Delhi High Court
Rani Constructions Pvt. Ltd. vs Pati-Bel J.V. And Anr. on 3 March, 2006
Equivalent citations: III(2006)BC554, 2006(1)CTLJ448(DEL), 129(2006)DLT38, (2006)144PLR24
Author: Badar Durrez Ahmed
Bench: Badar Durrez Ahmed
JUDGMENT Badar Durrez Ahmed, J.
Page 0821
1. Five bank guarantees constitute the subject matter of this application. These bank guarantees, numbered as BE-6/6/17 to BE-6/6/21, each for a sum of Rs. 25 lakhs, were issued by the Bank of Baroda (the Defendant No. 2) in favor of the defendant No. 1 at the instance of the plaintiff. The plaintiff has filed this suit, inter alia, seeking an injunction against the defendant No. 1 from invoking the said bank guarantees as well as injunction against the defendant No. 2 from making a payment to the defendant No. 1 in case an invocation is made by the defendant No. 1 under the said bank guarantees. Of course, these reliefs are preceded by the relief of declaration that no invocation can be made by the defendant No. 1, particularly, pursuant to the defendant No. 1's letter dated 09.02.2005 as the amounts would be beyond the scope of the bank guarantees itself.
2. The defendant No. 1 had been awarded the contract by National Highways Authority of India (NHAI) for four-laning and strengthening of existing 2 lanes on NH-2 from km 321.10 to km 393.00 in the State of U.P. It so happened that a part of this work was sub-contracted by the defendant No. 1 to the plaintiff in terms of a Memorandum of Understanding (MoU) dated 17.05.2002. The value of the sub-contract between the defendant No. 1 and the plaintiff was set at Rs. 120 crores out of the total contract which the defendant No. 1 had received from NHAI of Rs. 325 crores. It ultimately transpired that work only to the extent of Rs. 30 crores was actually handed over to the plaintiff by the defendant No. 1. Against this work of a value of Rs. 30 crores awarded to the plaintiff, the bank guarantees in question were extended by the defendant No. 2 in favor of the defendant No. 1 at the request of the plaintiff.
3. On 01.03.2005, when this matter came up for the first time before this court, an ex parte order was granted in favor of the plaintiff restraining the defendant No. 1 from invoking the bank guarantees. However, oblivious of the filing of the suit and the passing of the said order dated 01.03.2005, the defendant No. 1 invoked the bank guarantees on 03.03.2005. This necessitated the filing of an application [IA No. 3599/2005] by the plaintiff which was disposed of by an order dated 16.05.2005, when this court additionally made the order that the amounts under the bank guarantees Page 0822 shall not be released to the defendant No. 1 till IA No. 1617/2005 (i.e., the present application) is disposed of. The bank (defendant No. 2) has not entered appearance in the present proceedings and is being proceeded with ex parte.
4. Mr. Singla, the learned senior counsel for the plaintiff, contends that the bank guarantees are conditional, they are not unequivocal and the amounts sought to be recovered by the defendant No. 1 under these guarantees are beyond the scope and terms of the guarantees themselves. Mr. Singla took me straightway to the bank guarantees which are in identical terms. He referred to one such guarantee being Bank Guarantee No. BE-6/6/17 and submitted that the bank guarantee, although it uses the words 'unconditional' and 'irrevocable', is still a conditional guarantee. To appreciate the submissions made by the learned counsel for the plaintiff, it would be appropriate to set out the bank guarantee in its entirety which reads as under:-
BANK GUARANTEE FOR ADVANCE PAYMENT.
6/6/17 To, PATI-BEL, J.V. B-3/58, 3rd Floor, Safdarjung Enclave, New Delhi.
