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Heavy Engineering Corporation Ltd. Vs. Standard Chartered Bank - Court Judgment

LegalCrystal Citation
CourtKolkata High Court
Decided On
AppellantHeavy Engineering Corporation Ltd.
RespondentStandard Chartered Bank
.....court as recorded in order dated 27th february, 2014:“1. is the plaintiff entitled to invoke two bank guarantees being no.1001/83/108/g dated 16th february, 1983 and g/1001/84/608 dated 29th august, 1984?.2. is the plaintiff entitled to a decree for rs.1,10,33,207/- against the defendant no.1?.3. is the defendant no.1 entitled to challenge the validity of the invocation of the two bank guarantees?.4. is the plaintiff entitled to a decree for further interest pendente lite and interest upon judgment as claimed?.5. what relief, if any, the plaintiff is entitled to?.”. the documents in suit were tendered upon formal proof being dispensed with. the plaintiff adduced oral evidence through one witness who was examined. the defendants did not adduce oral evidence. the plaintiff’s claim is.....

IN THE HIGH COURT AT CALCUTTA Ordinary Original Civil Jurisdiction Original Side Present: The Hon’ble Justice Arindam Sinha C.S. No.38 of 2000 Heavy Engineering Corporation Ltd. Vs. Standard Chartered Bank For the plaintiff : Mr. Suhrid Roy Chowdhury, Adv. Mr. Reetobrata Mitra, Adv. Ms. Bithika Mandal, Adv. For the Defendant no.1 : Mr. K.V. Viswanathan, Adv. Mr. K Mukherjee, Adv. Mr. S.N. Bera, Adv. For the Defendant no.2 : Mr. P.K. Drolia, Adv. Heard on :

02. 07.2015, 15.07.2015, 21.07.2015, 29.07.2015, 13.08.2015, 31.08.2015 & 10.09.2015. Judgment on :

16. h October, 2015. Arindam Sinha, J.

The plaintiff had claimed, inter alia, decree for Rs.1,10,33,207/-. The plaint was amended thrice pursuant to orders dated 13th September, 2001, 31st July, 2007 and 19th February, 2008. The first two amendments were with regard to the name of the defendant no.1. By the third amendment the defendant no.2 was added. Trial of suit was commenced with the following issues being framed by another Learned Judge of this Court as recorded in order dated 27th February, 2014:“1. Is the plaintiff entitled to invoke two bank guarantees being no.1001/83/108/G dated 16th February, 1983 and G/1001/84/608 dated 29th August, 1984?.

2. Is the plaintiff entitled to a decree for Rs.1,10,33,207/- against the defendant no.1?.

3. Is the defendant no.1 entitled to challenge the validity of the invocation of the two bank guarantees?.

4. Is the plaintiff entitled to a decree for further interest pendente lite and interest upon judgment as claimed?.

5. What relief, if any, the plaintiff is entitled to?.”

. The documents in suit were tendered upon formal proof being dispensed with. The plaintiff adduced oral evidence through one witness who was examined. The defendants did not adduce oral evidence. The plaintiff’s claim is on account of invocation of the two bank guarantees. The defendant no.1, hereinafter referred to as the bank, sought to resist the claim of the plaintiff on the ground that the invocation of the said guarantees was not in terms. The guarantees furnished were in respect of advance payments against the supply of plant and equipment, made by the plaintiff to the defendant no.2, supplier. The guarantees were furnished at the instance of the defendant no.2 to secure its due performance as stated in the guarantees. The two guarantees are respectively dated 16th February 1983 and 29th August 1984 being Exhibits ‘D’ and ‘E’ in suit. The two guarantees carry similar clauses, the difference being in the dates and amounts. By Exhibit ‘D’ a sum of Rs.71,35,100/- was guaranteed to be paid to the beneficiary being the plaintiff and by Exhibit ‘E’ the sum of Rs.20,32,500. It would be sufficient to set out clauses 1 and 2 of Exhibit ‘D’.

