Madras High Court
Southern Petrochemical Industries ... vs Syndicate Bank on 28 June, 1999
Equivalent citations: (1999)3MLJ415
JUDGMENT Subbulakshmy, J.
1. Plaintiff is the appellant.
2. The case of the plaintiff is as follows:
The plaintiff is a limited company registered under Companies Act 1956. The defendant is a banking institution. The plaintiff entered into a contract with one Vijay Tanks and Vessels Ltd., Bombay for the performance of certain works. To ensure the due performance of their obligations, the said Vijay Tanks procured from the Bank certain guarantees. The first guarantee is No. 11 of 1980 dated 6.5.1980 and another is No. 93 of 1981 dated 3.9.1981. Under the terms of Guarantee No. l 1 of 1980, the Bank bound themselves as guarantors and primary obligators for a sum of Rs. 33,65,200 on the company's demand for payment by reason of Vijay' Tanks: failure to fulfil its obligations. Under the terms of Guarantee No. 93 of 1981, the Bank Bound themselves unconditionally and irrevocably to pay on demand a sum of Rs. 50,00,000 advanced to Vijay Tanks. Guarantee No. 11/80 was initially to remain in force till 31.12.1981. However, by agreement of all parties or by order of court, it was extended from time to time and finally till 31.7.1983. Guarantee No. 93/81 was initially to remain in force till 31.1.1982 However, by agreement of all parties or by orders of court, it was extended form time to time and finally till 31.7.1983. The plaintiffs, from time to time made claims on the bank certifying the amounts due under the guarantees. But, no amounts were paid under the guarantees. After the plaintiff had made the demands on the bank; Vijay Tanks filed Application No. 220 of 1983 in C.S. No. 31 of 1983 and obtained an ex parte order of injunction on 27.1.1983 preventing the plaintiff from enforcing their rights against the bank under the guarantees. As per the understanding given by Vijay Tanks and as per order dated 29.3.1983 the bank guarantees were extended upto 31.7.1983. It was a condition of the guarantee that a suit or action to enforce a claim should be filed within six months of that date. Acting on the faith of the extension give by the bank, the plaintiff refrained from taking action and proceeded with the matters pending in court. This Court, in Application Nos. 220 and 892 of 1983 by order dated 11.7.1983 granted injunction in respect of guarantee No. 11 of 1980 and dismissed the injunction in. respect of guarantee No. 93 of 1981. As against these orders, both the plaintiff and Vijay Tanks preferred Appeals in O.S.A. Nos. 100 and 101 of 1983. Ultimately, on 31.8.1983, by consent, the Appellate Bench permitted the plaintiff to recover the amount of Rs. 29,65,000 under guarantee No. 11 of 1980 from the bank should Vijay Tanks not make payment within a month. So far as guarantee No. 93 of 1981 was concerned, it is to be substituted by a fresh guarantee. However, no payment was made, nor was any fresh guarantee forthcoming. The plaintiffs by themselves and through their counsel made demands both on the Bank and on Vijay Tanks. But, the bank repudiated their liability, on untenable grounds, The bank is due and liable to pay the sum due under those guarantees. The transaction having been contracted in the usual course of business is a commercial transaction and the bank is liable to pay commercial rate of interest at 18% per annum. So, the plaintiffs have come forward with the suit for a judgment and decree against the defendant for a sum of Rs. 30,69,815,12 together with interest at 18% per annum and for Rs. 52,22,489,94 together with interest at the rate of 18% per annum due on both the guarantees.