In accordance with the provision of the conditions of the Contract, of four laning and strengthening of existing 2 lanes section from Km. 321.10 to Km.393.00 on NH-2 (Construction of Package 1 C) in the state of U.P. (GTRIP/3) by the National High Ways Authority of India, of M/s Rani Constructions Pvt. Ltd., C-10, Community Centre, Ashoka Tower, Janakpuri New Delhi-110058(hereinafter called the 'Contractor') shall deposit with PATI-BEL J.V., B-3/58, 3rd Floor, Safdarjung Enclave, New Delhi a bank guarantees to guarantee his proper and faithful performance under the said clause of contract in an amount of Rs. 25,00,000/- (Rupees twenty five lacs only) We the Bank of Baroda, Opp. Azad Maidan Panji -Goa as, instructed by the Contractor agree unconditionally and irrevocably to guarantee as primary obligator and not as surety merely, the Payment to PATI-BEL J.V., B-3/58, 3rd Floor, Safdarjung Enclave, New Delhi on his first demand whatsoever right of objection on or our part and without his first claim to the Contractor, in the amount not exceeding Rs. 25,00,000/- (Rupees twenty five lacs only) or against any loss or damage caused to or suffered by or would be caused to or suffered by the PATI-BEL, J.V. by reason of any breach by the said contractor of any of the term condition contained in the said agreement.
We further agree that no change or addition to or other modification of the terms of the contract documents which may be made between PATI-BEL J.V., B-3/58, 3rd Floor, Safdarjung Enclave, New Delhi, and the contractor, shall in any way release us from any liability under this guarantee, and we hereby waive notice of such change, addition or modification.
No drawings may be made by you under this guarantee until we have received notice in writing from you that an advance payment of the amount listed above has been paid to the Contractor pursuant to Contract.
Page 0823 This guarantee shall remain valid and in full effect from the date of the advance payment under the contract until PATI-BEL, J.V., B-3/58, 3rd Floor, Safdarjung Enclave, New Delhi, receives full payments of the same amount from the Contractor.
Notwithstanding anything contain herein:
1. Our liability under this bank guarantee shall not exceed Rs. 25,00,000/- (Rupees twenty five lacs only).
2. This guarantee shall be valid up to 07/03/2004.
3. We are liable to pay the guaranteed amount or any part thereof under this bank guarantee only and only if you serve upon us a written claim or demand on or before 07/03/004.
FOR BANK OF BARODA PANJI-GOA
--sd--
Chief Manager Date:
Referring to the bank guarantee, Mr. Singla firstly submitted that the first paragraph of the bank guarantee would disclose that while the entire contract between the defendant No. 1 and NHAI has been referred to, the plaintiff has been referred to as the 'Contractor'. Furthermore, he submits that in the second paragraph of the bank guarantee, the last three words are 'the said agreement'. According to him, this creates confusion inasmuch as it is not clear as to which agreement is referred to. Is it the larger contract between the defendant No. 1 and NHAI or the sub-contract between the defendant No. 1 and the plaintiff? Therefore, according to him, the guarantee is not unequivocal. He further submitted that the bank guarantee is not unconditional even though the words used say that it is unconditional and irrevocable. He submits that the following words at the end of the second paragraph clearly indicate that the bank guarantee is a conditional one:-
...against any loss or damage caused to or suffered by or would be caused to or suffered by the PATI-BEL, J.V. by reason of any breach by the said contractor of any of the term condition contained in the said agreement.
5. It is his submission that the invocation of the bank guarantee is conditional upon there being a breach of contract on the part of the defendant No. 1 and, secondly, such breach of contract resulting in loss or damage. Unless these conditions are fulfillled, the bank guarantee cannot be invoked and it is, therefore, his contention that the bank guarantee is a conditional one. Placing reliance on the decision of the Supreme Court in the case of Hindustan Construction Company Limited v. State of Bihar and Ors. , he submitted that the present case would be covered by the said decision. Taking up the consideration of the said decision, one finds that in that case, the well-settled principles that courts are reluctant in granting injunctions against the invocation of a bank guarantees except in cases of fraud and Page 0824 irretrievable injury were reiterated. Various earlier decisions of the Supreme Court were referred to. However, the Supreme Court, in the case of Hindustan Construction Company Ltd (supra) also pointed out that the terms of the bank guarantee should be seen to determine as to whether the bank guarantee is in unequivocal terms, is unconditional and recites as to whether the amount is to be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. In this context, the Supreme Court observed as under:-
9. What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of the bank guarantee are, therefore, extremely material. Since the bank guarantee represents and independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.