“1. In consideration of Messrs HEAVY ENGINEERING CORPORATION LIMITED a Government of India Enterprise, a Company registered under the Companies Act (hereinafter called the CORPORATION) having agreed to accept a Bank Guarantee from Messrs Simon Carves India Limited Simon House, Transport Depot Boad, Calcutta 700 027 (hereinafter called the SUPPLIER) on account of Advance Payment of a sum of Rs.71,35,100/(RUPEES SEVENTY ONE LAKHS THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY) as advance against Supply of Plant and Equipment by the CORPORATION to Messrs SIMON CARVES INDIA LIMITED in terms of Letter of Intent No.HEC/CS/1502/81 dated 19.05.1981.

2. We GRINDLAYS BANK P.L.C., 19 Netaji Subhas Road, Calcutta 700001 undertake the Indemnify and keep the CORPORATION indemnified to the extent of Rs.71,35,100/- (RUPEES SEVENTY ONE LAKHS THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY) against any loss or damage caused to or suffered by the CORPORATION by reason or any breach or failure by the said SUPPLIER, in due performance of the aforesaid contract, we shall forthwith on demand pay to the CORPORATION any sum, or sums not exceeding Rs.71,35,100/- (RUPEES SEVENTY ONE LAKHS THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY) without making any prior reference to the said SUPPLIER with and exclusion of any action in Court by SUPPLIER.”

. The plaintiff sought to invoke the said two guarantees by its letter dated 6th November, 1998 which was marked Exhibit ‘U’ in suit. The contents of the said letter are reproduced below:“Since a substantial amount is to be recovered from M/s.SCIL India Limited on account of contractual settlement of Dankuni Coal Complex Project, we hereby instruct you to proceed for encashment of the B.G.No.G1001/83/108G dt.16.2.83 for Rs.71,35,100/- and BG.No.G/1001/84/608 dt.29.2.84 for Rs.20,32,500/- and remit the proceeds of encashment to us within 7 (seven) days from the date of receipt of this letter. Kindly expedite the remittance of encashment proceeds through demand draft to be issued in favour of ‘M/s. HEAVY ENGINEERING CORPORATION LIMITED, on S.B.I. Hatia, Ranchi.”

. The plaintiff thereafter wrote letters dated 28th November, 1998, 19th December, 1998 and 28th December, 1998 to the bank for expeditious action for encashment of the guarantees which letters were marked Exhibits ‘X’, ‘Z’ and ‘AA’ in suit. Mr. Suhrid Roy Chowdhury, learned advocate appeared on behalf of the plaintiff and submitted the facts were not disputed. The guarantees of which the plaintiff was the beneficiary were unconditional. The sums under the said guarantees were payable to the plaintiff on demand so long the same was made in relation to the contract between the plaintiff and the defendant no.2. He submitted it would appear from the said Exhibits ‘U’, ‘X’ ‘Z’ and ‘AA’ that the invocation of the guarantees was in terms thereof. The bank had no defence to the claim of the plaintiff and the same should be decreed. He relied on Chitty on Contracts, 25th Edition on passage 4407 regarding performance guarantees as is reproduced below:“Performance guarantees. A number of cases have involved discussion of the nature of “performance guarantees”. which are, in essence, exceptionally stringent contracts of indemnity. They are contractual undertakings, normally granted by banks, to pay, or repay, a specified sum in the event of any default in performance by the principal debtor of some other contract with a third party, the creditor. An unusal feature of several modern cases has been that the bank’s liability arises on mere demand by the creditor, notwithstanding that it may appear on the evidence that the principal debtor is not in any way in default, nor even that the creditor himself is in default under the principal contract. Such guarantees are sometimes called “first demand guarantees.”

