PETITIONER:
DWARIKESH SUGAR INDUSTRIES LTD.
Vs.
RESPONDENT:
PREM HEAVY ENGINEEING WORK
DATE OF JUDGMENT: 07/05/1997
BENCH:
K.S. PARIPOORNAN, K. VENKATASWAMI, B.N. KIRPAL
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
THE 7TH DAY OF MAY, 1997
Present:
Hon'ble Mr.Justice K.S.Paripoornan
Hon'ble Mr Justice K.Venkataswami
Hon'ble Mr Justice B.N.Kirpal
Harish N.Salve, Sr.Adv., Krishan Mahajan, P.H.Parekh, Ms. Indu Varma, Advs. with him for the appellant Sudhir Chandra, Sr.Adv., Manmohan, Sanjay Raghuvanshi, R. Sasiprabhu, Advs. with him for the Respondents. J U D G M E N T
The following Judgment of the Court was delivered: KIRPAL. J.
Special leave granted.
Having been thrawted by orders of the court below in it attempt to get encashment of the bank guarantees, issued by the State Bank of India, Meerut Cantt. Branch (respondent no.2) respondent no.l has led to the filing of this appeal by aggrieved beneficiaries.
The appellant and respondent no.1 had entered into an agreement on 27th July, 1994 whereby respondent no.1 was to supply boiling house equipment the cost of which was Rs. 5.23 crores. The supply of equipment and material was to start from 15 September, 1994 and the same was to be completed by 10th August, 1995, as per the schedule of the supply agreed to by the parties.
According to one of the clauses of the aforesaid agreement respondent no.l had agreed to furnish bank guarantees in favour of the appellant. Out of the above six, only four bank guarantees were furnished including bank guarantee no. 40/51 dated 1st December, 1994 for a sum of Rs.26,15,000/- and bank guarantee no.40/47 dated 24th November, 1994 for a sum of Rs.35 lacs. These are the bank guarantees with which we are concerned in the present case. Bank guarantee no.40/51 was issued to ensure timely delivery of equipment and supply by respondent no. 1. The relevant clauses of the said bank guarantee no.40/51 are as follows: "In consideration of the premises
the Guarantor hereby
unconditionally and irrevocably
undertake to pay to the Purchaser
on their first written demand and
without demur such a sum not
exceeding Rs.26,15,000/- (Twenty
six lacs fifteen thousand only) as
the purchasers may demand
representing 5% (five per cent) of
the contract price, and if the
guarantor fails to pay the sum on
demand the guarantor shall also pay
on the sum demanded interest at the
bank lending rates then prevailing
reckoned from the date of demand
till the date of payment.
2.The guarantor shall pay to the
purchaser on demand the sum under
clause 1 above without demur and
requiring the purchasers to invoke
any legal remedy that may be
available to them, it being
understood and agreed firstly that
the purchasers shall be the sole
judge of and as to whether the
sellers have committed breach(es)
of any of the terms and conditions
of the said agreement and secondly
that the right of the purchasers to
recover from the guarantor any
amount due to the purchasers shall
not be affected or suspended by
reasons of the fact that any
dispute or disputes have been
raised by the sellers with regard
to their Lability or that
proceedings are pending before any
Tribunal arbitrator(s) or Court
with regard to or in connection
therewith, and thirdly that the
guarantor shall immediately pay the
aforesaid guaranteed amount on
demand and it shall not be open to
the guarantor to know the reasons
of or to investigate or to go into
the merit of the demand or to
question or to challenge the demand
or to know any fact affecting the
demand, and lastly that it shall
not be open to the guarantor to
require the proof of the liability
of the seller to pay the amount
before paying the aforesaid
guaranteed amount to the purchasers
The other bank guarantee no.40/47 was originally issued for a sum of Rs.51,70,000/- for securing advance payment. The agreement contemplated the liability being gradually reduced and on 28th August, 1995 this bank guarantee was reduced for a diminished amount of Rs.33 lacs. The relevant clause of this bank guarantee is as follows: "In consideration of the premises
the guarantor hereby
unconditionally and irrevocably
undertakes to pay to the purchaser
on their first written demand and
without demur such a sum not
exceeding Rs.51,70,000/- (Rupees
fifty one lacs seventy thousand
only) as the purchasers may demand
representing 10% (Ten per cent) of
the contract price, and if the
guarantor fails to pay the sum on
demand the guarantor shall also pay
on the sum demanded interest at the
bank lending rates then prevailing
reckoned from the date of demand
till the date of payment. Provided
that liability of the guarantor
hereunder shall reduce to the
extent of the advance adjusted
under clause 13 of the said
agreement.
