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Harprashad and Co. Ltd. Vs. Sudarshan Steel Rolling Mills and Others - Court Judgment

LegalCrystal Citation
Subject Company
CourtDelhi High Court
Decided On
Case NumberF.A.O. (O.S.) No. 146 of 1980
Judge
Reported inAIR1980Delhi174b
ActsCode of Civil Procedure (CPC), 1908 - Order 39, Rules 4 and 5
AppellantHarprashad and Co. Ltd.
RespondentSudarshan Steel Rolling Mills and Others
Cases Referred and Banwari Lal Radhe Mohan v. Punjab State Co
Excerpt:
.....passed on application under order 39 rules 4 and 5 wherein appellant sought permission to invoke bank guarantee which had been furnished by respondent - respondent submitted that certain agreement contemplates that all disputes between parties will be decided by arbitration - agreement is independent of bank guarantee - provision of agreement cannot be incorporated in bank guarantee - bank guarantee can be invoked without having resort to arbitration proceeding - appellant has independent rights against bank for invoking bank guarantee. - section 13: [altamas kabir & cyriac joseph,jj] custody of child - welfare of child vis--vis comity of courts - the minor girl child of 3 1/2 years was brought to india by her mother. the minor girl was a citizen of u.k. being born in u.k. her..........3. some understanding between the parties was apparently arrived at. this is reflected in a bank guarantee dated july 14, 1976, in favor of the appellant by the punjab national bank, shahdara, delhi, which had been furnished at the instance of the respondent. the relevant portions of the bank guarantee, with which we are concerned in the present case, read as under : 'with reference to contract made between iranian state railways and m/s. harprashad and co. ltd., mahajan house, e 1 & 2 ndse part ii, new delhi, for supply of railway track components and in compliance with request made by m/s. sudarshan steel rolling mills, 601, motiram road, shahdara, delhi-110032, we, punjab national bank, shahdara, delhi-32, hereby guarantee the good performance of the obligations which m/s......
Judgment:

Kirpal, J.

1. This appeal arises from the order passed on an application under O. 39, rr. 4 and 5, CPC, moved by the appellant wherein it had sought permission to invoke the bank guarantee which had been furnished by the respondent.

2. It appears that the appellant was trying to negotiate with the Iranian State Railways for the supply of certain goods. In order to be able to negotiate the proposed contract, the appellant, it seems, approached the respondents in order to ascertain for itself as to whether it would be in a position to make the supplies.

3. Some understanding between the parties was apparently arrived at. This is reflected in a bank guarantee dated July 14, 1976, in favor of the appellant by the Punjab National Bank, Shahdara, Delhi, which had been furnished at the instance of the respondent. The relevant portions of the bank guarantee, with which we are concerned in the present case, read as under :

'With reference to contract made between Iranian State Railways and M/s. Harprashad and Co. Ltd., Mahajan House, E 1 & 2 NDSE Part II, New Delhi, for supply of railway track components and in compliance with request made by M/s. Sudarshan Steel Rolling Mills, 601, Motiram Road, Shahdara, Delhi-110032, We, Punjab National Bank, Shahdara, Delhi-32, hereby guarantee the good performance of the obligations which M/s. Sudarshan Steel Rolling Mills has assumed towards Harprashad and Co. Ltd., in accordance with the above contract.

In case M/s. Sudarshan Steel Rolling Mills fails in the judgment of M/s. Harprashad and Co. Ltd. to carry out fulfilll any of the obligations assumed under the said contract, we undertake to promptly pay the Punjab National Bank, Parliament Street, New Delhi, in favor of M/s. Harprashad and Co. Ltd., or their order, purely upon receipt of first written notice, any amount up to Rs. 12,13,616 that may be claimed by them for any reason or purpose, at their own discretion without it being necessary for M/s. Harprashad and Co. Ltd., to issue a declaration or take action through administration, legal or other channels, or to prove the default of M/s. Sudarshan Steel Rolling Mills, and/or the variety of the affirmations made by them ......

