K. L. Steels Ltd. vs Maharashtra State Electricity Board and another

S.S. Nijjar, J.—This suit has been filed by the plaintiffs with a prayer for a declaration to the effect that there is no valid agreement between the plaintiffs and defendant No. 1 for supplies by the plaintiffs to defendant No. 1 of R. S. Joists as per the order dated July 8/10, 1995, on the terms and conditions contained in the tender being exhibit-B to the plaint. Further, defendant No. 1 is not entitled to call upon the plaintiffs to make supplies in terms of the aforesaid order. It is also prayed that defendant No. 1 is not entitled to invoke the bank guarantee dated December 3, 1994, and receive a sum of Rs. 5 lakhs or any other amount which is issued by defendant No. 2 in favour of defendant No. 1 for and on behalf of the plaintiffs. There is also a prayer for permanent injunction restraining defendant No. 1 from invoking the bank guarantee dated December 3, 1994. Permanent injunction is also prayed for against defendant No. 2 from making payment of Rs. 5 lakhs on the basis of the bank guarantee.

This notice of motion has been taken out for interim reliefs which are also sought as final reliefs. Prayer clause (a) is for an injunction restraining defendant No. 1 from in any manner insisting upon or compelling the plaintiffs to supply the R. S. Joists on the basis of the order dated July 8/10, 1995. Prayer clause (b) seeks an injunction against defendant No. 1 restraining him from invoking the bank guarantee. Prayer clause (c) seeks an injunction restraining defendant No. 2 from making payment of Rs. 5 lakhs on the basis of the aforesaid order. An affidavit in support of the notice of motion has been filed. In this affidavit, the prayers made in the suit have been repeated. Thereafter, it is stated that the averments made in the plaint are reiterated. In these circumstances, it is prayed that the notice of motion be made absolute.

Defendant No. 1 invited tenders in December, 1994. The said tenders were to be received on December 7, 1994. Opening of the tender was on December 8, 1994. The tenders were valid for acceptance up to and inclusive of the last date of the calendar month covering the date of completion of 180 days from the date of opening of the tender, i.e., up to June 30, 1995. The plaintiffs submitted the tender by their letter dated December 6, 1994. In the tender document, the plaintiffs have mentioned the name of R. M. Chopra and Mr. Raj Chopra, as the Bombay, contact persons. R. M. Chopra, is mentioned as the agent of the plaintiffs at item No. 8 of the tender document. The address of R. M. Chopra is also given. But, no power of attorney has been executed in favour of R. M. Chopra, so as to constitute him as the agent of the plaintiffs. Thus, R. M. Chopra, was only the contact person of the plaintiffs in Bombay. In fact, one Mr. Mukul Chander, was directed to submit the tender documents and to participate in the tender proceedings. The terms of the tender required that the tenderer should pay earnest money at 3 per cent. of the offer value up to Rs. 1.75 lakhs and, thereafter, at 1 per cent. of the balance offer value limited to Rs. 5 lakhs. The earnest money shall be paid in cash or by demand draft, it is provided that the earnest money deposit shall be forfeited (i) in case the tenderer withdraws the tender/offer during the validity period; (ii) in case the tenderer fails to pay the security deposit if the contract is awarded. The tenderers of some categories were exempted from payment of earnest money deposit. It included all Government and semi-Government institutions, small scale industrial units registered with the Director of Industries, Maharashtra, small scale units registered with the National Small Industries Corporation. The category for exemption is "the firm having a valid permanent bank guarantee of Rs. 5,00,000 (rupees five lakhs) with the Board." Defendant No. 2 was requested to issue a permanent bank guarantee in favour of defendant No. 1 so that the plaintiffs would be exempted from payment of earnest money of Rs. 5 lakhs against the tender. Defendant No. 2 on December 3, 1994, issued a permanent bank guarantee in favour of defendant No. 1 agreeing to pay at Bombay within 48 hours on demand in writing from defendant No. 1 an amount not exceeding the amount of Rs. 5 lakhs for and on behalf of the plaintiffs. The bank guarantee provides that it would be valid and binding on defendant No. 2 up to and inclusive of December 2, 1995. In the guarantee it is stated that the bank agreed unequivocally and unconditionally to pay, at Bombay, within 48 hours, on demand in writing any amount up to and not exceeding Rs. 5 lakhs. The agreement shall not be terminable by notice or any change in the constitution of the bank or firm of contractors or by any other reasons whatsoever and the liability of the bank shall not be impaired or discharged by any variation or alteration made, given, conceded with or without their knowledge or consent, by or between the parties to the said written contract. The validity of the bank guarantee will be extended by a further period of 12 months at the request of defendant No. 1. The plaintiff further states that till May, 1995, they did not hear anything from defendant No. 1. However, they received a telegram dated May 24, 1995, requesting the plaintiffs to extend the validity of the offer up to and inclusive of July 31, 1995, without change in price and other terms and conditions of tender. The plaintiffs replied to the said telegram on June 20, 1995, declining to extend the time limit. Copies of this letter were sent to various officers of defendant No. 1. By letter dated July 7, 1995, the plaintiffs directed the bank to cancel the bank guarantee. On the very next day, defendant No. 2 wrote to defendant No. 1 requesting for return of the bank guarantee. However, on the same day, i.e., July 8, 1995, defendant No. 1 sent an order to be executed by the plaintiffs. This order was sent by telegram and it was stated therein that the detailed order follows. On July 11, 1995, the plaintiffs wrote back to defendant No. 1 stating that they have not given any offer whatsoever dated May 26, 1995, as mentioned in the telegram. The validity of the offer was only up to June 30, 1995. Photostat copies of the earlier letters were sent to the plaintiffs. In reply to this, defendant No. 1 stated that they had accepted the offer, in view of the letter dated May 26, 1995, Wherein the validity was extended up to July 31, 1995. The letter dated May 26, 1995, received from one Mr. Raj Chopra, was also sent by defendant No. 1 to the plaintiffs. The plaintiffs protested by their letter dated July 29, 1995, that defendant No. 1 are wrongly acting on a letter sent by one Mr. Raj Chopra. It was stated that the said person is not the authorised signatory. He was never authorised to act as agent of the plaintiffs. In fact, R. M. Chopra, was to be the representative in Bombay. Consequently, the plaintiffs declined to commence the supply in terms of the order dated July 8, 1995. In spite of the aforesaid, when the plaintiffs came to know that defendant No. 1 is adamant in invoking the bank guarantee, the present suit has been filed.

