Delhi High Court
V.K. Constructions Works Ltd. vs The Bank Of Rajasthen Ltd. And Anr. on 29 May, 1992
Equivalent citations: II(1992)BC344, 48(1992)DLT468, 1992(23)DRJ371
Author: Arun Kumar
Bench: Arun Kumar
JUDGMENT Arun Kumar, J.
(1) This order will dispose of the interim applications filed by the plaintiff in the above suits to restrain the defendant from encashing the bank guarantees furnished by the plaintiff in pursuance of the contract between the parties. These are six suits filed by the plaintiff M/s V.K. Constructions Works Ltd. against the Army Welfare Housing Organisation. There are six Independent contracts between the parties and therefore these six suits. In each case there are two applications by the plaintiff regarding relief of injunction sought by the plaintiff against encashment of bank guarantees by the defendant. This order will dispose of all the 12 applications. Two sets of bank guarantees are involved. One set is regarding bank guarantees for the due repayment of the mobilization advance. The other set of bank guarantees is that of the performance guarantees. The Bank of Rajasthan Ltd., Panchsheel Park, New Delhi has furnished all the bank guarantees. The letters of invocation of bank guarantees are similar in language and content in all the cases, except for the variation in the amounts. The language of the bank guarantees to cover the mobilization advance is identical in all the cases except variation in the amounts. Similarly the language of the performance guarantees is similar in all the cases except the variation in the amounts, therefore, all these cases raise py?3 common questions of fact and law and the injunction applications are being disposed of by this common order.
(2) Out of the six suits, four suits being Suit No.3866/91, 3867/91, 3868/91 and 3870/91 are petitions under Section 20 of the Arbitration Act in which applications have been filed under Section 41 read with Schedule Ii of the Arbitration Act for interim orders. The other two suits being Suit No-3663/91 and 3664/91 are suits for permanent injunction in which injunction applications have been Filed under Order 39, Rules 1 and 2 of the Code of Civil Procedure. The two other injunction suits were filed in this court on 27th November 1991 while the four suits under the Arbitration Act were filed on 9th December 1991.
(3) The defendant is an organization for the welfare of Army Officers. It has undertaken the work of construction of dwelling units for its members. The plaintiff is a contractor and it undertook the work of construction of various dwelling units on behalf of the defendant at its various sites. Separate, though similar, agreements were entered into between the parties, with respect to each site. Thus there are in all six agreements regarding which six suits have been filed in this court Each contract contains an arbitration clause. The contracts also contain p73 clauses under which bank guarantees are to be furnished by the contractor in favor of the employer. The contractor who is the plaintiff in these proceedings furnished various bank guarantees in pursuance of the contract provisions. The defendant/employer issued separate demand notices to the bank in relation to each bank guarantee invoking bank guarantees and calling upon the bank to pay the amounts under the bank guarantees. These notices were issued on 19th November 1991 and 5th December 1991. The language of the notices is identical. During the pendency of these proceedings initially counsel for the defendant, i.e. the A.W.H.O. had made a statement that the bank guarantees will not be encashed till next date. Counsel for the plaintiff had undertaken to keep the bank guarantees alive. However, the statement regarding not encashing the bank guarantees was not extended after a few hearings and when in February 1992 the defendant took steps to encash the bank guarantees, the plaintiff Filed fresh sets of applications in these cases for injunction to restrain the defendant from encashing the bank guarantees. These fresh application were taken up for hearing and arguments continued almost day to day with effect from 27th February 1992. Though no formal order was recorded regarding non-encashment of the bank guarantees involved 83 till the disposal of these various applications, counsel for the defendant had assured the Court that till disposal of these applications the defendant will not seek for encashment of the bank guarantees.
(4) Two affidavits dated 3rd March 1992 and 24th March 1992 filed on record on behalf of the defendant show that on 26/27th February 1992 the defendant had in fact tried to encash all the bank guarantees involved in these cases and held discussions with the bank for this purpose. The defendant also handed over to the bank further letters of demand dated 27th February 1992 in continuation of their previous letters of demand served on the bank. By the subsequent letters of demand, the defendant has tried to make the notice of demand in accordance with the terms of the bank guarantee in order to cover up the lacunae in its initial notice of demand. In response to this notice of demand the bank issued a composite letter dated 9th March 1992 covering all the bank guarantees. A photo copy of the said letter has been placed on record Along with affidavit of the defendant dated 24th March 1992. In the said letter the bank has finally said "we may further make it clear that we have no interest in the above mentioned suits which pertain to disputes purely between you and the Contractor. Since the guarantees have now been properly invoked on 27.2.1992. payment thereof will be made immediately as per the directions of the Court". This letter is addressed by the bank to the defendant.
(6) The relevant clauses of the contract under which the bank guarantees were furnished are reproduced as under:-
"104.The contractor shall furnish within a period of thirty days of acceptance of his tender, a bank guarantee bond on a Nationalised Bank for an amount equal to two per cent of the contract amount subject to a maximum of Rupees One lacs as performance guarantee on the form as approved by the Employer. Validity of this bank guarantee should cover the entire contract period plus twelve months as defect liability period as per clause 98. On receipt of performance guarantee, the earnest money submitted Along with the tender shall be refunded. In case the completion period gets extended under clause 92 or for any other reason then the contractor shall arrange extension of validity of bank guarantee period up to 12 months beyond this date of completion.
107.Advance - At the request of the contractor an advance to a maximum of 5% (Five Percent) of the contract amount against bank guarantee from a nationalised bank shall be paid by the employer. This advance shall bear an interest at Eighteen Percent per annum. This advance would be given in two Installments and their recovery from the contractor shall be done as under :- a) First Installment - 50% of the total advance due shall be paid after the contractor's progress or works (excluding cost of material lying at site) is more than 10%. b) Second Installment - 50% of the total advance due shall be paid after the contractoir's progress on works (excluding cost of material lying at site) 'is more than 65%. c) Amount of first Installment of advance shall be recovered in eight equal monthly Installments starting from subsequent Ra payment and second Installment shall be recovered in five equal monthly Installments in the subsequent Ra payments.
