Vinitec Electronics Pvt. Ltd. vs Hcl Infosystems Ltd.
2004 Latest Caselaw 1242 Del

JUDGMENT

Mukul Mudgal, J.

1. This petition under Section 9 of the Arbitration and Conciliation Act, 1996(hereinafter referred to as the `Act') seeks an interim injunction pending arbitration, against the encashment/remittance of the performance bank guarantee at 10% of the contract value to the respondent or any one acting on its behalf. The guarantee dated 10th August, 2001 as amended on 20th August, 2001 was provided by the petitioner/applicant to the respondent in the sum of Rs.16,81,238.50p., issued by the Oriental Bank of Commerce, Kirti Nagar Branch, New Delhi. The encashment of the said bank guarantee is sought to be stayed by this petition.

2. The facts of the case are as follows:-

There was a contract dated 10th May, 2000 for the value of Rs.1,68,12,400/-(Rupees One crore sixty eight lacs twelve thousand and four hundred only) and it is the petitioner's case that after 30 per cent of the contract value was paid to the petitioner, a bank guarantee in question was furnished to the respondent. The original clause of the bank guarantee dated 10th August, 2001 reads as follows:-

"Whereas M/s Vinitec Electronics Pvt. Ltd. H-33, Bali Nagar, New Delhi(hereinafter called the `Supplier') supplied their Vinitec on-line UPS Systems of various capacities pursuant to their Agreement dated 10th May, 2000 and P.O.4500011730 dated 30.05.00 (ereinafter called the `Company') for the final Purchaser President of India through the Director, National Crime Records Bureau, Ministry of Home Affairs, Government of India, New Delhi(hereinafter called the `Purchaser').

Whereas in terms of Clause No.15 of the Agreement for receiving the entire balance payments of Rs.49,99,335/- from the company, the supplier have agreed to provide a Performance Bank Guarantee equivalent to Rs.16,81,238.50 as Ten percent of the value of the Contract to be kept valid till the warranty period during which times the Supplier is required to perform their warranty obligations to the Purchaser; and . Whereas Pursuant to the application made by the Supplier, We Oriental Bank of Commerce, Kirti Nagar, New Delhi(hereinafter called the `Bank') have accordingly agreed to give the Supplier a Bank Guarantee for the aforesaid purpose.

Therefore, we, the Bank, hereby affirm that we are Guarantors and responsible on behalf of the Supplier up to a total of Rs.16,81,238.50 (Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and paise Fifty only) and we undertake to pay any s m or sums within the limit of Rs.16,81,238.50 (Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and fifty paise only) as aforesaid upon receipt of written demand from the purchaser and Company within the validity of this Bank Guarantee, stablishing the Supplier to be in default for the performance of their warranty obligations under the Contract.

We, the Bank, affirm that our liability under this Guarantee is limited to the total amount of Rs.16,81,238.50(Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and paise fifty only) and it shall remain in full force up to and including 31st August, 2003 and shall be extended from time to time for such further period (s) as desired by the Purchaser, Company, and Supplier on whose behalf this Guarantee has been given.''

However, subsequently by the letter dated 20th August, 2001, the bank guarantee was amended and the paragraph 4 of the bank guarantee was replaced and was to be read as under:-

"Therefore, we, the Bank, hereby affirm that we are guarantors and responsible on behalf of the Supplier up to a total of Rs.16,81,238.50(Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and paise fifty only) and we undertake to pay any su or sums within the limit of Rs.16,81,238.50(Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and paise fifty only) as aforesaid upon receipt of written demand from the Company within the validity of this Bank Guarantee.