Guarantee will be effective on execution of contract between M/s. Harprashad and Co. Ltd. and M/s. Sudarshan Steel Rolling Mills/receipt of confirmed order/LC in favor of M/s. Sudarshan Steel Rolling Mills.'

4. Thereafter, on March 3, 1977, a formal contract between the appellant and the Iranian State Railways was executed. The aforesaid bank guarantee contemplated that a formal contract between the parties herein would be executed. After the appellant had entered into an agreement with the Iranian State Railways, it entered into the said formal agreement with the respondents on June 22, 1977. Under this agreement, the respondent (who was referred to in the agreement as 'the contractor') undertook certain obligations to be fulfillled quo the appellant (referred to in the agreement as 'the exporter'). The provisions of the said agreement, which are relevant for the purpose of this appeal, are contained in cls. 4, 5 and 7, which read as follows :

'4. That the 'contractor' shall be paid in Indian Rupees for supply of the goods at price equivalent to US $ 490.34 per metric ton C & F Khorramshahr Bunder Shahpour. This C & F price of US $ 490.34 per metric ton, mentioned above, has been arrived at after deducting gross C & F price of US $ per metric ton, a sum of US $ 20.06 per metric tonne, being the share of cash incentive apportionable to the 'exporter' calculated @ 24% on US $ 83.60, i.e., f.o.b. value assigned to exporter out of the total cash incentive receivable from the Government of India. It is agreed by between the parties that in event of any variation in the rate amount of case assistance, proportionate change will be made in the amount of US $ 20.06 per metric ton, as aforesaid and corresponding change will be in the price of US $ 490.34 per metric ton C & F Iranian Port, payable to the contractor.

5. The 'exporter' has approached shipping companies for special reduction in the freight rate. It is specifically agreed by and between the parties that in the event of any special reduction in the fright rate inclusive of all surcharge, is obtained by and due to efforts of the 'exporter' from the shipping companies, the benefit of this special reduction shall be appropriated as follows :

Special reduction up to US $ 20 per tone along with all the cash incentives thereon resulting by virtue of f.o.b. price going up on account of the special reduction in freight to be appropriated for the benefit of the 'exporter'. Any special reduction over and above US $ 20 per metric ton along with all the cash incentives resulting by virtue of f.o.b. price going up, to be shared equally between the 'exporter' and the 'contractors'. The 'contractor' will be at liberty to make shipments according to his convenience in accordance with the article No. 3 of the 'purchase contract'. If for the special reduction a minimum quantity is specified, the same will not exceed 200 tonnes per shipment. Any normal decrease in freight or surcharges thereon shall be to the account of the 'contractor, along with the cash incentive resulting by virtue of f.o.b. prices going up'.

It is agreed between the parties that prices shall be accordingly adjusted as and when such special reduction takes place and to the extent of shipment sent under such special reduced rate of freight.

7. That the 'exporter' has furnished a performance guarantee of the value of the 10% of the 'goods' to be supplied to 'Foreign Buyer' under the 'purchase contract', of the Punjab National Bank, Parliament Street, New Delhi. The said performance guarantee has been furnished by the Punjab National Bank against a counter-guarantee of the contractor. It is clearly agreed and understood that in the even of any amount being paid or payable under the performance guarantee of the 'exporter' to the 'foreign buyer' due to fault of the 'contractor', the 'contractor' through its counter-guarantee or otherwise shall make good the payment made pursuant to the aforesaid bank guarantee by Punjab National Bank and any such payment shall be exclusively and solely to the account of 'contractor' and the Punjab National Bank's certificates in respect Payment made under the performance guarantee shall be final and binding upon the 'contractor'.'

5. The appellant wanted to invoke the said bank guarantee as according to it, the Iranian State Railways had not paid a sum of US $ 2,60,000 under the contract. In order to prevent the said guarantee from being invoked, the respondent filed Suit No. 933 of 1978 wherein it was prayed that a permanent injunction should be issued restraining the appellant herein from invoking the aforesaid bank guarantee dated July 14, 1976.

