Delhi High Court
J.R. Enterprises And Others vs State Trading Corporation Of India ... on 1 September, 1986
JUDGMENT Charanjit Talwar, J.
1. This is an application by the petitioners under section 41, read with the the Second Schedule to the Arbitration Act and Order 39, rule 2 of the Code of Civil Procedure seeking that pending disposal of their petition under section 20 of the Arbitration Act, the respondent, viz., the State Trading Corporation of India Ltd. (STC), be restrained form Realizing the amount of the bank guarantee bearing No. 23 of 1984, dead February 28, 1984, which was issued by the Andhra Bank, Connaught Circus, New Delhi.
2. To appreciate the rival contentions of the parties, I may note a few admitted facts:
(1) the petitioners entered into a contract with the respondent- corporation on september 10, 1982, being contract No. STC/SUG/MOL/9/82-83 to procure form the nominated mills Indian cane molasses as per specifications in such quantities as may be released by the Governments form time to time to enable the respondents to fulfilll its obligations under its contract with the foreign buyers. The contract was to be effective form June 1, 1982, for a period of 5 years.
2. (a)Under clause 9 of that contract, a performance guarantee was to be furnished by the petitioners. That clause reads as under:
"9. Performance guarantee. - the agents will furnish to the State Trading Corporation a revolving bank guarantee for 10% of f.o.b. value of the goods covered by each export contract in the format prescribed by the State Trading Corporation for the performance by the agents of all the terms and conditions of this and the export contract. The said performance guarantee would also cover the liability of the agents for demurrage. the guarantee will revolve cover the liability of the agents for demurrage. the guarantee will revolve form one export contract to the other till the last shipment that they are required to make is made by the agents. the bank guarantee would be furnished prior to the commencement of the first shipment and would remain valid for l30 days after each shipment, or until each subsequent lot is shipped against expert contract whichever is later. Notwithstanding the revolving bank guarantee mentioned herein above, which the agents will furnish to the State Trading Corporation , the liability of the agents in respect of claims on the State Trading corporation on account of quality, quantity, demurrage or any other ground will not remain restricted to the period and/or value v=covered by the guarantee. In other words, the agents will always remain fully liable to the State Trading and also for all losses, coasts and experiences that the State Trading Corporation may be put to or suffer regardless of the value or the claim period mentioned in the aforesaid bank guarantee."
(b) Accordingly, a revolving bank guarantee on half of J.R. Enterprises (petitioners herein) for the performance of the above said contract was made by the Andhra bank.
(c) The relevant terms of the guarantee on which emphasis has been aid by counsel for the parties in support of their rival contentions read as follows:
"Now this revolving guarantee witnesses as follows:
1. The bank do hereby unconditionally and irrevocably guarantee that if the agents fail to perform any of their obligations contained in the said contract dated September 10, 1982, including any amendments or modifications to the aforesaid contract dated September 10, 1982, made between the agents and the State Trading Corporation , the bank shall play forthwith to the State Trading Corporation such amount or amounts as the bank may be called upon to pay subject to the maximum of Rs. s10 lakhs (rupees ten lakhs) plus interest at the rate of 22. 5 % per annum form the date the bank may be called upon by the State Trading Corporation to pay till the date of receipt of payment by the State Trading Corporation. This guarantee at all times during its currency be valid and ensure to the benefit of the State Trading Corporation for not less than the above amounts of Rs. 10 lakhs, plus interest as aforesaid Provided that the guarantee herein furnished shall be released and discharged after the expire of 30 days form the date of the shipment of the last lost of the goods, in respect of export contracts between the State Trading Corporation and the foreign buyers.
2. This guarantee shall not be affected by any change in the constitution of the bank or of the agents and/or of the State Trading Corporation.
3. Any amount notified to the bank in writing by the general manger of the State Trading Corporation as being due form the bank under or by virtue of this revolving guarantee shall be conclusive evidence against the bank of the amount due to the State Trading Corporation and shall not be questioned by the bank."
3. That disputes have arisen between the parties which according to the petitioners have to be referred to arbitration as per the arbitration agreement contained in the said contract.
4. That under the contract, the last shipment was made on July 21, 1985.
5. That the respondents invoked the bank guarantee on February 27 1986.
6. That the validity of the bank guarantee was extended by the Andhra bank till August 31, 1986, by a letter of March 10, 1986, although the guarantee was to expire on February 28, 1986.
