Punjab and Sind Bank vs Fenner (India) Ltd.

T.V. Ramakrishnan, J.—The short but difficult question to be decided in this appeal is whether a bank guarantee executed by the appellant--the Punjab and Sind Bank--in favour of the respondent--Fenner (India) Limited--has come into operation in the facts and circumstances of the case. The trial court has held that it has come into operation and has granted a decree as prayed for, for realisation of a sum of Rs. 32,61,250 with 15 per cent, future interest per annum on the principal amount of Rs.30 lakhs from the date of suit till realisation and proportionate costs of the suit in enforcement of the bank guarantee sued upon, Aggrieved by the decree and judgment, the defendant has filed this appeal.

The relevant facts necessary to be stated are thus : The respondent-company engaged in export business, entered into exhibit A-1 agreement dated April 23, 1991, with Vijay Exports, a business concern, for purchase of cashew kernels for the purpose of export. As per the agreement, Vijay Exports agreed to supply the respondent-company a minimum of two full container loads of cashew kernels every month for a period of 12 months commencing from August, 1991. The respondent, in its turn, agreed to make advance payment to Vijay Exports up to an amount of Rs. 30 lakhs for utilising it for procuring/processing cashew-nuts for supply to the respondent against security furnished by Vijay Exports by way of bank guarantee. Pursuant to the agreement, at the instance and request of Vijay Exports, the appellant executed and issued exhibit A-2, bank guarantee, dated April 24, 1991, in favour of the respondent. By the said guarantee, the appellant agreed to indemnify the respondent against any damages or loss that may be suffered by the respondent by reason of the non-fulfilment of any of the terms and conditions of exhibit A-1 agreement by paying the respondent on demand without any demur any sum that may be ascertained by the respondent as damages or loss they have suffered up to an amount of Rs. 30 lakhs. It was also agreed that the decision of the respondent on the question of breach of the performance of the underlying agreement and extent of damages or loss suffered by them would be final, conclusive and binding on the appellant. Pursuant to exhibit A-1 agreement, the respondent admittedly gave a demand draft for Rs. 20 lakhs dated July 15, 1991, by way of purchase advance. According to the respondent, after receiving the purchase advance of Rs. 20 lakhs, Vijay Exports committed breach of the terms and conditions contained in exhibit A-1 and failed to supply the cashew kernels as agreed in spite of repeated demands. As a result of various discussions held later between the representatives of the respondent and Vijay Exports, it was agreed that Vijay Exports would arrange for shipment of one FCL on or before October 31, 1991, and another FCL on or before November 10, 1991, and after making the shipment, the respondent was to pay the balance sale price after adjusting the advance. It was also agreed that on failure to supply as agreed on October 31, 1991. the respondent is entitled to encash the bank guarantee. The terms of such agreement were reduced to writing and was signed by the parties. A copy of the agreement so reduced into writing was forwarded to the appellant also. Vijay Exports failed to honour the said agreement also. Further agreements to supply the goods alleged to have been entered into between the parties were also not honoured and ultimately the respondent invoked the bank guarantee by their letters, exhibits A-3 and A-4, dated December 4, 1991, and December 7, 1991, respectively. The appellant promptly informed the respondent that the terms and conditions of the bank guarantee had not been complied with by the respondent and hence the appellant is not liable to pay the respondent any amount, as per its communication, exhibit A-5, dated December 11, 1991. In view of the reply given by the appellant repudiating its liability to pay any amount on the basis of the bank guarantee, the respondent has filed the suit alleging breach on the part of the appellant in performing their obligation under the bank guarantee, for realisation of the amount of Rs. 30 lakhs agreed to be paid on demand without any demur after issuance of a notice claiming interest at the rate of 21 per cent, per annum from the date of demand, namely, December 4, 1991.

The appellant denied its liability to pay any amount under exhibit A-2 bank guarantee contending that the bank guarantee has not come into force at all and as such the respondent is not entitled to enforce the same and claim any amount on the basis of it. It was pointed out that exhibit A-2 bank guarantee will come into force only on payment of Rs. 30 lakhs as advance as specifically stipulated in exhibit A-2 itself. The payment of Rs. 20 lakhs stated to have been made on July 15, 1991, as purchase advance falls short of the amount of advance agreed to be paid and as such is not sufficient to bring the bank guarantee into force. Since the entire amount of Rs. 30 lakhs has not been paid towards purchase advance, Vijay Exports has intimated the appellant about the default committed by the respondent and has interdicted the appellant from making any payment under the bank guarantee. As regards the subsequent agreements the appellant took up the stand that such understandings and agreements are not binding on it. The appellant also disputed the allegations regarding the damage and loss suffered by the respondent and contended that Vijay Exports is a necessary or at least a proper party to the suit for an effective adjudication of the dispute with it on the party array. Certain other contentions also were taken up to which it may not be necessary to refer in this judgment as the fate of the appeal will depend upon the decision on the main point already indicated by us. On the basis of the above contentions, it was submitted that the suit is liable to be dismissed.