The plaintiff availed all the mobilization advances and the bank guarantees in relation to mobilization advance are involved in four matters bearing Suit Nos. 3663/91. 3664/91. 3866/91 and 3870/91, while the performance guarantees arc involved in all the suits. It is necessary to quote the bank guarantees in order to appreciate the controversy involved. The bank guarantee in relation to mobilization advance is in following terms:
"BANKGUARANTEE The Managing Director, Army Welfare Housing Organisation, Room No.50, South Hutments, Kashmir House, Raja ji Marg, Dhq Po, New Delhi-110011, Dear Sir, Contract Agreement No. AWHC/NOIDA/11/89 -phase xviii M/s V. K. Construction Works Ltd., 42, Community Centre, Friends Colony. New Delhi. 1. The tender conditions of contract provide that on request an advance equal to Five Percent of contract amount i.e. Rs.1.83,54,360.00 shall be paid to the contractor by Army Welfare housing Organisation against surety in the form of a Scheduled Bank. 2. The said M/s V.K.Construction Works Ltd., New Delhi has approached us and at their request and in consideration of the promises, we. the Bank of Rajasthan Ltd., having our office at Panchsheel Park. New Delhi, have agreed to give such surety as is hereinafter mentioned in your favor. 3. We. the Bank of Rajasthan Ltd., having our office at Panchsheel Park (hereinafter called She "Surety" do hereby agree to give through this irrevocable guarantee to you the due payment of the said sum or Rs.4,58.000/ - (Rupees four lacs fifty eight thousand only), by the contractor to you in terms of the said contract conditions and we as surety undertake and agree with you that if default is made by the said M/s V.K.Constniction Works Ltd.. New Delhi i.e. the contractor does not refund the said advance in the terms and conditions of the contract. We shall on demand pay to you without any protest, delay or demur and without any reference of any kind whatsoever to the contractor in such manner as you may direct the said amount of Rs.4,58,000.00 (Rupees four lacs fifty eight thousand only) or such portion thereof not exceeding the said sum as you may require or is payable to you by the contractor for all or any such default you can look to us as the principal debtor without any reference whatsoever to the contractor. 4. You will have the full liberty without reference to us and without affecting this guarantee, postpone for any time or from time to time the exercise of any of the powers and rights conferred on you under the said contract with the said M/s V.K.Constniction Works Ltd., New Delhi and to enforce or to forbear from enforcing any powers or rights or by reasons of time being given to the said M/s V. K.- Construction Works Ltd.. New Delhi which under law relating to the sureties would but for the provision have the effect of releasing us. Any such time, /indulgence/ forbearance and/or any act or commission or commission on your part will not violate our this guarantee. 5, Your right to recover the said sum of Rs.4,58. 000.00 (Rupees four lacs fifty eight thousand only) from us in manner aforesaid will not be affected or suspended by reason of the fact that any dispute or disputes have been raised by the said M/s V.K.Construction Works Ltd., and/ or that any dispute or disputes are pending before any officer Tribunal, Court Arbitrator/Umpire. 6. The guarantee herein contained shall not be determined or affected by the liquidation or winding up. dissolution or change of constitution or insolvency of the said M/s V.K.Construction Works Ltd., New Delhi. but shall in all respects and for all purposes be binding and operative until full payment of all money due to you in respect of such liability or liabilities is received by you as if is is a continuing guarantee to secure your ultimate dues in the promises. 7. We have power to issue this guarantee in your favor under memorandum and Articles of Association and the undersigned has full power to do under the Power of Attorney No.A-299 granted to him by the bank. 8. We will have no right of subrogation against the contractor unless all your dues and aforesaid are paid in full. We do hereby waive our rights of suretyship which are inconsistent with all or any provisions hereof. 9. You will be at liberty to alter the terms of said contract and/or take any other security/guarantee/promissory notes from the contractor or others which will not effect/vitiate discharge our this guarantee. 10. This guarantee will bind our successors and assignees and your successors and assignees and will remain operative irrespective of any change in the constitution of our bank and/or the contractor. 11. Our liability under this guarantee is restricted to Rs.4,58,000.00 (Rupees four lacs fifty eight thousand only) and this guarantee shall remain in force until and unless a claim to enforce this guarantee is filed with us within one month from 11.12.1991 which is date of expiry of guarantee) all your rights under the said guarantee shall be forefeited and we shall be relieved and discharged from all liabilities there under. 12. We agree with you that in case we fail or neglect to honour our part of obligation and commit any breach in the terms and conditions of this irrevocable guarantee, we the surety, shall be liable to pay you damaged in addition to the amount guaranteed under this deed together with legal, miscellaneous and administrative expenses incurred by you in enforcing this guarantee against us. We further agree with you that you shall be the sole judge and your decision in this regard shall be the final and conclusively binding on us and we shall have no right to question the same on any ground whatsoever. 13. For the purpose of enforcing legal rights/remedies under this guarantee we agree with you that the Courts in the State of Delhi shall have exclusive jurisdiction. Yours faithfully for The Bank of Rajasthan sd/- Manager.Panchsheel Park. New Delhi."