4. Consequently the case of the petitioner is that it had supplied all equipment to the respondent by 2nd August, 2000 and it is the respondent who had defaulted in making the stipulated payments. On 2nd August, 2001 a balance sum of Rs.49,99,335/- remained unpaid. The respondent upon a demand made by the petitioner only agreed to pay the same provided the performance bank guarantee of 10% of contract value was furnished. Such a conditional bank guarantee was furnished and eventually was amended on 0th August, 2001. The furnishing of the bank guarantee was a condition precedent for receiving Rs.49,99,335/-. In spite of the provisional bank guarantee prescribing the entire amount of Rs.49,99,335/- being payable for the guarantee to come into effect, the respondent made a payment of only Rs.30,00,000/- on 22nd August, 2001 and a false allegation of payment of Rs.11,99,335/- was made. The sum of Rs.8 lacs still remains unpaid even as per the respondent's case. The invocation of the bank guarantee without paying the balance payment of Rs.19,99,335/- or even Rs.8 lacs which is admittedly said to be due is illegal as the bank guarantee had become inoperative, lifeless and still born as the condition precedent for its invocation were not complied with and the petitioner was said to be defrauded in the sum of Rs.17,37,225.50 by this fraudulent invocation.

5. Mr. Nayar, the learned senior counsel, appearing on behalf of the petitioner has contended that the original contract provided for an unconditional performance of bank guarantee when 30% amount was payable, the bank guarantee was furnished after the entire supply was completed and 100% payment become due. He further states that the bank guarantee being a conditional one and there being substantial deviations from original terms of the contract and the fact that the respondent did not act in accordance with the procedure and the payment prescribed and in fact deviated from it makes it clear in law that the bank guarantee cannot be enforced. The terms of the Bank guarantee are extremely material and contemplate strict liability and purposive enforcement of each letter. He has also submitted that the bank guarantee in question is explicit in terms that it is preconditional upon prior payment of Rs.49,99,335/- to the respondent and since admittedly the full payment of this sum has not been made, the bank performance guarantee cannot be invoked as it was not a self-contained performance bank guarantee but is a conditional one wholly dependent upon the payment of Rs.49,99,335/- and if any part of this sum remained unpaid, then the bank guarantee was to operative and it was obligatory while invoking the bank guarantee for the respondent to state in its letter of demand whether the sum of Rs.49,99,335/- has been paid in full. The non-statement of this in the demand of invocation dated 16th December, 003 shows that the demand is not in accordance with the terms of the guarantee and the failure to disclose the relevant fact at least of the unpaid sum of Rs.8 lacs amounts to playing fraud upon the bank and entitles the petitioner to an injunction again to the encashment of the performance bank guarantee to the respondent.

6. In support of its plea, the petitioner has relied upon Hindustan Construction Co. Ltd. vs. State of Bihar and others, , wherein it was held that the bank guarantee constitutes a separate, distinct and independent contract and in the conditional bank guarantee, the right to invoke guarantee is not unfettered and the Court can issue an injunction in appropriate cases. The petitioner has also relied upon State Bank of India and others vs. Manganese Ore (India) Ltd. and another, , which held that the conditional bank guarantee cannot be invoked unless and until the conditions specified in the invocation of the bank guarantee have been fulfillled.

7. Reliance has also been placed on two other judgments in Basic Tele Services Ltd. vs. Union of India and Another, and M/s Punj Sons (P) Ltd. vs. Hong Kong and Shanghai Banking Corporation and Anr., DRJ 1991 (20) 154, which I am not dealing with because in my view the matter is fully covered by the well settled position of law laid down by the judgments of the Supreme Court which have been recently summarized in 2004 VII AD (DEL) 24, PT Sumber Mitra Jaya vs. National Highways Authority of India by Hon'ble Mr. Justice Vikramajit Sen as under:-

6. The law as it has been enunciated by the Apex Court, in U.P. State Sugar Corporation v. Sumac International Limited , is to be found in these words of the Court:

12. The law relating to invocation of such bank guarantees is by now well settled.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 iterms 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 very purpose of giving such a bank guarantee would otherwise be defeted. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. 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. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. 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. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not ecessarily connected, though both may coexist in some cases.