6. The Supreme Court in the case of Hindustan Construction Company Ltd (supra), brought in a new dimension with regard to the question of injuncting encashment / invocation of a bank guarantee and that is that the invocation must be in terms of the bank guarantee otherwise the invocation would be bad. Apart from this added dimension, the Supreme Court, in the case of Hindustan Construction Company Ltd (supra), has merely reiterated the well-established position that a bank guarantee ought not to be injuncted unless there is fraud and that too an established fraud of an egregious nature and where irretrievable injury would be caused to the person who seeks the injunction if the injunction is not granted.
7. In the case before the Supreme Court, one of the bank guarantees was, inter alia, in the following terms:-
We, State Bank of India, incorporated under the State Bank of India Act, 1955, and having one of our branches at Nyayamurti C.N. Vaidya Marg, Fort, Bombay-400 023 (hereinafter referred to as 'the said Bank'), as instructed by the contractor, agree unconditionally and irrevocably to guarantee as primary obligator and not as surety merely, the payment of the Executive Engineer, Kharkai Dam Division II, Icha, Chaliama, Post Kesargarhia, District Singhbhum, Bihar, on his first demand without whatsoever right of objection on our part and without his first claim to the Page 0825 contractor, in the amount not exceeding Rs 10,00,000 (Rupees ten lakhs only) in the event that the obligations expressed in the said clause of the above-mentioned contract have not been fulfillled by the contractor giving the right of claim to the employer for recovery of the whole or part of the advance mobilisation loan from the contractor under the contract.
Considering this paragraph of the bank guarantee, the Supreme Court was of the view that although the bank guarantee used the expression 'agree unconditionally and irrevocably', it was also qualified by the portion given in italics. According to the Supreme Court, in view of the said italicised portion, the bank guarantee could not be construed as being an unconditional one so as to give the defendants in that case an unfettered right to invoke that guarantee and demand immediate payment thereof from the bank. The learned counsel for the plaintiff seeks to draw a parallel with the case before the Supreme Court and the present case. He submitted that although the words 'agree unconditionally and irrevocably' also find place in the present guarantees, the same is qualified by the words 'against any loss or damage caused to or suffered by or would be caused to or suffered by the PATI-BEL, J.V. by reason of any breach by the said contractor of any of the term condition contained in the said agreement.' According to him, this would make the bank guarantees unconditional.
8. On the other hand, the learned counsel for the defendant No. 1 submitted that, as mentioned by the Supreme Court in the case of Hindustan Construction Company Ltd (supra), the terms of the guarantee have to be seen and not just the words that are used therein and even if we make a reference to the terms as set out in the guarantee, it would be clear that apart from using the words 'unconditionally' and 'irrevocably', the guarantee is clearly unconditional and unequivocal. He submitted that the expressions 'as primary obligator', 'not as surety merely', 'on his first demand', 'whatsoever right of objection on our part' and 'without his first claim to the contract' would clearly show that the bank guarantee was unconditional and unequivocal.