(7) The performance guarantee is in the following terms:- "THE Managing Director, Army Welfare Housing Organisation, Room No.50, Southern Hutments. Raja ji Marg. Dhq Po New Delhi/110001. Dear Sir, Contract Agreement NO.AWHQ/NOIDA/ 11/89 with M/s V.K.Construction Works Ltd., Principal office. 42, Community Centre, New Friends Colony, New Delhi Regd.Office at 1142, Sector 15-B. Chandigarh. The tender conditions of contract provide inter alia that the contractor shall pay you a sum of Rs.1,00,000.00 (Rupees one lac only) as security on account of the amount covered by a performance guarantee in the manner and subject to the terms therein mentioned. This performance guarantee includes an undertaking on our part to pay on demand to you the sum of Rs.1,00,000.00 (Rupees one lac only) in the event of the said contractor having incurred forefeiture of the amount as aforesaid for breach of any of the terms and conditions and stipulations as aforesaid and contained in the said agreement without recourse to clause 104 of the said agreement. The said M/s V.K.Construction Works Ltd., Chandigarh has approached us and as their request and in consideration of the premises, we the Bank of Rajasthan Ltd., Panchsheel Park, New Delhi having our registered office at Clock Tower, Udaipur, have agreed to give such guarantee as is hereinafter mentioned in your favor. 1. We, the Bank of Rajasthan Ltd., having our office at Panchsheel Park, New Delhi (hereinafter called "the surety") do hereby irrevocable guarantee to you the due payment of the said sum of Rs.1,00,000.00 )(Rupees one lac only) by the contractor to you in terms of the said contract conditions and their due performance of the obligation in this behalf and we as surety undertake and agree with you that if default is made by the said M/s V.K.Construction Works Ltd., New Delhi i.e. the contractor in performing any of the terms of conditions of the contract or in payment of any money payable to you under the contract of which the Army Welfare Housing Organisation shall be the sold judge and its decision communicated to us in this regard shall be final and conclusively binding on us, it shall not be open to us to ask you reasons/details in this regard and we shall have no right to question the same or make reference to the contractor in amy manner whatsoever. We shall on demand pay to you without any protest, delay or demur and without any reference of my kind whatsoever to the contractor in such manner as you may direct the said amount of Rupees one lac only or such portion thereof not exceeding the said sum as you may from time to lime require or is payable to you by the contractor for all or any such default you can look to us as the principal debtor without any reference whatsoever to the contractor. 2. You will have the full liberty without reference to us and without affecting this guarantee, postpone for any time or from time to time the exercise of any of the powers and rights conferred on you under the said con p73 tract with the said M/s V.K.Construction Works Ltd.. New Delhi and to enforce or to forbear from enforcing any powers or rights orby reasons of time being given to the said M/s V.K.Construction Works Ltd., New Delhi which under law relating to the sureties would but for the provision have the effect of releasing us. Any such time Jindulgence/forbearance and/or any act or commission or commission on your part will not violate our this guarantee. 3. Your right to recover the said sum of Rs.1,00.000.00 (Rupees one lac only) from us in manner aforesaid will not be affected or suspended by reason of the fact that any dispute or disputes have been raised by the said M/s V.K.Construction Works Ltd., and/or that any dispute or disputes are pending before any officer Tribunal. Court Arbitrator/Umpire. 4. The guarantee herein contained shall not be determined or affected by the liquidation or winding up, dissolution or change of constitution or insolvency of the said M/s V.K.Construction Works Ltd., New Delhi, but shall in all respects and for all purposes be binding and operative until full payment of all money due to you in respect of such liability or liabilities is received by you as if this is a continuing guarantee to secure your ultimate dues in the promises. 5. We have power to issue this guarantee in your favor under memorandum and articles of Association and the undersigned has full power to do under the power of Attorney No. A-299 granted to him by the bank. 6. We will have no right of subrogation against the contractor unless all your dues and aforesaid are paid in full. We do hereby waive our rights of suretyship which arc inconsistent with all or any provisions hereof. 7. You will be at liberty to alter the terms of said contract and/or take any other security/guarantee/promissory notes from the contractor or others which will not effect/vitiate discharge our this guarantee. 8. This guarantee will bind our successors and assignees and your successors and assignees and will remain operative irrespective of any change in the constitution of our bank and/or the contractor. 9. Our liability under this guarantee is restricted to Rs. 1.00.000.00 (Rupees one lac only) and this guarantee shall remain in force until and unless a claim to enforce this guarantee is filed with us within one month from 31.03.1992 which is date of expiry of guarantee) all your rights under the said guarantee shall be forfeited and we shall be relieved and discharged from all liabilities there under. 10. We agree with you that in case we fail or neglect to honour our part of obligation and commit any breach in the terms and conditions of this irrevocable guarantee, we the surety, shall be liable to pay you damages in addition to the amount guaranteed under this deed together with legal. miscellaneous and administrative expenses incurred by you in enforcing this guarantee against us. We further agree with you that you shall be the sole judge and your decision in this regard shall be the final and conclusively binding on us and we shall have no right to question the same on any ground whatsoever. 11. For the purpose of enforcing legal rights/remedies under this guarantee we agree with you that the Courts in the State of Delhi shall have exclusive jurisdiction. Yours faithfully for The Bank of Rajasthan sd/- Manager, Panchsheel Park, New Delhi."
