Skip to content


Kerala State Construction Corporation Ltd. Vs. National Building Construction Corporation Ltd. - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtDelhi High Court
Decided On
Case NumberInterim Application No. 1003 of 1982 and Suit No. 211-A of 1982
Judge
Reported in24(1983)DLT348
ActsArbitration Act - Sections 20 and 41; Code of Civil Procedure (CPC), 1908 - Sections 151 - Order 39, Rule I
AppellantKerala State Construction Corporation Ltd.
RespondentNational Building Construction Corporation Ltd.
Advocates: G.V. Iyer,; S. Balakrishnan,; N.K.D. Namboodry,;
Cases ReferredBanwari Lal Radhe Mohan v. Punjab State Co
Excerpt:
.....and seller. if such temporary injunctions were to be granted in a transaction between a banker a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail. ..a bank guarantee is very much like a letter of credit. further it is submitted that the defendant had agreed to make prompt payment but it had not made the payment as such and that the defendant had failed to supply material such as cement and steel for construction and that the defendant has terminated the contract with a view to camouflage its own lapses......rate of 20% from each running bill of the plaintiff. further the plaintiff had agreed to furnish bank guarantee to the tune of 5% of the contract value for the satisfactory performance of the contracts. the defendant had also agreed to make special advance to the plaintiff on its furnishing 100% guarantee. (4) the following guarantees were issued on behalf of the plaintiff in favor of the defendant relating to the four agreements between the parties : (1)letter of guarantee for rs. 1.65 crores on account of mobilisation advance relating to construction of 235 houses issued by the government of kerala on 15th november, 1977 (suit no. 212-a/82). (2) letter of guarantee dated 18th october, 1979 for rs. 1.52 crores on account of mobilisation advance pertaining to three agreements dated.....
Judgment:

Sultan Singh, J.

(1) THIS judgment will dispose of four applications under Section 41 of the Arbitration Act read with Order 39 Rule I and Section 151 of the Code of Civil Procedure for restraining the defendant from enforcing the guarantees furnished by the plaintiff. The plaintiff in the four Suits No. 211-A, 212-A, 213-A and 214-A of 1982 under Section Bread with Section 20 of the Arbitration Act prays for filing of the arbitration agreement in Court and for appointment of an arbitrator.

(2) BRIEFLY the relevant facts are that National Building construction Corporation Limited, New Delhi (defendant) had entered into three contracts with the Public Housing Corporation on 2nd May, 1977, 3rd February, 1979 and 7th April, 1979 for the construction of (i) 1000 houses, (ii) school buildings, and (iii) public utility services in Beniwalid, Libya. On 17th October, 1977 the defendant entered into a sub-contract with plaintiff v. Kerala State Construction Corporation Limited, Trivandrum, a Government of Kerala Undertaking, by which the plaintiff agreed to construct 235 houses out of said 1000 houses (Suit No. 212-A/82). On 27th July, 1979 three sub-contracts were also executed between the defendant and the plaintiff by which the plaintiff agreed to construct (i) additional 100 houses, (Suit No. 211-A/82), (ii) three school buildings (Suit No. 213-A/82), and (iii) public utility services (Suit No. 214-A/82) in Beniwalid. The terms and conditions of all the four sub-contracts are almost similar. There is an arbitration clause in all the four sub-contracts. It provides that if any dispute or difference arises between the parties in regard to the construction work or the contract, the same shall be referred to arbitration. The disputes arose between the partics. The plaintiff thereforee, filed the said four suits and these applications.

(3) UNDER the said four agreements the defendant had agreed to pay to the plaintiff a sum equal to the 20% of the contract value as mobilisation advance against furnishing of Government guarantee for the equivalent amount. Such advance was to be deducted at the rate of 20% from each running bill of the plaintiff. Further the plaintiff had agreed to furnish bank guarantee to the tune of 5% of the contract value for the satisfactory performance of the contracts. The defendant had also agreed to make special advance to the plaintiff on its furnishing 100% guarantee.