Counsel for the plaintiffs has submitted that the validity of the tender was only up to June 30, 1995. No acceptance had been received up to June 30, 1995. Thus, there was no concluded contract between the parties. The plea put forward by defendant No. 1 is wholly fallacious and would not constitute a conclusive contract. Mr. Raj Chopra, was only the contact person of the plaintiffs in Bombay. He was never constituted as an agent of the plaintiffs. He had no authority whatsoever to sign any documents. Consequently, the alleged letter dated May 26, 1995, written by Mr. Raj Chopra, extending the validity of the tender up to July 31, 1995, is utterly useless, and cannot be made use of by defendant No. 1. Defendant No. 1 cannot invoke the bank guarantee in law. In view of the tender terms, the security could only be forfeited in the event the plaintiffs had withdrawn the tender during the validity period. This was not done by the plaintiffs. Consequently, the earnest money would be forfeited in case the plaintiffs have failed to pay the security deposit. This eventuality would only arise if there is a concluded contract. Since there is no concluded contract, it cannot be said that the plaintiffs have failed to pay the security deposit. The bank guarantee was only furnished in order to get exemption from failing to pay the earnest money. Clause (XXV) (4) of the tender provided that the firm having given a valid permanent bank guarantee of Rs. 5,00,000 the firm shall be exempted from paying the earnest money. According to counsel, this being the position, the defendants are not entitled to invoke the bank guarantee, nor can the plaintiffs be compelled to make supplies in accordance with the order dated July 8/10, 1995. In support of his submissions, the counsel has relied upon the judgment of this court reported in Kirloskar Pneumatic Co. Ltd Vs. National Thermal Power Corporation Ltd. and another, . Relying on the said judgment, counsel has submitted that the bank guarantee was not a performance guarantee. It was a guarantee issued in lieu of the earnest money. This guarantee could only be invoked if the tender has been withdrawn before the validity period, i.e., June 30, 1995. In that case, the National Thermal Power Corporation Ltd. (NTPC), a Government of India enterprise, invited tenders for the design, engineering, manufacture, erection, testing and commissioning of air-conditioning and ventilation systems to be installed at two satellite earth station sites. The last date and time for submission was February 26, 1985. The bids were to be opened on the same day after about half an hour. The bidder was required to furnish a bid guarantee for an amount of 2 per cent. of the bid price along with the bid and a contract performance guarantee for 10 per cent. of the contract value at the time of the award of contract. The bid guarantee was to be valid for a period of seven calendar months from the date set for the opening of the bids. The bid guarantee of the successful bidder was to be returned after the successful bidder provides the contract performance guarantee. If the performance guarantee is not supplied within thirty days after the date of the notice of award of the contract, then the bid guarantee amount was to be forfeited. Thus, it is obvious that there were two guarantees - (1) bid guarantee (2) performance guarantee, which was to be given after the award of contract. Kirloskar Pneumatic Company Limited of Pune (Kirloskar) submitted their tender, which was opened on February 26, 1985, along with the other tenders. However, since they had mistakenly quoted lesser price, they submitted a revised bid on July 15, 1985. On September 5, 1985, NTPC replied that the price cannot be increased after the bids were opened on February 26, 1985. All efforts at settlement had failed, and NTPC invoked the bank guarantee for Rs. 4,00,000 being the bid guarantee furnished by Kirloskar. The suit was filed by Kirloskar, for a declaration that NTPC are not entitled to invoke the bank guarantee. An application for injunction restraining NTPC from invoking the bank guarantee was also made. Keeping these facts in view, it has been held in para. 26 of the judgment that in the light of the above discussion, it is clear that as the bid given by Kirloskar was withdrawn before it was accepted, no contract as such has come into existence between Kirloskar and the NTPC. It is not the case of the NTPC that they had offered any consideration to Kirloskar to keep the offer open for a period of six months and even though the contract document provided to that effect it was always open to Kirloskar to revoke their offer before it was accepted. After discussing all the facts which are narrated in the said judgment that the contract having not been awarded, the question of submitting the contract performance guarantee did not arise, nor did the question of forfeiting of bid guarantee. Granting injunction, the court has held that there was no contract between the parties to keep the bid alive. The bid could be revoked before the acceptance as Kirloskar have done. The NTPC did not act to their detriment relying on the bid of Kirloskar. The bid guarantee could only be invoked if the contract were to be awarded to Kirloskar and they had failed to pay the amount or to perform their part which stage never arose. Thus, NTPC could not invoke the bid guarantee in terms of the contract and hence, a clear prima facie case exists in favour of Kirloskar. It was also held that the balance of convenience also is clearly in favour of Kirloskar, because at the end of the litigation, NTPC would be able to recover the amount of the bid guarantee, or such other sum as may be determined by the court. This finding is given in view of the fact that, it is nobody''s case that Kirloskar are not solvent to the extent of Rs. 4,00,000 and, therefore, the conditions of issuance of temporary injunction are satisfied. This was an appeal filed against the order rejecting the injunction passed by civil court at Pune.