(8) The language of the letter regarding invocation of the bank guarantee is also reproduced as under:- "DEARSir, 1. Whereas you have furnished a Bank Guarantee bond bearing number 61/91 dated 15 April.91 for Rs.4,58.000.00 (Rupees four lacs fifty eight thousand only) in view of advance paid by Army Welfare Housing Organisation against contract Agreement NO.AWHO/NOIDA/ 11/89 made between the Managing Director Army Welfare Housing Organisation and M/s V.K. Construction Works Ltd., contractor against which a claim to enforce this guarantee can be filed with you within one month from 11th December,91 and up to 11th Jan,1992. Clause 11 of the Bank Guarantee refers. 2. And Whereas it is expressly provided in the aforesaid guarantee bond that you undertake to pay the amount due and payable under the guarantee without any protest, delay or demur, merely on a demand from the Army Welfare Housing Organisation. 4. I, on behalf of Army Welfare Housing Organisation, hereby serve you with this notice of demand of Rupees four lacs and fifty eight thousand only against the aforesaid bank guarantee. 5. The amount may please be remitted in the form of bank draft in favor of Managing Director, Army Welfare Housing Organisation, New Delhi. Yours faithfully, sd/- (G K Sen ) Maj. Gen. (Retd.) Managing Director"
(9) The subsequent letters of demand regarding invocation of the bank guarantee are reproduced as under:-
(RE:-Mobilization advance) Dear Sir. 1. Reference our letter No.B/03020/ cont/CA-11-89/NOIDA/AWHO (ii) dated 19th November 1991. letter No.B/03020/cont/CA-11-89/NOIDA/ AWHO(ii) dated 26.2.1992 and discussion with Shri Sharda your branch Manager and Shn M.L.Seth of your Regional Office, at New Delhi on 26th February. 1992. 2. As per your requirement regarding clause 3 of the bank guarantee communicated verbally during above discussions, it is intimated that M/s V.K.Construction Works Ltd. has defaulted regarding refund of advance of Rs.4.58 lacs in terms of the conditions of the contract agreement. Therefore, the bank guarantee has been invoked and demand placed on you. The clause 3 further lays down that on demand, you shall pay to Army Welfare Housing Organisation without any protest, delay or demur and without any reference of any kind whatsoever So the contractor. 3. Please note that you are delaying the encashment of the bank guarantee on some pretext or the other inspite of our officers (Col.Sachdev and Col.Dham) meeting you since 25th February 1992 and our earlier communications. Any loss occurring to our organisation on account of this delay will be on your account. 4. You are again requested to make the payment of Rs.4.58 lacs as demanded forthwith. Yours faithfully, sd/- (MML Sharma) Maj. Gen. M.D., AWHO"
(RE-:Performance guarantee) Dear Sir, 1. Reference our letter No.B/03020/ cont/CA-11-89/NOIDA/AWHO(ii) dated 19th November 1991, letter No.B/03020/cont/CA-11-89/NOIDA/ AWHO(ii) dated 26.2.1992 and discussion with Shri Sharda your branch Manager and Shn M.L. Seth of your Regional Office, at New Delhi on 26th February, 1992. 2. in terms of clause I of the bank guarantee. Army Welfare Housing Organisation is the sold judge to decide the invoking of the bank guarantee and this decision to invoke the bank guarantee has been communicated to you vide our letter dated 19th November,1991 referred above. As per terms of bank guarantee, this decision is final and conclusively binding on you. However, as per your requirement communicated verbally during discussion on 26.2.1992. it is intimated that M/s V.K.Constniction Works Ltd. has defaulted in the performance of his obligations under contract agreement number AWHO/NOIDA/11/89 therefore, the said contract has been cancelled and it has been decided to invoke the bank guarantee. 3. Please note that you are delaying the encashment of the bank guarantee on some pretext or the other inspite of our officers (Col. Sachdev and Col.Dham) meeting you since 25th February, 1992 and our earlier communications. Any loss occurring to our organisation on account of this delay will be on your account. 4. You are again requested to make the payment of Rs.4.58 lacs as demanded forthwith. Yours faithfully. sd/- (MML Sharma) Maj.Gen. M.D., AWHO"
(10) It will be seen from the above facts that the subsequent letters of demand regarding encashment of the bank guarantees were issued by the defendant only on 27th February 1992 and. therefore, the copies thereof were placed on record during the course of hearing of this matter. Counsel for the plaintiff who during his opening arguments naturally argued on the basis of the notices of demand dated 19-11-91/5-12-91 and his major argument in relation to this notice was that the demand was not in accordance with the terms of the bank guarantee and, therefore, the defendant was not entitled to encash the bank guarantees. The initial notice of demand reproduced hereinabove shows that (he defendant merely stated in the notice that (he bank had undertaken to pay the amount under the bank guarantee without any protest, delay or demur merely on demand from the defendant and on that basis the defendant merely demanded the amount under the bank guarantee from the bank without saying anything more. Counsel for the plaintiff urged that regarding the bank guarantee for the mobilization advance, least the defendant had to say in the notice of demand was that the plaintiff had failed to refund the amount of advance because non-refund of the advance is a condition of the guarantee as is apparent from para 3 of the bank guarantee. The defendant did not at all say in the notice that the plaintiff had failed to refund the money or any part thereof. Regarding performance guarantee, again default on the part of the plaintiff is an important pre-requisite for invocation of the bank guarantee. Counsel for the plaintiff further submitted that the defendant may be the sole judge regarding the default but the defendant has to communicate to the bank that default has been committed by the plaintiff in performance of his obligations under the contract. The notice of demand does not mention anything about the default on the part of the plaintiff. The notice simply makes a demand of the amount under the bank guarantee. Therefore, the invocation of the bank guarantee according to the counsel for the plaintiff is not in accordance with the terms of the bank guarantee and is. therefore, bad and the defendant is not entitled to encash the bank guarantees. This argument of the counsel for the plaintiff is totally knocked off in view of the notice of demand dated 27th February 1992 in relation to the performance guarantees. However, in relation to the bank guarantees for the mobilization advance, the argument of the plaintiff proceeds on a different footing. In relation to the mobilisation advance bank guarantees, counsel for the plaintiff further argued that the mobilisation advance already stands realised by the defendant and, therefore, the defendant is not entitled to invoke the bank guarantees in view of the plain language of the bank guarantees in question. The notice of demand is attacked on this ground.