9. Considering the arguments advanced by the learned counsel for the parties, I am of the view that the bank guarantees in question are unconditional and irrevocable not only because they say so, but also because of the aforesaid expressions used in the guarantees themselves as pointed out by the learned counsel for the defendant No. 1. These expressions gain in importance when they are considered in the backdrop of the provisions of the Indian Contract Act, 1872 pertaining to contracts of guarantee contained in Sections 126 to 147 thereof. It is to be remembered that a bank guarantee is a contract of guarantees and is governed by principles as set out in Section 126 to 147 of the Indian Contract Act, 1872. Recently, in D.S. Construction Ltd v. Rites Limited 127 (2006) DLT 1, I had occasion to consider this aspect of the matter. The following portion of the said decision summarizes the legal position:-
Page 0826
16. To appreciate the arguments of counsel, it would be necessary to state the law on the subject. One must keep this in mind that while the law of contracts in England is largely uncodified and it is court made law based upon established commercial practices and principles of contract law which are essentially common law principles except in modern times where some specialised laws have been enacted. The same is the position with American law. In India, however, much of the principles of contract as was then a part of the common law of England has been codified in the form of the Indian Contract Act, 1872. Contracts, and that includes bank guarantees, would, therefore, be governed by the statutory provisions. The common law principles as applicable in England or in the USA which have been imported into the Indian legal system after the Indian Contract Act, 1872 would only supplement it and not supplant it. This, I am afraid, is often lost sight of when considering the question of injunction of Bank Guarantees.
17. I shall now examine the relevant provisions of the Contract Act. Section 126 of the said Act, which defines the terms 'contract of guarantee', 'surety', 'principal-debtor' and 'creditor,' provides that a 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety'. The person in respect of whose default the guarantee is given is called the 'principal-debtor' and the person to whom the guarantee is given is called the 'creditor'. A guarantee may be either oral or written. In the context of the present case, the bank guarantee is a contract of guarantee. The bank (defendant No. 2) is the surety inasmuch as it has extended the guarantee and the plaintiff and the defendant No. 1 are the principal-debtor and creditor respectively. The transaction between the aforesaid three parties is essentially a matter of three separate contracts. The first and main being the underlying contract between the principal-debtor and the creditor, i.e., between the plaintiff and the defendant No. 1. The second being the contract of guarantee or the bank guarantee which is between the surety and the creditor, i.e., the defendant No. 2 and the defendant No. 1. The third is the contract between the principal-debtor and the surety, i.e., between the plaintiff and the defendant No. 2. Although, the three contracts are independent in one sense, they are also inter-related in another sense and are founded upon the underlying contract. Section 128 of the Contract Act stipulates that the liability of the surety is co-extensive with that of the principal-debtor, unless it is otherwise provided by the contract9. Section 133 makes it clear that any variance made without the surety's consent in the terms of the contract between the principal-debtor and the creditor, discharges the surety as to transactions subsequent to the variance. Section 134 stipulates that the surety is discharged by any contract between the creditor and the principal-debtor, by which the principal-debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal-debtor. However, certain kinds of discharge of the principal-debtor which may operate by operation of law may not ensure to the benefit of the Surety. Such instances being the bankruptcy of the principal-debtor or liquidation in the case the principal-debtor is a company10. Construing the aforesaid provisions, it is apparent that although there are three separate Page 0827 relationships and contracts between the three parties, the contract of guarantee does, to a large extent, depend upon the relationship between the creditor and the principal-debtor under the underlying contract. This is so because firstly, the liability of the surety under a contract of guarantee is co-extensive with that of the principal-debtor unless, of course, otherwise provided by the contract. Secondly, any variation brought about by the principal-debtor and the creditor in the terms of the contract between them, without the surety's consent, would discharge the surety as regards all transactions subsequent to the variance. Thirdly, if the principal-debtor and the creditor enter into an arrangement whereby the principal-debtor is released or because of any act or omission on the part of the creditor the legal consequence of which is the discharge of the principal-debtor, the surety is also automatically discharged. Therefore, under the scheme of the provisions under the Contract Act itself, the contract of guarantee is not entirely independent of the underlying contract between the principal-debtor and the creditor and/or of their acts of omission or commission resulting in any variation or modification or discharge of the principal-debtor. Going strictly by these provisions, it would be seen that when a principal-debtor is discharged or released of its liability, then, the surety is also so discharged....
