M/s. Deltech Engineering Private Limited, Madras-4 vs Rishi Carbonics Private Limited, Hariyana and State Bank of India, SIB Division, Guindy, Madras-600032

Arumugham, J.—Application is filed under O.39, Rules 1 and 2 of CPC read with O.12, R.8 of the Original Side Rules, seeking the interim

injunction restraining the first respondent from enforcing the Bank Guarantee dated 28-5-1990 and the second respondent from paying the amount

covered by the aforesaid Bank Guarantee, pending disposal of the above suit. The affidavit filed in support of the petition and the plaint discloses

the following cost which are briefly stated as follows:

The applicant is the plaintiff in the suit which was filed for permanent injunction restraining the first respondent/1st defendant from invoking the

Bank Guarantee till the dispute between the petitioner/plaintiff and the first respondent/1st defendant is resolved by an arbitration and also the

second respondent/second defendant from paying the amount under the Bank Guarantee.

The applicant is one of the leading suppliers of Co2 - Carbon-di-oxide plaints as well as Dry Ice plants having the company at Madras, entered

into an agreement with the first respondent herein on 6-11-1989 and thereby agreed to supply the Co2 plants as well as the Dry-Ice plants to the

first respondent. It was also agreed among themselves under various terms and conditions., pertaining to the supply of the plants, Machineries and

its erection and performance as stipulated in the abovesaid agreement, persisted by the exchanges of various letters and meeting regarding the

offer, acceptance and the spade-word relating to the execution of the agreement herein before referred to and that accordingly, the applicant

supplied all the plants and machineries as per the specifications and stipulations contained in the Agreement dated 6-11-1989 and erected in the

factory under the overall control of the first respondent in his place. The first respondent is now doing commercial production upon the same with

full capacity and product purity and this was followed by the change of the first respondent''s name from M/s. Rishi Steels and Gases to M/s. Rishi

Carbonics (P) Limited and that thereby, the request made by the first defendant - first respondent to accept the change or the name so far as

reached on 16-12-1989, which was also duly accepted and that the Agreement dated 6-11-1989 remains unaltered.

Pursuant to the Agreement, above referred, the applicant arranged for a Bank Guarantee at the plaintiff''s/applicant''s behest on the condition

that the first respondent should have given due notice of the breach, if any, to the Contractor, viz., the applicant, in writing complying with all the

terms of the said Agreement that if the applicant failed to rectify the defect within the reasonable time notified to them. Thus the Bank Guarantee

arranged by the applicant was given in token of the due performance and that the guarantee is not an unconditional one, but absolutely depending

upon the conditions referred to above and that as such cannot be invoked like the other Bank Guarantees and that the Bank Guarantee given by

the second defendant on behalf of the plaintiff to the first defendant can be invoked only on the conditions stipulated in the said Agreement as well

as the Bank Guarantee are satisfied. There is a specific clause stipulated is the Agreement in which the applicant as well as the first respondent

agreed that the arbitration being one of the terms of the Agreement, has to be complied with before the Guarantee can be invoked and that was the

sine quo non for the invocation of the Bank Guarantee by the first respondent. While that being so, after the installation of the plants and

machineries, the first respondent with an ulterior motive began to make complaints about the performances of the plaints, time and again wantonly

to harass the applicant/plaintiff an evidenced by the various correspondences by means of letters and replies between the applicant and the first

respondent, till the date of filing the suit. But for every false claim made then and there, the applicant has been attending and rectifying the defects

pointed out and that even so, the first respondent was going on making new complaints in spite of the fact that the erection of the machineries were

functioning satisfactorily and that during the course of complaints and the due attendance by way of replies and rectifications, the first respondent

has sent a letter dated 4-2-1991 to the applicant, complaining of some new defects for which the applicant has suitably replied by his letter dated

12-2-1991.

