Dwarikesh
Sugar Industries Ltd. Vs. Prem Heavy Engineeing Work [1997] INSC 520 (7 May
1997)
K.S.
PARIPOORNAN, K. VENKATASWAMI, B.N. KIRPAL
ACT:
HEADNOTE:
THE
7TH DAY OF MAY, 1997 Present:
Hon'ble
Mr.Justice K.S.Paripoornan Hon'ble Mr Justice K.Venkataswami Hon'ble Mr Justice
B.N.Kirpal Harish N.Salve, Sr.Adv., Krishan Mahajan, P.H.Parekh, Ms.
Indu Varma,
Advs. with him for the appellant Sudhir Chandra, Sr.Adv., Manmohan, Sanjay Raghuvanshi,
R. Sasiprabhu, Advs. with him for the Respondents.
The
following Judgment of the Court was delivered:
KIRPAL.
J.
Special
leave granted.
Having
been thrawted by orders of the court below in it attempt to get encashment of
the bank guarantees, issued by the State Bank of India, Meerut Cantt. Branch (respondent no.2) respondent no.l has
led to the filing of this appeal by aggrieved beneficiaries.
The
appellant and respondent no.1 had entered into an agreement on 27th July, 1994 whereby respondent no.1 was to
supply boiling house equipment the cost of which was Rs.
5.23 crores.
The supply of equipment and material was to start from 15 September, 1994 and the same was to be completed by
10th August, 1995, as per the schedule of the supply
agreed to by the parties.
According
to one of the clauses of the aforesaid agreement respondent no.l had agreed to
furnish bank guarantees in favour of the appellant. Out of the above six, only
four bank guarantees were furnished including bank guarantee no. 40/51 dated
1st December, 1994 for a sum of Rs.26,15,000/- and bank guarantee no.40/47
dated 24th November, 1994 for a sum of Rs.35 lacs. These are the bank
guarantees with which we are concerned in the present case.
Bank
guarantee no.40/51 was issued to ensure timely delivery of equipment and supply
by respondent no. 1. The relevant clauses of the said bank guarantee no.40/51
are as follows:
"In
consideration of the premises the Guarantor hereby unconditionally and
irrevocably undertake to pay to the Purchaser on their first written demand and
without demur such a sum not exceeding Rs.26,15,000/- (Twenty six lacs fifteen
thousand only) as the purchasers may demand representing 5% (five per cent) of
the contract price, and if the guarantor fails to pay the sum on demand the
guarantor shall also pay on the sum demanded interest at the bank lending rates
then prevailing reckoned from the date of demand till the date of payment.
2.The
guarantor shall pay to the purchaser on demand the sum under clause 1 above
without demur and requiring the purchasers to invoke any legal remedy that may
be available to them, it being understood and agreed firstly that the
purchasers shall be the sole judge of and as to whether the sellers have
committed breach(es) of any of the terms and conditions of the said agreement
and secondly that the right of the purchasers to recover from the guarantor any
amount due to the purchasers shall not be affected or suspended by reasons of
the fact that any dispute or disputes have been raised by the sellers with
regard to their Lability or that proceedings are pending before any Tribunal
arbitrator(s) or Court with regard to or in connection therewith, and thirdly
that the guarantor shall immediately pay the aforesaid guaranteed amount on
demand and it shall not be open to the guarantor to know the reasons of or to
investigate or to go into the merit of the demand or to question or to
challenge the demand or to know any fact affecting the demand, and lastly that
it shall not be open to the guarantor to require the proof of the liability of
the seller to pay the amount before paying the aforesaid guaranteed amount to
the purchasers The other bank guarantee no.40/47 was originally issued for a
sum of Rs.51,70,000/- for securing advance payment.
The
agreement contemplated the liability being gradually reduced and on 28th August, 1995 this bank guarantee was reduced for
a diminished amount of Rs.33 lacs. The relevant clause of this bank guarantee
is as follows:
"In
consideration of the premises the guarantor hereby unconditionally and
irrevocably undertakes to pay to the purchaser on their first written demand
and without demur such a sum not exceeding Rs.51,70,000/- (Rupees fifty one lacs
seventy thousand only) as the purchasers may demand representing 10% (Ten per
cent) of the contract price, and if the guarantor fails to pay the sum on
demand the guarantor shall also pay on the sum demanded interest at the bank
lending rates then prevailing reckoned from the date of demand till the date of
payment. Provided that liability of the guarantor hereunder shall reduce to the
extent of the advance adjusted under clause 13 of the said agreement.
The
guarantor shall pay to the purchaser on demand the sum under clause 1 above
without demur and requiring the purchasers to invoke any legal remedy that may
be available to the them, it being understood and agreed firstly that the
purchaser shall be the sole judge of and as to whether the sellers have
committed any breach(es) of any of the terms and conditions of the said
agreement and secondly that the right of the purchasers to recover from the
guarantor any amount due to the purchasers shall not be affected or suspended
by reasons of the fact that any dispute or disputes have been raised by the
seller with regard to their Liability or that proceedings are pending before
any Tribunal, arbitrator(s) or court with regard thereto or in connection
therewith, and thirdly that the guarantor shall immediately pay the aforesaid
guaranteed amount on demand and it shall not be open to the guarantor to know
the reasons of or to the investigate or to go into the merits of the demand or
to question or to challenge the demand or to know any facts affecting the
demand, and lastly that it shall not be open to the guarantor to require the
proof of the liability of the seller to pay the amount before paying the
aforesaid guaranteed amount to the purchasers".
According
to the appellant respondent no.l did not supply the equipment at site, within
the time allowed, nor replaced any of the defective items which, according to
the appellant, had resulted in the ate commencement of the trial crushing in
the mill. It is further the case of the appellant that it had to make direct
purchases of many parts from other sources as the respondent no.1 had failed to
supply the equipment Ultimately by letter dated 21st November, 1995 written to
respondent no.2, the appellant invoked the bank guarantee. The material portion
of this letter was as follows:
"We
wish to inform you that M/S Prem Heavy Engineering Works (P) Ltd. Ram Mill,
Delhi Road, Meerut have failed to fulfill the condition of our agreement dated
27.7.1994 in so far as timely supply of the machinery and equipment under order
with them .
"As
per clause 14 of the supply agreement M/s Prem - Heavy Engineering Works (P)
Ltd., Meerut has failed to deliver the
equipments and its commissioning within the scheduled time frame.
Now we
hereby invoke the aforesaid guarantee for Rs.26,l5,000/-(Rupees twenty six lacs
fifteen thousand only) 5% of the contract value and enclose here with the
original guarantee for your record. Kindly hand over the Demand Draft in our favour
payable at Najibabad, Distt.
Bijnor,
Uttar Pradesh towards the invocation amount." As on 28th November 1995 respondent no.1 had already
obtained and ex parte injunction restraining the encashment of bank guaranteee,
no payment was made to the appellant by the bank.
Respondent
no.1 then filed another injunction application dated 12th January, 1996 with regard to the second bank
guarantee dated 24th
November, 1994 which
was for a sum of Rs.33 lacs. It obtained an Ex parte injunction in respect
thereto on the same day. Being ignorant of this the appellant wrote a letter
dated 16th January, 1996 to the respondent bank invokeing the said bank
guarantee no. 40/47. In the said letter it was stated that respondent no.1 had
failed to deliver the equipment as per the terms of the agreement and that the
appellant had bought equipment from various markets due to which the advance
amount which had been paid to respondent no.1 in respect of which this bank
guarantee had been issued, remained unadjusted. The bank was accordingly
required to pay the said amount of Rs.33 lacs.
According
to the appellant it is only after 16th January, 1996 that it became aware of the filing
of the aforesaid suit and the injunction application and it entered appearance
in Court on 18th
January, 1996 even
though no notice had been served on it. As per the appellant, there was delay
in the disposal of the injunction application, consequently it approached the
High Court for appropriate directions and the Allahabad High Court vide order
dated 10th may, 1996 directed the civil Judge, Meerut Cantt, to dispose of the
suit within the time fixed by it .
By a
detailed order dated 20th
August 1996, the
Second Civil Judge (Sr. Division) Meerut vacated the ex parte injunctions which had been granted and dismissed
the injunction applications. In arriving at this conclusion it observed that
respondent no.1 had not stated that the work had been completed and nor was
there any allegation of cheating or fraud contained in the plaint which had
been filed. The trial court referred to a number of decisions of this Court and
came to the conclusion that there was no basis, in law, for the grant of any
interim prohibitory order.
The
appellant on 22th
August, 1996 again
approached the respondent bank for the encashment of the bank guarantees, but
without success.
Respondent
no.1 then filed revision petition on. 257 of 1996 on 10th September. 1996
before the Allahabad High Court challenging the order dated 20th August, 1996 of the trial court. single judge of
the Allahabad High Court took up the revision petition and disposed it of on
the same day and after setting aside the order dated 20th August, 1996 it
remanded the matter back to the trial court for a fresh decision but, at the
same time, directed that till the disposal of injunction application the bank
guarantees in question shall not be invoked or encashed. The trial court was
directed to hear the parties within fifteen days of the receipt of the order
and to dispose of the injunction application within fifteen days thereafter.
Needless to date, due to dilatory tactics adopted by respondent no1 which is
evident from the documents available on the record of this "As per clause
14 of the supply agreement M/s Prem - Heavy Engineering Works (P) Ltd., Meerut
has failed to deliver the equipments and its commissioning within the scheduledtime
frame.
Now we
hereby invoke the aforesaid guarantee for Rs.26,l5,000/-(Rupees twenty six lacs
fifteen thousand only) 5% of the contract value and enclose here with the
original guarantee for your record. Kindly hand over the Demand Draft in our favour
payable at Najibabad, Distt. Bijnor, Uttar Pradesh towards the invocation
amount." As on 28th
November 1995
respondent no.1 had already obtained and ex parte injunction restraining the
encashment of bank guarantee, no payment was made to the appellant by the bank.
Respondent
no.1 then filed another injunction application dated 12th January, 1996 with regard to the second bank
guarantee dated 24th
November, 1994 which
was for a sum of Rs.33 lacs. It obtained an Ex parte injunction in respect
thereto on the same day. Being ignorant of this the appellant wrote a letter
dated 16th January,
1996 to the respondent
bank invoking the said bank guarantee no. 40/47. In the said letter it was
stated that respondent no.1 had failed to deliver the equipment as per the
terms of the agreement and that the appellant had bought equipment from various
markets due to which the advance amount which had been paid to respondent no.1
in respect of which this bank guarantee had been issued, remained unadjusted.
The bank was accordingly required to pay the said amount of Rs.33 lacs.
According
to the appellant it is only after 16th January, 1996 that it became aware of the filing
of the aforesaid suit and the injunction application and it entered appearance
in Court on 18th
January, 1996 even
though no notice had been served on it. As per the appellant, there was delay
in the disposal of the injunction application, consequently it approached the
High Court for appropriate directions and the Allahabad High Cour tvide order
dated 10th may, 1996 directed the civil Judge, Meerut Cantt, to dispose of the
suit within the time fixed by it .
By a
detailed order dated 20th
August 1996, the
Second Civil Judge (Sr. Division) Meerut vacated the ex parte injunctions which had been granted and dismissed
the injunction applications. In arriving at this conclusion it observed that respondnent
no.1 had not stated that the work had been completed and nor was there any allicgation
of cheating or fraud contained in the palaint which had been filed. The rtial
court referred to a number of decisions of this Court and came to the
conclusion that there was no basis, in law, for the grant of any interim
prohibitory order.
The
appellant on 22th
August, 1996 again
approached the respondent bank for the encashment of the bank guarantees, but
without success.
Respondent
no.1 then filed revision petition on. 257 of 1996 on 10th September. 1996
before the Allahabad High Court challenging the order dated 20th August, 1996 of kthe tial court. single judge of
the Allahabad High Cout took up the revision petition and disposed it of on the
same day and after setting aside the order dated 20th August, 1996 it remanded thre
matter back to the trial court for a fresh decision but, at the same time,
directed that till the disposal of injunction application the bank guarantees
in question shall not be invoked or cencashed. The trial court was directec to
hear the prties within fifteen days of the receipt of the order and to dispose
of the injunction application lwithin fifteen days thereafter. Needless to dtate,
due to rdilatory tactics adopted by fespondent no1 which is evident from the
documents available on the record of this case, the said injunction application
have not been disposed of the till with the result that the injunction granted
by the single judge of the High court vide order dated 10th September, 1996
still continues.
While
allowing the civil revision the single judge in his judgment did not think it
necessary to refer to the judicial diecisions which were cited before him. The
court observed that reference to the same was not becessary because the trial
court, who had observed that the plaint did no contain any allegation with
regard to fraud, had not noticed that allegation of fraud was cantained in the injuction
application. The learned judge noticed that the liability of bank under the
guarantee was absolute and that it was not supposed to question the authority
of the benificiary to encash the bank guarantee but observed that the same
" could not be the guideline for allowing the defendant to encash the bank
guarantee unless there was a finding that the defendant was having undue
enrichment thereby".
The
aforesaid decision of the High Court has been assailed by Sh. Harish N. Salve,
learned senior counsel for the appellant, who has contended that the High Court
fell in serious error in ignoring and not in even feferrin g to the decisions
of this Court where the principles regarding the grant of injunction in matters
relating to encashment of bank guarantees have been clearly spell out. Had this
been done, the learned counsel submits, the High Court could not, in law, have
continued with the temporary injunction.
Numerous
decisions this Court rendered over a span of nearly two decades have laid down
and reiterated the principles which the Courts must apply which considering the
question whether to grant an injunction which has the effect of restraining the
encashment of a bank guarantee. We do not think iot necessary to burden this
judgment by referring to all of them. Some of the more recent pronouncements on
this point where the earlier decisions have been considered and reiterated are Svenska
Electricty Board and ors. [(1995) 6 SCC 68], Hindustan (Engineers) Pvt. Ltd. [(1995) 6SCC 76] and U.P. State Sugar
568]. The gemeral principle which has been laid down by this court has been summarised
in the case of U.P. state sugar Corporation's case as follows:
"The
law relating to invocation of such bank guarantees in by now well ssettled.
When in the course of commercial dealings an unconditional bank guarantee is
given or accepted, the beneficial is entitled to realize suchj a bank guarantee
in terms thereof ireespective of any pending disputes. The bank giving such a
guarantee is bound to honlur, ir as per its terms irrespective of any dispute
raised by its costomer.
The
very purpose of giving such a bank a bank guarantee would othrwise be defeated.
The courts should, therefore, be slow in granting an injunction to restrian the
realization of such a bank guarantee. The courts have carvede out only two
exceptions. A fraud in connection with such a bank guarantee would vitiate the
very foundation with such a bank guarantee would vitiate the very foundation of
such a bank guarantee. Hence if thre is such a fraud of which the beneficiary
seeks to take the advantage, he can be restrained from doing so.
The
second exception relates to case where allowing the encashment of an
unconditional bank guarantee would result 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 contemplanted under this head must be of such an exceptional
and irretrievable nature as would override the terms of the guarantee and the
adverse effect of such an injunction of the guarantee and the adverse effect of
such an injunction on commercial dealings in the country." Dealing with
the queation of franud it has been held that fraud has to be an established
fraud. The following observation of sir John Donaldson, M.R. in Bolivinter oil
SA V. Chase Manhattan Bank (1984) 1 All ER 351, are apposite:
"The
wholly exceptional case where an injunction may be granted is where it is
proved that the bank knows that any demand for payment already made or which may
threafter be made will clearly be fraudulent. But the evidence must be clear
both as to the fact of fraud and as to the bank's knowledge .It would certainly
not normally be wufficient that rests on the ujncorroborated statement of the
customer, for irreparable damage can be done to a bank's credit in the
relatively brief time which must clapse between the granting of such an
injunction and an application by the bank to have it charged." (emphasis
supplied) The aforesaid passage was approved and followed by consultants and
Engineers (P) Ltd. [(1988) 1 SCC 174].
The
secondly exception to the rule of granting injunction, i.e., the resulting of
irretrievable injury, has to be such a circumstance which would make it
impossible for the guarantor to reimburse himself, if he ultimately succeeds.
This will have to be decisively established and it must be proved to the
satisfaction of due Court that there would be no possbility whatsoever of the recoverv
of the amount from the beneficiaIy. by way of restitution.
In the
instant case, as has been already noticed there were two types of bank
guarantees which were issued. Bank Guarantee No. 40/51 for Rs.26,15,000/- was
issued to issues timely y performance of the agreement by respondent No. 1.
the
relevant terms of this guarantee firstly makes it clear that the that has
unconditional and irrevocably undertaken to pay to pay to the appellant, on
written demand and without demand, the amount demanded it. Secondly, Clause II
of the said guarantee clarifies that the payment shall be made without demand
and on the undertaking that the appellant is to be sole judge whether the
seller has committed any breach. Consequently the right of the appellant to
recover the guaranteed amount is not to be effected or suspended by reason of
any dispute which can be raised or pending before the courts tribunals or
arbitrator Thirdly the guarantor had no right to know the reasons of or to
investigate the merits of the demand or to question or to challenge the demand
or to know any fact affecting the demand and lastly it was not open to the bank
to require the proof of the liability of respondent No.1 to pay the amount
before paying the aforesaid guaranteed amount to the appellant.
The
letter of invocation issued by the appellant demanding the payment ot Rs.26,15000/-
was in accordance with the terms of bank guarantee No. 40/51 and the bank was, threfore,
under an obligation to honour its undertaking and to make the payment . It,
however, chose not to fulfil its obligation. If the bank could not in law avoid
the payment, as the demand had bneen made in terms of the banjk guarantee, as
has been done in the present case, then the court ought not to have issued an
injunction which had the effect of restraining the bank from fulfilling its
contractual obligation in terms of the bank guarantee. An injunction of the
court ought not to be an instrument which is used in nullifying the terms of a contrant,
agreement or undertaking which is used in nullifying the terms of contract,
agreement or undertaking which is lawfully enforceable. In its aforesaid letter
dated 24th November,
1995 respondent no.1
had clearly admitted that entire supply had not been made. In view of this also
the High court was not justified in granting an injunction.
Bank
guarantee No.40/97 dated 24th
November, 1994, which
had been issued to secure the advance of Rs. 129.24 lacs which had been given
by the appellant, was also similar in terms to the earlier bank guarantee No.
40/51.
The
main contract between the parties contemplated that the amount of bank
guarantee shall stand reduced on adjustment being made. It is contended by Shri
Sudhier Chandra, learned counsel for the respondents that the full amount was ginen
adjusted and no amount remained outstanting and, therefore, the bank guarantee
No.40/47 could no longer be regarded as alive . In support of this contention,
the learned counsel relied on the observations of this Court in Board and ors.
(1995) 6 SCC 68 where an injunction was granted wheree the bank guarantee which
was issued was to be kept alive till the successful completion of trial
operations. our opinion, this decision can be of no assistance to respondent
no. 1 because in Larson & Turbo~s case (supra) this Court found that the
guarantee which had been given by the bank was to ensure only till the
successful completion of the trail operations and the taking over of the plant.
The documents revealed that the contractual terms in this regard has been
complied with and after successful completion of the trial operation, the plant
had admittedly been taken over. In view of this Court that the terms of the
bank gurantee did not permit its invocation once the trial operation have been
successfully completed.
In the
present case clause 3 of bank guarantee No. 40/47 relating to adjustment of the
advance stipulated as follows:
"The
guarantee shall come into force from the date thereof and shall remain valid
till the full advance amount is adjusted under Clause 13 of the said agreement
which according to the terms and conditions of the said Agreement is stipulated
to be adjusted proportionately from each bill of the Sells against actual
deliveries of the machinery and equipment at site but if the deliveries as
aforesaid have not been completed by the Sellers within the said period for any
reason what soever the Guarantor hereby undertakes that the Sellers shall
furnish a fresh or renewed guarantee on the Purchaser's proforma for such
further period as the purchaser's may intirmate failing which the guarantor
hall pay to the purchaser's a sum not execeeding Rs. 51,70,000/-(Rupees Fifty
one lacs seventy thousand only) or the residual amount of balance unadjusted
advance left after proprotionae adjustment in acccordance with clause 1 above
as the purchaser may demand." No plea was taken before the courts below
and no document has bcen shown to us by the respondents, which can prima ficie
indicate that the full amount to us by the respondents, which can prima facie
indicate that the full amount of advance had been adjusted under Clause 13 of
the main contrant between the appellant and the defendant no.1 According to the
appellants, the original guarantee was for Rs. 51,70,000/- but the same, after
adjustment of the advance, in terms of clause 13 of the main agreement, stood
reduced to Rs.33,00,000/- This amount was still outstanding and, therefore, the
bank guarantee had not come to an end and was rightly invoked.
Coming
to the allegation of fraud, it is an admitted fact that in the plant itself,
there was no such allegation was initially only in the first application for
the grant of injunction that in a paragraph it has been mentioned that the
appellant therein had invoked the bank guarantee arbitrarity. this application
contains no facts or particulars in support of the allegation of fraud. A
similar bald averment alleging fraud is also contained in the second
application for injunction relating to bank guarantee No. 40/47. This is not a
case where defendant no. 1 had at any time alleged fraud prior to the filing of
injunction application. The main contract, pursuant to which the bank
guarantees were issued, was not sought to be avoided by alleged fraud, nor was
it at any point of time alleged that the bank guarantee was issued because any
fraud had been played by the appellant. We have no manner of doubt that the
bald assertion of fraud had been made solely with a view to obtain an order of injunction
. In the absencce of established fraud and not a mere allegation of fraud and
that also having been made only in the injunction application , the court could
not, in the present case have granted an injunction relating to the encashment
of the bank guarantees.
It is
unfortunate that the High Court did not consider it necessaly to rrfer to
various judicial pronouncements of this Court in which the principles which
have to be fullowed while examining an application for grant of interim relief
have been clearly laid down. The observation of the High Court that reference
to judicial decisions will not be of much importance was cleart a me1hod
adopted by it in avoiding to fo11ow and apply the law as laid down by this
Court. Yet another scrious for which was carmnitted by the High Court, in the
present case, was not to examine the tenns of the bank guarantee and consider
the letters of invocation which had been written by the appellant. If the High
Court had trail the trouble of examining the documents on record, which had
been referred to bv the trial court, in its order refilsing to grant
injunction, the court would not have granted the interim injunction. We also do
not find any justification for the High Court in invoking the alleged principle
of adjust enrichment to the facts of the present case and then deny the appettant
the Iight to cncash the bank guarantee. If the High Court had taken the trouble
to see the law on the point it would have been clear that in encashment of bank
guaranmtee the applicability of the principle of undue enrichment has no
application.
We are
constrained to make these observation with regard to the manner in which the
High Court had dealt with this case because this is not an isolated cade where
the courts, while disobeying or not complying with the law laid down by this
Court , have at time been liberal in granting injunctgion restraining encalhment
of bank guarantees.
It is
unfortunate, that notwithstanding the authoritative the pronouncements of this
Court, the High Courts and the courts subordinate thereto, still seem intent on
affording to this Court innumerable opportunities for dealing with this area of
law, thought by this Court to be well settled.
When a
position, in law, is well settled as a result of judicial pronouncement of this
Court, it would amount to judicial impropriety to say the least, for the
subordinate courts including the High Courts to ignore the settled decisions
and then to pass a judicial ordor which is clearly contrary to the setded legal
position. Such judicial adventurism cannot be permitted and we strongly
deprecate the tendency of the subordinate courts in not applying the settled
principles and in passing whimsical orders which necessarily has the effect of
granting wronful and unwarranted relief to one of the parties. It is time that
this tendency stops.
Before
concluding we think it appropriate to mention about the conduct of the
respondent - bank which has chosen not to be in this case. From the facts
stated hereinabove it appears to us that the respondent bank has not shown
professional efficiaency, to say the least, and has acted in a partisan manner
with a view to help and assist respondent no. 1. At the time when there was no
restraint order from any Court, the bank was under a legal and moral obligation
to honour its commitments. It, however, failed to do so. It appears that the
bank deliberately draged its feet so as to enable respondent no.1 to secure favourable
order of injunctgion from the Court. Such conduct of a bank is difficult to
appreciate We do not wish to say anything more but it may feel that it will be
prejudicial in the event of the appellant taking action against it.
For
the aforesaid reasons this appeal is allowed. The judgment and order of the Allahabad
High Court dated 10th
September, 1996 in
revision petition no.257 of l996 is set aside and the order of the trial court datded
20th Auguat, 1996 dismissing the injunction application is restored. The
appellant would be entitled to cost which are quantified at Rs.20,000/-.
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