federation Ltd. (P) Ltd. v. Singh Consultants and Engineers, , held as follows:-

".....Therein this Court after elaborate consideration of all the decisions, held in para 34 that on the basis of these principles the commitments of bank guarantee 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 would interfere.

While elaborating the plea of fraud, in the concurrent judgment, Jagannatha Shetty, J. had it elaborately dealt with it and quoting Sir John Donaldson, M.R., in Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 ALL ER 351, 352, he stated that:

" The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged."

Under those circumstances, it was also held that the plea of fraud must be of an egregious nature as to vitiate the entire underlying transaction of the bank guarantee. It is fraud of that beneficiary and not the fraud of somebody else that would make the court to grant the order of injunction as asked for. If the bank detects with the minimal investigation the fraudulent action of the seller, the payment could be refused is not a fraud as contemplated under the guarantee. We respectfully agree with the above ratio.

XX XX XX

The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the court justified on that basis, to issue an injunction from enforcing the contract, i.e., bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the party's favor, he/it is entitled to damages or other consequential reliefs.

XX XX XX "

12. In M/s. Kalpavriksha Engineers and Management Consultants (P) Ltd. v. M/s. National Projects Construction Corpn. Ltd., 1992 (1) Delhi Lawyer 309, the crucial words in the bank guarantee were as follows :-

"..... We, New Bank of India, ......... irrevocably undertake and guarantee due performance of the said agreement ...... and do further hereby irrevocably undertake to pay to the Corporation on demand in writing without demur and without reference to the Consultants, all or any sum of money at any time due on demand, ........."

".......... any notice of breach of agreement / performance by the Consultants given to us by Corporation ...... any amount claimed in such notice by the Corporation on account thereof shall be final and binding on us as to the factum of breach and the amount payable by us..... "

13. In the instant case a similar term has been incorporated in the bank guarantee. In Kalpavriksha Engineers and Management Consultants (supra) it was held on a plain reading of the bank guarantee that the demand of the beneficiary on the bank to make the payment under the bank guarantee was final and binding. It was further held that the question whether there was any breach of the agreement by the person at whose instance the bank guarantee was furnished does not affect the obligation of the bank to pay the amount claimed by the former under the terms of the bank guarantee. In M/s. Triveni Engineering Works Ltd. v. M/s. Belganga Sahakari Sakhar Karkhana Ltd. and another, 1991 (4) Delhi Lawyer 189, a similar view was taken by this Court. The court expressing this view observed as follows :-

"....... The bank guarantee being an independent contract between the bank and defendant No.1, payment whereunder to the beneficiary (defendant No.1) is not to be suspended or stopped by reason of existence of disputes between the plaintiff-seller and defendant No.1-purchaser, as is explicitly provided in the bank guarantee itself. Parties entered into the bargain on the footing that an unconditional and irrevocable bank guarantee will be honoured in its letter and spirit. Even when the bank guarantee was furnished as a result of the underlying contract, the same cannot be said to be a part and parcel of the principal contract between the seller and the purchaser. The bank guarantee is a distinct and special type of agreement creating obligations and commitments directly between the bank and the beneficiary, the bank guarantee cannot be rendered otiose by asking the beneficiary to supply proof of breach/default of the seller with regard to the underlying contract.

XX XX XX "

14. In the instant case the bank guarantee constitutes the first respondent as the sole judge with regard to the question whether or not the amount under the bank guarantee is due to it. It seems to us that where the beneficiary is made the sole judge as to the question whether or not there has been a breach of the under-lying contract by the party at whose behalf the bank guarantee was furnished, or whether or not the amount under the bank guarantee is due to the beneficiary, the bank is under an obligation to pay the amount covered under the bank guarantee on demand by the beneficiary without raising any objection. Besides, it is not a case where fraud or irretrievable injury or special equity vitiating the under-lying contract has been pleaded by the appellant. It is only in the event of fraud or irretrievable injustice or in a case of special equity, or where the invocation of the bank guarantee has not been made in terms of the bank guarantee itself, that the court will interfere with the invocation of a bank guarantee. In Svenska Handelsbanken v. Indian Charge Chrome, (1994) 1 SCC 502, the Supreme Court held as follows:-

"In a case of confirmed bank guarantee/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. 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. Only in the event of fraud of irretrievable injustice the court would be entitled to interfere in a transaction involving a bank guarantee and under no other circumstances."

15. In the instant case the amount under the bank guarantee has become payable to the first respondent unconditionally and irrevocably. The bank guarantee has been invoked in accordance with the terms contained therein. We, therefore, do not find any force in the appeal. Accordingly, the same is dismissed.