The obligations of the applicant and the first respondent regarding the supply, erection and running of the plant are reciprocal in nature and that

the first respondent had to facilitate the rectification of the defect, if any, by rendering such assistance as may be needed by the applicant on that

score and that his attitude was totally different and that the defects as complained by the first respondent is not admitted and even if true, the 1st

respondent did not come forward to render the needed assistance to the applicant. It appears from the various allegations made in the plaint that

there was a dispute among the applicant and the first respondent herein about the performance of the machineries supplied and erected by the

applicant and that in these circumstances, quite contra to the conditions specifically agreed in the Agreement dated 6-11-1989 and though the

applicant was ready to refer the matter to arbitration as agreed, the first respondent has threatened to invoke the Bank guarantee in utter disregard

of the conditions stipulated in the Agreement and the Bank Guarantee which under law will not be justified and if it is allowed to be invoked, it

would cause great loss/and irreparable damages to the applicant herein. Upon these obligations, the applicant/plaintiff has filed the suit against the

first defendant/first respondent who is a beneficiary in so far as the Bank Guarantee given by the second defendant/second respondent is

concerned on behalf of the plaintiff/applicant and seeking the relief of temporary injunction restraining the first defendant/first respondent/from

invoking the Bank Guarantee given by the second respondent second defendant on behalf of the plaintiff and also the second defendant from

paying the amount thereupon.

On 21-2-1991, finding a prima facie case in favour of the plaintiff, this Court has granted interim injunction as prayed for against at both the

defendants herein.

The first respondent who is a party to the Agreement dated 6-11-1989 with whom the applicant has entered into the said Agreement, has filed a

counter affidavit and in which, he contended inter alia that the application seeking the relief of interim injunction as well as the suit against him and

the bank, viz., the second respondent restraining from invoking the bank guarantee is not at all maintainable in view of the various case laws

decided by the various High Courts and the Apex Court of our country that there cannot be any injunction against the invoking of the bank

guarantee since it was a document within the purview of the Negotiable Instruments Act and once bank guarantee was given and accepted, Which

is an unconditional one on demand, the amount guaranteed should be paid by the bank and that under the circumstances, and, as such the

application is not maintainable and that further it was contended that though the applicant plaintiff has supplied and erected the plants and

machineries as per the specifications and conditions stipulated in the agreement dated 6-11-1989 there was unnecessary delay in completing that

contract and that even so, the erection of the machineries and plants were completed, the erection work was not completed in full as agreed and

that above all, there were serious defects in the machineries and they are not functioning as per the specifications stipulated in the agreement and

that further the performances of the machineries supplied and erected by the applicant was totally defective and the resultant position was that the

first respondent was not able to have the full production and incurred heavy loss and that in spite of several letters and communications to rectify

and said defects, it was not done sy by the applicant, with the result, that the first respondent had intended to invoke the Bank Guarantee given by

second respondent on behalf of the applicant. Thus, in short, the first respondent formulates his defence on the basis that the application as well as

the suit which are for the relief of injunction by the court of law against the invoking? of the bank guarantee itself are not maintainable in view of the

specific findings as per the judgments given by the various High Courts and apex court of our country and that even so, the machineries and plants

supplied and erected by the applicant was totally defective and the consequent performance of the same were not upto the specifications agreed

upon between the parties herein and that inasmuch as the plaintiff applicant failed to rectify and defects pointed out, committed a breach of the

performance of the contract, the first respondent is duly entitled to invoke the Bank Guarantee and that therefore, the first respondent is well within

the legal submits to invoke the same to the extent of 3.1 lakhs which was followed upto 27-5-1991 and that under the circumstances, the interim

order granted by this Court is not correct and as such, the first respondent prayers that the said interim order has to be cancelled and the above

application filed by the plaintiff is to be dismissed.