(4) THE following guarantees were issued on behalf of the plaintiff in favor of the defendant relating to the four agreements between the parties :

(1)Letter of guarantee for Rs. 1.65 crores on account of mobilisation advance relating to construction of 235 houses issued by the Government of Kerala on 15th November, 1977 (Suit No. 212-A/82). (2) Letter of guarantee dated 18th October, 1979 for Rs. 1.52 crores on account of mobilisation advance pertaining to three agreements dated 27th July, 1979 regarding construction of 100 houses, 350 three school buildings and public utility services (Suits No. 211-A, 213-Aand 214-A of 1982). (3) Guarantee for Rs. 82.50 lakhs on account of special advance relating to 235 houses issued by the Governor of Kerala on 17th October, 1978 (suit No. 212-A/82). (4) Guarantee dated 19th October, 1979 issued by the State Bank of Travancore undertaking to pay Rs. 14,84,000.00 against any loss or damage relating to the agreement for construction of 100 houses (Suit No. 211-A of 1982). (5) Guarantee dated 19th October, 1979 issued by the State Bank of Travancore undertaking to pay Rs. 10,53,000.00 against any loss or damage relating to agreement for the construction of three school buildings (Suit No. 213-A/82). (6) Guarantee dated 19th October, 1979 issued by the State Bank of Travancore undertaking to pay Rs. 12,63,000.00 against any loss or damage relating to agreement for the construction, of public utility services (Suit No. 214-A/82). (7) Guarantee dated 14th July, 1980 issued by the State Bank of Travancore undertaking to pay Rs. 62,ll,485.00 on account of additional funds provided by the defendant with respect to the said three agreements dated 27th July, 1979 (Suits Nos. 211-A, 213-Aand 214-A of 1982).

(5) WHETHER the defendant is to be restrained from enforcing the above mentioned three guarantees issued by the Government of Kerala and four issued by the State Bank of Travancore on behalf of the plaintiff in favor of the defendant, is the only question for decision in the four applications.

(6) THE learned counsel for the plaintiff submits that the defendant has terminated the four contracts and various disputes have arisen between the parties for which suits under Section 20 of the Arbitration Act are pending, that till determination of the amount due from the plaintiff, the defendant be restrained from enforcing the said guarantees. His submission is that without determination of the quantum due to one party from the other it would not be possible for the defendant to say that any amount is due to it from the plaintiff. His further submission is that the arbitration clause is vague and the question of identity of an arbitrator is in dispute; that the guarantees issued by the Government and the bank are not unconditional and thereforee, the defendant cannot enforce the same that the guarantees are an integral part of the main agreements between the parties; that the guarantees issued for purposes of trade and transactions of sale and purchase should not be mixed with the guarantees issued for building contracts.

(7) THE first question is as to the nature of the obligation of the bank or the Government under the guarantee. It is well settled that a performance guarantee has many similarities to a letter of credit. Such a guarantee even though having its connection with the primary contract between the parties, is nevertheless an autonomous and independent contract and a bank or other authority which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the beneficiary of the guarantee and the person on whose behalf the guarantee is issued. The Supreme Court in United Commercial Bank v. Bank of India and others, : [1981]3SCR300 has observed as follows:

'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 courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another. If such temporary injunctions were to be granted in a transaction between a banker a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail......'

'A bank guarantee is very 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.'

(8) WHETHER a bank guarantee can be enforced or not by the beneficiary will depend upon the terms of the guarantee. If the terms 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 the party and the client at whose instance the bank guarantee had been issued. The party at whose instance the guarantee had been issued is a stranger to the contract of bank guarantee between the bank and the beneficiary . It is true that the bank guarantee in the instant case has been issued by the Government or the bank at the instance of the plaintiff in favored the defendant but the guarantee is between the defendant and the Government or the bank. The plaintiff is not a party to the guarantees referred to above. The guarantees have only been issued by the Government or the bank on behalf of the plaintiff. If the language of the guarantees entitles the defendant to receive payment from the bank or the Government, the disputes between the plaintiff and the defendant would not be a bar for the defendant to enforce the guarantee. (See : Premier Tyre Ltd v. Slate Trading Corn., 1981 Rajdhani Law Reporter 138, M/s. Harprashad and Co. Ltd., New Delhi v. M/s. Sudarshan Steel Boiling Mills and others (1983) DLT 34, Pesticides India, Props Mewar Oil & Gen. Mills Ltd. v. State Chemicals and Pharmaceuticals Corporation of India Ltd. and others AIR 1982 Delhi 78 and M/s. Banwari Lal Radhe Mohan v. Punjab State Co-operative Supply & Marketing Federation Ltd, Chandigarh and another (1983) D.L.T.83).