The guarantor shall pay to the
purchaser on demand the sum under
clause 1 above without demur and
requiring the purchasers to invoke
any legal remedy that may be
available to the them, it being
understood and agreed firstly that
the purchaser shall be the sole
judge of and as to whether the
sellers have committed any
breach(es) of any of the terms and
conditions of the said agreement
and secondly that the right of the
purchasers to recover from the
guarantor any amount due to the
purchasers shall not be affected or
suspended by reasons of the fact
that any dispute or disputes have
been raised by the seller with
regard to their Liability or that
proceedings are pending before any
Tribunal, arbitrator(s) or court
with regard thereto or in
connection therewith, and thirdly
that the guarantor shall
immediately pay the aforesaid
guaranteed amount on demand and it
shall not be open to the guarantor
to know the reasons of or to the
investigate or to go into the
merits of the demand or to question
or to challenge the demand or to
know any facts affecting the
demand, and lastly that it shall
not be open to the guarantor to
require the proof of the liability
of the seller to pay the amount
before paying the aforesaid
guaranteed amount to the
purchasers".
According to the appellant respondent no.l did not supply the equipment at site, within the time allowed, nor replaced any of the defective items which, according to the appellant, had resulted in the ate commencement of the trial crushing in the mill. It is further the case of the appellant that it had to make direct purchases of many parts from other sources as the respondent no.1 had failed to supply the equipment Ultimately by letter dated 21st November, 1995 written to respondent no.2, the appellant invoked the bank guarantee. The material portion of this letter was as follows:
"We wish to inform you that M/S
Prem Heavy Engineering Works (P)
Ltd. Ram Mill, Delhi Road, Meerut
have failed to fulfill the
condition of our agreement dated
27.7.1994 in so far as timely
supply of the machinery and
equipment under order with them .
"As per clause 14 of the supply
agreement M/s Prem - Heavy
Engineering Works (P) Ltd., Meerut
has failed to deliver the
equipments and its commissioning
within the scheduled time frame.
Now we hereby invoke the aforesaid
guarantee for Rs.26,l5,000/-(Rupees
twenty six lacs fifteen thousand
only) 5% of the contract value and
enclose here with the original
guarantee for your record. Kindly
hand over the Demand Draft in our
favour payable at Najibabad, Distt.
Bijnor, Uttar Pradesh towards the
invocation amount."
As on 28th November 1995 respondent no.1 had already obtained and ex parte injunction restraining the encashment of bank guaranteee, no payment was made to the appellant by the bank.
Respondent no.1 then filed another injunction application dated 12th January, 1996 with regard to the second bank guarantee dated 24th November, 1994 which was for a sum of Rs.33 lacs. It obtained an Ex parte injunction in respect thereto on the same day. Being ignorant of this the appellant wrote a letter dated 16th January, 1996 to the respondent bank invokeing the said bank guarantee no. 40/47. In the said letter it was stated that respondent no.1 had failed to deliver the equipment as per the terms of the agreement and that the appellant had bought equipment from various markets due to which the advance amount which had been paid to respondent no.1 in respect of which this bank guarantee had been issued, remained unadjusted. The bank was accordingly required to pay the said amount of Rs.33 lacs.