(11) Counsel for the parties have drawn my attention to various judgment of this court as well as those of the Supreme Court to highlight the legal principles in relation to encashment of bank guarantees. From these judgments it appears that the law on the subject has been completely thrashed out and it only now remains a question of application of the law to the. facts of a given case. A learned single Judge of this Court has in Bhasin Associates Ltd. vs. Hyundai Heavy Industry Co. Ltd.. 1991 Vol.III, Delhi Lawyer 43, called out the principles which are well established in view of these various judgments. (This judgment has been approved by a Division Bench of this Court as an appeal against it being Fao (os) 75/91 was dismissed on 15.11.91.) These principles are:- 1.A confirmed letter of credit and the bank guarantee stand on the same footing. The obligations assumed by the bank in a bank guarantee are irrevocable. Bank must honour its commitments according to the terms of the bank guarantee. A bank guarantee constitutes a bargain between the banker and the creditor (seller in the case of letter of credit) which imposes on the banker an absolute obligation to pay. 2. An irrevocable letter of credit has a definite implication. It is independent and unqualified by the contract of sale or other underlying transactions. These observations a fortiori apply to a bank guarantee because on the bank guarantees revolve many of the internal trade and transactions in a country. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised. 3. The contractual duty owned by an issuing or confirming bank to the buyer to honour the credit notified by him on presentation of apparently conforming documents by the seller is matched by a corresponding contractual liability on the part of the bank to the seller to pay him the amount of the credit on presentation of the documents. The principle is same in the case of bank guarantee. 4. Bank is not concerned in the least with the relations between the supplier and the customer, nor with the question whether the supplier has performed his contractual obligations or not, nor with the question whether supplier is in default or not. The bank .must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exceptions being (1) when there is a clear fraud by one of the parties of which the bank has notice or the bank guarantee has been obtained by misrepresentation or concealment of material facts, and (2) injunction can be granted to prevent irretrievable injustice but only in very special and exceptional cases and. of course, depending upon the facts of that case. 5. Also a bank guarantee providing for payment on demand without proof or conditions is in the nature of a promissory note payable on demand and where the plaintiff has not established fraud on the part of the defendant, the bank is required to honour the bank guarantee on demand made by the defendant. 6. It is not material if the injunction sought is against the bank or the party invoking the bank guarantee as the net effect would be restraining the bank from performing the bank guarantee. That cannot be done. One cannot be indirectly what one likes not free to do directly. Frame of the suit by not impleading the bank cannot make any difference in the position of law. 7. If the bank guarantee is invoked and on that account the person giving the bank guarantee is ruined he is not without remedy. He is not to suffer any injustice which is irretrievable. Hew can sue the party invoking wrongly the bank guarantee for damages. 8. When it is said that in the presence of "special equities" arising from a particular situation which might entitle the party on whose behalf bank guarantee is given to an injunction restraining the bank in performance of bank guarantee, the words "special equities" only mean a situation where the injunction is sought to prevent injustice which is irretrievable. 9. The view that in a given case the matter will still be referred to arbitration and in those circumstances if bank guarantee was permitted to be encashed, it would be improper, cannot be sustained in view of the well settled principles on which the bank guarantees are operated. 10. It is not the rule that there should be a prima facie case. In order to restrain the operation either of irrevocable letter of credit or of bank guarantee, there should be serious dispute and there should be a good prima facie case of fraud and special equities to prevent irretrievable injustice between the parties. The courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee.
(11) All the important judgments of this Court, other High Courts and of the Supreme Court have been noted and discussed in he judgment in Bhasin Associates Ltd. (supra). Therefore I do not propose to discuss or repeat here the various observations contained in these judgments. After the decision in Bhasin Associates, the Supreme Court has delivered another judgment reported as General Electric Technical Services Co. Inc. Vs. Punj Sons Pvt. Ltd., . In the said judgment the law laid down by the Supreme Court in its earlier judgment in U.P. Co-op. Federation Ltd. vs. Singh Consultants & Engineers Pvt. Ltd. has been reiterated.
(12) The law is settled that terms of a bank guarantee enjoy a position of primacy in deciding any question relating to encashment of the bank guarantee. The language of the bank guarantee is the sole guiding factor and the manner and validity of invocation of a bank guarantee will have to be only with reference to the language of the bank guarantee. The observation of the Courts in various judgments that the bank guarantee is an independent contract and is enforceable without reference to the under-lying contract as well as to the person at whose instance the bank guarantee is given, is also largely based on the language of the bank guarantees which are normally furnished. It is no doubt true that a bank guarantee is an independent contract and its encashment depends on the language of the bank guarantee, therefore, the person at whose instance the bank guarantee is furnished may be relegated to the position of non-entity.
(13) In most of the cases decided by the various courts no reference is made to Section 126 of the Indian Contract Act. Under the Indian Law this statutory provision applies to all guarantees. It follows that there have to be three parties to a guarantee. The person in respect of whose default the guarantee is given is called the 'principal debtor'. The person to whom the guarantee is given is called the 'creditor' while the person who give the guarantee is called the 'surety'. This aspect of the law was dealt with in great detail in M/s Nangia Construction (Industry) Pvt. Ltd. vs. National Building Construction Corporation Ltd. & Ors., 1990(2) Delhi Lawyer 403. I am informed that a Special Leave Petition against the said judgment of the Single Judge of this Court was dismissed by the Supreme Court. Since the guarantees under the Indian Law are covered by Section 126 of the Contract Act, it is difficult to obliterate the principal debtor or the person at whose instance the bank guarantee is furnished from the scene altogether. However, in practice the language of the bank guarantees which are generally issued by the banks or accepted by the beneficiaries/creditors makes the position of she principal debtor almost illusory.
(14) Interests of trade and commerce and the credibility which has to be provided to instruments like the bank guarantee for the role they play in the modern trade and commerce require that the bank guarantees be treated almost at par with letters of credit as if there are only two parties to it and in that sense and for such reasons the Courts have held that the bank guarantee is bilateral contract. A letter of credit and a bank guarantee are documents which are in great use in the present day trade and commerce and that is why it has been repeatedly emphasised that their enforceability should not be interdicted or interfered with by the Courts except in exceptional circumstances like fraud, special equalities or invalidity of notice of demand. The bank guarantees have been held to be bilateral contracts on the basis of the language of the bank guarantees in use these days. The bank guarantees generally provide that the bank will pay without reference to the principal debtor and often go the extent of saying, as in the present case. that so far as the creditor/beneficiary is concerned, it can look to the bank as if the bank is the principal debtor. Such bank guarantees make the party at whose instance the guarantee is furnished a non-entity. The bank guarantee agreement is rendered a bilateral contract. Therefore I don't find any conflict in the proposition of law based on Section 126 of the Contract Act as brought out in M/s Nangia Construction (supra) and the other judgments holding that a bank guarantee is a bilateral contract.