10. Section 134 of the Indian Contract Act, 1872 provides for the discharge of the surety by release or discharge of the principle debtor. It provides that the surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. A bank guarantee is contract of a guarantee where the bank acts as the surety and the surety is normally discharged by virtue of Section 134 when the principal debtor is released. This is the normal position in law. However, the bank guarantees in question disclose that the bank has undertaken the liabilities not merely as a surety but also as a 'primary obligator'. In other words, it has undertaken this liability unconditionally and without recourse or reference to the underlying contract between the defendant No. 1 and the plaintiff, i.e., between the creditor and the principal debtor even to the limited extent permissible under Section 134 of the Indian Contract Act, 1872. Another important circumstance is that the guarantee itself reveals that the bank is liable to pay on the first demand without the bank having any right of objection. This is equivalent to the expression 'without demur' as visualised in the Supreme Court decision in the case of Hindustan Construction Company Ltd (supra). The further expression that the bank is liable to pay without a claim first being made on the contractor (plaintiff) also indicates the same sentiment. All these aspects point in only one direction and that is that the bank guarantees in question are unconditional in terms and not merely because they profess to be so.
11. Furthermore, upon construing the third paragraph of the bank guarantees, one finds that the bank has even waived its right under Section 133 of the Page 0828 Indian Contract Act, 1872. The third paragraph of the bank guarantees provides that the bank agrees that no change or addition to or other modification of the terms of the contract documents which may be made between the plaintiff and the defendant No. 1 would in any way release the bank from its liability under the guarantee and the bank waives notice of such change, addition or modification. Section 133 provides that any variance made without the surety's consent in the terms of the contract between the principal debtor and the creditor, discharges the surety as to the transaction subsequent to the variance. Even this right, which has been given to a surety, has been waived by the bank. This circumstance also is indicative of the fact that the bank guarantees are clearly unconditional and unequivocal. Therefore, the contention of the learned counsel for the plaintiff that the bank guarantees are conditional and not unequivocal cannot be sustained.
12. Mr. Singla, arguing on behalf of the plaintiff, further submitted that the bank guarantees were not unequivocal because there was sufficient confusion as to which contract was referred to upon a reading of the first and second paragraphs of the bank guarantees. I find myself unable to agree with the submissions made by Mr. Singla. The reason being that the first paragraph merely contains the recitals and recitals do not govern the operative portion of any document when the latter is clear. This is well-settled. Insofar as the operative portion contained in the second paragraph is concerned, there is no confusion. It refers to the agreement between the petitioner and the defendant No. 1.
13. Coming, now, to the last aspect of the matter as regards the submission that the purported demand made by the defendant defendant No. 1, which ultimately culminated in the issuance of the invocation letter dated 03.03.2005, I find that that is a consideration which does not arise in the present case. This is so because in the present suit, the issue is with regard to whether the plaintiff is entitled to get an order of injunction restraining the defendant No. 1 from invoking the guarantees. This suit was filed at a time when the guarantees themselves had not been invoked. In respect of the invocation of the bank guarantees, the plaintiff has filed a separate suit being CS(OS) No. 599/05 in which an application under Order 39 Rules 1 and 2 of the Code of Civil Procedure, 1908, being IA No. 3546/2005 has been filed for this specific purpose and it would be appropriate if this is dealt with in that application. Insofar as the present application is concerned, I am, prima facie, of the view that the bank guarantees are unconditional and unequivocal. Since no fraud has been pleaded, the plaintiff is not entitled to a blanket order of injunction restraining the defendant No. 1 from invoking the bank guarantees or the defendant No. 2 (bank) from releasing payments if the bank guarantees are properly invoked in terms of the guarantees. As stated above, the question whether the bank guarantees have been properly invoked will be considered in CS(OS) No. 599/2005.
This application is dismissed.