The evidence in the suit consisted of the oral testimony of PW-1 and DW-1 and the documents produced on both sides marked as exhibits A-1 to A-12 series and exhibits B-1 to B-5. Interpreting exhibit A-2, the learned sub-judge came to the conclusion that on the payment of Rs. 20 lakhs exhibit A-2 bank guarantee has come into force and the commencement of the bank guarantee was not dependent upon the lump sum payment of Rs. 30 lakhs. It was found that everywhere in exhibit A-2 reference is seen made about exhibit A-1 primary agreement and a reading of the various terms and conditions of exhibit A-1 would go to show that what was contemplated by the parties was to make an advance up to Rs. 30 lakhs to Vijay Exports to facilitate supply of cashew kernels for export and in order to secure the repayment of the advance paid in case of default to supply, exhibit A-2 was executed. On the basis of the above reasoning, the learned sub-judge held that "exhibit A-2 is liable to be enforced the moment the payment is made by the respondent to the processor towards purchase advance". The contention that the respondent was bound to prove the damage actually sustained on account of the alleged breach of agreement committed by the supplier as a condition for claiming any amount on the basis of the bank guarantee was also found against holding that the respondent has been made the sole judge on the question of breach of the terms of the underlying agreement and the quantum of damages, etc., as per the terms contained in exhibit A-2. On the basis of the above findings, the respondent was found to be entitled to enforce the bank guarantee for the recovery of the amount as claimed in the plaint with interest. As regards the contention that Vijay Exports is a necessary or proper party, the same was considered by the court below as a preliminary point and has recorded a finding that the supplier is neither a necessary nor a proper party to the proceedings as per the order dated March 4, 1994. The claim for interest was allowed only from the date of the suit.

Arguing the appeal, learned senior counsel, Shri S. Narayanan Poti, has raised the following contentions : exhibit A-2 is a contingent or conditional guarantee which will come into operation only on payment of Rs. 30 lakhs as advance. As the respondent has failed to make the payment of the agreed amount of Rs. 30 lakhs as purchase advance, there is a breach of one of the essential conditions of exhibit A-2. As such, exhibit A-2 has not come into operation and the respondent is not entitled to enforce the bank guarantee. The processor, Vijay Exports, is entitled to get the benefit of payment of advance of Rs. 30 lakhs and unless it gets such benefit, the bank guarantee cannot be legally enforced. There is, in the circumstances, failure of consideration for the guarantee. Even assuming that the bank guarantee has come into operation on payment of Rs. 20 lakhs and the respondent is entitled to enforce the same, only an amount of Rs. 20 lakhs can be claimed in enforcement of the bank guarantee and not any amount towards loss or damages alleged to have been suffered by it. Damages and other losses claimed cannot be decreed in the absence of any pleading and proof to that effect. In substantiation of the above contentions, learned senior counsel submitted that the bank guarantee is an independent contract entered into between the appellant and the respondent and the rights and liabilities between the parties to it are totally and exclusively governed by the terms and conditions contained in it and the underlying agreement, namely, exhibit A-1, and its terms cannot be referred to for any purpose whatsoever while interpreting or understanding the scope and effect of exhibit A-2. The terms and conditions of the bank guarantee especially one regarding payment of Rs. 30 lakhs as advance as a condition for the guarantee to come into force is clear beyond any doubt and as such there is no question of referring to the terms contained in exhibit A-1 agreement or any other agreements and understandings reached between the respondent and Vijay Exports in relation to the supply of the goods either prior to or after the execution of exhibit A-2 while interpreting exhibit A-2. It was submitted that the terms and conditions contained in exhibit A-2 are liable to be construed strictly. In the light of the above contentions, learned counsel contended that the findings of the court below are clearly unsustainable in law.

