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Judgment
111 paragraphs · 1,950 wordsSl. No.,Bank Guarantee No.,Amount (in Rs.),Issued by
1.,110375IBGA00001,"80,91,000/-","IDBI Bank (Respondent
No.2)
2.,1103751BGA00033,"13,42,000/","IDBI Bank, (Respondent
No.2)
3.,110375IBGA00034,"19,75,000/-","IDBI Bank (Respondent
No.2)
4.,110375IBGP00102,"36,96,507/-","IDBI Bank (Respondent
No.2)
5.,110375IBGP00103,"30,46,500/-","IDBI Bank (Respondent
No.2)
6.,117015IGBER0041,"1,61,81,994/-","D e n a Bank Ltd.
(Respondent No.3)
7.,117015IGBER0042,"2,29,25,000/-","D e n a Bank Ltd.
(Respondent No.3)
,Total,"5,72,58,001/-",
9.He referred to the decision of the Supreme Court in Hindustan Construction Co. Ltd. v. State of Bihar & Ors. : (1999) 8 SCC 436 and submitted,,,
that in that case, the Supreme Court had considered a similarly worded bank guarantee and had held that it was a conditional bank guarantee.",,,
10.Second, Mr Datta contended that there were special equities in favour of the petitioner. He contended that the bank guarantees had not been",,,
invoked for almost four years and invoking the same, without any further development, was fraudulent. He submitted that the financial status of IICL",,,
and its group companies was precarious and if the petitioner is not secured at this stage, it would not be able to recover the amount even if it succeeds",,,
before the Arbitral Tribunal. He contended that in the circumstances, the balance of convenience was squarely in favour of the petitioner and",,,
irretrievable injury would be caused if the relief, as sought for by the petitioner, is not granted.",,,
11.Mr Rajat Navet, the learned counsel appearing for the respondents countered the submissions made on behalf of the petitioner. He submitted that",,,
the bank guarantees in question were unconditional and apart from the bank guarantee no. 110375IBGA00001, all other bank guarantees also included",,,
a clause, which obliged the bank to pay the amount demanded, to the maximum of the sum specified, notwithstanding, the dispute raised by the",,,
contractor in any suit or proceeding. He submitted that, admittedly, the petitioner had not completed the work in question and, thus, there is no doubt",,,
that IICL was entitled to encash the bank guarantees in question. He further submitted that some of the bank guarantees were to secure the amounts,,,
advanced by IICL, and there could be no doubt that IICL was entitled to recover the same.",,,
Reasons and Conclusion,,,
12.At the outset, this Court is unable to accept that the bank guarantees are conditional as contended by Mr Dutta. A plain reading of the bank",,,
guarantees in question indicates that the bank had agreed to pay the amount forthwith as demanded by IICL “without proof or conditions or without,,,
recourse or demur or protest or enquiryâ€. These words make it amply clear that the concerned bank was obliged to remit the funds immediately on,,,
invocation of the bank guarantees. The contention, that such demand would be honoured only once it was established that the petitioner had failed or",,,
neglected to execute the contract satisfactorily, is unmerited. It is well established that a bank guarantee is a separate agreement, which is to be",,,
performed on its own terms. A bank cannot be expected to examine or ascertain whether a contract has been satisfactorily performed and it must act,,,
on the terms of the bank guarantee. In this case, the concerned banks were obliged to remit the amount without making any enquiry and, thus, the",,,
banks have acted in terms of the bank guarantees.,,,
13.Mr Datta contended that since the clause of the bank guarantee as considered by the Supreme Court in Hindustan Construction Co. Ltd. (supra),,,
was similar to the clause as contained in the bank guarantees in question, the bank guarantees must be considered to be conditional bank guarantees",,,
as held by the Supreme Court. This contention is not persuasive. A similar contention was also considered by a Coordinate Bench of this Court in M/s,,,
Rani Constructions Pvt. Ltd. v. M/s Pati-Bel J.V. & Anr. : 2006 (129) DLT 38. In that case, Court observed that the bank had undertaken the liability",,,
not only as a surety but as a primary obligator and the same indicated that the bank guarantee was unconditional. The relevant extract of the said,,,
decision is set out below:-,,,
“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 obligatorâ€. 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. â€,,,
14.In the present case, Clause no. 7 of the bank guarantee no. 110375IBGA00001 expressly provides as under:",,,
“7.The Bank‟s obligations under this ABG for the Guarantee Amount are in the nature of primary, independent and absolute obligations and not by",,,
way of surety.â€,,,
15.In view of the above, there can be little doubt that the bank had undertaken an independent obligation to pay without demur or enquiry as observed.",,,