. It has been held that performance guarantees of this nature are analogous to a bank’s letter of credit, and that the bank’s liability is of a primary nature which is unaffected by allegations that the creditor is in breach of the main contract between him and the principal debtor. In the event of fraud the court may be able to intervene to protect the surety; but the court has refused to imply a term to the effect that the beneficiary of such a guarantee will only give notice of a claim if there is reasonable cause. The bank or other financial institution which grants a performance guarantee will, of course, demand a counter-guarantee or indemnity from the customer at whose request the guarantee is granted. As the customer will be liable to reimburse the bank on their payment under the guarantee, and as he will be unable to prevent the bank from paying (except in cases of fraud) when demand is made on the bank, his position is clearly perilous. Indeed, Lord Denning M.R. has said that “these performance guarantees are virtually promissory notes payable on demand.”

. Of course, the party at whose request a performance guarantee is issued, may have his remedy on the contract in the event of his being wrongfully called upon to pay, as the result of his bank’s being similarly called upon. But where the other contracting party is abroad, and the contract is governed by the law of a foreign country, this remedy may in practice be of small value.”

. He then relied on the decision in Dwarikesh Sugar Industries Ltd. Vs Prem Heavy Engineering Works (P) Ltd. reported in (1997) 6 Supreme Court Cases 450 to submit that it was only were prima facie fraud had been established that payment on demand made under a bank guarantee could be resisted. He submitted further the defendant not having put any question in cross-examination disputing the contents of those Exhibits proved by the plaintiff’s witness nor having adduced any oral evidence itself, did not have a case in defence. He cited the decision in Traders Syndicate vs. Union of India decided by a Learned Single Judge of this Court and reported in AIR1983Calcutta 337 placing reliance on a portion of paragraph 5 therein as is reproduced below:“There is no cross-examination of the plaintiff’s witness on his evidence on this point. No suggestion was put to Kundu that the claim was not lodged on behalf of the plaintiff which was a must. Without such a suggestion, the defendant’s counsel was not entitled to argue that no claim in respect of the second consignment was made by the plaintiff and Kundu’s evidence on this point should be rejected. AIR1961Cal 359 is an authority on this point. In para 10 of this report at p.362 it was held:“Whenever the opponent has declined to avail himself of the opportunity to put his essential and material case in cross-examination, it must follow that he believed that the testimony given could not be disputed at all. It is wrong to think that this is merely a technical rule of evidence. It is a rule of essential justice. It serves to prevent surprise at trial and miscarriage of justice, because it gives notice to the other side of the actual case that is going to be made when the turn of the party on whose behalf the cross-examination is being made comes to give and lead evidence by producing witness. It has been stated on high authority of the House of Lords that this much a counsel is bound to do when cross-examining that he must put to each of his opponent’s witness in turn, so much of his own case as concerns that particular witness or in which that witness has any share. If he asks no question with regard to this, then he must be taken to accept the plaintiff’s account in its entirety.”


. Mr. Viswanathan, learned advocate appeared on behalf of the bank and submitted the invocation of the guarantees made by the plaintiff was not in terms thereof. The guarantees were on account of advance payments and Exhibit ‘U’ being the letter of invocation did not refer to either advance payments or supplies. He submitted the bank by its letter dated 18th Nobember, 1998 (Exhibit ‘W’) had made it clear that the guarantees were issued by it specifically covering the advances to be made by the plaintiff to the defendant no.2 for supply of plant and equipment. There had been such supply made consequent to which there was progressive reduction in the value of the guarantees as reduced to nil before October, 1990. The guarantees had nothing to do with amounts recoverable by the plaintiff from the defendant no.2 on account of contractual settlement of Dankuni Coal Complex Project, being the reason given for invocation, which therefore was not in terms of the guarantees. He relied on the decision in Hindustan Construction Company Pvt. Ltd. vs. State of Bihar reported in AIR1999SC3710on paragraphs 9 and 21 therein. Mr. Drolia, learned advocate appeared on behalf of the defendant no.2 and submitted his client was added as a party defendant pursuant to order obtained by the plaintiff. Under directions made in such order the plaintiff had paid some money to the official liquidator (since the company was in liquidation), which money was long since spent in defending the claim of the plaintiff made against his client. He submitted it was only as late as on 29th July 2015 when learned counsel appeared on behalf of the plaintiff and had made known to Court that it was not claiming decree against his client. He, therefore, submitted the suit of the plaintiff against his client be dismissed with costs. The plaintiff and the bank appear to be at variance on propositions of fact and law regarding the invocation of the said bank guarantees. The law relied upon at the bar with regard to invocation of bank guarantees as declared by the Supreme Court in Dwarikesh Sugar Industries Ltd. (supra) and Hindustan Construction Co. Ltd. (supra) can be referred to. In Dwarikesh Sugar Industries Ltd. (supra) the Supreme Court in paragraph 29 said as follows:“29. It is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be followed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decisions will not be of much importance was clearly a method adopted by it in avoiding to follow and apply the law as laid down by this Court. Yet another serious error which was committed by the High Court, in the present case, was not to examine the terms of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had taken the trouble of examining the documents on record, which had been referred to by the trial court, in its order refusing to grant injunction, the court would not have granted the interim injunction. We also do not find any justification for the High Court in invoking the alleged principle of unjust enrichment to the facts of the present case and then deny the appellant the right to encash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guarantee the applicability of the principle of undue enrichment has no application.”