6. Along with the aforesaid suit, the respondent herein filed an application for the grant of an interim injection for restraining the present appellant from encashing the bank guarantee. The interim injunction, as prayed for, was granted. The appellant herein then filed an application for vacation of the same.

7. By order dated December 1, 1978, the aforesaid interim applications of the parties in the aforesaid suit were disposed of by D. K. Kapur J. An injunction was granted restraining the present appellant from encashing the bank guarantee. It was directed that the bank guarantee should not be encased unless the Iranian State Railways invoke the performance guarantee furnished to it by the appellant. It was further held that the appellant herein could encash the bank guarantee if the appellant found that the respondents have failed to fulfilll the obligations under the contract. The learned judge directed that whenever the appellant wanted to invoke the bank guarantee, it should inform the court by an application about the same if the court permits, then the bank guarantee may be encashed.

8. An appeal was filed against the said decision. The said appeal was, however, dismissed by a Division Bench of this court in judgment which is Harprashad and Co. Ltd. v. Sudarshan Steel Mills [1980] 50 Comp Case 709. It was observed by the Division Bench that in terms of the bank guarantee, the appellant herein should have given a notice in writing to the bank stating that in its judgment the respondents herein had failed to carry out any of the obligations imposed upon them by the agreement dated June 22, 1977, and, thereforee, the appellant had become entitled to recover the amount under the bank guarantee. Unless such a notice was given, the bank was not obliged to make the payment. It is for this reason the appeal was dismissed.

9. The appellant then filed an application under O. 39, r. 4, being I.A. No. 2937 of 1980, from whose decision the present appeal arises. In this application, the appellant sought to inform this court that it desired to encash the bank guarantee for a sum Rs. 8,02,541.75. According to the appellant this sum had become due and payable to it in terms of clauses 4 and 5 of the agreement dated June 22, 1977, and, in its judgment this was the loss which had been suffered by the appellant herein on account of the failure of the respondent to perform and fulfilll the obligations contracted by the respondents herein under the agreement dated June 22,1977. The appellant gave details of how this amount of Rs. 8,02,541.75 had been arrived at and also filed documents in support of its claim.

10. The respondent filed its reply opposing the said application. It also contended that the aforesaid amount was not payable to the appellant. In para. 6 of the reply, it was contended by the respondent as follows :

'That the bank guarantee dated July 14, 1976, furnished by defendant No. 3 for plaintiff to defendant No. 1 was for the good performance of the contract and it was subject to the contract dated June 22, 1977, executed between the plaintiff and defendant No. 1. It is specifically denied being wrong, false, mala fide and illegal that the plaintiff has committed any breach of the above-said contract and/or has failed to fulfilll the obligations under the above-said contract dated June 22, 1977, which has enabled defendant No. 1 to invoke and encash the bank guarantee amount.'

11. The appellant filed a rejoinder to the said reply reiterating the averments contained in the application. By order dated December 1, 1980, R. N. Aggarwal J. dismissed the appellant's application. The learned single judge held that the bank guarantee referred to the purchase contract between the appellant and the Iranian State Railways and the guarantee made no reference to the agreement dated June 22, 1977. It was observed that on the day when the bank guarantee was furnished by the respondent the only obligation in contemplation of the parties were those contained in the contract between the appellant and the Iranian State Railways. The agreement between the parties dated June 22, 1977, was held not be in contemplation of the parties. According to the learned judge, this view finds support from cls. 2 and 7 of the contract dated June 22, 1977. It was lastly observed that disputed have already been referred to arbitration and the bank guarantee should not be allowed to be invoked.

