Precision Products vs Kerala State Poultry Development Corporation Ltd.

D.H. Waghela, J.—ADMIT. Mr.Keyur Gandhi appearing on behalf ofM/s. Nanavati Associates waives service of notice.Heard the learned counsel for the appellant and therespondent No.1. This appeal is preferred from the orderbelow the Notice of Motion in Civil Suit No.2367 of 1998whereby the prayer for interim injunction againstinvocation of bank guarantee is rejected. Earlier, anad-interim injunction was granted on 6.5.1998 by theVacation Judge in the Civil Court and after the impugnedorder dated 25.2.2000, its effect was stayed for a periodof four weeks to enable the appellants to approach thehigher forum. Thereafter, the stay granted against itsown order by the trial Court was extended and continuedfrom time to time. By consent of the parties, the appealis taken up for final hearing and disposed by thisjudgment.

The appellant firm (the original plaintiff) andthe respondent (the original defendant No.1) have enteredinto a contract for design, procurement, fabrication,transportation erection and commission of a poultry feedmixing plant after the appellant''s tender was accepted bythe respondent. The period of completion of the work wasstipulated to be six months from the date of the Letterof Intent which was dated 3.1.1996. Besides the otherconditions, it was clearly stipulated in the contractthat the time for completion of work was to be theessence of the contract. Pursuant to the stipulatedterms of payments, but not strictly according to them, apayment of Rs.5,41,556 was made by the respondent by wayof an advance against a bank guarantee of a like amountexecuted by the appellant. The rival pleadings and thedocuments placed on record indicate delay in theexecution of the work due to the reasons attributed bythe parties to each other. The basis and details of suchallegations as are pleaded by the parties are elaboratelydiscussed by the trial Court in the impugned order andare not required to be again discussed in detail fordeciding the central issue arising in this case. It maybe sufficient to state that a prima facie case was soughtto be made out by the appellant on the basis of itsallegation that a fraud was perpetrated by the respondentby entering into the contract without the necessaryarrangement of funds and by delaying the completion ofthe project as per the contract by failing to arrangesufficient funds and, after committing the breach of thecontract, by invoking the bank guarantee for recoveringthe amount which was already received and spent by theappellant in the execution of the contract. On the otherhand, during the course of the delayed and incompleteexecution of work under the contract, the respondent hadwarned the appellant by its letter despatched on19.6.1996 that the considerable delay in implementationof the project could be viewed as a lapse in thefulfillment of the conditions of the contract. When theappellant had requested for despatch instructions andproper storage facilities for piecemeal despatch of thecomponents of the project, the respondent had informedthat piecemeal despatch of the materials was notacceptable. At a meeting held on 8.10.1996 to review theimplementation of the project where the appellant wasrepresented by its Vice President, it was pointed out tohim that piecemeal supply was not acceptable and theplant was required to be commissioned in accordance withthe conditions. Thereafter, as per its letter dated5.5.1997, the appellant sought despatch instructions for the equipments which were ready and requested forpayments against them. Replying the said letter, therespondent stated that necessary finance would bearranged by it at the earliest and the entire lot ofmachinery would be lifted as soon as finance was madeavailable to it. It has to be noted that, after thisletter, in point of time, straightaway comes the letterdated 27.4.1998 invoking the bank guarantee. Thus, noclue as to the developments taking place during theperiod from June 1997 to April 1998 is to be found on therecord.

The bank guarantee in question in favour of therespondent was initially issued on 16.3.1996 and extendedupto 30.7.1998. The relevant paras of the bank guaranteeread as under:

"We, State Bank of India, (hereinafter called the Bank) do hereby undertake to pay the purchaser an amount not exceeding Rs.5,41,556/- (Rupees Five Lacs Fourtyone thousand Five hundred Fiftysix only) against any loss/damage caused to or would be caused to or suffered by the purchaser by reason of any breach by the supplier of any of the terms and conditions contained in the Contract/ Purchase Order.

We, State Bank of India, do hereby undertake to pay the amounts due and payable under this guarantee without any demur merely on a demand from the purchaser stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the purchaser by reasons of any breach by the supplier of any of the terms and conditions contained, in the contract/ purchase order or by reasons of the supplier''s failure to perform the contract/purcahse order, any such demand made on the Bank shall be conclusive as regards the amount due and payable by the Bank under this guarantee shall be restricted to an amount not exceeding Rs.5,41,556/- (Rupees Five Lacs Fourtyone thousand Five hundred fiftysix only)."

On the facts as above, it is vehemently argued onbehalf of the appellant that there are special equitiesin favour of the appellant in view of the breach ofconditions and fraud committed by the respondent inrespect of the primary contract, the issuance of bankguarantee as also in the matter of invocation of the bankguarantee after causing loss to the appellant. Insupport of his submissions, the appellant has relied uponthe following observations made by the Hon''ble SupremeCourt in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., .

"Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same.If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank''s obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about 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."