Sri Chandran Pillai, learned counsel for the respondent, supported the decree and the findings regarding the enforceability of the bank guarantee and argued that in the facts and circumstances of the case, the learned judge was justified in interpreting the terms and conditions contained in exhibit A-2 with reference to the terms and conditions contained in the underlying agreement, exhibit A-1 also. It was submitted that as per exhibit A-1, the agreement was only to pay an amount up to Rs. 30 lakhs as purchase advance. The said provision would make it clear that a lump sum payment of Rs. 30 lakhs as advance was not contemplated by the parties as a condition precedent for bringing into force the guarantee. Rs. 30 lakhs was mentioned only as an upper limit of the purchase advance. Since in the proviso contained in clause 4 of exhibit A-2 there is no specific mention of Rs. 30 lakhs as the amount to be paid as advance, the said provision to that extent is vague or indefinite and as such a reference to Clause (3) of exhibit A-2 and exhibit A-1 agreement referred to therein, is necessary for a proper interpretation or understanding of exhibit A-2 while considering the question regarding the conditions to be complied with for bringing into operation the bank guarantee. It is unreasonable to think that the parties to a transaction like the one on hand have agreed to accept a guarantee for payment of a maximum amount of Rs. 30 lakhs for indemnifying the damages or loss to be incurred by the beneficiary subject to a condition that it will come into operation only on payment of the entire amount of Rs. 30 lakhs and not on payment of any lesser amount. Learned counsel further submitted that the conduct of the parties subsequent to the date of exhibit A-1 agreement would indicate that on payment of Rs. 20 lakhs as purchase advance, the seller bad accepted the same as purchase advance and was assuring the purchaser delivery of the goods as agreed. The seller was not putting forward the short payment of advance as even a ground for delaying delivery though various other reasons were given for the delay in supplying goods. The records produced in the case would clearly show that though the seller was requesting for payment of the balance amount of Rs. 10 lakhs agreed to be paid as purchase advance, such payment was not insisted upon as a condition for the supply of the goods. Ultimately, the seller had to agree that the purchaser can enforce the bank guarantee in case the goods are not supplied as agreed in exhibit A-12(a). Exhibit A-12(a) containing the terms of the settlement reached between the purchaser and seller regarding the supply of goods on the basis of the purchase advance actually made was communicated to the appellant also for its information. Even after the receipt of the copy of exhibit A-12(a), the appellant has not informed the respondent anything about the stand it was taking in the matter especially the stand now taken by the appellant. It is only when the respondent has invoked the bank guarantee that the appellant has totally denied its liability, The silence on the part of the appellant at the time when a copy of exhibit A-12(a) was forwarded to the appellant is crucial and is sufficient to estop the appellant from denying its liability raising the contention that the guarantee has not come into operation. If the appellant was of the view that the guarantee has not come into operation on payment of Rs. 20 lakhs as purchase advance, the bank was under a duty to inform the same to the respondent. Having failed to do so, the appellant should not be allowed to raise any contention to the effect that the guarantee has not come into force and to disown the liability for that reason. It was submitted that so long as the seller has not insisted upon payment of the entire amount of Rs. 30 lakhs as a condition precedent for arranging the supply of goods, the appellant is not legally justified in taking the stand now taken by it for denying its liability to pay the amount agreed to be paid as per exhibit A-2. In the facts and circumstances of the case, the only reasonable way of interpreting the relevant terms of exhibit A-2 is the way in which the trial court has interpreted the same in the impugned judgment. It may not be reasonable to hold in the facts and circumstances of the case that exhibit A-2 guarantee will come into force only on payment of the entire amount of Rs. 30 lakhs by way of purchase advance when the agreement between the parties to exhibit A-1 is only to pay an amount up to Rs. 30 lakhs as purchase advance. As regards the contention that the respondent cannot recover damages without pleading and proving the damage or loss suffered by it, it was submitted that the respondent has been constituted the sole judge of the breach of the agreement as well as the quantum of damages and the appellant is to pay without any demur the amount claimed by the respondent in enforcement of the bank guarantee. As regards the contention that Vijay Exports is a necessary or a proper party it was submitted that the trial court is fully justified in its view and no interference is called for with the findings entered by the court on that point.

There is no serious dispute regarding the material facts and circumstances on the basis of which a decision has to be rendered in this appeal. The terms and conditions in exhibits A-1 and A-2 are not in dispute. The fact of payment of Rs. 20 lakhs as alleged in the plaint has not been disputed. Exhibit A-11 is the receipt acknowledging the payment of Rs. 20 lakhs by the demand draft. It is evident from exhibit B-2 letter of the respondent that the full amount of Rs. 30 lakhs was not paid only because of credit restrictions. The correspondence between the parties would show that the seller was requesting repeatedly for payment of the balance of Rs. 10 lakhs. However, the records produced in the case would also clearly establish that the seller was promising to supply the goods agreed by it immediately on receipt of Rs. 20 lakhs as purchase advance and later on different dates mentioned in its letters and fax messages addressed to the respondent without insisting upon payment of the balance amount as a condition for supply of goods. The respondent was insisting that the seller perform its obligation under exhibit A-1 agreement pointing out the hardship and heavy loss it is incurring as a result of the non-supply of goods even after the receipt of Rs. 20 lakhs by way of purchase advance. The officers of both concerns have discussed the matter at various levels and various stages. Fresh understanding and agreements were reached between the purchaser and seller regarding supply of goods on the basis of the am''ount of Rs. 20 lakhs actually paid as purchase advance. The terms of such settlement or agreement were reduced into writing as evidenced by exhibit A-12(a). The respondent has forwarded to the appellant also copies of such agreements reached between it and the seller, for the appellant''s information. The appellant has not given any reply with reference to such communications till the respondent called upon the appellant to pay the amount of Rs. 30 lakhs in enforcement of the bank guarantee. Immediately on demand, the appellant has taken up the stand that the bank guarantee has not come into operation and that it is not liable to pay the amount as claimed. As the above facts and circumstances are either admitted or not disputed or established, the only question to be considered is whether, in the facts and circumstances of the case, the bank guarantee has come into operation or not ?

Exhibit A-1, dated April 23, 1991, is the agreement between the respondent and the seller (Vijay Exports) containing the terms and conditions subject to which goods have to be supplied to the purchaser by the seller. Clauses (2) and (3) of exhibit A-1 agreement read thus :

"In order to finance purchase of raw nuts and processing for exports, the processor requires financial support and the exporter has agreed to advance up to Rs. 30,00,000 (rupees thirty lakhs only) as purchase advance to be secured by a bank guarantee.

The processor agrees to supply a minimum of two full containers every month of cashew kernels to the exporter for export during next 12 months commencing from August, 1991."