Counsel for defendant No. 1 has stated that rightly or wrongly, the defendants have been informed on May 26, 1995, that the validity period has been extended by the plaintiffs up to July 31, 1995. Relying on the said letter, the order was passed on October 8/10, 1995. So far as the defendants are concerned, there was a concluded contract. In the event, the defendants act in breach of contract, they are entitled to invoke the bank guarantee. These are the pleas which are taken by defendant No. 1 in the affidavit in reply. It is further submitted by counsel for defendant No. 1 that the bank is duty bound to honour the guarantee. They have no option, but to make payment in accordance with the bank guarantee when the same is invoked. Counsel has submitted that the law on bank guarantees has been considered by the Division Bench of this court in Kisan Sahakari Chini Mills Ltd. v. Richardson and Cruddas Ltd. [1997] 1 Bom C.R. 638; [1999] 96 Comp Cas 776 . After considering the whole of the case law, certain principles have been culled out by the Division Bench. The case of defendant No. 1 falls squarely within the principles laid down by the Division Bench. Consequently, it is stated that there is no merit in the notice of motion. In fact both the notice of motion and the suit deserved to be dismissed.

I have carefully considered the submissions made by the counsel. In view of the judgment of the Division Bench, the findings given by the single judge in the case relied upon by the plaintiffs have lost all significance. The Division Bench is not only a larger Bench, but the judgment is also later in time. A perusal of the principles culled out in para. 17 of the said judgment shows that the bank guarantee is a contract which is quite distinct and independent of the underlying contract. The bank is required to honour the bank guarantee the bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. In para. 17 the following principles have been laid down (page 790)

"The principles that emerge from the above decisions of the Supreme Court can be summed up thus :

(i) That a bank guarantee is ordinarily a contract quite distinct and independent of the underlying contract, the performance of which it seeks to secure and the bank is required to honour the guarantee according to its terms. The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document of guarantee itself. Once that document is in order, the bank giving the guarantee must honour the same and make payment.