It was submitted that the breach and violation ofthe conditions of the primary contract by the respondentamounted to a fraud on its part and applying the maxim exturbi causa non oritur actio, it vitiated the invocationof the bank guarantee. It was also submitted that thereare special equities in favour of the appellant andirretrievable injury was likely to be caused to it as itwas a small scale industry who would be hard-hit by thefurther loss even as the respondent may not be able tomake good the loss due to its financial difficulties incase the suit was ultimately decided in favour of theappellant. A case of fraud was also sought to be madeout in respect of invocation of the bank guarantee on thebasis of the conditions contained in it. It was pointedout from the paragraphs extracted hereinabove thatcausing of loss/ damage and sufferance of the same by therespondent by reason of any breach by the appellant ofany of the terms and conditions of the contract was acondition precedent to invocation of the bank guarantee,and since such condition precedent was not fulfilled, theinvocation of the bank guarantee was illegal. Developingthis argument, it was also submitted that the invocationwas fraudulent inasmuch as the breach of the contract wascommitted by the respondent to its own knowledge and yetthe bank guarantee was invoked as if the breach of thecontract was committed by the appellant.

The learned counsel for the appellant relied uponthe judgment of the Hon''ble Supreme Court in Hindustan Construction Co. Ltd. Vs. State of Bihar and Others, to submit that the bank guarantee was notunconditional or unequivocal in terms so as to allow therespondent an unfettered right to invoke the same. Apicture of parallel facts was sought to be drawn and itwas submitted that the terms of the bank guarantee wereextremely material. In the facts of the case before theSupreme Court, the lapse was on the part of the defendants who were not possessed of sufficient funds forcompletion of the work and the allegation that theplaintiff itself abandoned the work did not, prima facie,appear to be correct and hence special equities werefound to be in favour of the appellants. It has to benoted here that, in the facts of the present case, atbest, a fairly arguable case of breach of contract can bemade out on either side. Moreover, in HINDUSTANCONSTRUCTION CO. LTD. (supra), the bank guarantee wascontaining a condition clearly referring to the originalprimary contract itself and the guarantee was supposed tobe invoked only when that condition was specificallyshown to have been violated. Whereas, the bank guaranteein the present case clearly stipulates that the bankundertook to pay the amounts due and payable under theguarantee without any demur and merely on demand from therespondent stating that the amount claimed is due by wayof loss or damage caused or suffered by the purchaser byreason of breach by the supplier of any of the termscontained in the contract or by reason of the supplier''sfailure to perform the contract/ purchase order and suchdemand made by the bank is to be conclusive as regardsthe amounts due and payable by the bank. It has beenfairly conceded that, under the independent contract ofbank guarantee, the bank cannot be allowed to inquire orinvestigate the statement made by the beneficiary.

In the facts of this case, the breach of contractis alleged on both sides and as observed in the impugnedorder, each and every aspect pleaded by the appellantrequired investigation and examination after the case wasput to trial. However, the fact remains that theallegations of fraud are sought to be made out of thealleged breach of the primary contract between theparties and not in respect of the contract of bankguarantee, which is a contract between the respondent andthe bank. Even the allegations of fraud in the matter ofinvocation of the bank guarantee are also based on theallegation of the loss or damage to either party arisingout of the breach of the primary contract between theparties. The stipulation in the first of the clauses ofthe bank guarantee quoted above has to be read asqualified by the next stipulation. Therefore, the factumof any loss or damage caused or suffered by therespondent by reason of any breach by the appellant ofany of the terms and conditions contained in the contractcannot be questioned or inquired into by the bank as thedemand made on the bank by way of invocation isstipulated to be conclusive as regards the amount due andpayable by the bank. The argument that while invokingthe bank guarantee the respondent was conscious of thefact that breach of the primary contract was committed byhim and no loss or damage was caused to him cannot beaccepted, because it is the contentious issue which isyet to be decided by the Court. In this view of thematter, the contention that the respondent was committinga fraud in the matter of invocation of the bank guaranteehas no substance.

The Hon''ble Supreme Court has, in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd., and another, , clearly laid down theguidelines in the matter of granting injunction torestrain realization of bank guarantee and the same canbe summarised as under:

(i) Court should be slow in granting injunction to restrain realization of bank guarantee;

(ii) The right to recover the guaranteed amount is not to be affected or suspended by reason of any dispute which can be raised or which may be pending before courts, tribunals or arbitrator;

(iii) If 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 facts affecting the demand, it may not be open to the bank to require the proof of liability before paying the guaranteed amount.

(iv) In absence of established fraud, [and not a mere allegation of fraud made only in the injunction application] the court ought not to grant any injunction against encashment of bank guarantee.

(v) Besides the fraud in connection with the bank guarantee which would vitiate the very foundation of it, there could be a second possible exception where encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties. The harm or injustice must be of such exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such injunction on commercial dealings.