According to the appellant it is only after 16th January, 1996 that it became aware of the filing of the aforesaid suit and the injunction application and it entered appearance in Court on 18th January, 1996 even though no notice had been served on it. As per the appellant, there was delay in the disposal of the injunction application, consequently it approached the High Court for appropriate directions and the Allahabad High Court vide order dated 10th may, 1996 directed the civil Judge, Meerut Cantt, to dispose of the suit within the time fixed by it .
By a detailed order dated 20th August 1996, the Second Civil Judge (Sr. Division) Meerut vacated the ex parte injunctions which had been granted and dismissed the injunction applications. In arriving at this conclusion it observed that respondent no.1 had not stated that the work had been completed and nor was there any allegation of cheating or fraud contained in the plaint which had been filed. The trial court referred to a number of decisions of this Court and came to the conclusion that there was no basis, in law, for the grant of any interim prohibitory order.
The appellant on 22th August, 1996 again approached the respondent bank for the encashment of the bank guarantees, but without success.
Respondent no.1 then filed revision petition on. 257 of 1996 on 10th September. 1996 before the Allahabad High Court challenging the order dated 20th August, 1996 of the trial court. single judge of the Allahabad High Court took up the revision petition and disposed it of on the same day and after setting aside the order dated 20th August, 1996 it remanded the matter back to the trial court for a fresh decision but, at the same time, directed that till the disposal of injunction application the bank guarantees in question shall not be invoked or encashed. The trial court was directed to hear the parties within fifteen days of the receipt of the order and to dispose of the injunction application within fifteen days thereafter. Needless to date, due to dilatory tactics adopted by respondent no1 which is evident from the documents available on the record of this
"As per clause 14 of the supply
agreement M/s Prem - Heavy
Engineering Works (P) Ltd., Meerut
has failed to deliver the
equipments and its commissioning
within the scheduledtime frame.
Now we hereby invoke the aforesaid
guarantee for Rs.26,l5,000/-(Rupees
twenty six lacs fifteen thousand
only) 5% of the contract value and
enclose here with the original
guarantee for your record. Kindly
hand over the Demand Draft in our
favour payable at Najibabad, Distt.
Bijnor, Uttar Pradesh towards the
invocation amount."
As on 28th November 1995 respondent no.1 had already obtained and ex parte injunction restraining the encashment of bank guarantee, no payment was made to the appellant by the bank.
Respondent no.1 then filed another injunction application dated 12th January, 1996 with regard to the second bank guarantee dated 24th November, 1994 which was for a sum of Rs.33 lacs. It obtained an Ex parte injunction in respect thereto on the same day. Being ignorant of this the appellant wrote a letter dated 16th January, 1996 to the respondent bank invoking the said bank guarantee no. 40/47. In the said letter it was stated that respondent no.1 had failed to deliver the equipment as per the terms of the agreement and that the appellant had bought equipment from various markets due to which the advance amount which had been paid to respondent no.1 in respect of which this bank guarantee had been issued, remained unadjusted. The bank was accordingly required to pay the said amount of Rs.33 lacs.
According to the appellant it is only after 16th January, 1996 that it became aware of the filing of the aforesaid suit and the injunction application and it entered appearance in Court on 18th January, 1996 even though no notice had been served on it. As per the appellant, there was delay in the disposal of the injunction application, consequently it approached the High Court for appropriate directions and the Allahabad High Cour tvide order dated 10th may, 1996 directed the civil Judge, Meerut Cantt, to dispose of the suit within the time fixed by it .
By a detailed order dated 20th August 1996, the Second Civil Judge (Sr. Division) Meerut vacated the ex parte injunctions which had been granted and dismissed the injunction applications. In arriving at this conclusion it observed that respondnent no.1 had not stated that the work had been completed and nor was there any allicgation of cheating or fraud contained in the palaint which had been filed. The rtial court referred to a number of decisions of this Court and came to the conclusion that there was no basis, in law, for the grant of any interim prohibitory order.
The appellant on 22th August, 1996 again approached the respondent bank for the encashment of the bank guarantees, but without success.
