M/S. Infinity Projects vs Union Of India
2022 Latest Caselaw 5266 Tel

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                                                                                Dr.GRR,J
                                                                      WP No.16927 of 2021


              THE HON'BLE Dr. JUSTICE G. RADHA RANI

                    WRIT PETITION No.16927 OF 2021


ORDER:

1. This writ petition is filed by the petitioner to issue a writ of mandamus

declaring the action of 2nd respondent bank in refusing to honour the bank

guarantee bearing No.128220IGFIN0033 in favor of the petitioner, inspite of

the petitioner invoking the same on 12.07.2021 as illegal, arbitrary and violative

of circulars issued by the Reserve Bank of India, and consequently to direct the

respondent No.2 to remit the proceeds of the Bank Guarantee

No.128220IGFIN0033 in favor of the petitioner.

2. Heard Sri P.S.S.Kailash Nath, learned counsel for the petitioner and the

learned Senior Counsel Sri S. Ravi for respondent Nos.1 and 2.

3. The learned counsel for the petitioner submitted that the petitioner was a

registered Proprietorship firm engaged in the business of real estate and

construction activities. In the regular course of its business, the petitioner

entered into an agreement with one M/s. Kompass Infrastructures Private

Limited (Contractor) to construct a commercial complex on turn-key basis at

Hyderabad on 28.09.2020. As per the terms of the contract, the contractor had

to construct a commercial complex of 78,750 Sq.ft @ Rs.2000/- per Sft. which

would bring the contract value to Rs. 15,75,00,000/-. As per Clause 9 of the

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contract, the petitioner had to give a mobilization advance of 20% of the

contract value which comes to Rs.3,15,00,000/- to the contractor and to secure

the same, the contractor had to submit a mobilization advance bank guarantee to

the petitioner. In compliance of the agreed terms under the contract, the

petitioner paid mobilization advance of Rs. 3,15,00,000/- to the contractor from

time to time on various dates by way of bank transfers and the contractor issued

a bank guarantee with BG No. 128220IGFIN0033 with the issuing bank as the

2nd respondent. The 2nd respondent executed a bank guarantee with the issue

date as 29.09.2020 and expiry date as 28.09.2022 in favor of the petitioner, on

behalf of the contractor. The bank guarantee was unconditional, irrevocable and

without demur and with an undertaking to pay the beneficiary immediately on

demand. It was submitted that pursuant to the issuance of bank guarantee by

the 2nd respondent, the petitioner confirmed the same by sending a scanned copy

of the bank guarantee vide e-mail on 06.10.2020. The petitioner also got a copy

of the confirmation letter from the zonal office (Punjagutta) on 02.07.2021

confirming the validity of the bank guarantee. Pursuant to the commencement

of the work under the contract, the contractor failed to comply with the terms of

the contract dated 28.09.2020 which resulted in the breach of contract and

thereby the petitioner was constrained to invoke the bank guarantee. As per the

conditions of the bank guarantee dated 28.09.2020, the petitioner could invoke

the same by way of a notice by way of speed post or otherwise to the 2nd

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respondent bank and upon receipt of the notice by the bank, the bank undertook

to pay the same by way of RTGS or Demand Draft. The petitioner accordingly

sent notices of demand invoking the bank guarantee vide e-mails on 12.07.2021,

15.07.2021, 17.07.2021, 19.07.2021 and 20.07.2021. The notice sent by way of

speed post on 14.07.2021 and 16.07.2021 were delivered to the 2nd respondent.

Inspite of seven (07) demand notices, the 2nd respondent bank failed to honor

the bank guarantee. Aggrieved by the same, the petitioner filed the present writ

petition.

4. The learned counsel for the petitioner further submitted that bank

guarantee was a commitment made by the issuing bank to make payment to the

beneficiary on behalf of its client. Failure on the part of the bank to honor the

claim legitimately made on it projects a distorted picture of its functioning and

is antithetical to the banking system and the legitimacy of the bank guarantee.

