Delhi High Court
Khushi Ram Behari Lal Ltd. vs State Trading Corporation Of India Ltd. ... on 19 December, 1996
Equivalent citations: [1998]91COMPCAS206(DELHI)
Author: J.B. Goel
Bench: J.B. Goel
JUDGMENT
J.B. Goel J.
1. By this order, I shall dispose of I.A. No. 6997 of 1996 filed by the plaintiff, in the suit seeking an interim injunction against the defendants restraining them from invoking the bank guarantee dated February 21, 1995. The immediate cause for the plaintiff in filing the suit is that defendant No. 1 had approached defendant No. 2 bank for extending the validity period of the bank guarantee or otherwise threatening its invocation. The bank guarantee was given for the plaintiff in pursuance of an agreement dated February 21, 1995, with defendant No. 1.
2. The dispute between the parties has arises in the following circumstances :
3. Defendant No. 1, State Trading Corporation of India Ltd. (for short, "STC"), had entered into a contact with the Ministry of Food, Government of the Republic of Bangladesh, on February 1, 1995, for export of 25,000 M.T. +/- 5 per cent. India non-basmati parboiled rice (PR-106 variety). R.K. Export House was to supply the above goods to the STC and was to furnish a performance guarantee to the buyer, i.e., the Government of the Republic of Bangladesh. The said supplier backed out and due to urgency of the shipment which was to be completed by February 28, 1995, defendant No. 1 decided to purchase the desired stocks of rice from the Food Corporation of India (for short, "FCI") at open sale price and to get the same processed and graded by a private party. The STC entered into a contract dated February, 21, 1995, with the plaintiff for processing and upgrading 25,000 M.T. of rice and to ship the same to the foreign buyer on the terms and conditions agreed in the contract dated February 21, 1995 (annexure "I" to the plaint). The contract provided that the plaintiff was to take delivery of the rice to be supplied for the STC at the FCI godown at Gandhidham, process and upgrade the rice and bag the same as per specification given in the contracts, domestic and foreign. The plaintiff was also to arrange loading of the rice on the ship nominated by the STC and some more acts and things which were required to be performed by the plaintiff were mentioned in annexures "I" and "II" to the contract, which included to appoint cargo handling agents at their own cost, keep transit foreign warehouse insurance processor and the export indemnity letter, certificate of origin, etc. For this work, the STC was to pay the plaintiff Rs. 1.345 per M.T.
4. A time frame was provided for doing all this processing as per clause 12 which reads as under :
"Processor agrees to make the first shipment of 6,000 M. T. +/- 5 per cent. latest by February 28, 1995, provided material is available for delivery at FCI Kandla/Gandhidham, four days prior to the shipment date. Thereafter, balance shipment of 19,000 M.T. +/-5 per cent. to be effected not later than March 15, 1995."
5. The contract between the plaintiff and the defendant required the plaintiff to furnish the performance bank guarantee in terms of clause 17 to the following effect :
"Processor agreed to furnish performance bank guarantee of Rs. 35,30,625 within two banking days of signing of this agreement in favour of STC. Such PBG to be valid for three months and to be extendable for further period if required."
6. This contract also gave the right to the STC to invoke this bank guarantee in case the plaintiff failed to perform the conditions as mentioned in the contract in terms of its clause 18 which reads as under :
"18. In the event of non-supplying of rice in part or whole by the processor as per conditions mentioned hereinabove as also in annexures "I" and "II", STC reserve the right to invoke the PBG without assigning any reason whatsoever. STC has a right to recover losses/damages, etc., and shall not be in any way, restricted to only invocation of bank guarantee. STC has full right to recover losses/damages which STC may suffer due to non-fulfilment of this agreement and export contract."
7. In pursuance of this clause the plaintiff furnished the following performance bank guarantee of defendant No. 2 :
"Now, therefore, this guarantee witnesses and the bank hereby irrevocably and unconditionally agrees and declares as follows :
1. In consideration of the premises mentioned hereinabove, the bank does hereby irrevocably and unconditionally guarantee the due and faithful performance of the agreement dated February 21, 1995, on the part of the processor and agrees, undertakes and guarantees to the STC that in the event of any breach/failure/default, for whatsoever reason, on the part of the processor, in performing all or any of its obligations under the agreement as well as the export contract as may be amended from time to time, the bank shall, forthwith on a demand in writing for payment under this guarantee made by an officer of the rank of Chief Marketing Manager or above of the STC, pay to the STC without any demur, protest or contestation and without any reference to the processor the said amount to Rs. 35,30,625 ... notwithstanding any dispute whatsoever pending between the STC and the processor. In case the bank does not pay invoked amount within seven days from the date of demand the bank shall pay interest at 10 per cent. from the date of demand and date of actual payment."