Respondent no.1 then filed revision petition on. 257 of 1996 on 10th September. 1996 before the Allahabad High Court challenging the order dated 20th August, 1996 of kthe tial court. single judge of the Allahabad High Cout took up the revision petition and disposed it of on the same day and after setting aside the order dated 20th August, 1996 it remanded thre matter back to the trial court for a fresh decision but, at the same time, directed that till the disposal of injunction application the bank guarantees in question shall not be invoked or cencashed. The trial court was directec to hear the prties within fifteen days of the receipt of the order and to dispose of the injunction application lwithin fifteen days thereafter. Needless to dtate, due to rdilatory tactics adopted by fespondent no1 which is evident from the documents available on the record of this case, the said injunction application have not been disposed of the till with the result that the injunction granted by the single judge of the High court vide order dated 10th September, 1996 still continues. While allowing the civil revision the single judge in his judgment did not think it necessary to refer to the judicial diecisions which were cited before him. The court observed that reference to the same was not becessary because the trial court, who had observed that the plaint did no contain any allegation with regard to fraud, had not noticed that allegation of fraud was cantained in the injuction application. The learned judge noticed that the liability of bank under the guarantee was absolute and that it was not supposed to question the authority of the benificiary to encash the bank guarantee but observed that the same " could not be the guideline for allowing the defendant to encash the bank guarantee unless there was a finding that the defendant was having undue enrichment thereby".
The aforesaid decision of the High Court has been assailed by Sh. Harish N. Salve, learned senior counsel for the appellant, who has contended that the High Court fell in serious error in ignoring and not in even feferrin g to the decisions of this Court where the principles regarding the grant of injunction in matters relating to encashment of bank guarantees have been clearly spell out. Had this been done, the learned counsel submits, the High Court could not, in law, have continued with the temporary injunction. Numerous decisions this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the Courts must apply which considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think iot necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken Vs. Toubro Ltd. Vs. Maharashtra State Electricty Board and ors. [(1995) 6 SCC 68], Hindustan Steel Works Construction Ltd. Vs. G.S. Atwal & co. (Engineers) Pvt. Ltd. [(1995) 6SCC 76] and U.P. State Sugar Corporation Vs. Sumac International Ltd. [(1997)1 SCC 568]. The gemeral principle which has been laid down by this court has been summarised in the case of U.P. state sugar Corporation's case as follows: "The law relating to invocation of
such bank guarantees in by now well
ssettled. When in the course of
commercial dealings an
unconditional bank guarantee is
given or accepted, the beneficial
is entitled to realize suchj a bank
guarantee in terms thereof
ireespective of any pending
disputes. The bank giving such a
guarantee is bound to honlur, ir
as per its terms irrespective of
any dispute raised by its costomer.
The very purpose of giving such a
bank a bank guarantee would
othrwise be defeated. The courts
should, therefore, be slow in
granting an injunction to restrian
the realization of such a bank
guarantee. The courts have carvede
out only two exceptions. A fraud
in connection with such a bank
guarantee would vitiate the very
foundation with such a bank
guarantee would vitiate the very
foundation of such a bank
guarantee. Hence if thre is such a
fraud of which the beneficiary
seeks to take the advantage, he
can be restrained from doing so.
The second exception relates to
case 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 contemplanted 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 of the
guarantee and the adverse effect
of such an injunction on
commercial dealings in the
country."
Dealing with the queation of franud it has been held that fraud has to be an established fraud. The following observation of sir John Donaldson, M.R. in Bolivinter oil SA V. Chase Manhattan Bank (1984) 1 All ER 351, are apposite:
"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
threafter 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 wufficient that rests
on the ujncorroborated statement of
the customer, for irreparable
damage can be done to a bank's
credit in the relatively brief time
which must clapse between the
granting of such an injunction
and an application by the bank to
have it charged."
(emphasis supplied)
The aforesaid passage was approved and followed by this court in U.P. coooperative Federation Ltd. Vs. Singh consultants and Engineers (P) Ltd. [(1988) 1 SCC 174]. The secondly exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of due Court that there would be no possbility whatsoever of the recoverv of the amount from the beneficiaIy. by way of restitution.