. It is therefore necessary to look to the facts of that case found by the said court which would appear from paragraphs 2 to 5 and 7, the relevant portions of which are reproduced below:“2. Having been thwarted by orders of the court below in its attempt to get encashment of the bank guarantees, issued by the State Bank of India, Meerut Cantt. Branch (Respondent

2) Respondent 1 has led to the filing of this appeal by the aggrieved beneficiaries.

3. The appellant and Respondent 1 had entered into an agreement on 27-7-1994 whereby Respondent 1 was to supply boiling house equipment the cost of which was Rs.5.23 crores. The supply of equipment and material was to start from 159-1994 and the same was to be completed by 10-8-1995, as per the schedule of the supply agreed to by the parties.

4. According to one of the clauses of the aforesaid agreement Respondent 1 had agreed to furnish bank guarantees in favour of the appellant. Out of the above six, only four bank guarantees were furnished including Bank Guarantee no.40/51 dated 1-12-1994 for a sum of Rs.26,15,000 and Bank Guarantee no.40/47 dated 24-11-1994 for a sum of Rs.35 lakhs. These are the bank guarantees with which we are concerned in the present case.

5. Bank Guarantee no.40/51 was issued to ensure timely delivery of equipment and supply by Respondent 1.

7. According to the appellant Respondent 1 did not supply the equipment at site within the time allowed, nor replaced any of the defective items which, according to the appellant, had resulted in the late commencement of the trial crushing in the mill. It is further the case of the appellant that it had to make direct purchases of many parts from other sources as Respondent 1 had failed to supply the equipment. Ultimately by letter dated 21-11-1995 written to Respondent 2, the appellant invoked the bank guarantee. The material portion of this letter was as follows: “We wish to inform you that M/s Prem Heavy Engineering Works (P) Ltd., Rani Mill, Delhi Road, Meerut have failed to fulfil the conditions of our agreement dated 27-7-1994 insofar as timely supply of the machinery and equipment under order with them. In view of their failure, we hereby invoke the bank guarantee in terms of clauses 1, 2 and 3 of the aforesaid guarantee and hereby demand payment of Rs.26,15,000 (Rupees Twenty-six lakhs fifteen thousand only). You are, therefore, required to issue a demand draft drawn in favour of our company payable at Najibabad for Rs.26,15,000 (Rupees Twenty-six lakhs fifteen thousand only). The original guarantee is enclosed which may please be acknowledged.”


. On the facts in that case as reproduced above the Supreme Court in paragraph 24 of the said judgment (Dwarikesh Sugar Industries Ltd. (supra) ) had held as follows:“24. The letter of invocation issued by the appellant demanding the payment of Rs.26,15,000 was in accordance with the terms of Bank Guarantee no.40/51 and the Bank was, therefore, under an obligation to honour its undertaking and to make the payment. It, however, chose not to fulfil its obligation. If the Bank could not in law avoid the payment, as the demand had been made in terms of the bank guarantee, as has been done in the present case, then the court ought not to have issued an injunction which had the effect of restraining the Bank from fulfilling its contractual obligation in terms of the bank guarantee. An injunction of the court ought not to be an instrument which is used in nullifying the terms of a contract, agreement or undertaking which is lawfully enforceable. In its aforesaid letter dated 24-11-1995 Respondent 1 had clearly admitted that entire supply had not been made. In view of this also the High Court was not justified in granting an injunction.”