(9) THE learned counsel for the plaintiff submits that there is difference in the guarantees given for trade purpose and the guarantees for building contracts. Whether a guarantee is for a transaction of sale or purchase or for performing certain conditions under building contract, the question whether the beneficiary has a right to enforce the guarantee depends upon the interpretation of the terms of the guarantee. In my opinion it is immaterial whether the bank guarantee was given for trade purposes or for contracts relating to construction of building. Further whether the guarantee is a part of the main contract between the plaintiff and the defendant or it is an independent contract between the bank and the defendant also depends upon the true interpretation of the terms of the guarantee.

(10) THE first letter of guarantee dated 15th November, 1977 issued by the Government of Kerala on behalf of the plaintiff in favor of the defendant is for Rs 1.65 crores relating to mobilisation advance agreed to be made by the defendant to the plaintiff. The defendant was to advance 20% of the contract value i.e. Rs. 1.65 crores and the same was to be realised by deducting ]from the bills of the plaintiff at the rate of 20%, from each running bill. The Government agreed to pay to the defendant the whole of the said amount in the following words :

'THE liability under this shall extend to the payment of the whole of the amount of Rs. 1.65 crores, as advance provided for in the agreement. This guarantee shall remain in force and be effective go long as the said advance or any part thereof remains outstanding and shall expire or become ineffectual only after the recovery of the entire sum of Rs. 1.65 crores covered by this guarantee and upon intimation thereof being given by the Prime Contractor to the Government.'

(The Prime Contractor is the defendant). Similar clause exists in the second guarantee dated 18th October, 1979 with respect to the other three sub-contracts dated 27th July, 1979 issued by the Government of Kerala for Rs. 1.52 crores on account of mobilisation advance. Under these two guarantees the Government has assured the defendant to pay the amount to it, in case the plaintiff fails to pay. The entire amount is recoverable by deduction from the bills of the plaintiff at the rate of 20% from each running bill. The guarantees are to remain in force till the total amount is recovered and the Government is informed about the recovery. The question however, is what is the amount recoverable by the defendant from the plaintiff with respect to these two guarantees. Initially the defendant had agreed to recover the said amounts by deduction at the rate of 20% from the bills of the plaintiff. The disputes have been raised by the plaintiff and he has filed the present suits for the appointment of an arbitrator and for reference of the disputes. The contracts have been terminated by the defendants. The plaintiff alleges that it was prevented from completing the work on account of failures of the defendant to perform its assurances and obligations as reflected in the agreernsnts. It is submitted that the defendant had agreed to pay 20% of the contract value as mobilisation advance but the defendant had not complied with the game. Further it is submitted that the defendant had agreed to make prompt payment but it had not made the payment as such and that the defendant had failed to supply material such as cement and steel for construction and that the defendant has terminated the contract with a view to camouflage its own lapses. It appears that some construction work was done by the plaintiff for which some bills have been submitted. How much advance was made by the defendant is not a question to be decided in these proceedings. The terms of the two guarantees which are identical mean that the defendant is to recover by deduction from the bills of the plaintiff and if any amount remains payable by the plaintiff on account of refund of mobilisation advance, the same if recoverable by the defendant by enforcing the guarantee against the Government of Kerala. As there are disputes and there is no automatic clause in the guarantees enabling the defendant to recover the amount from the Government of Kerala, it appears that without determination of the amount due on account of refund of mobilisation advance and the amount due to plaintiff for the work done by it, it would not be possible for the defendant to enforce the guarantee against the Government of Kerala. Under these circumstances, lam of the opinion that prima facie the defendant cannot enforce the two guarantees at this stage.

(11) UNDER the third guarantee dated 17th October, 1978 for Rs. 82.50 lakhs relating to the contract dated 17th October) 1977 for the construction of 235 houses, the defendant had agreed to advance the amount on the condition that the Government furnishes the guarantee for its repayment. Under this guarantee the amount is payable by the Government of Kerala in case the plaintiff commits breach of any of the provisions regarding repayment of the advance. The Government was to pay the amount to the defendant on demand with interest at 7% per annum or so much portion thereof as may be found due to the defendant from the plaintiff. It is further provided that account settled between the defendant and the plaintiff shall be conclusive evidence against the Government of the amount due to the Prime Contractor i.e. the defendant from the plaintiff. The disputes are pending the amount if any due to the defendant has not been settled as yet and it would not be possible to determine the amount unless the arbitration proceedings are concluded. There is thus no settlement between the parties and thereforee, the defendant is not in a position to make demand. In other words the defendant is not entitled to enforce this guarantee also at this stage.