In the instant case, the bank guarantee had been issued by the 2nd respondent

which was a scheduled bank and an instrumentality of the State, and hence

failure on the part of the 2nd respondent to honor the bank guarantee inspite of

the petitioner having a valid claim invoking the bank guarantee within the time

period and further holding the original deed of guarantee executed by the 2nd

respondent bank was against the nature of the bank guarantee. The Master

Circular - Guarantees and Co-acceptances issued by the Reserve Bank of India

on 01.07.2009 would state that bank guarantee should be honored without any

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delay or demur. By failing to honor the bank guarantee invoked by the

petitioner, the 2nd respondent failed to comply with the bank guarantee dated

29.09.2020 and also the Master Circular of the Reserve Bank of India which

was binding on the 2nd respondent bank. On account of the delay, the 2nd

respondent bank was providing the contractor a window of opportunity to take

steps against the encashment of bank guarantee and prayed to allow the writ

petition.

5. The learned senior counsel for the respondents submitted that M/s.

Kompass Infrastructures Private Limited represented by its directors Sri

Kattamidi Santosh Reddy, Somavarapu Surender Reddy, Gopal Kondakal and

Srinivas Nekkanti (Borrowers) were enjoying the credit facilities from

erstwhile Andhra Bank, Madhapur Branch which was amalgamated with Union

Bank of India w.e.f. 01.04.2020. At the request of the said borrower, the

respondent bank sanctioned the credit facilities, a bank guarantee limit of

Rs.15,00,00,000/- and secured overdraft limit of Rs. 3,26,00,000/-, in total

Rs. 18,26,00,000/- vide sanction letter dated 05.09.2020 subject to the terms and

conditions mentioned there in. The borrower represented by its Managing

Director, Mr. K. Santosh Reddy informed the respondent bank that they had

been awarded the contract for "Residential Housing" and as per the terms of the

contract dated 28.09.2020 between the petitioner and the borrower, mobilization

advance up to 20% of the original contract value of Rs. 15,75,00,000/- was

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payable to the contractor against bank guarantees and the borrower was required

to submit the bank guarantee towards the mobilization advance of 20%,

amounting to Rs. 3,15,00,000/- of the contract price against submitting of the

bank guarantee for 100% of the mobilization advance. At the request of the

borrower, the respondent bank issued a bank guarantee bearing

No.128220IGFIN0033 dated 29.09.2020 for a period of one year for an amount

of Rs.3,15,00,000/- in favor of the petitioner. The petitioner vide letter dated

06.10.2020 released / returned the above said bank guarantee to the respondent

bank and on the basis of the said letter and receipt of the original bank

guarantee, the respondent bank reversed/closed the bank guarantee on

06.10.2020. To the shock and surprise of the respondent bank, it had received

an e-mail dated 12.07.2021 from the petitioner invoking the bank guarantee and

demand for payment of entire bank guarantee amount.

6. The learned senior counsel submitted that the respondent bank also issued

some other bank guarantees on behalf of the borrower and while the matter

stood thus, one M/s. OFB Tech. Pvt. Ltd., vide e-mail dated 25.06.2021

requested the respondent to confirm the issuance of bank guarantee No.

12821IGL0003821 dated 24.08.2021 for Rs. 2,00,00,000/- with expiry date

23.06.2022. The respondent bank sent reply stating that the said bank guarantee

number did not exist and it was not issued by their branch. On 01.07.2021, the

branch had again received e-mail from M/s. OFB Tech. Pvt. Ltd., to confirm the

Dr.GRR,J WP No.16927 of 2021

bank guarantee referred above and the respondent reiterated that the said bank

guarantee was not issued by their branch. The said M/s. OFB Tech. Pvt. Ltd.,

also filed a writ petition before the High Court at New Delhi. In the light of the

above developments, suspecting four play, the respondent bank lodged a

complaint dated 08.07.2021 with the Station House Officer, Madhapur,

Hyderabad against the said borrower and its directors. The Station House

Officer, Madhapur registered FIR No. 791 of 2021 under Sections 406, 420,

465, 467, 468 and 471 read with Section 120 of IPC and took up investigation.