By filing the reply affidavit, the applicant has reiterated all of his stand specifically pleaded in the plaint and more particularly denies the

allegations made by the first respondent about the delay in supplying the plants and machineries and its erections and the consequent alleged

defects in the performance of the same as well as the loss or damage as alleged by him. On the other hand, by pointing out the various letters and

correspondences transpired between him and the first respondent, he alleges that the machineries and the plants were erected in perfect condition

and the production works were commissioned and in the result, that the first respondent has been commercialising the product through the plants

and machineries supplied and erected by him as per the specifications and conditions agreed upon and that therefore, term was no breach of

contract entered into between him and the first defendant and that so much so, there is no need to invoke the bank guarantee by the first

respondent and that too without complying the conditions stipulated in the bank guarantee as well as the conditions stipulated in the agreement

dated 6-11-1989 and that without doing so, the first respondent is not entitled to invoke the said bank guarantee without referring the dispute to

arbitration which is a condition precedent to invoke the same and that inasmuch as the threat of the first respondent to invoke the Bank Guarantee,

caused irretrievable damages to him, he was constrained to file the suit as well as the application and got the interim order on establishing the prima

facie case through the pleadings and documents. In other respects, the applicant reiterates his specific stand taken in the plaint. His further case

was that there was no notice given to him by the first respondent in order to give a reasonable time to rectify the defects as was agreed upon in the

Bank Guarantee itself and that in the absence of the same, the first respondent is not entitled to invoke the bank Guarantee nor the second

respondent who gave the Bank Guarantee to the beneficiary is not liable to pay the same and that as such, ad-interim injunction granted was

proper and legal and that as such, it has to be made absolute in the interest of justice.

The second respondent bank has not come forward with any written objections or statement.

Upon the above pleadings, the only point which arises for consideration is, ""Whether the applicant/plaintiff is entitled to have the interim

injunction against the respondents herein from invoking the bank guarantee in question without giving reasonable opportunity by means of giving

due notice and referring the matter to the arbitration as agreed upon?

The very fact that the petitioner as well as the first respondent has entered into the agreement on 6-11-1989, agreeing to various terms and

conditions to be followed by themselves relating to the supply of the machineries, erection and their due performances and the correspondent

obligations to be carried out by the respondents herein and that accordingly, machineries were supplied, erected and commissioned as agreed,

were not disputed by the respective parties herein as evident from the pleadings at present. According to the first respondent, the petitioner has

committed breach, since the machineries supplied and erected by him, were not upto the mark as specified and that in site of the repeated

requests, he has not rectified the same, and thus caused heavy loss continuously to him and that as such, he is entitled to invoke the bank guarantee

given by the second respondent to the extent of Rs. 3.10.000/-. and that since it was an instrument, under Negotiable Instruments Act and that

having accepted by him, that the loss due to the non-performance of the contract, he can invoke the said guarantee and that second

respondent/bank on demand is bound and liable to pay and honour the said guarantee and that as decided by the case laws, the Court cannot

interfere by restraining him from invoking the guarantee and that on the above said grounds, the first respondent pleads that the petition is to be

dismissed in limine.

On the other hand, it was the case of the applicant that the parties herein are bound by the various terms and conditions stipulated in the

agreement dated 6-11-1989 and that having agreed and that in accordance with it, he has supplied the machineries, perfect in quality and erected

at the place of the first respondent as per the specifications made and agreed in the agreement, started functioning and commissioned the

manufacturing works and that it was first respondent, who with an ulterior motive, used to raise complaints regarding defects one after another,

wantonly and deliberately and that without complying with the conditions stipulated in the agreement above referred as well as the bank guarantee

given on his behalf by the second respondent and without giving any notice, on providing any opportunity to rectify the mistake, the first respondent

is not entitled to invoke the bank guarantee in question since it was not an unconditional one, but burdened with the conditions as agreed upon and

the same have to be complied with before invoking the same and that inasmuch as the said conditions agreed upon had not been complied with, the

first defendant is not entitled to invoke the said bank guarantee on the false ground and also because of the agreement that disputes of whatever

nature between the applicant and the first respondent have to be referred to arbitration as agreed, the first respondent is not entitled to invoke the

bank guarantee and that even so, the case laws relied on behalf of the first respondent is not at all applicable to the facts or the present case as it is

clearly a different one and that therefore, the ad-interim injunction granted in favour of the applicant is to be made absolute.

