The Indian Sugar And General ... vs The State Bank Of Travancore And ...
2007 Latest Caselaw 1266 Del

JUDGMENT

G.S. Sistani, J.

1. By way of present suit, the plaintiff has prayed for a decree of declaration and permanent injunction against the defendants to declare the bank guarantee bearing No. BG 26/03 for a sum of Rs. 69,45,000/- dated 04.08.2003 inoperative primarily on the grounds that the bank guarantee did not come into operation and secondly that the invocation of the bank guarantee is bad in law.

2. The brief facts of the case are that on 22.10.2001, the plaintiff and defendant No. 2 had entered into an agreement for designing, procuring, manufacturing and supplying of machinery. In terms of Clause 15.1 of the said contract, the purchase (seller) had to design, procure, manufacture, supply of machinery and do the supervision of erection and commissioning of the machinery and equipment specified in Annexures 1 to 7 annexed to the said contract.

3. Defendant No. 2 (purchaser) had agreed to pay a price of Rs. 13.89 crores to the plaintiff in terms of Clause 3 of the said contract. In terms of Clause 15.1 of the said contract, 5% of the contract price was to be paid as an advance by defendant No. 2, on the plaintiff furnishing a bank guarantee within ten days from the date of contract. The plaintiff in terms of the aforesaid clause furnished the bank guarantee to defendant No. 2.

4. It is submitted by learned Counsel for the plaintiff that, although, the bank guarantee was given and extended from time to time but since the entire advance payment was never made by defendant No. 2 to the plaintiff and thus, the said bank guarantee never came into force nor became effective/operative.

5. At the first date of hearing i.e. 09.03.2004, this Court had granted an injunction restraining defendants from encashing the bank guarantee. The defendants were served in the suit. Defendant No. 2 filed a reply to the stay application, however, subsequently the counsel for defendant No. 2 stopped appearing, and a Court notice was issued to defendant No. 2 again. It has been recorded in the Order of the Court dated 15.09.2005 that the service was effected on defendant No. 2. Defendant No. 1 was proceeded ex parte on 28.1.2005 and defendant No. 2 was proceeded ex parte on 25.11.2005. The plaintiff has filed ex parte evidence in the form of affidavit.

6. Learned Counsel for the plaintiff has drawn the attention of the Court to Clause 3 of the Bank Guarantee, which is reproduced below:

3. This Guarantee shall come into force from the date of confirmation by the Seller of receipt of full advance payment from the Purchaser by the Seller....

7. The first submission of learned Counsel for the plaintiff is that this bank guarantee did not come into force, in view of the fact that as per Clause 3, the bank guarantee would come into force only from the date of confirmation by the seller i.e. the plaintiff of receipt of full advance payment by the purchaser which is defendant No. 2. Learned Counsel for the plaintiff further relies on a communication dated 22.08.2003 exhibit PW-1/4 wherein defendant No. 2 has clearly acknowledged the fact that the full advance payment has not been made to the plaintiff herein.

8. Learned Counsel for the plaintiff further submits that even otherwise the invocation of the bank guarantee is not proper and relies upon Clause 2 of the bank guarantee, which is reproduced below:

2...

(i) The communication for invoking this bank guarantee shall be signed by the Chairman and Managing Director of the purchaser and shall be countersigned by the Commissioner of Sugar, Maharashtra State.

(ii) The Letter of invocation shall be accompanied by a statement showing the value that is claimable under this Guarantee after reducing the advance already adjusted with particulars thereon.

(iii) The purchaser shall have given a notice of 15 days to the Seller duly acknowledged by the Seller prior to making such a demand on the Guarantor indicating the intention of the Purchaser to invoke the Bank Guarantee.

9. As per Clause 2 of the bank guarantee, the communication for invocation of the bank guarantee was to be signed by the Chairman and the Managing Director of the purchaser and countersigned by the Commissioner of Sugar, State of Maharashtra. According to counsel for the petitioner, this letter of invocation bears the signature of the Chairman as well as the Commissioner of Sugar, State of Maharashtra but not of the Managing Director of the purchaser. Further the letter of invocation was to be accompanied by a statement showing the value which is claimed under this guarantee after reducing the advance already adjusted with particulars thereon.