During the course of investigation, the said case was transferred to CCS,

Economic Offences Wing , Cyberabad and the investigation was pending and

the respondent bank also lodged supplementary complaint dated 07.09.2021 and

the same was acknowledged by CCS-EOW on 08.09.2021. The respondent

bank suspected that there might be nexus in between the borrower and the

beneficiary to de-fraud the bank. The bank requested CCS-EOW to investigate

into the matter whether the contracts which were awarded by the said

beneficiaries to the borrower were genuine business constructions and whether

the said beneficiaries had parted money to the borrower by way of mobilization

advance, etc., and whether the borrower had received the material from the

beneficiaries who were supposed to supply the material to the borrower. The

respondent bank was also having an apprehension whether the above said

beneficiaries were holding the genuine bank guarantee issued by the bank or

Dr.GRR,J WP No.16927 of 2021

fabricated bank guarantees and therefore requested CCS-EOW to call for the

original bank guarantees from the beneficiaries and refer the matter for forensic

lab to decide the genuineness of the said bank guarantees. The respondents

came to know that CCS-EOW issued notices to the concerned parties under

Section 91/160 Cr.P.C. including the beneficiaries referred in the complaint and

a notice dated 10.08.2021 was issued to the petitioner also to appear before the

investigating officer along with the original bank guarantees which were listed

in the said notice and relevant documents and witnesses to examine and finalize

the case at the earliest.

7. The learned counsel further submitted that the respondent bank strongly

suspected that the alleged contract of "Residential Housing" dated 28.09.2020

between the petitioner and the borrower was non-existing and no real work had

been allotted by the petitioner to the borrower. The respondent bank had been

induced by the petitioner and the borrower by fraud and misrepresentation to

issue the bank guarantee. At the first instance, the non-existing contract and the

very bank guarantee issued by the respondent bank was a voidable agreement

under Section 17, 18 and 19 of the Indian Contract Act and need not be honored

by the bank. He further contended that the above transaction would require

deep investigation by the investigating agency to find the roots of the fraud

including verifying the genuineness of the work/contract, materials supplied by

the petitioner to the borrower and whether the borrower and the beneficiary had

Dr.GRR,J WP No.16927 of 2021

obtained the bank guarantees with the sole purpose of defaulting when the bank

guarantees were invoked and whether the borrower and beneficiary/petitioner

had forged or fabricated and returned the bank guarantees and were trying to

obtain unlawful gain by invoking the returned bank guarantees and the

genuineness of the bank guarantees with the petitioner. As the matter was under

investigation by the competent authorities, any order passed in favor of the

petitioner during the investigation would have far reaching consequences on the

investigation and the same would also cause irretrievable injustice to the

respondent bank and prayed to dismiss the petition.

8. As per the Master Circular issued by the Reserve Bank of India on

09.11.2021 pertaining to payment of invoked guarantees, it was stated that:

"Where guarantees are invoked, payment should be made to the beneficiaries without delay and demur. An appropriate procedure for ensuring such immediate honoring of guarantees should be laid down so that there is no delay on the pretext that legal advice of approval of higher authorities is being obtained".

"Delays on the part of banks in honoring the guarantees when invoked tend to erode the value of the bank guarantees, the sanctity of the scheme of guarantees and image of banks. It also provides an opportunity to parties to take recourse to courts and obtain injunction orders. In the case of guarantees in favor of government departments, this not only delays the revenue collection efforts but also gives an erroneous impression that banks are actively in collusion with the parties, which tarnishes the image of the banking system".

"There should be an effective system to ensure that the persons on whose behalf the guarantees are issued will be in a position to perform their obligations in the case of performance guarantees and honor their commitments out of their own resources, as and when needed, in the case of financial guarantees".

Dr.GRR,J WP No.16927 of 2021

9. The learned counsel for the petitioner also relied upon several judgments

of the Hon'ble Apex Court. In this regard, he relied upon the judgment of the

Hon'ble Apex Court in Standard Chartered Bank v. Heavy Engineering

Corporation Limited and another1, wherein it was held that:

"As per the precedents laid down by this Court, the question of law is no more res integra and is well settled that the bank guarantee is an independent contract between the bank and beneficiary and bank is always obliged to honor its guarantee as long as it is an unconditional and irrevocable one. At the same time, the dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence and only two exceptions to the rule have been carved out. The first is when there is a fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The second exception to the general rule of non-intervention is such when there is an "irretrievable injury" or "irretrievable injustice" that would occur to the bank".