It was to comply with the requirement of furnishing guarantee to secure the purchase advance to be paid that the bank guarantee was issued. Exhibit A-2 is the bank guarantee furnished pursuant to exhibit A-1. The relevant clauses and the covenants of exhibit A-2 are the following :

"Whereas an agreement dated April 23, 1991, has been entered into between the purchaser and Vijay Exports, Kochi, a sole proprietary concern having its office at 23/393, Panampillly Nagar, Kochi-16, hereinafter referred to as ''seller'' (which shall mean and include its successors, assigns, heirs and legal representatives) for the purchase of cashewnuts for export as described in the aforesaid agreement.

And whereas it has been agreed under the terms and conditions of the aforesaid agreement that the purchaser shall make an advance to the seller of Rs. 30,00,000 (rupees thirty lakhs only) for utilising it for procuring/processing cashewnuts to be supplied under the said agreement on his furnishing a guarantee from a bank acceptable to the purchaser.

And whereas the guarantor has as per terms and conditions of the aforesaid agreement agreed to guarantee for the amount of advance payment in favour of the seller, now this deed witnesses that in pursuance of the terms and conditions of the aforesaid agreement and in consideration of the advance payment agreed to be made to the seller by the purchaser, the guarantor do hereby agree and undertake to indemnify the purchaser and keep the purchaser indemnified to the extent of a sum not exceeding the said sum of Rs. 30,00,000 (rupees thirty lakhs only) against any damage or loss that may be suffered by the purchaser by reason of non-fulfilment of any of the terms and conditions of the agreement, by the seller and the guarantor hereby undertakes to pay on demand and without any demur or delay to the purchaser any sum unconditionally and irrevocably not exceeding the sum of Rs. 30,00,000 (rupees thirty lakhs only) as may be ascertained by the purchaser as the damages or loss that the purchaser may have suffered, provided that the guarantee comes into force when the advance payment has been made to the account of the seller and the guarantor hereby covenants with the purchaser as follows :

That the decision of the purchaser as to whether the seller has committed breach of any such terms and conditions of the agreement or not and as to the amount of damages or loss assessed by the purchaser shall be conclusive, final and binding on the seller.

That the purchaser shall have the fullest liberty without affecting in any way the liability of the guarantor under this guarantee or indemnity from time to time to vary any of the terms and conditions of the said agreement or to extend time of performance by the seller or to postpone for any time and from time to time any of the powers exercisable by it against the said seller and either to enforce or forbear from enforcing any of the terms and conditions governing the said agreement and the said guarantor shall not be released from its liability under these presents by any exercise by the seller of the liberty with reference to matters aforesaid or by reason of time being given to the said seller or any other forbearance act or omission on the part of the purchaser or any indulgence by the purchaser to the said contract or any other matter or thing whatsoever which under the law relating to sureties would but for this provision have the effect, of so releasing the guarantor from its such liability."

From the above provisions in exhibit A-2 it is clear that they refer to exhibit A-1 agreement as the underlying agreement or basic agreement with reference to which the guarantee was obtained and furnished by the seller to the purchaser and issued by the appellant. It is particularly important to note that while Clause (2) of exhibit A-1 would show that the agreement between the purchaser and seller was to advance an amount "up to Rs. 30 lakhs as purchase advance", Clause (3) of exhibit A-2 refers to the agreement reached between the purchaser and seller as per exhibit A-1 as one for making an advance to the seller of Rs. 30 lakhs. There is apparently a material difference between the agreement as recorded in Clause (2) of exhibit A-1 and the agreement stated to have been reached between the purchaser and seller on the date of exhibit A-1 and referred to in Clause (3) of exhibit A-2. An agreement to make an advance of Rs. 30 lakhs as purchase advance is quite different from an agreement to pay an advance up to Rs. 30 lakhs. Clause (3) of exhibit A-2 would show that the bank guarantee was issued on the basis that the purchaser and seller have already entered into an agreement whereby the purchaser has agreed to make an advance of Rs. 30 lakhs to the seller as purchase advance, Further, in Clause (4) of exhibit A-2 the parties have agreed that the guarantee would come into operation only when the advance has been made to the account of the seller. The said provision forms part of Clause (4) of exhibit A-2 in the form of a proviso.

Regarding the difference in the wording used in exhibits A-1 and A-2 to indicate the obligation of paying purchase advance, it was submitted that the advance payment referred to in the proviso added to Clause (4) of exhibit A-2 is the advance payment referred to in Clause (3), namely, advance of Rs. 30 lakhs and not an advance up to Rs. 30 lakhs as provided in Clause (2) of exhibit A-1. According to counsel for the appellant, the difference in the terminology used in exhibits A-1 and A-2 documents, while referring to the agreement reached between the seller and purchaser is very material, deliberate and purposive and cannot be characterised as accidental and inconsequential.