To appreciate the rival contentions raised before me on behalf of the respective parties herein, I may advert to the relevant conditions

stipulated in the agreement dated 6-11-1989 as was admitted by the applicant as well as the first respondent and that accordingly, under the

heading ""Payment Terms"", clause-''e'' provides as follows:

Bank Guarantee by DEL for the advance made by RSG which will be automatically adjusted as soon as the amount is adjusted in the invoice.

And, Clause-''f'' reads as follows:

Far 10% of the amount, DEL will give the performance guarantee for 12 months at the time of despatch of documents through bank.

Then, subsequently under the heading, ''performance'', it was stipulated as follows:

DEL guarantees all machinery and materials or their own manufacture furnished under this contract against defects in workmanship and material for

one year from time of shipment and will, at their option, repair or replace such products as they may find defective. On machinery and materials

furnished by DEL, but manufactured by others, DEL will extend the same guarantee, they receive from the manufactures. Any liability of DEL,

arising from defects in machinery, workmanship or material, whether manufactured by them or otherwise, shall not in any case exceed the cost of

correcting such defects.

Then, under the heading, ""Arbitration"", it was provided as follows:

Disputes of whatever nature arising under, out of, or in respect of the contract shall unless amicably settled, be referred to the survey of arbitration

of two gentlemen, one to be named by RSG and one by DEL. The surveyors or arbitrators shall appoint an umpire before entering upon the

reference. In the event of either of the parties failing to nominate a surveyor or an arbitrator within fifteen days after being requested in writing to be

so by the other party, the said other party shall have the power to nominate a surveyor or arbitrator on behalf of the defaulting party as well as the

two surveyors or arbitrators so nominated shall proceed to act. The decision of the surveyors or arbitrators or the umpire shall be final and binding

on both parties.

The survey or arbitration under this cause shall take place at Delhi and any arbitration shall except as modified by this clause, be under the

provision of the Indian Arbitration Act, that may be in force at time.

Regarding the gamut of the clauses hereinbefore extracted and stipulated, the parties herein have no disputes at all and they have admitted that

the said conditions are in existence and binding upon them. Therefore, it follows that it was made very clear that both the applicant and the first

respondent had agreed that disputes of whatever nature means all disputes arising under, out of or in respect of this Agreement shall be referred to

the arbitration unless the same are not amicably settled and then by agreeing to the mode of arbitration to be followed and that with regard to the

performances of the machineries and materials supplied by the applicant, the stipulation made under the heading, ""Performance"" became the fool-

proof in the agreement itself.

With regard to the relief asked for, it has become necessary to advert the bank Guarantee given by the second defendant bank on behalf of the

applicant herein the first respondent, on 28-5-1990 for the period commencing from 28-5-1990 to 27-5-1991 to the extent of guarantee of Rs.

3,10,000/-.. This bank guarantee No.Gua/Sib/E/48/ 1990-91 is appeared to have been given by the second respondent bank to the first

respondent on behalf of the applicant herein. After the preamble portion, the condition stipulated in this bank guarantee for invoking the same by

the beneficiary is as follows:

Now, it is hereby agreed as follows:

In case there is a breach of warranty by the contractor on the satisfactory and trouble free performance of the Co2 plant in relation to capacity and

product purity, provided that the beneficiary has given due notice of the said breach to the contractor in writing, and complied with all other terms

of the aforesaid agreement and the said contractor has failed to remedy the said defect within a reasonable time notified to them, the State Bank of

India, Guindy branch, agree and undertake unequivocally and unconditionally to pay on demand in writing from the said beneficiary or any officer

authorised by it in this behalf, any amount not exceeding Rs. 3,10,000/-. (Rupees Three Lakhs Ten Thousand only) to the said beneficiary on

behalf of the said contractor, who has entered into the above contract.