10. He also relied upon the judgment of the Hon'ble Apex Court in Ansal

Engineering Projects Limited v. Tehri Hydro Development Corporation

Limited2, wherein a three-judge bench of the Hon'ble Apex Court held that:

"It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prime facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the Bank, had arisen in performance of the contract or execution of the Works undertaken in furtherance thereof. The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor".

2020 (13) SCC 574

1996 5 SCC 450

Dr.GRR,J WP No.16927 of 2021

11. He also relied upon the judgment of the Hon'ble Apex Court in

Hindustan Corporation Limited v. State of Bihar3, wherein a two-judge

bench of the Hon'ble Apex Court held that:

"What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished. The terms of the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the Bank Guarantee; or else, the invocation itself would be bad."

.

12. He also relied upon the judgment of the Hon'ble Apex Court in SBI v.

Mula Sahakari Sakhar Karkhana Limited4, wherein a two-judge bench of

the Hon'ble Apex Court held that:

"It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction". "If a construction, as was suggested by Mr. Naphade, is to be accepted, it would also be open to a banker to put forward a case that absolute and unequivocal bank guarantee should be read as a conditional one having regard to circumstances attending thereto. It is, to our mind, impermissible in law."

13. The settled position in law that emerges from the precedents of this Court

is that the bank guarantee is an independent contract between bank and the

beneficiary and the bank is always obliged to honor its guarantee as long as it is

an unconditional and irrevocable one. The dispute between the beneficiary and

(1999) 8 SCC 436

(2006) 6 SCC 293

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the party at whose instance the bank has given the guarantee is immaterial and

is of no consequence. The exceptions to this rule is when there is a clear case of

fraud, irretrievable injustice or special equities. The Court ordinarily should not

interfere with the invocation or encashment of the bank guarantee so long as the

invocation is in terms of the bank guarantee.

14. He also relied upon the judgment of the Hon'ble Apex Court in Bank of

India v. Nangia Constructions (I) Pvt. Ltd., and others5 wherein it was held

that:

"It is unfortunate that a nationalized bank is finding excuses for refusing to make the payment on totally untenable and frivolous grounds. The Division Bench was fully justified in making observations regarding the conduct of the nationalized bank. The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalized bank. In the present day world, the national and international commercial transactions largely depend on bank guarantees. In case the banks are permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions will come to a grinding halt. This principle has been reiterated in large number of cases by this court. We do not deem it appropriate to burden this judgment by reiterating all those judgments".

15. He also relied upon the judgment of the Hon'ble Apex Court in Uttar

Pradesh Federation Ltd., v. Singh Consultants and Engineering (P) Ltd.6,

wherein while explaining the salient features of letter of credit, it was held that:

"The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods

AIR 2008 SC 2906

(1998) 1 SCC 174

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prior to their delivery. The bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) receives payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. The Courts, however, carved out an exception to this rule of absolute independence. The Courts held that if there has been "fraud in the transaction" the bank could dishonour beneficiary's demand for payment. The Courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else."

16. The learned senior counsel for the respondents also relied upon the same

judgment on the ground that 'fraud unravels all', wherein it was held that:

"The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of the any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment". "To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases, of which the leading or 'landmark' case is Sztejn v. Henry Schroder Banking Corp., [ 1941] 3 1 NYS 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] 1 All E.R. 979 (1978) QB 159 though this was actually a case about a performance bond under which a bank assumes obligation to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application to the maxim ex trupi cause non oritur actio or if plain English is to be preferred, 'fraud unravels all', the courts will not allow their process to be used by a dishonest person to carry out a fraud."

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17. The learned senior counsel for the respondents also relied upon the

judgment of the High Court of Calcutta in AIMS India Private Ltd., and

others v. Indian Bank and others7 on the ground that a writ is not

maintainable in the matters of Bank Guarantees as there is no public law

element involved in it and it arises out of a contract, wherein it was held that:

"The claim of the petitioner is essentially a money claim. The bank guarantee is a contract between the bankers and the beneficiary. Although the same had been furnished at the instance of the petitioner, it cannot be said that the agreement was a tripartite one".

"This bench was also recently in A.C. Roy and Ors. v. Union of India and Ors. reported in MANU/WB/0035/1995: AIR1995Cal246 relying upon a large number of Supreme Court decisions, decisions of this court as also Patna High Court, enter alia, held that a dispute under a bank guarantee is a private dispute and the same does not involve any public element and, thus no writ is maintainable".