. Paragraphs 9 and 21 in Hindustan Construction Pvt. Ltd. (supra) is reproduced below:“9. What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished. The terms of the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the Bank Guarantee; or else, the invocation itself would be bad.

21. As pointed out above, Bank Guarantee constitutes a separate, distinct and independent contract. This contract is between the Bank and the defendants. It is independent of the main contract between the HCCL and the defendants. Since the Bank Guarantee was furnished to the Chief Engineer and there is no definition of “Chief Engineer”. in the Bank Guarantee nor is it provided therein that “Chief Engineer”. would also include Executive Engineer, the Bank Guarantee could be invoked by none except the Chief Engineer. The invocation was thus wholly wrong and the Bank was under no obligation to pay the amount covered by the “Performance Guarantee”. to the Executive Engineer.”

. The plaintiff’s witness in answer to question no.30 deposed as follows:“30. (Shown another document dated 6th November, 1998 being Exhibit “U”. in this proceeding) who has signed this document?./ This letter was signed by me. This was invocation of two bank guarantees in which we served notice of invocation on 6th November, 1998. The bank replied to such letter of invocation by their letter dated 18th November, 1998. The bank did not call any witness. So therefore the letter of 18th November, 1998 remains an exhibit on its formal proof having been dispensed with as aforesaid. The plaintiff by its letter dated 28th November, 1998 being Ext. ‘X’ dealt with the bank’s letter dated 18th November, 1998. The plaintiff’s witness in answer to question nos. 36 and 37 deposed as follows:

“36. (Shown another letter dated 28th November, 1998 being Ext. ‘X’ in this proceeding) who has signed this document?./ This letter was also signed by me. This letter has requested for revalidation of Bank Guarantees to ANZ Grindlays Bank.

37. Are the contents of the documents true and correct?. / Yes.”


. On a careful perusal of the contents of Exhibit ‘U’ being the letter of invocation of the said bank guarantees, this court is unable to hold the same was invocation in terms. There is no reference to the purpose for which the said bank guarantees were furnished, as would appear from the said letter of invocation. Hence the plaintiff has failed to make out a case against the bank upon notice of defence stated in paragraph 5 in the written statement filed by the bank as is reproduced below:“5. The defendant states that the aforesaid two guarantees are not at all unconditional guarantees and can be invoked by the plaintiff only on the ground of loss and/or damage suffered by the plaintiff on account of non-supply of the plant and equipment by SCIL and in no other circumstances the aforesaid guarantees could be invoked by the plaintiff.”

. Such was followed up by the following suggestion and question in crossexamination of the plaintiff’s witness as are reproduced below:“76. I put it to you that this guarantee is only against securing advance granted by you to Simon Carves India Ltd. for supply of plant and machinery not for performance?. / I do not agree.

77. Can this guarantee by any stretch of imagination cover the performance not relating to supply of plant and machinery?. / It must relates to performance because it is expected that the supplier will supply the right plant and equipment as stipulated in the contract. But here what has happened that they have supplied the plant and equipment, but they have not completed their supply of plant and equipment. Whatever they have supplied, some of the plant and equipment have also subsequently detected as defective and the those defective equipment they have not replaced. So on the one hand they have not completed the supply on the other hand they have not replaced the defective plant and equipment so I consider their performance is not as per the stipulation of the contract.”

. In view of the above the issues in suit are answered as follows. Issue no.1 in favour of the plaintiff, issue no.3 in favour of the bank and issue nos.2, 4 and 5 against the plaintiff. The suit of the plaintiff therefore fails and is dismissed without costs against the defendant no.1 and with costs against the defendant no.2. (Arindam Sinha, J.)

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