On the other hand, learned counsel for the respondent would contend that though the wording used while referring to the nature of the agreement reached between the purchaser and seller in Clause (3) of exhibit A-2 is different and would convey that the amount agreed to be paid as purchase advance as per exhibit A-1 is a definite amount of Rs. 30 lakhs, what was really agreed at the time of execution of exhibit A-1 was as stated in Clause (2) of exhibit A-1. So long as there is no dispute about the nature of the agreement reached between the purchaser and seller as incorporated in Clause (2) of exhibit A-1, the reference in Clause (3) of exhibit A-2 to the effect that the purchaser and seller have agreed to advance an amount of Rs. 30 lakhs as purchase advance can only be a mistaken reference to the agreement really reached and recorded in Clause (2) of exhibit A-1. There is no reason to think that the seller and the appellant have deliberately intended to make a statement about or reference to a different agreement in Clause (3) of exhibit A-2 as a condition for issuing the bank guarantee. In Clause (3) of exhibit A-2 the parties were only referring to one of the conditions of exhibit A-1 agreement or to one of the terms agreed to between the purchaser and seller while entering into exhibit A-1 and was not referring to a new term agreed between the seller and the appellant as a condition for the issue of the bank guarantee. As such it was submitted that the difference in the terminology can only be due to an accidental mistake and cannot be deliberate.

The law as to the contractual obligations of the parties under the bank guarantee seems to be well-settled. In United Commercial Bank Vs. Bank of India and Others, , the Supreme Court, after a detailed analysis of the English and Indian decisions and the statement of the law by the learned authors dealing with bank guarantee and letter of credit, has stated thus (page 206) :

". . . the rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit."

The above statement of law has been consistently followed in the various subsequent decisions of the Supreme Court including the latest decisions in Larsen and Toubro Limited Vs. Maharashtra State Electricity Board and others, and National Thermal Power Corporation Ltd. Vs. M/s. Flowmore Private Ltd. and another, . A Division Bench of this court has also followed the above principle in Unique Alliance Industries v. Anupama Agencies [1994] 2 KLT 831 [1998] 91 CompCas 254 and Regional Science Centre v. Varghese K. Pulayath and Co. [1994] 2 KLT 921 ; [1998] 91 CompCas 227 In Syndicate Bank Vs. Vijay Kumar and others, , it has been held thus (page 604) :

"... It is well-settled that the bank guarantee is an autonomous contract and imposes an absolute obligation on the bank to fulfil the terms and the payment on the bank guarantee becomes due on the happening of a contingency on the occurrence of which the guarantee becomes enforceable,"

Article 3 of the Uniform Customs and Practice for Documentary Credits (1983 Revision) as given in the book The Law of Bankers'' Commercial Credits by Gutteridege and Maurice Megrah (7th edition) is to the following effect :

"Credits by their nature are separate transactions from the sale or other contract(s) on which they may be based and the banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit."

Stating the duty of a party who is entitled to draw a letter of credit, the learned authors of the book have stated thus ;

"... A party who is entitled to draw against a letter of credit must strictly observe the terms and conditions under which the credit is to become available and, if he does not and the bank refuses to honour his credit, he has no cause of action against the bank."

Dealing with the requirements of strict compliance with the terms of a letter of credit and supply of documents, Lord Sumner has stated in Equitable Trust Co. of New York v. Dawson Partners Ltd. [1927] 27 LI. L. 49 thus :

"There is no room for documents which are almost the same or which will do just as well."

The above statement of law was followed by Justice Parker in Banque v. Rayner [1982] 2 LI. L. 476 wherein it was observed thus :

"... Lord Sumner''s statement cannot be taken as requiring rigid meticulous fulfilment of precise wording in all cases. Some margin must and can be allowed, but it is slight, and banks will be at risk in most cases where there is less than strict compliance."

The passages quoted above would indicate the cautious approach to be made in the matter. The fact that the Supreme Court has quoted with approval the relevant principles laid down in English decisions and the books of English authors in Tarapore and Co. Vs. V/O Tractoroexport and Another, , would indicate that such principles are applicable in India too.

Exhibit A-2 is obviously a conditional bank guarantee issued subject to the condition that it will come into force on payment of advance to the account of the seller. The proviso to Clause (4) of exhibit A-2 is clear to that effect. Of course, the proviso only states that the bank guarantee will come into force on payment of advance to the account of the seller. What is the amount to be paid as advance for bringing the bank guarantee into force is the crucial question. A reference to Clause (3) of exhibit A-2 would indicate that the purchaser and seller have already agreed under the terms and conditions of exhibit A-1 agreement entered into between them on April 23, 1991, to make a payment of an advance to the seller of Rs. 30 lakhs. The provision in Clause (3) would clearly establish that the appellant has issued the bank guarantee on the basis that the purchaser and seller have already entered into an agreement on April 23, 1991, to make an advance to the seller of Rs. 30 lakhs and it is pursuant to such agreement that the bank guarantee has been issued in favour of the respondent. If the terms and conditions of the bank guarantee alone can legally be referred to and relied upon while determining the rights and liabilities of the parties to the bank guarantee, the only reasonable conclusion which can be reached is that the advance referred to in the proviso to Clause (4) of exhibit A-2 is the one mentioned in Clause (3) and only on payment of Rs. 30 lakhs the bank guarantee will come into operation. This in fact is the precise stand taken by the appellant while denying its liability to pay any amount under the bank guarantee in exhibit A-5 reply and in the written statement.