"It was held- "Right to enforce bank guarantee arises out of a contract qua-contract".

"There is no public law element involved in it".

"Thus a writ will not issue in the matter of enforcement of bank guarantee unless there exists a public law element."

18. The learned senior counsel further submitted that the Respondent Bank

was a Government of India Undertaking and is honouring various bank

guarantees issued from time to time if the said bank guarantees were in order.

In the present case, as fraud was involved and the matter was under

investigation by the CCS-EOW, Cyberabad and unless the investigation was

completed, the respondent bank was not in a position to take a decision on the

subject matter of the invocation of the bank guarantee, as the same would cause

1997 (4) SCC 237

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irretrievable injustice to the Respondent Bank and prayed to dismiss the writ

petition.

19. As seen from the facts of this case, the Bank issued bank guarantee

bearing No. 128220IGFIN0033 dated 29.09.2020 for a period of one year for an

amount of Rs. 3,15,00,000/- in favor of the petitioner. The respondent bank

alleged that the petitioner vide letter dated 06.10.2020 released / returned the

said bank guarantee to the respondent bank and on the basis of the said letter

and receipt of the bank guarantee, the respondent bank reversed/ closed the bank

guarantee on 06.10.2020; to its shock and surprise, the respondent bank

received an e-mail dated 12.07.2021 from the petitioner invoking the bank

guarantee demanding for payment of the entire bank guarantee amount. The

contention of the respondent bank was that bank filed a complaint prior to

invocation of the alleged bank guarantee, the original bank guarantee had been

returned by the beneficiary and they had already reversed / closed the bank

guarantee in their books and there was no existing liability in their books. Their

contention was that there was no proof that the bank guarantee held by the

petitioner was original and it was possible that he could have been defrauded by

the borrower who might have handed over the fabricated bank guarantee to the

petitioner and returned the original bank guarantee to the bank along with

covering letter of the petitioner; as original and covering letter (Written

Instructions) had been received by the bank from the beneficiary, the bank had

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closed the bank guarantee. The bank was also suspecting that the alleged

contracts between the borrower and the beneficiaries (Petitioner) were non-

existent and no real work had been allotted by the petitioner to the borrower, the

bank had been induced by the petitioner and the borrower by fraud and

misrepresentation to issue the bank guarantee at the first instance to a non-

existing contract and it could be an alternate financial arrangement. The

contention of the bank was that the very bank guarantee issued by the

respondent bank was a voidable agreement under Section 17, 18 and 19 of the

Indian Contract Act and in view of the same, the bank had issued a

supplementary complaint dated 07.09.2021 requesting the authorities to

investigate into the said matter and to determine who was holding the original

bank guarantee and whether or not the contracts entered in between the

petitioner and the borrower were genuine or not and any material had been

supplied for the alleged advancement / mobilization of bank guarantees

executed by the parties.

20. The learned senior counsel for the respondent bank further contended that

the writ was bad for non joinder of necessary parties that is the borrower with

whom the petitioner had entered into the alleged agreement.

21. As the matter is under investigation and as it was alleged that the bank

received a letter dated 06.06.2020 from the petitioner and on the basis of the

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said letter and on receipt of the alleged original bank guarantee, the bank

released / returned the said bank guarantee on 06.10.2020 and the petitioner

vide e-mail dated 12.07.2021 invoked the bank guarantee No.

128220IGFIN0033 for payment of entire bank guarantee amount, it was

necessary for the investigating agency to determine as to which was the original

bank guarantee. When there were disputed questions of facts which shall be

investigated and as the respondent was suspecting that the contract between the

borrower and the beneficiaries was non-existent and lodged a supplementary

complaint dated 07.09.2021 and the petitioner in contra was suspecting that he

was cheated by M/s. Kompass Infrastructure Private Ltd., in coalition with the

bank officials, no direction can be given to the bank authorities to remit the

proceeds of bank guarantee No.128220IGFIN0033 in favor of the petitioner.

22. In the result, the writ petition is dismissed. No order as to costs.

Miscellaneous Petitions pending, if any, shall stand closed.

_____________________ Dr. G. RADHA RANI, J

Date: 26.10.2022 NSK