12. We are unable to agree with the conclusion arrived at by the learned single judge. In our opinion, the bank guarantee could in invoked if the appellant was of the view that the obligations under the agreement dated June 22, 1977, have not been fulfillled by the respondents. The bank guarantee is unhappily worded, but on a close scrutiny of the facts, the only conclusion possible is that the 'contract' referred to in the bank guarantee, the non-fulfillment of which entitles the appellant herein to invoke the bank guarantee, can only be the 'contract' between the parties herein, and the bank guarantee does not refer to the contract between the appellant and the Iranian State Railways, as held by the learned single judge. It is important to note that the bank guarantee dated July 14, 1976, in terms states that 'it will be effective on execution of contract between Harprashad and Co. Ltd. v. Sudarshan Steel Rolling Mills ...'. In the bank guarantee, it is stated that the bank guarantees 'the good performance of the obligations which M/s. Sudarshan Steel Rolling Mills have assumed towards M/s. Harprashad and Co. Ltd. in accordance with the above contract.' The money is to be paid if the respondent 'fails in the judgment of M/s. Harprashad and Co. Ltd., to carry out and fulfilll any of the obligations assumed under the said contract ...' At the time when the bank guarantee was issued, no contract between the Iranian State Railways and M/s. Harprashad and Co. Ltd., had in fact come into existence. In any case, the respondent herein was not a party to that contract. Under the contract dated March 3, 1977, between the appellant herein and the Iranian State Railways, no obligations were assumed by the respondent. There was no privity of contract between the respondent and the Iranian State Railways. The last portion in the bank guarantee, wherein it is stated the same will come into effect on the execution of a contract between the parties herein, leads us to believe that there was an oral agreement between the parties which was reduced to writing on June 22, 1977. The respondent had to discharge its obligations towards the appellant under the said agreement and not under the agreement between the appellant and the Iranian State Railways. The bank guarantee makes reference only to that contract under which obligations have been assumed by the respondents towards the appellant. That contract can only be the contract dated June 22, 1977.

13. As already noted, the bank guarantee is to be effective only on formal contract between the parties being executed. If the agreement dated June 22, 1977, had not been entered into, there would be no obligations to be performed by the respondents towards the appellant. The bank guarantee was to come into operation not on the day it was executed but was to come into operation on a further date. That further date was to be the date when the contract between the parties had been executed. The agreement between the parties was executed on June 22, 1977, and it is with effect from that day that the bank guarantee became effective and came into operation. The question of invoking the bank guarantee can, thereforee, arise only after June 22, 1977, and not earlier. The occasion for interpreting the Bank guarantee would thus arise only after June 22, 1977, after it has come into operation, and the word 'contract' referred to in the bank guarantee can only mean the contract dated June 22, 1977, for it under that agreement that certain obligations have been taken over by the respondent. We are, thereforee, of the opinion that the bank guarantee had been wrongly construed, by the learned single judge, to mean that the 'contract' referred to in the said bank guarantee was the 'contract' of purchase between the appellant and the Iranian State, Railways and not the agreement dated June 22, 1977.

14. There is one other why the learned single judge could not have come to that conclusion which he did. The law of pleadings require that a party cannot urge contrary to what it has pleaded. In paragraph 6 of its reply to I.A. No. 2937 of 1980, which has been quoted hereinabove, the respondent has clearly admitted that the bank guarantee dated July 14, 1976 furnished by it 'was for the good performance of the contract and it was subject to the contract dated June 22, 1977, executed between the plaintiff and defendant No. 1'. The respondent thereforee, clearly admitted in its reply that the bank guarantee was furnished by it in respect of the contract dated June 22, 1977. There being no dispute between the parties on this issue, the contrary finding cannot be sustained.

15. We also find that the attention of the learned judge was presumably not drawn to the observations of the Division Bench in the earlier case between the parties. It was observed by the Division Bench that the bank guarantee could be invoked when the appellant states that the respondent 'has failed to carry out any of the obligations imposed upon it by the agreement dated June 22, 1977'. The Division Bench decided the case on the basis that the contract referred to in the bank guarantee was a contract dated June 22, 1977, and not the contract between the appellant and the Iranian State Railways.