The petitions, case in a nut-shell is that the invocation is not strictly in terms of the bank guarantee. the submission is that under the proviso to clause(1) quoted above, the guarantee stood discharged after the expiry of 30 days form the date of last shipment, i,e, July 21, 1985.
the respondents, however, contest this proposition. Mr Watel, their learned counsel submits that the said proviso laying down the limitation, applies only in respect of one of the obligations of the petitioners and that obligation relates to shipment of the molasses. He submits that the shipment is not the only obligation under the molasses. He submits that the shipment is not the only obligation under the contract. According to counsel, under the said contract, the other obligations were procurement of molasses, its storage and transportation for shipment.
Apart form the above contention Mr. Watel has made three further submissions:
1. That the petitioners have no locus standi to see the relief in this application as they are strangers qua the bank guarantee.
2. That the document (bank guarantee), being a commercial document, must be read as a whole and be so interpreted so as to show its business efficacy, and
3. Extending the bank guarantee till August 31, 1986, after its invocation though the last shipment was made on July 21, 1985, shows that the petitioners were aware that it we not restricted to their obligation of shipment only.
Thus, it is submitted that under the terms of the bank guarantee which guarantee is unconditional and irrevocable, the respondents cannot be restrained by an injunction from Realizing the amount of the said bank guarantee from the Andhra Bank.
I may note at this stage that so far the respondents have not filed their written statement to the petition under section 20 of the Arbitration Act. Neither from the reply to this application nor from any of the documents is it clear as to why shipments of molasses were not asked to be made by the respondents after July 21, 1985. However, copies of some letters which have been placed on record do show that a considerable quantity of molasses had been procured and stored by the petitioners at Bombay presumably for the purpose of shipment. During arguments, Mr.Watel informed me on my asking that a policy decision had been taken at the relevant time not to ship further molasses out of India because of its shortage in the country.
The contract in question dated September 10, 1982, shows that the petitioners had agreed "severally and jointly to procure from the nominated mills Indian cane molasses of the specification and quality specified in the State Trading Corporation's contracts concluded/to be concluded with the foreign buyers (hereinafter called `the goods'), in such quantities as may be released to the State Trading Corporation by the Government from time to time to enable the State Trading Corporation to fulfilll its obligations under its contract(s) with foreign buyers."
Thus the contract as entered into between the parties specifically enables the respondents to fulfilll their obligations under contracts with foreign buyers. Its clause I (general) makes the intention further clear that the procurement, transportation, storage and loading of the Indian cane molasses in ships by the petitioner was with a view to enable the State Trading Corporation to perform, fulfilll the export contracts which it had concluded or was to conclude with the foreign buyers. That clause reads as under :
"1. General :
(i) This contract will be for a period of five years effective from June 1, 1982.
(ii) The contract can be terminated at any time with six months' notice by either side without assigning any reason whatsoever.
(iii) The against jointly and severally agree and undertake to perform and fulfilll all obligations, covenants and agreements which the State Trading Corporation may undertake to perform, fulfilll and observe under and/or by virtue of export contract(s) that the State Trading Corporation may conclude with its foreign buyers for export of the goods and these obligations, convenants and agreements include any additions or amendments thereto as may be agreed to by and between the State Trading Corporation and its foreign buyers with the mutual consent of the agents. Such obligations, etc., undertaken by the agents to be performed, fulfillled and observed include, without being restricted to, inspection, procurement, movement, transportation, storage and loading into ships of the goods as may be provided in the export contracts and discharge of any excise or other bonds/guarantees that may be given by the State Trading Corporation to the concerned authorities.
(iv) The agents will also comply with the requirements of letters(s) of credit to be established by the State Trading Corporation's foreign buyers including giving cable advice copies of non-negotiable sets of documents to the foreign buyers and/or their nominees."