8. The contract provided that the first lot of 6,000 M.T. of rice was to be shipped to Bangladesh latest by February 28, 1995, but the requisite quantity of rice was to be made available by the STC to the plaintiff four days prior to this shipment date which they failed to do and the plaintiff thus could not do his part of the job/works as required under contract.
9. The STC, vide their letter dated February 24, 1995 (annexure "3"), wrote to the managing director of the FCI requesting him to make available the requisite quantity of rice so as to enable the STC to complete the export obligation by March 15, 1995, and on this request the FCI could arrange to make available only 4,600 M.T. of rice through the FCI godown on March 4, 1995, to the plaintiff. Thereafter, between March 6, 1995, and March 31, 1995, more quantity of rice from the FCI godown was supplied by the STC to the plaintiff. In this way the plaintiff was supplied in all 11852.697 M.T. of rice for processing and shipment as against the contracted quantity of 25,000 MT. The goods could not be shipped for transport to the Government of Bangladesh on February 28, 1995, and March 15, 1995, as agreed and the contract between the STC and the Government of Bangladesh remained unoperational. It is not the case of the STC that there was any fault or breach on the part of the plaintiff in not completing its part of the contract. When the time for shipment on February 28, 1995, was not observed and no further instructions were received from the STC, the plaintiff had written letter dated March 13, 1995, to the STC seeking further instructions to process and for shipment of rice to the Government of Bangladesh and also informed the STC that the plaintiff had incurred various expenses for completing their part of the agreement, vide their letter dated March 13, 1995 (annexure "5").
10. No instructions were issued by the STC to the plaintiff for a long time and by means of a fax message dated March 29, 1995 (annexure "6"), they informed the plaintiff as under :
"We propose to lift the stocks of rice kept in your custody at Kandla/Gandhidham as it is for loading per m.v. Mantis.
Since, vessel has already tendered N.O.R. you are requested to immediately advise your representative at Kandla/Gandhidham to allow STC, Gandhidham/Curcha to lift the stocks in his presence for leading into the vessel m.v. Mantis. Matter most urgent."
11. Vide letter dated March 29, 1995 (annexure "7"), the plaintiff in reply informed the STC as under :
"We understand from Mr. S. R. Verma that you intend to export superfine rice lying in our custody at Kandla port on 'as is where is' basis without effecting grading and repacking. We request you to kindly consult us before taking any action in this regard since we have made lot of efforts right from loading this cargo from Punjab to Kandla and storing the same at Kandla port. You are also well aware of the fact that we have already incurred heavy expenses to the tune of approximately Rs. 75 lakhs for handling this cargo till this time.
This is for your information and for immediate discussion."
12. Vide another letter dated March 31, 1995 (annexure "8"), the plaintiff further informed the STC that they had undertaken various steps on their part in performance of the contract as per details given in this letter and offered to settle their claim of compensation for their services at Rs. 400 per M.T. amounting to Rs. 47 lakhs. The plaintiff, vide fax message dated April 4, 1995, in reply to the defendant's letter dated April 3, 1995, also supplied break-up/details of the actual expenses incurred by the plaintiff till that date in handling the stocks of rice of the STC and the total claim made amounted to Rs. 60,90,356 and requested the defendant to make payment of these expenses.
13. The STC wrote a letter dated April 3, 1995 (annexure "9"), to the plaintiff requesting that the rice be loaded on the vessels m.v. Mantis and GIOS pending negotiations of the compensation to be paid to the plaintiff and in another letter dated April 5, 1995 (annexure "10"), informed the plaintiff as under :
"As explained to you during discussion, we shall examine the same and shall subsequently discuss with you to arrive at an amicable settlement. Meanwhile, as discussed with you we would request kindly to release at least 10,800 M.T. rice out of the total stocks of about 11,800 M.T. lying with you against trust receipt."
14. It appears that this request of the defendant was complied with by the plaintiff and 10,800 M.T. of the rice was loaded into the vessel m.v. Mantis and GIOS as per the directions of the defendant as is admitted by the defendant in para 4 of its statement.
15. Subsequently, perhaps after various meetings and discussions, the defendant, vide their letter dated April 16, 1996 (annexure "12"), offered to pay to the plaintiff Rs. 21.02 lakhs in full and final settlement of their claims subject to the plaintiff accounting for the balance stock of rice lying with them, and further desired that "we will consider releasing of your PBG on receipt of stocks from you and on your accepting the above amount of Rs. 21.02 lakhs as full and final settlement of all your claims". On demand by the plaintiff, vide letter dated May 15, 1996 (annexure "14"), details of this compensation offered were also given.