16. It was contended by the learned counsel for the respondent that, according to clause 7 of the agreement dated June 22, 1977, the bank guarantee could be invoked if the appellant herein is required to pay any amount to the Iranian State Railways in terms of the performance guarantee executed by it in favor of that Railways. We are unable to agree with this submission. The agreement dated June 22, 1977, does not say that the bank guarantee could be operated upon only if any sum becomes payable to the Iranian State Railways on a default being committed by the respondent. The obligations of the respondent to make payment are to be found in the bank guarantee. Clause 7 of the agreement dated June 22, 1977, only clarifies that the bank guarantee would also cover the Iranian contract, but whether the bank guarantee could be encased or not will really depend upon the terms of the bank guarantee, and the terms of the bank guarantee cannot be varied or overridden by any of the terms of the agreement dated June 22, 1977. This is also held in the earlier decision by the Division Bench at page 180 of the report, when it was observed that 'the agreement dated June 22, 1977, has been read with the bank guarantee only to understand the terms of the bank guarantee and not to override the terms of the guarantee'. The bank guarantee is to be invoked if the respondent does not fulfilll its obligations in favor of the appellant in terms of the agreement dated June 22, 1977. Clause 7 of the said agreement only extends the operation of the bank guarantee. The said clause is, in effect, in the nature of an indemnity and it would entitle the appellant to encash the bank guarantee if the appellant has to make payment to the Iranian State Railways due to any fault of the respondent herein.

17. It was contended on behalf of the respondent that as disputed between the parties are pending adjudication, the single judge was right in issuing the temporary injunction. In our opinion, merely because suits between the parties are pending would not, ipso facto, entitle the plaintiff to the grant of an injunction. It was held by this court in Harprashad and Co.'s case [1980] 50 Comp Case 709 that the liability under the bank guarantee is absolute and cannot be evaded by raising disputes. The court held that (at p. 721) :

'No dispute raised under the agreement of June 22, 1977, can be a reason for non-payment of the amount due under the bank guarantee. The bank guarantee is an autonomous and independent contract and must have effect according to its own terms.'

18. The case of Harprashad and Co. [1980] 50 Comp Case 709 was followed by another Division Bench of this court in its judgment in the case of Premier Tyers Ltd. v. State Trading Corporation of India Ltd. [1981] 51 Comp Case 316. In Premier Tyres' case, a bank guarantee had been given which was in the nature of a performance guarantee. According to Premier Tyres Ltd., a dispute arisen as to whether any default had been committed by it or not and, as such, the State Trading corporation should be restrained from Realizing the bank guarantee. The single judge having refused to grant an interim injunction, an appeal was filed. Rajindar Sachar J., speaking for the Bench, observed that (at p. 329) :

'It is now well settled that performance guarantee stand on a footing similar to an irrevocable letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms.'

19. It was held that in terms of the bank guarantee it was wholly irrelevant as to whether a dispute has been raised and as to whether the party which furnished the bank guarantee had failed to fulfilll its obligations or had become liable to make the payment. The terms of the bank guarantee have to be seen on their own.

20. A bank guarantee is a contract between the issuing bank and the person in whose favor the guarantee had been furnished. Though the bank guarantee may have been issued by the banker at the instance of its client, as far as the bank guarantee is concerned, it is a bilateral contract between the banker and the party in whose favor the guarantee has been furnished. The party at whose instance the guarantee has been furnished is, in a way, a stranger to the contract of bank guarantee. The person in whose favor the bank guarantee has been issued has a right to ask the bank to fulfilll its obligations in terms of the bank guarantee. If the terms of the bank guarantee entitle a party to ask for the payment of money from the bank, then that right cannot be interfered with merely for the reason that there exists a dispute between that party and the client at whose instance the bank guarantee had been issued.

21. Reference in this context may usefully be made to a decision of the Supreme court in the case of United Commercial Bank Ltd. v. Bank of India, : [1981]3SCR300 Comp Cas, the court observed as follows :

'A letter of credit sometimes resembles and is analogous to a contract of guarantee. In Elian v. Matsas, [1966] 2 LI LR 495, Lord Denning, M.R., while refusing to grant an injunction, stated : '... a bank guarantee is every much like a letter of credit. The courts will do their utmost to enforce it according to its terms. They will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. Thus they refused in Malas v. British Imex Industries Ltd. [1958] 2 QB 127. But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction.'