10. It is further submitted by learned Counsel for the plaintiff that PW-1 Sh. Alok Chander Kaura in his affidavit has clearly stated that neither the notification was signed by the Managing Director of defendant No. 2 nor any statement was given by defendant No. 2 in terms of the bank guarantee. Counsel for the plaintiff further submits that defendant No. 2 was also to give a 15 days notice to the seller which is the plaintiff herein prior to making a demand. The deponent has clearly stated that no such notice was given to the seller and even otherwise there was no breach on the part of the plaintiff.

11. To substantiate his arguments, learned Counsel for the plaintiff has relied upon various pronouncements of this Court viz. Hindustan Construction v. State of Bihar and Ors. . National Highways Authority of India v. Canaa Enterprises . Gujarat Optical Communications Ltd. v. Department of Telecommunications 2000 VII AD (Delhi) 734. EMCO Pressmaster Pvt. Ltd. v. Union of India . Lloyd Steel Industries Ltd. v. Indian Oil Corporation , Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya , wherein the principles governing invocation of bank guarantee and the exceptions thereof have been formulated, reiterated and applied. On an extensive perusal of these cases, the said principles are culled out as under.

(i) A bank guarantee is an independent and distinct contract between the bank and the beneficiary.

(ii) Generally, bank guarantees are unconditional whereby the bank undertakes to give money to the beneficiary on demand, without demur or protest.

(iii) In case of an unconditional bank guarantee, the nature of the obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary.

(iv) As bank guarantees are fundamental to trade and commerce, both at the domestic and international level, the general rule is that courts of law should be slow and cautious in granting injunction to restrain their realization. For instance, courts should refrain from probing into the disputes between the parties or from embarking on questions as to whether the beneficiary is trying to take undue enrichment, etc.

(v) However, there are four exceptions to the aforesaid general rule, that is, the court may grant injunction restraining the invocation of bank guarantee, if:

(a) There is a fraud of an egregious nature in connection with the bank guarantee which would vitiate the very foundation of such guarantee and the beneficiary seeks to take advantage of such fraud.

(b) The applicant, in the facts and circumstances of the case, clearly establishes a case of irretrievable injustice or irreparable damage.

(c) The applicant is able to establish exceptional or special equities of the kind which would outrage the conscience of the court.

(d) The bank guarantee is not invoked strictly in its terms and by the person empowered to invoke under the terms of the guarantee.

12. Relating the aforesaid principles governing the invocation of bank guarantees, I am of the view that the invocation of bank guarantee by the defendant in the present case is hit by the exception (d), i.e. "The bank guarantee is not invoked strictly in its terms and by the person empowered to invoke under the terms of the guarantee." The evidence filed by the plaintiff is not rebutted. A perusal of the bank guarantee shows that this bank guarantee was to come into force from the date of confirmation by the seller on receipt of the full advance payment from the purchaser. Based on the evidence of the plaintiff's witnesses as well as the communication dated 22.08.2003 of defendant No. 2, this Court is satisfied that the full advance payment was not made to the plaintiff. The witness of the plaintiff has further categorically stated in his affidavit that the letter of invocation did not bear the signatures of the Managing Director of the purchaser. Neither the letter of invocation was accompanied by the statement showing the value that is claimed under the guarantee nor a 15 days notice as stipulated in the terms of the bank guarantee was given to the plaintiff.

13. In view of the aforesaid, the plaintiff's plea for stay on invocation of bank guarantee is sustainable. Accordingly, the suit of the plaintiff is decreed in terms of Paragraph 27 (a) to (d) of the plaint. Leave is granted to the plaintiff under Order 2 Rule 2 of the Code of Civil Procedure.

14. Let a decree sheet be drawn up accordingly.