(15) Before coming to the facts of the present case I consider it appropriate to deal with two legal submissions made by counsel for the defendant in this context. They are - (1) the objection to the validity of the notice of demand is not open to the party at whose instance the bank guarantee has been furnished; and (2) no relief can be granted to the plaintiff on its application under Section 41 read with Schedule Ii of the Arbitration Act in proceedings under Section 20 of the Arbitration Act in relation to the contract of bank guarantee because this contract is an independent contract and the arbitration clause is only contained in the underlying contract, i.e. the construction agreement.
(15) Regarding the first point counsel for the defendant submits that a contract of bank guarantee is an independent contract and it has only two parties to it, i.e. the bank and the beneficiary. Therefore, the objection regarding validity of notice if at all can be taken by the bank and not by the party at whose instance the bank guarantee has been furnished. In support of this submission the counsel has relied on the Supreme Court decision in General Electric Technical Services Co. Inc. (supra). I do not find any observation in the said judgment which goes to the extent the argument is being advanced by counsel for the defendant. The Supreme Court had occasion to deal with the notice of demand and in the light of the language of the bank guarantee involved in the said case it was observed that certain facts were not necessarily required to be mentioned in the notice of demand and. therefore, the notice of demand was held to be valid. The judgment does not say or held that the objection regarding notice of the demand cannot be raised by the party at whose instance the bank guarantee has been furnished. Counsel for the defendant has also referred to D.T.H. Construction Pvt.Ltd. vs. Steel Authority of India Ltd., Air 1986 Cal. 81, which goes to the extent of holding that even if the notice of demand is bad that will not help the bank ultimately and it will not be an excuse for the bank for non-payment of the amount due under the guarantees. It is observed in the said judgment that if the bank has understood the purport of the notice then the bank cannot be heard to say that there has been no statement in the notice that the beneficiary has suffered loss and or damages on account of the defaults committed by the person on whose behalf the guarantee was given.
(16) In this connection certain observations contained in the Supreme Court decision in U.P. Co-op. Federation Ltd. (supra) are worth noting. Para 53 of the judgment is reproduced as under:- 53.Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defense except in the case of fraud. The bank's obligations of course should-not be extended to protect the unscrupulous seller, that is. the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an "egregious nature as to vitiate the entire underlying transaction". It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action fo the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction."
(17) These observations of the Supreme Court clearly show that the buyers, i.e. the party at whose instance the bank guarantee is furnished is entitled to approach the court and seek an injunction against encashment of the bank guarantee. These observations considered in the background of the legal position noticed hereinbefore that under the-Indian Law a contract of .bank guarantee has three parties which includes the party at whose instance the bank guarantee is furnished, make it clear that the plaintiff in the present suit cannot be non-suited on the ground of having no locus standi to seek redressal of his present grievances.
(18) The settled law that the bank guarantee has to be dealt with strictly according to its language and the terms contained therein strengthens this view. The party at whose instance the bank guarantee is furnished cannot be denied even this much right that it may point out to the court that the notice of demand is not in accordance with the language and terms of the bank guarantee. In a given case the bank may collude with the beneficiary in allowing the bank guarantee to be encashed. In another case a bank may overlook the defect in she notice of demand, Unless this right is allowed to the party at whose instance the bank guarantee is being furnished it may lead to injustice. Ultimately it is that party which has to bear the consequences of encashment of the bank guarantee. Therefore, I am not inclined to take a view that the doors should be completely closed to a party at whose instance the bank guarantee is furnished to approach the court. The Supreme Court has recognised this fact as noticed in the above quotation from its decision in the case of U.P. Co-op. Fed. Ltd. (supra). I may note here that this view is confined to the legal question raised regarding locus standi of the party at whose instance the bank guarantee is furnished to challenge the notice of demand. This view in no way be understood to undermine the importance attached to a bank guarantee in the present day trade and commerce and to the legal position which does not admit of interference in encashment of bank guarantees by courts except in exceptional circumstances.
(19) This brings me to the second legal question raised by counsel for the defendant. Counsel for the defendant has urged in support of his argument that it is settled law that a bank guarantee is an independent contract and it has to be considered and enforced without reference to the underlying contract, i.e. the contract in pursuance of which the bank guarantee was furnished. He has drawn my attention to Section 41 of the Arbitration Act read with Schedule Ii of the said Act to submit that under these provisions relief can be granted to a party only in relation to "the contract which contains the arbitration clause and not. in relation to an independent contract. In support of this argument counsel has relied on H.M. Kamaluddin Ansari & Co. vs. Union of India & Ors., . In this case a petition under section 33 of the Arbitration. Act had been filed challenging the validity of the arbitration clause Along with an application under section 41 of the Arbitration Act for injunction restraining the purchaser from withholding the payment under another contract. It was held that injunction prayed for could not be granted because the amount due under the other contract to the contractor/applicant was not the subject matter of the proceedings under section 33 of Arbitration Act.
(20) The analogy of the Supreme Court judgment cannot be strictly applied in the present case. It may be true that for purposes of encashment of bank guarantee one may not have to make any reference to the construction agreement and the enforcement of the bank guarantee has to be seen on the language of the bank guarantee. However, the parent contract cannot be totally overlooked because the bank guarantee has been furnished only in accordance with the requirement of the said contract. Secondly, the disputes which may ultimately be referred to arbitration in the petition under section 20 are likely to include the dispute regarding bank guarantee. In fact in one of the present cases it has been shown that in the reply filed by the defendant, the defendant has himself sought to refer the dispute regarding bank guarantees to arbitration. When this is so it may not be proper to drive a party to multiplicity of proceedings by making it file one petition for reference of disputes to arbitration under section 20 of the Arbitration Act and another independent suit for injunction regarding encashment of bank guarantee. For this reason as also for the reason that though the bank guarantee is an independent contract yet since it has been furnished in pursuance of another contract which contains an arbitration clause, I am not inclined to hold that the plaintiff cannot seek a remedy in the arbitration proceedings. The right of the party at whose instance the bank guarantee is furnished to file a suit in relation to the bank guarantee has been recognised. I do not find it fair and reasonable to drive such a party to separate proceedings. I may note here that in various cases decided by this court no party has been non-suited on-this ground and the petitions for interim relief under section 41 of the Arbitration Act read with Schedule Ii have been entertained. In view of this discussion the second contention on behalf of the defendant fails.