In the instant case, as has been already noticed there were two types of bank guarantees which were issued. Bank Guarantee No. 40/51 for Rs.26,15,000/- was issued to issues timely y performance of the agreement by respondent No. 1. the relevant terms of this guarantee firstly makes it clear that the that has unconditional and irrevocably undertaken to pay to pay to the appellant, on written demand and without demand, the amount demanded it. Secondly, Clause II of the said guarantee clarifies that the payment shall be made without demand and on the undertaking that the appellant is to be sole judge whether the seller has committed any breach. Consequently the right of the appellant to recover the guaranteed amount is not to be effected or suspended by reason of any dispute which can be raised or pending before the courts tribunals or arbitrator Thirdly the guarantor had no right to know the reasons of or to investigate the merits of the demand or to question or to challenge the demand or to know any fact affecting the demand and lastly it was not open to the bank to require the proof of the liability of respondent No.1 to pay the amount before paying the aforesaid guaranteed amount to the appellant.
The letter of invocation issued by the appellant demanding the payment ot Rs.26,15000/- was in accordance with the terms of bank guarantee No. 40/51 and the bank was, threfore, under an obligation to honour its undertaking and to make the payment . It, however, chose not to fulfil its obligation. If the bank could not in law avoid the payment, as the demand had bneen made in terms of the banjk guarantee, as has been done in the present case, then the court ought not to have issued an injunction which had the effect of restraining the bank from fulfilling its contractual obligation in terms of the bank guarantee. An injunction of the court ought not to be an instrument which is used in nullifying the terms of a contrant, agreement or undertaking which is used in nullifying the terms of contract, agreement or undertaking which is lawfully enforceable. In its aforesaid letter dated 24th November, 1995 respondent no.1 had clearly admitted that entire supply had not been made. In view of this also the High court was not justified in granting an injunction.
Bank guarantee No.40/97 dated 24th November, 1994, which had been issued to secure the advance of Rs. 129.24 lacs which had been given by the appellant, was also similar in terms to the earlier bank guarantee No. 40/51. The main contract between the parties contemplated that the amount of bank guarantee shall stand reduced on adjustment being made. It is contended by Shri Sudhier Chandra, learned counsel for the respondents that the full amount was ginen adjusted and no amount remained outstanting and, therefore, the bank guarantee No.40/47 could no longer be regarded as alive . In support of this contention, the learned counsel relied on the observations of this Court in Larson & Turbo Ltd. Vs. Maharashtrata state Electricity Board and ors. (1995) 6 SCC 68 where an injunction was granted wheree the bank guarantee which was issued was to be kept alive till the successful completion of trial operations. our opinion, this decision can be of no assistance to respondent no. 1 because in Larson & Turbo~s case (supra) this Court found that the guarantee which had been given by the bank was to ensure only till the successful completion of the trail operations and the taking over of the plant. The documents revealed that the contractual terms in this regard has been complied with and after successful completion of the trial operation, the plant had admittedly been taken over. In view of this Court that the terms of the bank gurantee did not permit its invocation once the trial operation have been successfully completed.
In the present case clause 3 of bank guarantee No. 40/47 relating to adjustment of the advance stipulated as follows:
"The guarantee shall come into
force from the date thereof and
shall remain valid till the full
advance amount is adjusted under
Clause 13 of the said agreement
which according to the terms and
conditions of the said Agreement is
stipulated to be adjusted
proportionately from each bill of
the Sells against actual deliveries
of the machinery and equipment at
site but if the deliveries as
aforesaid have not been completed
by the Sellers within the said
period for any reason what soever
the Guarantor hereby undertakes
that the Sellers shall furnish a
fresh or renewed guarantee on the
Purchaser's proforma for such
further period as the purchaser's
may intirmate failing which the
guarantor hall pay to the
purchaser's a sum not execeeding
Rs. 51,70,000/-(Rupees Fifty one
lacs seventy thousand only) or
the residual amount of balance
unadjusted advance left after
proprotionae adjustment in
acccordance with clause 1 above as
the purchaser may demand."