Clause 1 of the bank guarantee which has already been noticed is to construed keeping in view the paramount conditions of the said contract. Mr. Watel agrees that these are tow limitations provided therein. He does not dispute that although the revolving bank guarantee which was furnished by the bank was to cover "10% of f.o.b. value of the goods covered by each export contract for due performance by the agents of all the terms and conditions of the aforesaid contract" yet, under its clause 1, the bank was liable to pay subject to a maximum of Rs.10 lakhs plus interest at the specified rate to the State Trading Corporation. This means that even if the particular export contract of the State Trading Corporation for one shipment was for more than a crore, the bank was liable to pay, when called upon, a maximum of Rs.10 lakhs irrespective of the f.o.b. value of the goods. The submission, however, is that the proviso (quoted above) which lays down that, the guarantee furnished should be discharged after the expiry of 30 days from the date of shipment and not to other obligations. In support of his contention that this proviso must be read to mean that the limitation provided therein relates only to the obligation of shipment, he relies on Delhi Development Authority v. Durga Chand Kaushish, , wherein it has been held that in construing the document one must have regard not to the presumed intention of the parties but to the meaning of the words they have used therein. Their Lordships approved of the rule settled by the court in Radha Sundar Dutta v. Mohd. Jahadur Rahim, . In that case, it was observed:
"Now, it is a settled rule of interpretation that if there be admissible two construction of a document, one of which will give effect to all the clauses therein while the other will render one or more of them nugatory, it is the former that should be adopted on the principle expressed in the maxim ut res magis valeat quam pereat."
3. In Durga Chand's case, , the convenant of the lease deed (convenant 9) dealings with the enhancement and renewal of the lease deed fell for consideration. By the deed, the plaintiff was leased from April 1, 1931, a plot of land situated in Pahar Ganj, Delhi, for a period of 90 years. The plaintiff had been asked and made to pay enhanced rents within the said period of 90 years. The said convenant laid down, that the renewal was to take place only at the end of the term thereby granted, i.e., 90 years. The said convenant laid down that the right of enhancement could be exercised only when the lease was renewed. After noticing the relevant terms of the lease deed, it was held that convenant 9 could apply only after the termination of the initial period of 90 years, in spite of the proviso to it which read "subject always to the exception, reservations and conditions and covenants hereinafter contained." In paragraph 24 (at page 2615) of the reported judgment, it has been held :
"We think that the the proviso to covenant No.9 could be said to suffer from the voice of an uncertainty which can only be removed by ignoring the words creating this uncertainty. We think that, in such a case, the ambiguous words can be disregarded so that the terms of the earlier operative part of the demise, which are clear, must prevail."
Anther judgment cited by Mr. Watel on interpretation of documents is Sahebzada Mohammad Kamgarh Shah v. Jagdish Chandra Deo Dhabal Deb, . It lays down that the intention of the parties to a document of grant has to be gathered from the words used by the parties themselves. In doing so, the parties must be presumed to have used the words in their strict grammatical sense. It was held (at page 957) that :
4. The third judgment cited by learned counsel on this aspect is Union of India v. D.N. Revri and Co., , which, inter alia, lays down that a contract being a commercial document must be interpreted in such manner as to give efficacy to the contract rather than to invalidate it.
5. In view of the unambiguous intentions of the parties herein that the contract in question for performance of which the guarantee was furnished was to enable to the State Trading Corporation, respondents herein, to fulfilll their obligations under their contracts with the foreign buyers, at this stage, when there is no specific averment as to why the respondents did not seek further shipments, it is difficult to hold that the proviso to clause 1 of the guarantee pertains only to the obligations of shipment.
6. I may note that in reply to this application, the case of the respondents is that the petitioners have put the State Trading Corporation to a loss of more than a crore of rupees. The petitioners also claim that much of amount. These disputes in case they are held to be referable, will be decided in the main suit under section 20 of the Arbitration Act. But as I have said, prima facie, it appears that the bank guarantee stood discharged after the last date of shipment particularly so in view of the fact which has been urged before me during arguments that the further shipments were discontinued because of the policy of the State.
7. The other main question is whether the petitioners locus standi to move the present application. Reliance of Mr.Watel is on an observation in Harprashad and Co.Ltd. v. Sudarshan Steel Rolling Mills, , wherein it had been stated that the party at whose instance the guarantee. In paragraph 19 of the reported judgment on which reliance has been placed, it had been held that (at pages 539 and 540 of [1985] 58 Comp Cas) :
"A bank guarantee is a contract between the issuing bank and the person in whose favor the guarantee has been furnished. Though the bank guarantee may have been issued by the banker at the instance of its client, as far as the bank guarantee is concerned, it is a bilateral contract between the banker and the party in whose favor the guarantee has been furnished. The party at whose instance the guarantee has been furnished is, in a way, a stranger to the said contract of bank guarantee. The person in whose favor the bank guarantee has been issued has a right to ask the bank to fulfilll its obligations in terms of the bank guarantee. If the terms of the bank guarantee entitle a party to ask for the payment of money from the bank, then that right cannot be interfered with merely for the reason that there exists a dispute between that party and the client at whose instance the bank guarantee had been issued."