22. A Bank which gives a performance guarantee must honour that guarantee according to its terms. In R. D. Harbottle (Mercantile) Ltd. v. National West Minister Bank Ltd. [1977] 3 WLR 752 Kerr J., considered the position in principle. We would like to adopt a passage from his judgment at p. 761 :

'It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life blood of international commerce. Such obligations are regarded as collateral to the underlying right and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or as stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international commerce could be irreparably damaged.

The observations of Kerr J. have been cited with approval by Lord Denning, M.R., in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1977] 3 WLR 764.'

23. A similar view with regard to performance guarantees has also been taken by this court in the case of Pesticides India : Props. Mewar Oil and General Mills Ltd. v. State Chemicals and Pharmaceuticals Corporation of India Ltd., AIR 1982 Delhi 78 and Banwari Lal Radhe Mohan v. Punjab State Co-operative Supply and Marketing Federation Ltd., : AIR1982Delhi357 . In both these cases, it was held that the performance guarantees are similar to letters of credit and the obligations of the bank is absolute in terms of the bank guarantee and the same cannot be lightly interfered with by the courts and the banks cannot be restrained from making payment in terms of the banks guarantee. In our opinion, the said decision lay down the correct law.

24. In the present case, the appellant has clearly started that a sum of Rs. 8,02,541.57 is due to it as the respondent has failed to fulfilll its obligations contain in cls. 4 and 5 if the re-agreement dated June 22, 1977. In the judgment of the appellant, this amount had becomes payable by the respondent. In our view, the terms of the bank guarantee have been fulfillled, with the result that the bank was under an obligation to pay the amount demanded by the appellant. The bank cannot be restrained by an injunction from discharging its obligations arising out of a bank guarantee. It is to be borne in mind that, as observed in United Commercial Bank's case [1982] 52 Comp Case 186, as well as in Premier Tyres Ltd.'s case [1981] 51 Comp Case 316, the court usually refrains from the granting injunction to restrain the performance of a contractual obligation arising out of the bank guarantee. The respondent has not been able to show that in the present cases any fraud has been committed. In fact none has been alleged. This being so, the mere fact that there is a dispute pending between the parties, which has yet to be adjudicated upon, would be no ground for restrain in the bank from complying with its obligations under the bank guarantee.

25. It was then submitted by the learned counsel for the respondent that the agreement dated June 22, 1977, contemplates that all disputes between the parties will be decided by arbitration. The arbitration clause contained in the said agreement can, in our opinion, not prevent the appellant from incoming the bank guarantee. As already observed, the agreement dated June 22, 1977, is independent of the bank guarantee. The provision of the agreement dated June 22, 1977, cannot be incorporated into the bank guarantee. The bank guarantee can be invoked without having resort to the arbitration proceeding. The appellant has an independent rights against the bank for invoking the bank guarantee in accordance with the terms thereof.

26. It was lastly contended that the claim of the appellant is mala fide. Prima facie we find that this is not so. According to clause 5 of the agreement, if there is special reduction in the fright rates due to the efforts of the appellant, then the benefit thereof will go to the appellant to the extant specified in the said clause. Our attention has been dears to various documents filled along with I.A. No. 2937 of 1980 which prima facie show that the appellant has been making demands to have the rate of fright decreased. It does prima facie appear that it was due to the efforts of the appellant that the frights were reduced. We would not, however, like to give our considered opinion on this aspect of the case because this may seriously prejudice the suits which are pending between the parties. We are, however, of the opinion that it cannot be said that the claim put forth by the appellant was mala fide, as is sought to be contended done us by the learned counsel for the respondent.

27. For the aforesaid reasons, the impugned judgment dated December 1, 1980, is set aside and I.A. No. 2937 of 1980 is allowed and the appellant is permitted to encash the bank guarantee for the sum of Rs. 8,02,541.75. The appellant would be entitled to costs. Counsel's fee Rs. 650.

28. Appeal allowed.


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