3. The defendant filed written statement, contending as follows:
Guarantee No. 11/98 was originally valid only upto 31.12.1982. They were extended from time to time by the defendant with the concurrence, of the plaintiff and VTVL only upto 30.9.1982. The further extension made by the defendant upto 31.12.1982 and thereafter upto 31.7.1983 were not only accepted by the plaintiff but they were challenged as unilateral and that they were not inconformity with the requirements of the plaintiff. So, the guarantees could be said to have been valid and binding only upto 30.9.1982 as there is no concluded agreement between the parties with reference to the extension made by the defendant after 30.9.1982. The plaintiff invoked the suit guarantee by its letter dated 24.9.1982 with reference to the guarantees extended upto 30.9.1982. The defendant is not a party to the proceedings in C.S. No. 31 of 1983 and so, the defendant is not bound by any undertaking said to have been made by the said VTVL. As the plaintiff has not accepted the extension of the guarantee made beyond 30.9.1982, it is not open to the plaintiff to rely upon or refer to such extension and the plaintiff is estopped from making any claims in respect of extensions not mutually agreed to between the parties. The plaintiff never accepted the extension of the guarantees. The plaintiff invoked these guarantees by their letter dated 24.9.1982. VTVL filed C.S. No. 31 of 1983 for injunction to restrain the plaintiff from invoking the said guarantees. An interlocutory application was also taken out for injunction to restrain the plaintiff from receiving any money for the suit guarantees and the plaintiff was injuncted from invoking the bank guarantee No. 11/80 and so far as guarantee No. 93/81 is concerned, injunction was not granted. In the appeals preferred as against that order in O.S.A. Nos. 100 and 101 of 1983, a compromise was entered into between the plaintiff and VTVL. This defendant is neither a party in the trial nor in the appellate court and the compromise was not entered with the concurrence of this defendant and so, the order of the appellate court dated 31.8.1983 is not binding on this defendant. The compromise entered into between the plaintiff and the said VTVL would also have the effect of discharging the defendant from the guarantee obligations under Sections 129 and 135 of the Contract Act. So, the allegation that no payment was made nor was any fresh guarantee forthcoming is of no consequence As the plaintiff did not accept for extension of guarantee after 31.7.1983, there is no concluded contract with the plaintiff after 30.9.1982. The defendant denies its liability to pay any amount to the plaintiff. The defendant is not liable to pay any interest.
4. The learned single Judge decreed the suit in respect of guarantee No. 11/80 and dismissed the suit in respect of guarantee No. 93/81.
5. As against that judgment and decree, the plaintiff preferred the O.S.A. contending as follows: The finding of the learned Judge that the plaintiff has waived its right to enforce guarantee No. 93/81 dated 9.3.1981 in view of judgment in O.S.A. Nos. 100 and 101 of 1983 of this Court based on the compromise between the appellant and VTVL is erroneous. The appellant further contends that in as much as C.S. No. 31 of 1983 was withdrawn by Vijay Tanks and it having been dismissed based on which fresh guarantee had to be executed ceased to exist and there is no waiver of right on the part of the plaintiff to enforce guarantee No. 93/81. It is further contended by the appellant that guarantee No. 93/81 being a contract creating an irrevocable obligation to perform unconditionally and irrevocably, it is enforcible irrespective of the judgment in O.S.A. Nos. 100 and 101 of 1983 and the defendant is liable not only as a guarantor but also as primary obligor and the guarantee is an enforcible contract.
6. The defendant preferred Cross-Objections No. 94 of 1998 contending that the judgment and decree passed in respect of guarantee No. 11/80 is not sustainable and the compromise decree passed in O.S.A. Nos. 100 and 101 of 1983 has superseded the earlier bank guarantee and the contract as per the compromise decree is a fresh contract entered into without the knowledge of the guarantee and that would discharge the liability of the guarantor and so, the judgment and decree is not sustainable.
7. Points that arise for consideration in the appeal and cross objections are whether the plaintiff is entitled to enforce the guarantee No. 93/81 and whether the judgment and decree passed by the learned single Judge in respect of guarantee No. 11/80 is not sustainable as contended by the defendant.