16. The balance quantity of goods were lying in the custody of the plaintiff's agent, i.e., Act Shipping Ltd., Ship 206-207, Seva Sadan II, New Kandla, and as desired by the defendant in their letter dated May 22, 1996 (annexure "15"), the undertaking of that agent was also furnished by the plaintiff for releasing the balance quantity of the stock to the defendant unconditionally. The said agent had given an undertaking that they were in possession of the balance stock of PBSF rice belonging to the STC, and in the event the STC floats tender for despatch of these stocks they undertook to deliver the same to the person/firm authorised by the STC to whom such stocks will be sold immediately, and further undertook that they shall not withhold the delivery of the above said cargo for whatsoever reason including their claim outstanding for settlement by the STC on account of handling charges. This fact is admitted in para. 27 of the written statement by the STC. In spite of this no steps have been taken by the STC for taking delivery of the remaining stocks of rice and instead of releasing the bank guarantee the STC had been approaching defendant No. 2 and the plaintiff for extension of the validity of the bank guarantee, from time to time which was so got extended till July 15, 1996. The STC again wrote to defendant No. 2-bank for extension of the validity of the bank guarantee and defendant No. 2-bank, vide their letter dated July 15, 1996 (annexure "20"), informed the plaintiff that defendant No. 1 was claiming the guarantee amount unless the same is extended and the plaintiff had to bear 100 per cent. margins since the guarantee had become a disputed guarantee.
17. After receipt of this letter the plaintiff filed the present suit impleading the STC as defendant No. 1 and the bank, namely, State Bank of India, as defendant No. 2 alleging that this action of defendant No. 1 was fraudulent, arbitrary, mala fide, unfair and the STC were not justified under the contract and claimed reliefs of injunctions against demanding any payment under the said guarantee.
18. The bank guarantee had been extended earlier and on August 30, 1996, the plaintiff was further directed by this court to extend the bank guarantee for two weeks from September 17, 1996, and it has been further extended during the pendency of the suit. However, on December 12, 1996, after hearing the parties, and on the plaintiff making an unconditional statement that they had no objection in releasing the balance stock of the rice to the plaintiff, direction was given by the court that if the defendant pays Rs. 21 lakhs odd as admitted by them, then the plaintiff shall renew the bank guarantee for two weeks.
19. I have heard learned counsel for the parties.
20. Learned counsel for the plaintiff has contended that the plaintiff had furnished the bank guarantee in pursuance of the agreement dated February 21, 1995, with the STC and that the agreement contemplated that the goods were to be shipped to the Government of Bangladesh under the agreement entered into with them on February 1, 1995; that agreement was abandoned and the plaintiff was not required to ship the goods under the agreement dated February 21, 1995, so it stood frustrated and the bank guarantee furnished by the plaintiff cannot be invoked by the STC. In any case, the plaintiff has already returned to the STC stocks of 10,800 MT of rice and the remaining stock has not been lifted by the STC, for no fault of the plaintiff, and the plaintiff is entitled to compensation for handling the goods of the defendant as bailee and the defendant had offered a sum of Rs. 21.02 lakhs which though is unreasonable and too inadequate even has not been paid which should have been paid without prejudice to the rights and contentions of the parties. This action of the defendant in asking the bank for renewal of the bank guarantee and giving a threat of invoking the bank guarantee on failure of the plaintiff is fraudulent, misuse of its position and is against the equities in the circumstances of the case, and the plaintiff is thereby put to double burden and irretrievable loss. In the circumstances, the defendant is not entitled to claim extension of or for invoking bank guarantee. He has relied on Hindustan Steel Works Construction Ltd. v. Tarapore and Co. [1996] 87 Comp Cas 344 and Synthetic Foams Ltd. v. Simplex Concrete Piles (India) Pvt. Ltd. .
21. Whereas learned counsel for the defendant has contended that the rights and obligations of the parties are governed by the agreement dated February 21, 1995, which provided for furnishing of a bank guarantee and unless the obligations arising out of that contract are discharged by the plaintiff the obligation to honour the commitment made in the bank guarantee has to be fulfillled by the plaintiff; the bank guarantee is an independent contract, as such the defendant is entitled to seek extension of its validity and in the case of failure to do so to invoke the same as agreed under the contract. He has relied to do so to invoke the same as agreed under the contract. He has relied on Larsen and Toubro Ltd. v. Maharashtra State Electricity Board and certain observations made in Hindustan Steel Works Construction Ltd. v. Tarapore and Co. , which was also relied on, on behalf of the plaintiff.