14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corpn. case, 566 Fed Supp 1210. In that case an exporter in USA entered into an agreement with the Imperial Government of Iran and sought an order terminating its liabilit on stand by letters of credit issued by an American Bank in favor of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the exhort licenses in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The Court uh eld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and realisation of the bank guarantee/letters of credit would cause irrearable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively estab ished. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek case (supra) there was a certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee.

15. Our attention was invited to a number of decisions on this issue -- among them, to Larsen and Toubro Ltd. v. Maharashtra SEB, and Hindustan Steel Workers Construction Ltd. v. G.S. Atwal and Co. (Engineers) (P) Ltd., also to National Thermal Power Corpn. Ltd. v. Flowmore (P) Ltd., . The latest decision is in the case of State of Maharashtra v. National Construction Co., where this Court has summed up the positio by stating:

"The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order the bank giving the guarantee must honour the same and make payment ordinarily unless there is an allegation of fraud or the like. The courts will not interfere directly or indirectly to withhold payment, otherwise trust in commercinternal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle the disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause of action for the same is independent of enforcement of the guarantee."

The other recent decision is in Hindustan Steelworks Construction Ltd. v. Tarapore and Co., .

16. Clearly, therefore, the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be a fraud in connection with the bank guarantee".

7. In U.P. State Sugar Corporation case (supra), the arguments raised to support the continuance of the injunction were that the beneficiary had terminated the contract on the incorrect ground that time was of the essence of the contract, and that the hances of making any recovery if it succeeded in the Arbitration was illusory since the fortunes of the rival company now lay in the hands of BIFR. These arguments did not find favor with the Court which comprised their Lordships M.M. Punchi and Suata Manohar JJ. These passages were relied upon by a Bench of the Supreme Court comprising K.S. Paripoornan, K. Venkataswami and B.N. Kirpal, JJ. in the case Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Anr., . It is clear that the Apex Court has spoken in one voice and with unanimity on this aspect of the law.

8. S.C. Aggarwal and G.T. Nanavati, JJ, who decided the disputes raised in the Hindustan Steelworks Case (supra), after considering several previous decisions of the Apex Court including U.P. Cooperative Federation Ltd. V. Singh Consultants and Engineers (P) Ltd. (1988) SCC 174, General Electric Technical Services Co. Inc. V. Punj Sons (P) Ltd. , Larsen and Tubro Ltd. Vs. MSEB, and Hindustan Steel Works Construction Ltd. Vs. G.S. Atwal and Co. held a follows:

"We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irrerievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere. In this case fraud has not been pleaded and the relief for injunction was sought by the contractor/Respondent 1 on the ground that special equiies or the special circumstances of the case required it. The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach of the contract, that the contractor has a counter-claim against the appellant, that the disputes between the parties have been referred to the arbitrators and that no amount can be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors are not sufficient to make this case an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, therefore, not right in restrainin the appellant from enforcing the bank guarantees''.

8. Mr. Goswami, the learned counsel for the respondent submitted that the original contract value was Rs.1,68,12,400/-, out of which Rs.1,60,12,400/- i.e. 95% of the contract value already stood paid and all obligations of the respondent pursuant to claus e 15 (a), (b) and (c) of the contract have been fulfillled by the respondent and the bank guarantee in question was furnished to the respondent upon payment of 30% contract value to the petitioner. It is also submitted that the first three paragraphs of the bank guarantee are merely recitals and give a background of the transaction and what the Court is concerned is the operative portion of the bank guarantee which is paragraph 4.

9. The learned counsel for the respondent has placed reliance upon CIT, Hyderabad vs. M/s Motor and General Stores Pvt. Ltd., 1967 SCR 874, to contend that neither the recital in the preamble nor the resolution will control the language of the operative portion of the document or its legal effect. Reliance has also been placed upon Union of India vs. Sukumar Sen Gupta, 1990 (Supp) SCC 545, to contend that recital in a deed could not operate as an estoppel against the specific terms and conditions there f.