The learned counsel for the appellant has alsorelied upon a judgment of this Court in Prem Conductors Pvt. Ltd. Vs. State Bank of India and Another, wherein the defendant, by its own conduct, placed theplaintiff in a position where it could not perform itspart of the contract. On such facts, it is held that topermit invocation and realisation of the bank guaranteewould tantamount to permitting a party to take advantageof its own wrong even if such wrong or lapse wasinadvertent or beyond his control. It was submittedthat, in the instant case also, such exceptionalcircumstances existed which justified judicialinterdiction. This judgment cited on behalf of theappellant can easily be distinguished on facts insofaras, in the instant case, the terms of the contract inrespect of the advance payments to be made by therespondent were wholly independent of the time-framewithin which the plant was to be fabricated, supplied anderected. Therefore, prima facie, it cannot be said thatthe failure on the part of the appellant in performingits part of the contract was a direct consequence of thefailure on the part of the respondent in making temporaryadvance payments.

The learned counsel appearing for the respondent hasrelied upon (1996) 5 SCC 450 (ANSAL ENGINEERING PROJECTSLTD. v. TEHRI HYDRO DEVELOPMENT CORPORATION LTD.) insupport of his submission that the beneficiary cannot berestrained from encashing the bank guarantee even if thedispute between the beneficiary and the person at whoseinstance the bank guarantee was given by the bank, hadarisen in performance of the contract, or execution ofthe works undertaken in furtherance thereof. It wasfurther submitted that any payment by the bank wouldobviously be subject to the final decision of the Court.At the stage of invocation of the bank guarantee, theneed for final adjudication and decision on the amountgiven by the appellant is not called for and would runcontrary to the terms of the special contract enteredinto in the form of the bank guarantee. Relying upon thejudgment in SREE JAIN SWETAMBAR TERAPANTHI VID v.PHUNDAN SINGH (AIR 1999 SC 2322), it is also submittedthat the impugned order of the trial Court cannot be setaside unless the trial Court is found to have gone wrongin recording prima facie satisfaction and unless thematerial on record was leading to a contrary finding.The judgment of this Court in Vijaysinh Amarsinh and Co. Vs. Hindustan Zinc Ltd. and Another, is alsorelied upon on behalf of the respondent to point out thatif the suit were to be brought by the bank, the Courtwould not have granted injunction as the bank was boundby the terms of the contract and what could not be donedirectly cannot be achieved indirectly in a suit broughtby the appellant.

In the facts of the present case, the documentson record suggest that, for whatever reasons, not asingle component of the project was despatched by theappellant and there was no question of completion orcommissioning of the project. Even as the appellant wasurgently awaiting destpach instructions and furtherpayments and the dispute regarding acceptability ofpiecemeal despatches was going on, the time-limit forcompletion of the project had since long expired on3.7.1996. The condition of the contract for the projectdoes not contain any stipulation for delaying executionof work against delay in the receipt of payments by theappellant. Therefore, prima facie, the allegations ofdelay or difficulties of the respondent in arrangingfunds and giving despatch instructions are unduly broughtin to justify the delay and failure at the appellant''send. Such tentative conclusion is inescapable in view ofthe fact that the appellant has not even once conveyed tothe respondent that all the components and each of theitems were ready for despatch. On the contrary, theparties appear to have ceased to communicate after theletter dated 19.5.1997 sent to the appellant by theFinance Manager of the respondent. Thus, if, in fact,the project was abandoned due to time overruns, therespondent would be justified in recovering the paymentsmade by way of advance by invoking the bank guarantee.And, prima facie, the appellant does not have any specialequities in its favour. As against the apprehension ofthe appellant about the poor financial condition of therespondent and the doubts about the recovery of anyamount if such eventuality arises, the learned counselfor the respondent has, on instructions, stated that therespondent undertakes to meet any claim arising from theinvocation of the bank guarantee.

It has also to be noted here that, in the instantcase, the bank guarantee in question was meant to coverthe grant of advance and against the loss or damagesuffered due to breach of any condition of the contract.Where the whole project is wound up or abandoned due todelays apparently occasioned by bickering over despatchinstructions and piecemeal supplies, it cannot be heldthat a party should not be allowed to encash the bankguarantee to recover the advance paid; even thoughultimately either party might be found to be responsiblefor the breach of the primary contract. In other words,unless and until such breach of the contract is proved,it cannot be said that the respondent had, to its ownknowledge, not suffered but caused a loss and itsinvocation of the bank guarantee to recover the amountpaid as advance was mala fide or fraudulent. In thiscontext, it has to be borne in mind that the bankguarantee is an independent agreement between the bankand the beneficiary and the undertaking contained thereinhas to be ordinarily enforced except where a strong caseof fraud or irretrievable loss or injury is made out inthe matter of its invocation. The appellant has failedto make out such a strong case and there is no reason tointerfere with the tentative conclusions as regards primafacie case and balance of convenience to which the trialCourt has reached in the impugned order.

In the result, in the circumstances and for thereasons stated hereinabove, the appeal is dismissed withno order as to costs.

The learned counsel for the appellant hasrequested that in case of the appeal being dismissed, thestay operating in favour of the appellant may becontinued for a further period of four weeks for thepurpose of allowing the appellant to approach the higherforum. Accordingly, this prayer is granted and the stayorder granted by the trial court which was operative tilldate, shall continue upto 29.7.2000.