(21) In the background of this legal position I have to consider the facts of these cases and whether any injunction can be granted in favor of the plaintiff and if so to what extent. There are two sets of bank guarantees in these cases. One set consists of performance guarantees while the other set consists of bank guarantees to cover mobilisation advances. Though several bank guarantees are involved, the language of the bank guarantees in each set is identical. Therefore, each set can be considered by taking one of the bank guarantees in the set concerned as the basis of discussion.
(22) Mobilisation Advance Guarantees The entire bank guarantee has already been reproduced in an earlier part of this judgment. Para 3 thereof is crucial for the present purpose. What is sought to be secured is due payment of the sum advanced to the contractor in terms of the contract conditions. Further the bank has undertaken that "if default is made by the said V.K. Construction Works Ltd., New Delhi i.e., the contractor does not refund the said advance in the terms and conditions of the contract. We shall on demand pay to you without any protest, delay or demur and without any reference p73 of any kind whatsoever to the contractor in such manner as you may direct the said amount of Rs._____ or such part thereof not exceeding the said sum as you may require or is payable to you by the contractor for all or any such default you can look to us as the principal debtor without any reference whatsoever to the contractor."
(23) The aforesaid language of the bank guarantee clearly shows that it was intended to secure the defendant against default of the plaintiff in refund of the amount of the advance. Use of the words - "due payment of the said sum by the contractor", "default is made", "i.e. the contract does not refund the said advance", "we shall on demand pay to you -the said amount of Rs.___ or such portion thereof- as you may require or is payable to you by the contractor for all or any such default-", clearly shows that the bank guarantee is conditional and is intended to operate in the event of default in repayment and to the extent of such default. That is it can be enforced/enchased to the extent the advance remains unrefunded. Words "or such portion thereof" are suggestive of this. A conditional guarantee need not be encashed till the condition is fulfillled.
(24) In the face of this language of the bank guarantee it is not possible to urge that the moment any default is committed by the contractor in repayment of any portion of the advance, she bank guarantee can be encashed for its full amount, irrespective of the extent to which refund has been made. The purpose of the bank guarantee is to ensure that the mobilisation advance is fully refunded to the beneficiary.
(25) It is this feature/language of the bank guarantee in the present cases which distinguishes these cases from the decision of the Supreme Court in General Electric Technical Services Co Inc. (supra). In Getsco the bank guarantee was a composite guarantce. initially it was to cover the mobilisation advance. Later it was extended to cover performance of the contract. The bank guarantee dated 28th October. 1986 which was submitted regarding the mobilisation advance does not talk of refund of the mobilisation advance or the extent of refund. It talks of loss or damage caused or suffered or to be caused or suffered by the owner by reason of beach by the contractor of the terms and conditions of the agreement. On this language of the bank guarantee the Supreme Court held that the recovery of She mobilisation advance or the extent to which it was recovered were irrelevant factors in relation to encashment of the bank guarantee and the bank was bound to pay irrespective of any recoveries of the mobilisation advance having been effected. In the bank guarantees involved in she present cases, the recovery of the mobilisation advance and the extent to which it has been recovered are very relevant and material factors. This is in fact a condition of the bank guarantee and can not be ignored. Therefore, the notices of demand dated 19.11.1991, 5.12.1991 or 27.2.1992 which at best go to the extent of saying that the contractor "has defaulted regarding refund of advance", fail to comply with the requirement of the bank guarantee. The notice must indicate the extent of default in refund of the advance and the bank guarantee is encashable to the extent of such default.
(26) Counsel for defendant submits that merely saying "default" in the notice of demand is enough. This will be doing violence to the language and purport of the bank guarantee. I feel fortified in this view by comparing the bank guarantee regarding the mobilisation advance with the bank guarantee regarding performance of the contract. While in the performance guarantee the beneficiary has been made the sole judge of the default in performance of the contract and he need not spell out the default or the extent of default, in the mobilisation advance guarantee it is not so. In the latter the encashment has been linked to the extent of refund. If the intention was otherwise i.e. irrespective of the extent of refund of advance, the entire amount under the bank guarantee was repayable, it could have been so provided and at least the bank guarantee would not have been in the terms in which it exists. This language of the bank guarantee involved is quite understandable and is also reasonable. For the intention is not to make profit or seek enrichment at the cost of another which will be so if even when some refund has been made, the entire amount could be recovered under the bank guarantee. The purpose of the bank guarantee in the present case is to secure the beneficiary against any default in refund of the advance. Therefore, its encashment has understandably been permitted to the extent of default in refund of the advance. Thus, the beneficiary cannot merely say default has been committed.
(27) He has to say what default and to what extent and to that extent encashment of the bank guarantee is permissible. It has been held by the Supreme Court in United Commercial Bank Versus Bank of India etc., that a bank is not liable to honour unless there is exact compliance with the terms of the credit. Such documents must be scrutinised with meticulo Fus care. Therefore. a bank guarantee can only be encashed as per its terms. The bank guarantee in question does not admit of encashment on the basis of a mere averment of default. The extent of default has to be averred and to that extent it is encashable - nothing more, nothing less. The Court will intervene to prevent any action on the part of the beneficiary which may be contrary to the terms of the bank guarantee. Strict adherence to the tms of the bank guarantee has to be ensured. The notices of demand for encashment of the bank guarantees relating to the mobilisation advances not being in accordance with terms of the bank guarantees in the present cases, these bank guarantees cannot be permitted to be encashed. The interim applications in all these cases are allowed to this extent and the defendant is restrained from encashing the bank guarantees regarding mobilisation advance in pursuance of the said notices.
(28) Counsel for defendant has further argued that the bank has vide its letter dated 9.3.1992 showed its willingness to encash the bank guarantees. Therefore, there is no unpediment to encashment of the bank guarantees and the Court should not interfere. Having held that the party at whose instance the bank guarantee is given has a right to approach the Court to stop its encashment, it follows that this argument does not survive. Even otherwise the bank has only showed its willingness to pay as per orders of the Court. I have held that the mobilisation advance bank guarantees are not liable to be encashed in the facts of the case. The bank will abide by this direction.