It is true that under exhibit A-1 agreement dated April 23, 1991, the purchaser and seller have only agreed to make an advance up to Rs. 30 lakhs. As per exhibit A-1 the agreement was not for payment of a definite sum of Rs. 30 lakhs in lump. There is no dispute regarding the correctness of Clause (2) of exhibit A-1 as representing the agreement reached between the purchaser and seller. As such there is obviously a substantial difference noticeable in the nature of the agreement regarding payment of advance reached between the parties as recorded simultaneously in exhibit A-1 and as referred to in exhibit A-2. On the basis of the terms and conditions in exhibit A-2 the seller has obtained the bank guarantee and the appellant has issued it in favour of the respondent as if the purchaser and seller have entered into an agreement agreeing to make a definite sum of Rs. 30 lakhs as purchase advance. There is no pleading or evidence adduced in the case to establish the circumstances in which the agreement dated April 23, 1991, between the purchaser and seller was referred to as one for the payment of a definite sum of Rs. 30 lakhs as advance whereas the agreement really entered into was only to pay advance up to Rs. 30 lakhs. It is only reasonable to conclude that the appellant must also have been aware of the terms and conditions contained in the basic agreement, namely, the agreement dated April 23, 1991. In spite of the fact that both the parties were aware of the terms and conditions contained in exhibit A-1 agreement the seller has secured and the bank has issued the bank guarantee on the specific basis that the basic agreement between the purchaser and seller is to pay an amount of Rs. 30 lakhs as advance. In view of the provision contained in the proviso to Clause (4) of exhibit A-2 which makes the bank guarantee itself conditional on payment of advance to become operative, it may not be reasonable to assume that the difference in the wording of the two clauses dealing with the question of payment of purchase advance contained in exhibits A-1 and A-2 is inconsequential or unintentional. In Clause (3) of exhibit A-2 the agreement stated to have been entered into between the purchaser and seller has been described as one for payment of a definite sum, namely, Rs. 30 lakhs. It is relevant to note that there is no scope for any doubt if the terms and conditions in exhibit A-2 alone are considered to solve the indefiniteness of the amount of advance to be paid as per the proviso to bring the bank guarantee into force. The bank guarantee is an autonomous contract entered into between the appellant and the seller. Pursuant to the said agreement, the appellant has undertaken an unconditional liability to pay an amount of Rs. 30 lakhs subject to the terms and conditions contained in the bank guarantee itself. While performing the obligation undertaken by the appellant under the bank guarantee it is also under an obligation to strictly adhere to the terms and conditions contained in the bank guarantee subject to which it has undertaken the liability to pay the amount. In other words, the appellant has a duty to make payment to the beneficiary in terms of the bank guarantee and at the same time it is under an obligation or a duty to strictly conform to the terms and conditions contained in the bank guarantee. Though the bank guarantee is one issued with reference to a basic agreement and in the majority of the cases in pursuance of such agreement it cannot be treated as a contract subject to the terms and conditions contained in the basic agreement. It is an autonomous and independent contract entered into between one of the parties to the basic agreement though with reference to it. Though the basic agreement and its terms and conditions might be the foundation or basic reason for bringing into existence the bank guarantee, it has to be treated as fully autonomous and independent transaction as and when it is brought into existence in the light of the settled legal position regarding bank guarantee. The terms and conditions contained in exhibit A-2 cannot be allowed to be restricted, regulated or made subject to the terms and conditions contained in the basic agreement. Except for referring to the basic agreement for the purpose of stating that the purchaser and seller have already entered into an agreement and that pursuant to such agreement, the seller has agreed to furnish a bank guarantee as provided therein, there is no specific clause stating that the bank guarantee is being issued subject to the terms and conditions contained in exhibit A-1 agreement also or that the terms and conditions contained in exhibit A-1 will form part of exhibit A-2 bank guarantee. In the circumstances, merely because there is reference made to exhibit A-1 in exhibit A-2 it may not be possible to hold that exhibit A-2 is issued subject to the terms and conditions contained in exhibit A-1 or that such conditions will regulate or control the rights and liabilities of the parties under the bank guarantee,

The argument that the provision in the proviso is vague and indefinite and as such the vagueness and indefiniteness have to be resolved with reference to the terms contained in exhibit A-1 also cannot be accepted. Even assuming that there is any vagueness or indefiniteness regarding the amount of advance to be paid as far as the provision in the proviso is concerned, a reference to the provision in Clause (3) of exhibit A-2 would remove such vagueness and indefiniteness beyond any doubt and as such there is no scope to refer to the provisions in exhibit A-1 for that purpose. Whatever may be the real nature of the agreement entered into between the seller and buyer at the time when exhibit A-1 was executed, the parties to exhibit A-2 have proceeded on the basis that the buyer and the seller has agreed to make a purchase advance of Rs. 30 lakhs a definite amount and not an amount up to Rs. 30 lakhs. The effect of Clause (3) of exhibit A-2 is certainly to that effect. So long as Clause (3) of exhibit A-2 remains as such, the appellant in our view can justifiably treat the bank guarantee as having come into force only on being satisfied that an amount of Rs. 30 lakhs has been paid as purchase advance to the seller, its customer, on whose behalf the appellant has issued the bank guarantee. To bring the bank guarantee into operation the beneficiary must satisfy that it has paid the advance mentioned in the proviso as referred to or agreed to in Clause (3) of exhibit A-2.