8. Exs.P-1 and P-2 are the Bank guarantees executed by the defendant in favour of the plaintiff for Rs. 33,65,200 and Rs. 50,00,000 respectively. Time was extended for these guarantees upto 31.7.1983. when the plaintiff made their claims under the guarantees, Vijay Tanks filed Applications Nos. 220 and 892 of 1983 in C.S. No. 31 of 1983 wherein injunction was granted in respect of guarantee No. 11/80 and no injunction was granted in respect of guarantee No. 93/81. As against those orders, both the plaintiff and Vijay Tanks preferred appeals in O.S.A. Nos. 100 and 101 of 1983. Ultimately on 31.8.1983, by consent, the Appellate Bench permitted the plaintiffs to recover the amount of Rs. 29,65,000 under guarantee No. 11/80 from the Bank should Vijay Tanks not make payment within a month and so far as guarantee No. 93/81 is concerned, it was to be substituted by a fresh guarantee. The plaintiff contends that no payment was made nor any fresh guarantee was for the coming and when the plaintiff made their claim on the bank guarantees, the defendant bank repudiated their liability. The defendant contends that the defendant was not a party to the proceedings in C.S. No. 31 of 1983 and O.S.A. Nos. 100 and 101 of 1983 and so, the order of the appellate court dated 31.8.1983 is not binding on them and the compromise entered into between the plaintiff and the Vijay Tanks would also have the effect of discharging the defendant from the guarantee obligations under Sections 129 and 135 of the Contract Act. The learned Single Judge found so far as guarantee No. 11/80 is concerned, the relevant portion in the compromise enables the plaintiff to invoke the bank guarantee to the extent of Rs. 29,65,000 and the decree has to be limited for that amount only and in respect of guarantee No. 93/81 Ex.P-2, the learned single Judge has found that in view of the compromise memo in respect of that guarantee, instead of guarantee for Rs. 50,00,000 a fresh guarantee for Rs. 50,00,000 will be given by the appellants to satisfy any award passed by the Arbitrator in favour of SPIC upto the limit of Rs. 50,00 000 and in view of such statement by the plaintiff, any claim on the guarantee is not only dependent on the award to be passed by the Arbitrator but also on the basis of the fresh guarantee to be executed, the plaintiff has waived its right and so, it cannot be enforced in this suit and dismissed the suit in respect of guarantee No. 93/81 Ex.P-2, These findings are challenged in the present appeal and the cross appeal.
9. Mr. M. Subramaniam, learned senior counsel for appellant submitted that the defendant-Bank is liable to pay the claim on the bank guarantee when the bank guarantee is invoked by the plaintiff and the defendant as guarantor as well as primary obligor is liable to pay the amount to the plaintiff under the guarantee.
10. Learned Counsel for the respondent/defendant submitted that by virtue of the compromise entered into in O.S.A. Nos. 100 and 101 of 1983, the defendant was discharged from the guarantee obligations under Sections 129 and 135 of the Contract Act and as the defendant is not a party to the compromise decree, the order of the appellate court dated 31.8.1983 is not binding on this defendant.
11. With regard to enforcibility of the contracts, Exs.P-1 and P-2, it is relevant to mention the wordings contained in Exs.P-1 and P-2. The defendant got bound themselves not only as guarantor but also as primary obligors and have undertaken to be responsible to the company, their successors and assigns for payment of all or any sums of money, losses, damages, costs, charges and expenses that may become due or payable by the contractor in the faithful performance of his said obligations and the defendant bank also unconditionally and irrevocably guaranteed payment without demur and without recourse to the owner. These bank guarantees Exs.P-1 and P-2 were prepared in order to ensure due performance of the obligations under the contract entered into between the plaintiff and one Vijay Tanks and Vessels Ltd., Bombay, As necessity arose for enforcing the bank guarantees, the plaintiff invoked the bank guarantees which claim has been repudiated by the defendant. Exs.P-1 and P-2 are unconditional and irrevocable guarantees for payment without demur and without recourse to the owner. In Vinay Engineering v. Neyveli Lighnite Corporation Ltd., and another , it has been held that, If the bank guarantees are unconditional, the bank has no defence when its guarantee is sought to be enforced. It is the document of guarantee that has to be scanned to ascertain whether the guarantee is conditional or otherwise and whether it is an autonomous contract by itself....