(ii) The commitments of the banks under a bank guarantee must be honoured free from interference by the courts. Otherwise trust in commerce, internal and international, would be irreparably damaged.

(iii) It is only in exceptional cases, that is to say, in the case of irretrievable injustice or fraud, that the court should interfere.

(iv) The nature of fraud is fraud of an egregious nature as to vitiate the entire underlying transaction. It is fraud of the beneficiary, not the fraud of somebody else. There must be a specific plea of fraud. The party alleging fraud must necessarily plead and produce all necessary evidence in proof of the fraud in execution of the contract of guarantee. Moreover, fraud like any other charge of a criminal proceedings must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjecture. The material and evidence have to show it.

(v) Irretrievable injustice should be of the kind arising in irretrievable situations. The irreparable harm should not be speculative. If should be genuine and immediate as well as irreversible. It should be a case where the party seeking restraint on invocation of the bank guarantee has no adequate remedy of law at all and the harm to him would be irreparable. The subsequent dispute in the performance of the contract does not give rise to cause nor the court would be justified on that basis to issue an injunction from enforcing a bank guarantee, because the party is not left without remedy in such a case he is entitled to damages and other consequential reliefs.

(vi) The same principles will apply to cases where injunction is sought against a party seeking to invoke the bank guarantee because the net effect of such an injunction is to restrain the bank from performing the bank guarantee. That is so, because one cannot do indirectly what one is not free to do directly."

I am of the considered opinion that the present case clearly falls in each and every principle as extracted above. The bank has to honour the guarantee. No exceptional case has been made out by the plaintiffs. There is no irretrievable injustice or fraud which has been committed on the plaintiffs. The fraud in any event has to be the fraud of the beneficiary and not the fraud of somebody else. There must be a specific plea of fraud. No such plea is raised in the plaint. There is no irretrievable injustice which should be of a kind arising in irretrievable situation. Admittedly, a letter has been written by Mr. Raj Chopra, extending the validity period of the tender. The authenticity or otherwise of the same, can only be determined after the parties have led evidence at the final stage of the suit. At present, the court has to be guided by the affidavits which have been filed by the parties. Since prima facie it appears that there is a concluded contract, the judgment of the single judge in Kirloskar Pneumatic Co. Ltd. v. National Thermal Power Corporation Ltd. [1990] 69 Comp Cas 389 would not be applicable. Rather the principles laid down by the Division Bench would make it wholly unjust to grant the relief of injunction as prayed for in the notice of motion. Counsel for the plaintiffs has then submitted that by the ad interim order, they have been directed to keep the bank guarantee alive in order to secure the claim of defendant No. 1, in the event the suit is dismissed. Counsel for defendant No. 1 has brought to the notice of the court the latest judgment of the Supreme Court in AIR 1997 1644 (SC) . After examining the case law, the Supreme Court has reiterated in paras. 12 and 14 as under (page 185 of Comp Cas) :

"The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence, if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases 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 contemplated 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 on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases. In the case of U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. [1989] 65 Comp Cas 283, which was the case of a works contract where the performance guarantee given under the contract was sought to be invoked, this court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the bank has notice. The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honouring its guarantee, this court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank NA [1984] 1 All ER 351 : ''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 thereafter 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 sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank''s credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged''. This court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee."

At page 187 of 89 Comp Cas

"On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised, the court said in the above case that the irretrievable injury must be of the kind which was the subject matter of the decision in Itek Corporation v. First National Bank of Boston, 566 Fed Supp 1210. In that case an exporter in USA entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American Bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of the United States and had cancelled the export contract. The court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American courts would not be executable in Iran under these circumstances and realisation of the bank guarantee/letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek Corporation v. First National Bank of Boston 566 Fed Supp 1210, there was a certainty on this issue. Secondly, there was good reason, in that case for the court to be prima facie satisfied that the guarantors, i.e., the bank and its customer would be found entitled to receive the amount paid under the guarantee."

In view of the above, I find no merit in the notice of motion. The same is hereby dismissed with no order as to costs.

At this stage counsel for the plaintiffs prays that the ad interim order has continued for two years and, therefore, the same may be continued for another two weeks. In my view, the ad interim order has been in operation already for a long period of time. There is no justification. Rejected.