It is relevant to note in this connection that the bank guarantee containing Clause (3) which unambiguously refers to an agreement to pay a definite sum of Rs. 30 lakhs which is different from the agreement recorded in exhibit A-1 was with the respondent immediately on its issue for scrutiny by the respondent. As per exhibit B-5 letter dated June 26, 1991, the respondent has acknowledged the receipt of the bank guarantee in the following terms :

"We also acknowledge with thanks your issuing a bank guarantee No. PSB/BG/1/91-92, dated April 24, 1991, of Rs. 30,00,000 in our favour which will be securing our advance of Rs. 30,00,000 to be made to Vijay Exports."

No attempt seems to have been made to point out the obvious difference in the nature of the agreement actually reached and the one referred to as reached in Clause (3) of exhibit A-2 and to get the provision contained in Clause (3) of exhibit A-2 corrected to bring it in conformity with the term actually agreed as recorded in Clause (2) of exhibit A-1. Clause (3) of exhibit A-2 was allowed to stand as such throughout till the bank guarantee was sought to be enforced. Having accepted the bank guarantee with Clause (3) therein without raising any objection, it may not be now possible for the respondent to contend for the position that the bank guarantee will come into operation on payment of any reasonable amount and not on payment of Rs. 30 lakhs alone.

The contention based upon exhibit A-12(a) cannot also be accepted so long as there is no pleading and evidence to the effect that it was an agreement reached with the concurrence of the appellant or that the appellant has agreed to abide by the said agreement subsequently reached between the seller and the buyer and to act accordingly. Mere silence on the part of the appellant without anything more cannot be treated as acceptance of the terms of exhibit A-12(a) even accepting that exhibit A-12(a) was received by the bank. Unless the appellant was called upon to express its concurrence with the terms of the subsequent agreement as evidenced by exhibit A-12(a), its silence cannot be treated as either acceptance or acquiescence with the said altered terms of the agreement contained in exhibit A-12(a). The appellant could not have unilaterally accepted the terms and conditions contained in exhibit A-12(a) without reference to its customer, the seller. The appellant could have done so only at its peril. In the absence of a specific request to communicate its decision in the matter of acceptance of the terms and conditions in exhibit A-12(a) agreement, the appellant cannot be held to have accepted the new terms contained in exhibit A-12(a) which differs from those contained in exhibit A-2.

It is true that as between the respondent and the supplier, it would not have been possible for the supplier company to contend that so long as Rs. 30 lakhs is not paid it is not bound to supply the goods or that the bank guarantee will come into force only on payment of Rs. 30 lakhs in the light of the correspondence forming part of the file produced and marked in court as exhibit A-12 and exhibit A-12(a) agreement. The correspondence between the parties forming part of exhibit A-12 file would clearly show that the supplier company has agreed to supply the goods on receipt of Rs. 20 lakhs already paid as purchase advance without insisting on payment of the full amount of Rs. 30 lakhs as a condition precedent for performing its obligation, though it has requested for payment of the balance amount of Rs. 10 lakhs also. Further, exhibit A-12(a) would also preclude any such contention being raised by the supplier company. However, the above circumstances cannot be relied upon to contend that the appellant is bound to take note of the subsequent conduct of the customer and honour the guarantee without strictly conforming to the terms and conditions of the guarantee which is obviously different from the terms subsequently agreed between the customer and the respondent-beneficiary. This is especially so in a case where the supplier--the customer of the appellant--has not been impleaded even though there was a specific request made for impleading the customer contending that it is a proper party for an effective and complete adjudication of the entire dispute.

The contention raised on behalf of the respondent that the court should not interpret the guarantee in a very strict and technical manner so as to make it altogether otiose or inoperative and should place on it a reasonable interpretation which would give a meaning and content to it taking note of the fact that it is a transaction entered into between businessmen, cannot also be accepted in the facts and circumstances of the case. If the terms and conditions of exhibit A-2 alone can be looked into for the purpose of deciding the rights and liabilities of the appellant, the respondent and the customer of the appellant, there is no real scope for placing either a strict or liberal interpretation on exhibit A-2 to decide the question whether it has come into operation or not. There is no vagueness or indefiniteness about the terms and conditions in exhibit A-2 if they are considered independently without reference to the terms in exhibit A-1 especially Clause (2) of exhibit A-1. As already held by us the proviso in Clause (3) of exhibit A-2 removes all vagueness and indefinite-ness in the provision in the proviso to Clause (4) regarding the amount agreed to be paid as purchase advance. We find it difficult to accept the submission of learned counsel for the respondent that no reasonable and prudent businessman would accept a conditional guarantee like exhibit A-2 which will become operative only on payment of Rs. 30 lakhs and if the sum advanced falls short of anything less than Rs. 30 lakhs, the guarantee will remain inoperative. We think that in the light of the settled legal position with regard to guarantees it may not be possible for us to consider the reasonableness or otherwise of the terms of the guarantee with a view to make it reasonable if it is otherwise on a plain reading of it, by any process of interpretation strict or liberal. We find no force in the above submission.