By a casual I look and mere reading of this condition stipulated in the Bank Guarantee itself and agreed upon by the parties in this case, the

applicant contractor, the first respondent the beneficiary and the second respondent the bank, clinches the fact that the Bank should pay the

amount guaranteed not exceeding to Rs. 3,10,000/-. on demand made in writing by and on behalf of the beneficiary, viz., the first respondent and

that to pay the said amount as being unequivocally and unconditional to the said beneficiary as agreed upon, provided that the Breach of Warranty.

If any by the contractor, viz., the applicant herein and he should be called upon by the first respondent, viz., the beneficiary by giving the due notice

of the said breach in detail in writing and compiled with all other terms of the agreement after providing a reasonable time to the applicant

contractor to carry out the rectification of the defect by notifying them. Thus, it was made clear that even if any breach of the Agreement dated 6-

11-1989 was committed, then he should be given the due notice in writing and should have been provided with a reasonable time to rectify the

mistake and that if he has failed to do so, then the beneficiary, viz., the first respondent is entitled to invoke the bank Guarantee by making a

demand in writing and that on such demand being made, the second respondent bank should unequivocally, unconditionally and without any

objection pay the amount guaranteed to the extent of Rs. 3,10,000/-. to qualify the said position more particularly the giving of the due notice in

writing relating to the defects, if any, in the machinery or the performance of the machinery erected and by calling upon the contractor to rectify the

same providing the reasonable time is a condition, as agreed upon as sine quo non to invoke the bank Guarantee. In this respect, I am able to see

that the Bank Guarantee No. 48/1991 given by the second respondent bank to the first respondent beneficiary on behalf of the applicant, the

contractor, is not an unconditional on, but it is a conditional guarantee and that unless and until the conditions stipulated in the Guarantee itself, as

agreed upon between the parties herein, is complied, the beneficiary is not entitled to invoke the same in law.

Thiru V. Sridevan, the Learned Counsel appearing for the applicant contends that the invoking of this Guarantee given on behalf of the

applicant by the bank to the beneficiary is burdened with the condition of giving due notice, pointing out the exact defects in the performance of the

machineries and the repairs to be carried out by providing reasonable time and without doing so, the beneficiary is not entitled to invoke the same

and that even so and apart from the same, the parties having agreed to refer the disputes of whatever in nature arising among themselves in respect

of this Agreement, should nave been referred the matter before an Arbitrator and that without doing so, even though the applicant was ready to

refer the disputes and complaints raised by the first respondent before an arbitrator, making attempts to invoke the bank Guarantee is not only

unjustifiable but also totally against the virtue of the conditions stipulated and agreed upon in the Bank Guarantee itself, and that as such, the

attempt made by the first respondent to invoke the said Bank Guarantee without complying the above agreed conditions will definitely cause

irretrievable loss to the applicant herein and that under the circumstances, the interim order passed by this Court, perfectly established the prima

facie case and that as such, it has to be made absolute. Keeping in view of the conditions stipulated in the guarantee itself, in the context that the

first respondent has not even controverted the said position either by pleadings or through his counsel during the course of arguments, I am inclined

to accept the arguments to be forwarded by the Learned Counsel Thiru Sridevan appearing on behalf of the applicant herein and that the logical

consequences is that I am not inclined to countenance the arguments of the Learned Counsel Thiru B. Ramamurthy appearing for of the first

respondent that this Bank Guarantee is an unconditional one and that should be honoured on making the demand by the beneficiary.

Then, Thiru B. Ramamurthy, the Learned Counsel appearing for the first respondent has placed his reliance on a decision made by the

Supreme court in a case reported in U.P. Co-operative Federation Limited v. Singh Consultants and Engineers(P) Limited 1988-1-S.C.C. 174

and also a decision of this Court reported in Revathi C.P. Equipments Limited, Coimbatore v. Sangeetha Tubewell Corporation, Madras and

Another AIR 1989 Madras 302 as well as an unreported judgment of this Court made in Civil Revision Petition No. 1775 of 1989 dated 25-10-

1989, between M/s. G.K. Steel (Coimbatore) P. Limited and Larson and Toubro Limited and Another. It is true that the Supreme Court has

clearly laid down the rules and enunciated the principles to be followed in granting injunction under Order 39, Rule 1, if the matters are relating to

the invoking of the Bank guarantee given on behalf of the one party by the Bank to the beneficiary as it has come under the one instrument as

defined under the, Negotiable Instrument Act and that if the demand was made, then the Bank should honour its commitment of payment to the

beneficiary without any demur or objection whatsoever and that was the legal position and that in such circumstances, the court cannot interfere by

way of granting injunction under O.39 Rule-1 from invoking the said Bank Guarantee and restrain the bank from honouring the same.