8. There is no doubt that simply because disputes have arisen in the present case between the parties, that ground by itself does not entitle the petitioners to move the court for an injunction restraining the performance of a contractual obligation of the Andhra Bank. But in the view which I have taken that prima facie the guarantee was furnished are total strangers. Mr.Divan, learned counsel for the petitioners, submits that there is no absolute rule prohibiting the grant of an interim injunction in a case like the present on the asking of a party at whose instance the guarantee was furnished. He relies on Arul Murugan Traders v. Rashtriya Chemicals and Fertilizers Ltd., , wherein the learned single judge of the court has held that in a case where an element of fraud exists, an injunction to prevent one of the parties to the contract from deriving unjust enrichment by invoking the bank guarantee can be granted. He has also cited the principle of law laid down by the Supreme Court in United Commercial Bank v. Bank of India, , for his contention that not only in cases of fraud but also in cases where the terms of the guarantee had not been fulfillled, the bank is not bound to pay. He relies on the observation in paragraph 43 of that reported judgment which reads as follows (at page 208 of [1982] 52 Comp Cas) :
"The appellant presumably knew little or nothing about mustard oil Bankers are not dealers in mustard oil in such a case a case as this, but dealers in documents only. The appellant as the issuing bank was presented with documents and asked to pay a very large sum of money in exchange for them. Its duty was not to go out and determine by physical examination of the consignments, or employment of experts, whether the goods actually conformed to the contract between the buyer and the seller, nor even determine either from its own or expert advice, whether the documents called for the goods which the buyer would be bound to accept. The banker knows only the letter of credit which is only authority to act, and the documents which are presented under it. If these documents conform to the letter of credit, he is bound to pay. If not, he is equally not bound to pay. The letter of credit called for `Sizola brand pure mustard oil' while the railway receipts carried the description `Sizola brand pure mustard oil `unrefined' and it was not within the province of the appellant to say that the letter description meant identically the same thing as the former."
9. In my view, in Harprashad and Co. v. Sudarshan Steel Rolling Mills, , the observation that the party at whose instance the guarantee had been furnished "is in a way a stranger to the said contract of bank guarantee" cannot be read to mean that the property is a total stranger. The earlier judgment of a Division Bench in Harprashad and Co. Ltd. v. Sudarshan Steel Rolling Mills, is applicable to the facts of the present case. Therein it was held that "the terms of the bank guarantee has not become due for payment to the beneficiary." I am also bound by the decision of this Division Bench. Under the terms of the present bank guarantee, the amount does not seem to have become due for payment to the beneficiary. Therefore, as per the principle laid down in the earlier judgment of Harprashad and Co. v. Sudarshan Steel Rolling Mills [1985] 50 Comp Case 709 (Delhi), the demand of the respondents being the beneficiary of the bank guarantee, is prima facie liable to be rejected by the bank. In case an injunction as sought for is not granted, the petitioner are going to be put to irreparable loss. Mr. Divan has further shown me documents on the record wherein the petitioners had informed the respondents that they were asking the bank to extend the guarantee without prejudice to their rights. In the letter of March 7, 1986 (at page 97 of the documents file) written on behalf of the petitioners to the State Trading Corporation, it has been stated :
"Without prejudice and without entering into any controversy with you at this stage we are advising Andhra Bank to have the above bank guarantee extended up to 31st August, 1986. You are now requested to write to our bank as per draft letter enclosed with our letter dated 6th March. Upon receipt of this letter, we will do the necessary follow-up. Thanking you."
10. The conduct of the party in getting the bank guarantee extended which was without prejudice to their rights cannot thus be used against them. The balance of convenience is also in favor of the petitioners who have raised a bona fide contention which merits to be tried. I may note that although no element of fraud exists, yet the guarantee having been invoked after it had prima facie expired, I consider it a fit case that during the pendency of the suit, the injunction sought for in this application be granted. I order accordingly. However, keeping in view that the matter raises an important question of law, I direct that the suit to be tried expeditiously and, if possible, be disposed of within four months. I further direct the petitioners to extend the bank guarantee in question for another six months from today.
11. The respondents to file their written statement within a fortnight. Replication to be filed within a fortnight thereafter. Suit be listed on October 3, 1986, for further proceedings and for the framing of issue.
12. IA stands disposed of.