(12) THE State Bank of Travancore furnished three guarantees dated 19th October, 1979 on account of agreement between the parties whereby the plaintiff had agreed to furnish bank guarantee 5% of the total value of the contract for the proper execution of the work and for the due fulfillment of the terms and conditions of the contract. The said bank had issued the seventh guarantee dated 14th July, 1980 for Rs. 62,ll,485.00 for the advance made to the plaintiff as additional funds. These bank guarantees are in identical language. The bank had undertaken to pay to the defendant the amounts mentioned therein against any loss or damage or suffered by reason of any breach of the terms and conditions of the contract by the plaintiff. The bank had further agreed to pay the amount to the defendant merely on its demand stating that the amount claimed by it was due by way of loss or damage caused to it by reason of any breach of the terms and conditions of the contract. It is further provided that the demand on the bank shall be conclusive as regards the amount due and payable by the bank under the guarantee. It is unconditional. Mere demand by the defendant makes it obligatory for the bank to pay if the demand is made in the manner prescribed in the guarantee. Para three of these guarantees reads as under :

'WE,State Bank of Travancore, DO HEREBY UNDERTAKE TO PAY THE AMOUNT DUE and payable under this guarantee without any demur, merely on a demand from the corporation stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Corporation by reason of any breach by the said contractor of any of the terms and conditions contained in the said contract. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the Bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs.------- The defendant in view of the above term has a right to claim payment from the bank according to the procedure prescribed in the guarantee. There is no question of determination of any amount by any person other than the defendant. The guarantee is unconditional. Determination of the amount by the defendant and mere demand by it from the bank in accordance with the procedure given in the guarantee is sufficient to make the bank liable to pay the amount under the guarantee. The bank is no doubt under a duty to pay according to the procedure prescribed in the guarantee. The plaintiff does not come into the picture. The bank had issued the guarantee on behalf of the plaintiff in favor of the defendant. This bank guarantee is an independent contract between the bank and the defendant, and being unconditional can be enforced by the defendant. There is no condition that till the determination of the disputes between the parties no demand can be made by the defendant. There is no bar either upon the bank to make payment to the defendant or upon the defendant to realise the amount. I am thereforee, of the opinion that the defendant has a right to enforce the four guarantees issued by the State Bank of Travancore provided the demand is made in accordance with the procedure provided in the guarantee. This is a matter for the bank to satisfy itself that the demand by the defendant is in accordance with the procedure provided in the guarantee.

(13) LEARNED counsel for the plaintiff submits that the defendant by letter dated 27th May, 1981 had demanded the payment under these guarantees on the basis that the same were not extended. It appears that the demand was not in accordance with the manner provided for in the guarantees and thereforee, payment was not made. It is made clear that in case the defendant demands the amount in the manner provided in any of the four guarantees, the bank would be free to make payment.

(14) IT is thereforee, held that prima facie the defendant is not entitled to enforce the three guarantees issued by the Government of Kerala or the Governor of Kerala. Balance of convenience is in favor of the plaintiff in restraining the defendant from enforcing the three guarantees. The plaintiff is also likely to suffer irreparable injury if the defendant is allowed to enforce there three guarantees without determining whether any amount is due to defendant from the plaintiff on account of items referred to in these guarantees.

(15) AS a result of the above discussion the ex-parte orders dated 1st April, 1982 on these four applications (I.A. 1003/82 in Suit No. 211-A/82, I.A. 1004/82 in Suit No. 212-A/82, I.A. 1005/82 in Suit No.213-A/82 and I.A. 1007 in Suit No. 214-A/82) are modified. The injunction order relating to the four guarantees for Rs. 14,84,000.00 , Rs. 10,53,000.00 , Rs. 12,63,000.00 and Rs. 62,11,485.00 issued on 19th October, 1979 and 14th July, 1980 by the State Bank of Travancore in favor of the defendant is hereby vacated. The injunction order relating to three guarantees issued by the Government of Kerala is confirmed and the defendant is restrained from encashing the guarantees dated 15th November, 1977 for Rs. 1.65 crores, dated 17th October, 1978 for Rs. 82.50 lakhs and dated 18th October, 1979 for Rs. 1.52 crores issued by the Government of Kerala or the Governor of Kerala on behalf of the plaintiff in favor of the defendant till the decision of the suit. Parties are left to bear their own costs. Injunction partly vacated.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //