Andhra Pradesh State Electricity Board vs Bulk Systems International Ltd. and Vijaya Bank

V. Jagannathan, J.—The appellant-Board herein is carrying on the business of supply of electricity in Andhra Pradesh and it calls in question the order passed on I.A. No. I by the trial court restraining the appellant from invoking the two bank guarantees executed by R-1 and the main ground urged in the appeal is that the trial court could not have prevented the appellant from encashing the amount of the two bank guarantees bearing Nos. 12/91 and 13/91, both dated 27.3.1991, and the trial court has totally erred in following the law laid down by the Apex Court with regard to the bank guarantees.

Sri G.V. Shantharaju, learned senior counsel for the appellant, submitted that in respect of the work undertaken at Shrishailam Left Bank Power Station with an installed capacity of 990 MW with external assistance from Overseas Economic Corporation Fund, Japan in the year 1991, as the project, involved installing belt conveyor system, the appellant called for tenders for design, fabrication, supply, erection, commissioning, operation and maintenance of belt conveyor system and the tender offered by R-1 herein was accepted and an agreement was entered into between the appellant and R-1 and, following the said agreement, amounts were paid to R-1 as interest free advance to be recovered from the running account bills and, in turn, R-1 produced two bank guarantees as per bank guarantee No. 13/91 to the tune of Rs. 23,13,664.50 ps. and bank guarantee No. 12/91 to the tune of Rs. 2,65,585.00, both bearing date 27.3.1991. Thereafter, it is the case of the appellant that, as R-1 did not complete the work entrusted under the contract within the time given, the appellant had to resort to act of encashing the bank guarantees. It was at thus juncture that R-1 moved the trial court for an order of injunction and, accordingly, the learned trial judge passed the order on I.A.No. I refraining R-1 Vijaya Bank from paying any amount under the bank guarantees to the appellant herein pending disposal of the suit.

The learned senior counsel Sri Shantharaju submitted that the trial court was totally in error in passing the impugned order and it lost sight of the settled position in law as regards the interference of the courts with regard to bank guarantee is concerned. In this connection, he placed reliance on the decisions of the Apex Court, reported in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., , and BSES Ltd. (Now Reliance Energy Ltd.) Vs. Fenner India Ltd. and Another, . Therefore, placing reliance on the aforesaid decisions, it was submitted that the trial court''s order is totally perverse and goes contrary to the well settled position in law that as far as enforcement of the bank guarantee is concerned, the courts generally decline to interfere by granting injunction against the enforcement of the bank guarantees and, therefore, the impugned order, on the face of it, is liable to be set aside particularly having regard to the conditions obtaining in the bank guarantee itself.

On the other hand, the learned Counsel for R-1 contended that the bank guarantee is a conditional one because, the bank guarantee will have to be read along with the letter of intent dated 25.1.1991 and, therefore, the order of the trial court is just and proper. Apart from that, it was submitted that as the appellant itself was due in large sum of money to R-1 under the running bills for the work which had been completed by R-1, the question of encashing the bank guarantees will not arise. As regards the discretion exercised by the trial court is concerned, the learned Counsel placed reliance on the decisions reported in 1968(1) M.L.J. 552 and Wander Ltd. and Another Vs. Antox India P. Ltd., . He also brought to my attention the order passed by this Court in M.F.A. No. 550/1997.

Having heard both sides and after taking note of the rulings cited by the respective sides, the point for consideration is whether the bank guarantee executed is a conditional one. As far as this question is concerned, it becomes necessary to have a look at the various clauses of the bank guarantee itself.

The bank guarantee has been produced at Annexure-F1 to the paper book and the said bank guarantee dated 27.3.1991, among other things, provides thus:

We, Vijaya Bank, undertake to pay the amount guaranteed hereunder or such part, thereof as required within one week of the same being demanded by the Board without referring the issue to the Contractor and without questioning the right of the Board to make such demand or the propriety or legality of the demand.

Therefore, a plain reading of the above clause of the bank guarantee does not give any indication that the bank guarantee is a conditional one. On the other hand, the said clause permits one to take the view that no fetters are put on the appellant-Board from encashing the amount under the bank guarantees. The very use of the expression "without questioning the right of the Board to make such demand or the propriety or legality of the demand" indicates that the bank was bound to pay the amount under the two bank guarantees without a question being asked. As such, it is not possible to read the bank guarantees as conditional bank guarantees in the face of the above clause forming part of the bank guarantees.

As far as the interference by the courts is concerned, the Hon''ble Supreme Court in the case of BSES Ltd. (Now Reliance Energy Ltd.) Vs. Fenner India Ltd. and Another, , has held that in respect of unconditional irrevocable bank guarantees securing performance of the contractor as well as the advance paid to him, where principal finding the contractor''s performance to be not satisfactory and, therefore, seeks to encash the bank guarantee, in such circumstance, the bank is bound to make the payment irrespective of any contractual dispute between the principal and the contractor. The court, further observed that, it is not the function of the bank or of the supreme Court to enquire as to whether due performance had actually happened, when, under the terms of the guarantee, the respondent-Bank was obliged to make payment when the guarantee was called in, irrespective of any contractual dispute between the appellant and the respondent. The Apex Court also held in the said case that there are only two exceptions to the rule that bank guarantee must be honoured in accordance with its terms and they are, where there is clear fraud of which the bank has noticed and the fraud must be of an egregious nature so as to vitiate the entire underlying transaction. The second exception is when there are special equities in favour of injunction, such as when ''Irretrievable injury'' or ''irretrievable injustice'' would occur if such an injunction was not granted.

In another decision in the case General Electric Technical Services Company Inc. Vs. M/s. Punj Sons (P) Ltd. and another, , the Apex Court has held that the court can issue injunction restraining the bank from making the payment to the principal, the amount guaranteed under the bank guarantee only in case of fraud of serious nature or special equities and where, under the bank guarantee, the bank undertook to pay the guaranteed amount without any demur on mere demand of the principal on the ground of non-performance or breach of contract treating the demand to be conclusive as to the amount due, the court would not be justified in issuing injunction interdicting the bank from encashing the bank guarantee on demand of the principal.

In the case of Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd., and another, , it has been held by the Hon''ble Supreme Court, that courts should be slow in granting injunction to restrain realisation of the bank guarantee and when a position is well settled by judicial pronouncement of the Supreme Court, ignoring the same by subordinate courts including High Courts and passing a contrary order amounts to judicial impropriety and judicial adverturism, which is clearly contrary to the settled legal position.

In the case of Daewoo Motors India Ltd. Vs. Union of India (UOI) and Others, , it has been held by the Hon''ble Supreme Court that though the bank guarantee should be read along with the terms of the contract between the parties, when the bank guarantee is absolute and unconditional, the terms of contract have no relevance.

In the light of the aforesaid position in law, in the instant case, the argument of the learned Counsel for R-1 that the hank guarantees will have to be read along with the letter of intent, therefore, does not appeal to me as carrying enough conviction behind it because, as already noted above, the very clause in the bank guarantee itself makes it clear that the bank guarantee is absolute and unconditional. Furthermore, in the same decision, it has been further held that though it is true that the bank guarantee has to be read in conjunction with the terms of the contract, but when the bank guarantee itself is in absolute terms, the agreement between the company and R-1 would be of no avail to the bank. In the case on hand, therefore, the agreement between the appellant and R-1 will be of no avail as far as R-2 Bank is concerned in view of the unconditional bank guarantee that is executed in absolute terms.

In the light of the above settled position in law, I am of the view that, in the instant case, the clause which has been reproduced above itself answers the question that is raised for consideration and the answer is that the bank guarantee is an unconditional one. Therefore, the trial court was in error in not applying the above proposition of law laid down by the Apex Court in regard to the courts interfering with the bank guarantees. As such, the two decisions cited by the learned Counsel for R-1 will not be of any help in the instant case as not only the facts involved in those decisions are different, from the one we are dealing with, but in view of the authoritative pronouncement of the Apex Court with regard to the courts'' power to interfere by granting injunction in respect of bank guarantees, the order of the trial court will have to be held unsustainable in law.

In the result, the appeal is allowed and the impugned order is set aside.