No plea was taken before the courts below and no document has bcen shown to us by the respondents, which can prima ficie indicate that the full amount to us by the respondents, which can prima facie indicate that the full amount of advance had been adjusted under Clause 13 of the main contrant between the appellant and the defendant no.1 According to the appellants, the original guarantee was for Rs. 51,70,000/- but the same, after adjustment of the advance, in terms of clause 13 of the main agreement, stood reduced to Rs.33,00,000/- This amount was still outstanding and, therefore, the bank guarantee had not come to an end and was rightly invoked.
Coming to the allegation of fraud, it is an admitted fact that in the plant itself, there was no such allegation was initially only in the first application for the grant of injunction that in a paragraph it has been mentioned that the appellant therein had invoked the bank guarantee arbitrarity. this application contains no facts or particulars in support of the allegation of fraud. A similar bald averment alleging fraud is also contained in the second application for injunction relating to bank guarantee No. 40/47. This is not a case where defendant no. 1 had at any time alleged fraud prior to the filing of injunction application. The main contract, pursuant to which the bank guarantees were issued, was not sought to be avoided by alleged fraud, nor was it at any point of time alleged that the bank guarantee was issued because any fraud had been played by the appellant. We have no manner of doubt that the bald assertion of fraud had been made solely with a view to obtain an order of injunction . In the absencce of established fraud and not a mere allegation of fraud and that also having been made only in the injunction application , the court could not, in the present case have granted an injunction relating to the encashment of the bank guarantees.
It is unfortunate that the High Court did not consider it necessaly to rrfer to various judicial pronouncements of this Court in which the principles which have to be fullowed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decisions will not be of much importance was cleart a me1hod adopted by it in avoiding to fo11ow and apply the law as laid down by this Court. Yet another scrious for which was carmnitted by the High Court, in the present case, was not to examine the tenns of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had trail the trouble of examining the documents on record, which had been referred to bv the trial court, in its order refilsing to grant injunction, the court would not have granted the interim injunction. We also do not find any justification for the High Court in invoking the alleged principle of adjust enrichment to the facts of the present case and then deny the appettant the Iight to cncash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guaranmtee the applicability of the principle of undue enrichment has no application. We are constrained to make these observation with regard to the manner in which the High Court had dealt with this case because this is not an isolated cade where the courts, while disobeying or not complying with the law laid down by this Court , have at time been liberal in granting injunctgion restraining encalhment of bank guarantees.
It is unfortunate, that notwithstanding the authoritative the pronouncements of this Court, the High Courts and the courts subordinate thereto, still seem intent on affording to this Court innumerable opportunities for dealing with this area of law, thought by this Court to be well settled.
When a position, in law, is well settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety to say the least, for the subordinate courts including the High Courts to ignore the settled decisions and then to pass a judicial ordor which is clearly contrary to the setded legal position. Such judicial adventurism cannot be permitted and we strongly deprecate the tendency of the subordinate courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wronful and unwarranted relief to one of the parties. It is time that this tendency stops.
Before concluding we think it appropriate to mention about the conduct of the respondent - bank which has chosen not to be in this case. From the facts stated hereinabove it appears to us that the respondent bank has not shown professional efficiaency, to say the least, and has acted in a partisan manner with a view to help and assist respondent no. 1. At the time when there was no restraint order from any Court, the bank was under a legal and moral obligation to honour its commitments. It, however, failed to do so. It appears that the bank deliberately draged its feet so as to enable respondent no.1 to secure favourable order of injunctgion from the Court. Such conduct of a bank is difficult to appreciate We do not wish to say anything more but it may feel that it will be prejudicial in the event of the appellant taking action against it. For the aforesaid reasons this appeal is allowed. The judgment and order of the Allahabad High Court dated 10th September, 1996 in revision petition no.257 of l996 is set aside and the order of the trial court datded 20th Auguat, 1996 dismissing the injunction application is restored. The appellant would be entitled to cost which are quantified at Rs.20,000/-.