22. In Larsen and Toubro Ltd. v. Maharashtra State Electricity Board , reference has been made to earlier decisions of the Supreme Court including the law laid down in Svenska Handelbanken v. Indian Charge Chrome [1994] 79 Comp Cas 589; [1994] 1 SCC 502, governing the principles for invoking the bank guarantees. This case law including the case of Larsen and Toubro Ltd. [1996] 85 Comp Cas 214 (SC) has also been referred to in Hindustan Steel Works Construction Ltd. v. Tarapore and Co. .
23. The principles governing the exercise of jurisdiction by the court in the matter of bank guarantees as laid down are that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. In the case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceedings between the parties at whose instance the bank guarantee is given and the beneficiary. Commitments of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say in the case of fraud or is a case where irretrievable injustice would be done if the bank guarantee is allowed to be encashed, the court should interfere. Again in Ansal Engineering Projects v. Tehri Hydro Development Corporation Ltd. (3-judge Bench) these principles have been followed. However, it is clear from the law so laid down that the court is empowered to exercise jurisdiction against invoking of bank guarantee in cases where fraud or special equity is prima facie made out so as to prevent irretrievable injustice to the parties.
24. In the present case under the contract between the plaintiff and the STC dated February 21, 1995, the bank guarantee furnished was to be valid for three months but extendable and could be invoked in the event of non-supply of any part or whole by the processor of the stock of rice as per conditions mentioned in the agreement. The contract between the STC and the foreign buyer was cancelled or frustrated in the month of February or March, 1995, itself. The STC should have either lifted the stock of rice immediately or settled new terms with the plaintiff. Part of the goods were obtained and the plaintiff had given consent for releasing the balance stock which ought to have been lifted without unnecessary or unreasonable delay. Under this contract, the plaintiff was entitled to charge at the rate of Rs. 1,345 per M.T. for the various services and jobs undertaken by them from the defendant. However, as those services could not be performed because the agreement between the defendant and the foreign buyer was cancelled or otherwise revoked it is not alleged that the plaintiff had committed any breach of the contract dated February 21, 1995. The plaintiff was holding stock of rice of the STC obviously as a bailee and as a bailee is entitled to reasonable remuneration. The plaintiff has given his statement of claim as compensation and the defendant has offered a sum of Rs. 21.02 lakhs and even that amount remains unpaid till date. A major part of the goods had been lifted and only a small part of it is left. When the plaintiff has not objected to the lifting of the goods by the STC without insisting on their claim being satisfied it is very unfortunate that the STC after 22 months has not lifted the balance stock of the goods lying with the plaintiff. Thereby it has put the plaintiff to unnecessary double burden, on costs being incurred in getting the bank guarantee extended from time to time; and, secondly, in handling the latter's stock as bailee. The equities of the case demand that the defendant should have paid at least an amount of Rs. 21.02 lakhs which according to them the plaintiff was entitled to as compensation and lift their balance stock of rice. The action of the defendant in the circumstances is clearly fraudulent, a misuse of their position, unjust and inequitable. On December 12, 1996, when the arguments were heard a categorical statement was made on behalf of the plaintiff that they had never refused to allow the removal of the remaining stocks of the goods to the defendant but there was no offer to pay the admitted amount even on that date. It was but just and proper on the part of the defendant to have removed their goods and in the meantime, paid the amount of Rs. 21.02 lakhs which according to them is payable to the plaintiff subject to the dispute for the balance claim determined in the proper forum. The defendants (STC) are trying to make capital out of their own acts of omission and commission if not out of misconduct on the part of someone from their side.
25. In the circumstances, the demand made by the defendant on the bank in their letter dated July 15, 1996, for extension of validity of the bank guarantee and for failure to do so, threat extended to invoke the bank guarantee was unreasonable, unjustified and highly inequitable. In my view, this is a fit case for exercising the discretion of this court against the defendant.
26. I accordingly allow this application and grand temporary injunction in favour of the plaintiff and against the defendants restraining defendant No. 1 from invoking the bank guarantee in question given by defendant No. 2.
27. As the bank guarantee has been extended after the suit was filed in pursuance of the interim orders passed by this court, defendant No. 1 is also directed to make payment of the expenditure incurred by the plaintiff for extending the bank guarantee after July 15, 1996, within 15 days failing which the plaintiff will be entitled to recover the same by execution in this case or otherwise in accordance with law.
28. This application is allowed with costs. Costs assessed at Rs. 10,000. This is without prejudice to the rights of the parties otherwise arising under the contract.
29. I.A. No. 6997 of 1994 in S. No. 1680 of 1996 :
30. Vide separate judgment pronounced today this I.A. is disposed of.
31. Suit No. 1680 of 1996 and I.A. No. 12306 of 1996 :
32. Parties are directed to file their respective documents within four weeks and appear before the J.R. for admission/denial of documents on 18th February, 1997, and before the court for disposal of the I.A. and for framing of issue on April 8, 1997.