10. Reliance has also been placed on GE Technical Services Co. Inc. vs. Punj Sons (P) Ltd. and Anr., , wherein the Hon'ble Supreme Court held that failure on the part of the appellant to specify the remaining mobilization advance in the letter of encashment of guarantee is not material to the liability of the bank under the bank guarantee.

11. In my view what I am required to consider are terms of the guarantee and not the history relating to the bank guarantee or the other terms in the erstwhile recital. Consequently for the sake of convenience the entire guarantee as amended on 20th August, 2001 is set out as under:-

"Whereas M/s Vinitec Electronics Pvt. Ltd. H-33, Bali Nagar, New Delhi(hereinafter called the `Supplier') supplied their Vinitec on-line UPS Systems of various capacities pursuant to their Agreement dated 10th May, 2000 and P.O.4500011730 dated 30.05.00 (ereinafter called the `Company') for the final Purchaser President of India through the Director, National Crime Records Bureau, Ministry of Home Affairs, Government of India, New Delhi(hereinafter called the `Purchaser').

Whereas in terms of Clause No.15 of the Agreement for receiving the entire balance payments of Rs.49,99,335/- from the company, the supplier have agreed to provide a Performance Bank Guarantee equivalent to Rs.16,81,238.50 as Ten percent of the value of the Contract to be kept valid till the warranty period during which times the Supplier is required to perform their warranty obligations to the Purchaser; and .Whereas Pursuant to the application made by the Supplier, We Oriental Bank of Commerce, Kirti Nagar, New Delhi(hereinafter called the `Bank') have accordingly agreed to give the Supplier a Bank Guarantee for the aforesaid purpose.

Therefore, we, the Bank, hereby affirm that we are guarantors and responsible on behalf of the Supplier up to a total of Rs.16,81,238.50(Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and paise fifty only) and we undertake to pay any sum or sums within the limit of Rs.16,81,238.50(Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and paise fifty only) as aforesaid upon receipt of written demand from the Company within the validity of this Bank Guarantee.

We, the Bank, affirm that our liability under this Guarantee is limited to the total amount of Rs.16,81,238.50(Rupees Sixteen Lacs Eighty One Thousand Two Hundred Thirty Eight and paise fifty only) and it shall remain in full force up to and including 31st December, 2003 and shall be extended from time to time for such further period (s) as desired by the Purchaser, Company, and Supplier on whose behalf this Guarantee has been given."

12. The bank guarantee in question while reciting the history of the supply which was made by the petitioner and the payment required to be made eventually affirmed that the bank guarantee was payable upon the receipt of the written demand from the company within the validity of the bank guarantee. No other condition was specified for the invocation of the bank guarantee. There may have been some merit in the plea of the petitioner's counsel, Shri Rajiv Nayyar, provided the erstwhile bank guarantee of 0th August, 2001 which was subsequently amended on 20th August, 2001, was in place. The erstwhile bank guarantee did stipulate that invocation was dependent upon the requirement of the supplier to be in default for warranty obligations under the contrac. However, the amended bank guarantee which indisputably governed the present contractual relations between the parties specifically stuck out the requirement of supplier to be in default of warranty obligations so as to enable the invocation of the bank guarantee. This Court is not therefore required to look at the effect of the other recitals as the paragraph four which provides for invocation only for a demand during the validity of the bank guarantee. In my view, the bank guarantee was payable only upon the written demand from the respondent company during the validity of the bank guarantee. Such demand having been made admittedly, this Court cannot, contrary to the well settled principles relating to invocation of bank guarantees quoted above, per it collateral questions of breach of contract including non payment of the sum of Rs.49,99,355/- in full to be agitated. No case is thus made out for interference. Accordingly the petition under Section 9 of the Arbitration and Conciliation Act, is dismissed. Consequently the interim order dated 25th August, 2004 stands vacated with effect from 8th November, 2004

12. The OMP and the IA stand disposed of accordingly.