This obligation of the bank was not only as a surety but the “primary, independent and absolute†obligation of the bank.",,,
16.As observed above, a bank guarantee is an independent contract between the bank and the beneficiary and must be interpreted on its ownÂ",,,
terms. In Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd & Anr.: (1996) 5Â,,,
SCC 450, the",,,
Supreme Court had explained as under:-,,,
“It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the,,,
underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the,,,
beneficiary. Unless fraud or special equity exists, is the pleaded and prima facie established by strong evidence as a triable issue, the beneficiary",,,
cannot be restrained from encasing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee,,,
was given by the Bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof The Bank",,,
unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms",,,
of the bank guarantee. The object behind is to inculcate respect for free flow of commence and trade and faith in the commercial banking transactions,,,
unhedged by pending disputes between the beneficiary and the contractor.â€,,,
17.As stated above, the banks have accepted the obligation under the bank guarantees as a primary, independent and absolute obligation and such",,,
obligation is plainly unconditional.,,,
18.In Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd. and Anr. : (2007) 6 SCC 470, the Supreme Court had",,,
distinguished the decision rendered by the Supreme Court in Hindustan Construction Co. Ltd. (supra) in the following manner:-,,,
“28.The learned counsel in support of his submission relied upon the decision of this Court in Hindustan Construction Co. Ltd. Vs. State of Bihar &,,,
Ors. This Court in Hindustan Construction Co. having referred to the terms of clause (9) of principal contract between the parties therein came to the,,,
conclusion that the bank guarantee specifically refers to the original contract and postulates that if the obligations expressed in the contract, are not",,,
fulfilled by HCCL, the right to claim recovery of the whole or part of the “advance mobilisation†then alone the bank was liable to pay the amount",,,
due under the guarantee to the Executive Engineer. The court found that the bank guarantee specifically refers to clause (9) of the principal,,,
agreement and it is under those circumstances it came to the conclusion that the amount covered by the bank guarantee becomes payable and the,,,
same could be invoked only in the circumstances referred to in clause (9) of the principal agreement. The bank guarantee executed by the bank in the,,,
Beneficiary Name,IIC Limited,,
Credit Account No.,2570340000137,,
Centre (Location),Amravati,,
Bank,HDFC BANK LTD,,
Branch,Amravati Branch Maharashtra,,
Account Type,Savings/Current/Over Draft,,
IFSC Code,HDFC0000257,,
must be interdicted. The said contention is also unpersuasive. Apart from asserting that the parent/group companies of IICL have suffered a quarterly,,,
loss of ₹215 crores for the first quarter of financial year 2017 and has suffered an annual net loss of ₹320.52 crores for the year ended March, 2017",,,
as against a net loss of ₹108.25 crores in the previous fiscal year, the petitioner has not produced any specific material, which would indicate that IICL",,,
would be unable to return the amounts collected by invocation of bank guarantees in the event, the petitioner prevails arbitration.",,,
31.More importantly, the fact that an entity has suffered a loss is no ground to interdict invocation of bank guarantees. It is well settled that the bank",,,
guarantees can be interdicted only in exceptional cases. In Hindustan Steel Works Construction Ltd. v. Tarapore & Co. and Anr.: AIR 1996 SC,,,
2268 , the Supreme Court held as under:",,,
“We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the",,,
courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is",,,
allowed to be encashed, the court should interfere. In this case fraud has not been pleaded and the relief for injunction was sought by the",,,
contractor/Respondent 1 on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or,,,
special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach of the,,,
contract, that the contractor has a counter-claim against the appellant, that the disputes between the parties have been referred to the arbitrators and",,,
that no amount can be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors",,,
are not sufficient to make this case an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The,,,
High Court was, therefore, not right in restraining the appellant from enforcing the bank guarantees.â€",,,
In view of the above, the petitions are unmerited and are, accordingly, dismissed. The parties are left to bear their own costs. All the pending",,,
applications are also disposed of.,,,
It is clarified that this Court has not expressed any opinion on the merits of the dispute between the parties and nothing stated herein should be,,,
construed as such.,,,