The Supreme Court has held in U.P. Sugar Corporation v. Sumac International Ltd. , that, When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realise such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated." The Supreme Court has held in State of Maharashtra v. National Construction Company, Bombay , that, "The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order, the bank giving the guarantee must honour the same and make payment. Ordinarily unless there is an allegation of fraud or the like, the courts, will not interfere directly or indirectly to withhold payment, otherwise trust in commerce, internal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle their disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising excontratu is not barred and the cause of action for the same is independent of enforcement of the guarantee.
Law relating to invocation of bank guarantee is well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted the beneficiary is entitled to realise the said bank guarantee in terms thereof, irrespective of any pending disputes. Bank giving such a guarantee is to honour as per its terms, irrespective of any dispute raised by the parties. The very purpose of giving bank guarantee would otherwise be defeated. The exceptions are that when a fraud is committed, the fraud in connection with such a bank guarantee would vitiate the very intention of such bank guarantee and encashment of unconditional bank guarantee resulting 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 contemplated under this head must be of such an exceptional and irrestrievable nature as would override the terms of the guarantee. So, the legal position is well settled that in the case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary.
12. In the instant case, the bank guarantees Exs.P-1 and P-2 are unconditional and irrevocable as per their terms. So, under Exs.P-1 and P-2, the defendant bank is bound not only as guarantors but also as primary obligors on a perusal of Exs.P-1 and P-2 as primary obligators On a perusal of Exs.P-1 and P-2 it is clear that they are unconditional bank guarantees and the dispute if any between the plaintiff and the contractor has no relevance with regard to invoking of the guarantees. It is evident from the documents that the plaintiff has invoked the bank guarantees in time as per their terms by sending letters. The Bank guarantees were given at the instance of the Contractor and it was also accepted by the plaintiff and extension of time was also granted for invocation of the bank guarantees. The plaintiff invoked the bank guarantees within the extended period of time as evidenced by letters Exs.P-4 and P-5. Since the extension of time was accepted by the parties, there is a binding contract between the parties and the defendant was under an obligation to honour the bank guarantees when the claim was made by the plaintiff on Exs.P-1 and P-2. So, both the bank guarantees, Exs.P-1 and P-2 are enforceable contracts they being unconditional and irrevocable and the defendant bank has also undertaken to pay the amount without any demur. The defendant bank is duty bound to honour the bank guarantees. The defendant has failed to honour the bank guarantees and such failure on the part of the defendant is illegal and in clear violation of the terms and conditions of the bank guarantees. We are therefore of the view that the defendant is liable and is obliged to honour Exs.P-1 and P-2 bank guarantees. We agree with the finding of the learned single Judge in respect of enforcement of bank guarantees Ex.P-1.
13. With regard to Ex.P-2, the learned single Judge found that by virtue of the compromise entered into between the parties in O.S.A. Nos. 100 and 101 of 1983, the plaintiff has waived its right and so, Ex.P-2 is not enforceable. In respect of Ex.P-1, the plaintiff was permitted to recover the amount under the compromise decree. But, in respect of Ex.P-2, guarantee No. 93/81, the compromise memo was to the effect that instead of guarantee No. 93/81 for Rs. 50,00,000 a fresh guarantee for Rs. 50,00,000 will be given by the appellants to satisfy any award passed by the Arbitrator in favour of SPIC upto the limit of Rs. 50,00,000 The learned single Judge has also found that in view of such statement by the plaintiff that any claim on the guarantee is not only dependent on the award to be passed by the Arbitrator but also on the basis of the fresh guarantee to be executed, the plaintiff has waived its right and if the plaintiff is allowed to recover the amount covered by guarantee No. 93 of 1981, that will amount to justifying a fraud. The learned single Judge further found that when the contractor and the plaintiff agree that guarantee No. 93/81 will not be enforced, there is an undertaking given by it to the court that it will not insist in recovering the amount, covered by that