The appellant as the guarantor was bound to act strictly in accordance with the terms of the guarantee and could honour the demand for payment under the guarantee only on satisfying itself that the condition precedent for enforcement of the guarantee has been complied with satisfactorily. In the light of the admitted fact that only Rs. 20 lakhs have been paid as purchase advance the appellant could not have paid the amount as demanded by the respondent. This is especially so in the light of the instruction issued to it by the supplier as per exhibit B-3 letter dated, December 5, 1991, not to effect payment under exhibit A-2 bank guarantee stating that the respondent has committed breach of the term regarding payment of purchase advance. As such the failure on the part of the appellant to pay the amount as demanded by the respondent cannot be held to be illegal.

The supplier has furnished the bank guarantee for securing the purchase advance to be made in future to his account by the beneficiary. In other words, the consideration for the guarantee is the payment of purchase advance of Rs. 30 lakhs stated to have been agreed between the supplier and the buyer. As the amount of purchase advance paid was only Rs. 20 lakhs there is failure of consideration also, at least to the extent of Rs. 10 lakhs. It is also relevant to note that as far as the guarantor is concerned it is essential that the principal (the supplier) should get the full benefit to procure which the guarantor or surety has intervened. Otherwise the guarantor will not be bound. We may usefully quote the following two passages from the celebrated work of Rowlatt on the law of Principal and Surety :

"A guarantee for which the consideration is future advance, supply, or other credit, the forbearance of any existing liability, or the withdrawal of any existing process, is not binding until the creditor acts upon it, and performs the consideration. The surety will become liable as soon as the consideration is performed without notice from the creditor of its performance (page 68),

It is essential that the principal should get the full benefit to procure which the surety intervened ; otherwise the surety will not be bound . . ." (page 84).

Applying the above principles of law, it has to be held that until the supplier, the principal as far as the guarantor is concerned, gets the entire benefit of purchase advance of Rs. 30 lakhs it cannot be held that the guarantor is bound to discharge his liability under the guarantee. The appellant can be held to be bound only on satisfying that his principal has received the full benefit for which the guarantee was furnished.

In the light of what is discussed above, we find that the view taken by the learned Sub-Judge that on payment of Rs. 20 lakhs as purchase advance exhibit A-2 has come into force is unsustainable in law. Accordingly, we would set aside the said finding and would hold that exhibit A-2 bank guarantee has not come into operation as the condition regarding payment of purchase advance of Rs. 30 lakhs has not been complied with by the respondent. As the condition precedent for commencement of the liability under the guarantee has not been complied with the appellant was justified in refusing to honour the demand for payment under the bank guarantee. In the circumstances, it has to be held that the respondent-plaintiff had no cause of action against the appellant-bank on the basis of exhibit A-2 bank guarantee.

In the light of the above finding though it is really unnecessary to go into the sustainability of the other findings entered by the learned Sub-Judge in his judgment, we may briefly deal with such findings also and record our findings thereon for the sake of completeness of our judgment. If our finding on the question of enforceability of the guarantee was in favour of the plaintiff, we would have unhesitatingly confirmed all other findings of the learned Sub-Judge. In the light of the provisions in exhibit A-2 there cannot be any doubt about the legal position that the beneficiary has been constituted the sole judge as far as the question regarding breach of primary contract and the damage or loss suffered on account of such breach is concerned and the appellant is bound by the decision taken by the beneficiary on those aspects, As such there is no merit in the contention raised on behalf of the appellant that the respondent is bound to allege and prove breach of the primary contract and the quantum of damages or loss incurred as a result of such breach. Similarly, we find that legally it may not be possible to hold that the supplier is either a necessary or formal party to the suit as instituted by the respondent which is one merely for the purpose of enforcing the bank guarantee though we think that impleadment of the supplier by the respondent-plaintiff as prayed for by the appellant would have given the court some more freedom in adjudicating the entire dispute more effectively and moulding the relief more satisfactorily by adjusting the equities involved in the case between all the parties to the primary agreement and the guarantee. We agree with the finding of the learned Sub-Judge that the questions regarding the breach of the primary contract and the rights and liabilities of the parties based on such breach are all. matters to be decided in other appropriate forums and are not matters legitimately arising for decision in the suit, especially in view of the arbitration clause admittedly contained in exhibit A-1 agreement. We do hot also find any reason to interfere with the award of 15 per cent, interest as against the claim for interest at 21 per cent. As there is no stipulation for payment of interest on the amount due as per the guarantee the award of interest only from the date of suit is also fully justifiable in the light of the claim for interest in exhibit A-7 notice and has only to be confirmed. As such we would have confirmed the decree passed by the learned Sub-Judge in full and would have dismissed the appeal with costs if our finding on the question of enforceability of exhibit A-2 bank guarantee was in favour of the respondent.

In the light of our finding that exhibit A-2 bank guarantee has not come into operation and as such the respondent-plaintiff has no cause of action against the appellant-bank, we would allow the appeal with costs and would set aside the decree passed by the trial court and dismiss the suit.