(29) In view of this decision, I need not go into the controversy between the parties regarding the extent to which the mobilisation advance already stands realised/adjusted by the defendant. According to the plaintiff the entire mobilisation advance already stands realised in all the cases' However, the defendant has denied this. The pleadings of the defendant in reply are vague, evasive and argumentative. The defendant has held back full information which is within its exclusive knowledge. On the other hand counsel for plaintiff has made a statement at the bar that the plaintiff has no objection to encashment of the mobilisation advance guarantees to the extent the mobilisation advance remains unrefunded in each case. By this statement the plaintiff has tried to assert and make good its plea that the mobilisation advance stands fully refunded. It is worth mentioning here that it is not the case of the defendant that no recovery at all has been made of the mobilisation advances. This means some recoveries have been made. During the course of hearing of these applications the parties have tried to make good their respective stand in thisbehalf. However, as already said, I need not go into this question for the present.
(30) Performance Guarantee:- One of the performance guarantees has already been reproduced hereinbefore. The relevant clauses under the said guarantee are clauses 1 and 3. A reference to clause 1 shows that it is an irrevocable guarantee given for the due payment of the sum involved by the contractor to the beneficiary for the due performance of the obligations of the contractor as per the contract conditions. It further says that if default is made by the contractor in performing any of the terms or conditions of the contract or in payment of any money payable to the beneficiary under the contract of which the beneficiary shall be the sole judge, the beneficiary will communicate its decision to the bank which will be final and conclusive and binding on the bank. The bank has also undertaken that it will not be open to the bank to ask any reasons/details in this regard from the beneficiary and it will not question the same or make reference to the contractor in any manner whatsoever. The bank has promised to pay on demand without any protest, delay or demur and without any reference of any kind whatsoever to the contractor and in such manner as the beneficiary may direct, the amount of the bank guarantee or such portion thereof not exceeding that amount as the beneficiary may require or is payable to it by the contractor. The bank has placed itself in the position of a principal debtor and has undertaken to pay without any reference to the contractor. These words of the bank guarantee clearly show that the beneficiary has been made the sole judge regarding any defaults of the contractor or regarding any money payable on account of defaults or breach of contract by the contractor. The beneficiary has only to communicate its decision in this behalf to the bank and the bank has undertaken to pay as a principal debtor without protest, delay or demur and without reference to the contractor. Therefore, by a mere statement in the communication by the beneficiary to the bank that default has been committed by the contractor in performance of the conditions of the contract, the beneficiary can call upon the bank to pay whatever amount it may decide as payable by the bank subject to the maximum amount of the bank guarantee. A reference to the notices of demand particularly to the one issued on 27th February 1992 shows that the same meets the requirements of the bank guarantee and the bank cannot be interdicted in performance of the obligation undertaken by the bank under the bank guarantee.
(31) In clause 3 of the bank guarantee it is provided that the right to recover conferred on the beneficiary under this guarantee will not be affected or suspended by reason of any dispute or disputes raised by the contractor which may be pending before any officer, tribunal, court, arbitrators/umpire. Thus the bank guarantee is very wide in its language, and sweep and it does not admit of any ground for interdicting its encashment except of course fraud or special equities. I may note here that there is no plea of fraud in relation to the performance guarantees in the present case.
(32) The only grounds on which encashment of performance guarantees was sought to be stayed by the plaintiff are that the notice of demand is not in accordance with the terms of the bank guarantees and that there are special equities in favor of the plaintiff which call for an order of injunction against encashment of the bank guarantees. So far as the question of validity of the notice of demand is concerned the case was argued before me on the basis of the notices of demand issued by the defendant vide letters dated 19th November 1991, 5th December 1991. These notices provided ample scope for the arguments that were advanced by counsel for the plaintiff attacking the same. However, the subsequent notices issued by the defendant to the bank on 27th February 1992 knock out the entire arguments. In the subsequent notices the defendant has clearly communicated to the bank that the contractor has defaulted in the performance of its obligations under the contract agreement and, therefore, the defendant has called upon the bank to pay the entire amount under the bank guarantees. This the beneficiary could do as per the terms of the bank guarantee. Therefore, I do not find any ground to hold that the notice of demand is invalid.
(33) Coming to the question of of special equities, counsel for the plaintiff has urged that in some of the cases almost the entire contract has been performed and the only reason for which the entire work could not be completed for instance in one of the cases is that the defendant insists on providing doors manufactured by a particular company. The said company is lying closed and, therefore, doors of that particular brand are not available. In another instance he submits that the defendant is insisting on use of tiles manufactured by only a particular company and those tiles are not at all available in the market. On the basis of these instances it is argued that defendant has prevented the plaintiff from completing its obligations under the contract and on account of this unreasonable attitude of the defendant the plaintiff should not be made to suffer. I do not consider that such instances as urged by the plaintiff fall within the category of special equities carved out as an exception to the rule in favor of encashment of bank guarantees. Secondly, the language of the bank guarantee in question makes the defendant as the sole judge of breach of contract and the amount to be claimed for this. Therefore, there is no scope for any one else to consider any mitigating circumstances. The contract provision supercedes everything. The contention of the counsel for the plaintiff that there are special equities requiring an injunction to the bank or the defendant restraining encashment of the bank guarantees cannot be sustained.
(34) It follows from the above discussion that so far as the performance guarantees are concerned, the plaintiff is not entitled to any relief and to this extent the prayer of the plaintiff in the interim applications stands rejected.
(35) However, the defendant is restrained from encashing the bank guarantees furnished to it by the plaintiff to cover the mobilisation advances on the basis of the notices of demand dated 19th November 1991/5th December 1991/27th February 1992.
(36) All the interim applications listed above stand disposed of. In the circumstances of the case there will be no order as to costs.