guarantees, and so the conduct of the plaintiff in instituting the suit for recovery of the amount covered by Ex.P-2 really amounts to a fraud on its part and the bank is justified in refusing to pay in view of the compromise, and accordingly dismissed the claim of the plaintiff in respect of Ex.P-2 guarantee. Law relating to invocation of bank guarantee is well settled and any dispute between the parties is not a ground for refusing the claim of the plaintiff. Under Ex.P-2, the defendant bank has undertaken to pay the amount without any demur. So, Ex.P-2 is an enforceable contract and any statement made in the compromise memo will not vitiate Ex.P-2 bank guarantee and it will not make that unenforceable. Under Ex.P-2 the defendant has unconditionally and irrevocably agreed to make payment without any demur. The two exceptions which the courts have allowed against invocation of bank guarantees viz., fraud and irretrievable injustice also do not apply to the instant case. Because of the compromise, memo it cannot be stated that if the plaintiff is allowed to invoke the bank guarantee Ex.P-2, it would amount to justifying a fraud. In the compromise memo it is stated that guarantee No. 93/81, for Rs. 50,00,000 a fresh guarantee for Rs. 50,00,000 may be given by the appellants to satisfy any award passed by the Arbitrator in favour of SPIC upto the limit of Rs. 50,00,000 and any claim on the guarantee by SPIC is dependent on the award to be passed by the Arbitrator. That compromise was entered into between the plaintiff and the contractor. So far as Ex.P-2 bank guarantee is concerned, it was executed and, it is enforceable and as soon as demand is made by the plaintiff on that bank guarantee, the defendant is liable to pay that amount. Since Ex.P-2 is irrevocable and unconditional guarantee and as the defendant has undertaken to pay that amount; under that guarantee, invocation of that bank guarantee will not amount to fraud and it may also not be stated that irretrievable injustice would be caused. The defendant bank was not absolved of its liability because of the compromise which was entered into between the plaintiff and the contractor and it will not amount to waiver.
14. The Kerala High Court in Canara Bank v. Goukuldas Shenoy (1991)72 C.C. 298, laid down that the guarantor cannot plead discharge on the ground of compromise entered into between the bank and the principal debtor. With regard to the contention of the defendant that the compromise entered into between the plaintiff and the contractor would also have the effect of discharging the defendant from the guarantee obligations under Sections 129 and 135 of the Contract Act, the said contention is wholly untenable because the defendant bank is not a party to that compromise and it is in no way concerned with that compromise. Section 135 of the Contract Act reads thus, A contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to use, the principal debtor, discharges the surety unless the surety assents to such contract.
Because of the compromise, it cannot be stated that the bank which has guaranteed for the payment of the amount under Ex.P-2 can escape from its liability by stating that compromise was entered into between the plaintiff and the contractor. Ex.P-2 is a bank guarantee which is unconditional and irrevocable and it is enforceable and when it is invoked, the defendant bank is liable to pay that amount to the plaintiff. As the guarantee was enforced and it was invoked within the extended time, the defendant bank was bound to honour it and payment cannot be refused to the plaintiff. So, by virtue of the compromise entered into between the plaintiff and the contractor, the defendant bank is not entitled to contend that it was discharged of its liability. The defendant is bound to honour the bank guarantee when it was invoked. Ultimately, if that amount was paid by the contractor to the plaintiff consequent to the decision arrived in C.S. No. 193 of 1985, the plaintiff is liable to reimburse the amount to the defendant.
15. We hold that the defendant Bank is liable to honour both the bank guarantees Exs.P-1 and P-2 and the plaintiff is entitled to invoke and encash them. The judgment and decree of the learned single Judge so far as encashment of the guarantee Ex.P-1 is concerned is affirmed. The Judgment and decree of the learned Single Judge in respect of the guarantee, Ex.P-2, is set aside and the plaintiff's suit in respect of that guarantee is decreed. Interest at 12 per cent per annum from the date of the suit till the date of realisation shall be paid to the plaintiff by the defendant. If any amount is paid to the plaintiff by the contractor, the defendant bank must be reimbursed to that extent by the plaintiff.
16. In the result, the original side appeal is allowed and the cross objections is dismissed. Connected pending C.M.Ps. are closed. No costs.