Even the case laws laid down by this Court in the above references, and the ratio held out by the Supreme court have to be followed by the

judges of this Court. With great respect, I may advert that the cases dealt with by the apex court as well as this Court in the above references cited

above are on purely different facts from that of the present one and that in those cases, the bank guarantee was not burdened with any pre-

condition to be performed before invoking the same and that an unconditional guarantee was the basis in all the above cases an that thereupon, the

principles to be followed in such circumstances were clearly laid down, but in the instant case, the beneficiary has accepted to perform the

condition specifically stated in the Guarantee itself and that therefore, the Bank Guarantee in question is not an unconditional one. Therefore, under

the circumstances, as the said position has not been negatived by the first respondent either in the pleadings or in the arguments, I am fully satisfied

to hold that the propositions of law laid down by the apex court or our country as well as this Court in the above citations may not be helpful to the

first respondent to any extent and cannot be imparted with the facts of the present case.

I have carefully persued all the communications which transpired between the applicant herein and the first respondent from the date of

Agreement, i.e., 6-11-1989 till 15-3-1991 which find place in the typed set and I am able to see that in none of the letters of correspondences, the

compliance of the conditions stipulated and agreed upon in the Bank Guarantee itself has not been done by the beneficiary which in my view, the

first respondent is not entitled to invoke the guarantee in question and that further having regard to the clause agreed upon an stipulated in the

Agreement dated 6-11-1989 itself that all the disputes arising between the parties herein out of this contract, have been agreed to be referred to an

arbitration and that while so, exchange of mere notices with replies as well as telegrams alone are not suffice to hold that there was a breach of

Agreement committed by the Contractor, viz., the applicant herein. Even assuming that there is a breach or defects in the performance of the

machineries of their erections, though the same were alleged through letters and telegrams sent to the applicant herein, but being rectified then and

there and fresh complaints were projected then and there till the date of filing the suit and that no attempts were made to refer the matter to an

arbitrator as agreed, even though the applicant has opted his choice for referring the matter as a dispute to the arbitrator as agreed.

After a careful analysis of the entire correspondence letters and telegrams exchanged between the first respondent and the applicant,

Agreement, Bank Guarantee, registered notice, reply as well as the pleadings, I am inclined to hold the Bank Guarantee in question, threatened to

be invoked by the first respondent, is not an unconditional Guarantee to be invoked at any time at the option of the beneficiary as has been laid

down by the apex court of our country as well as this Court in the above case laws item. But, this is a guarantee burdened with the conditions

agreed upon by the beneficiary as a sine qua non to invoke the same on the breach, if any, by giving due notice and providing a reasonable

opportunity to rectify the same and, that even so, the first respondent was never inclined to comply and to refer the alleged dispute, if any, for the

arbitration as agreed and that in this context, the arguments of the Learned Counsel, Thiru. B. Ramamurthy that inasmuch as on the alleged breach

committed by the applicant herein, the Court cannot restrain the first respondent from invoking the Bank Guarantee in questions on the basis of the

ratios laid down by the apex court as well as this Court, cannot be countenanced and that the legal consequence is that I accept the contentions

made by the Learned Counsel appearing for the applicant herein. I find this is a fit case and prima facie has been established and the balance of

convenience is in favour of the applicant. In the result, the ad-interim injunction granted by this Court in favour of the applicant on 21-2-1991 is

hereby made absolute till the disposal of the suit, and ordered accordingly but with no costs under the circumstances.