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Banwari Lal Radhe Mohan Vs. Punjab State Co-operative Supply and Marketing Federation Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtDelhi High Court
Decided On
Case NumberInterim Application No. 4316 of 1981 and Suit No. 1392A of 1981
Judge
Reported inAIR1982Delhi357; [1985]58CompCas210(Delhi); 1982(3)DRJ233; 1982RLR525
ActsArbitration Act, 1940 - Sections 20 and 41; Code of Civil Procedure (CPC), 1908 - Sections 151 - Order 39, Rules 1 and 2
AppellantBanwari Lal Radhe Mohan
RespondentPunjab State Co-operative Supply and Marketing Federation Ltd. and anr.
Advocates: P.R. Mridual,; R.K. Anand,; P.P. Rao and;
Cases Referred and Pesticides India v. State Chemicals and Pharmaceuticals Corporation of India Ltd.
Excerpt:
bank guarantee. bank guarantees impose an absolute obligation on the banks concerned to pay on demand in their terras and unless the case falls within any of the exceptions the banks are bound to pay without demur irrespective of the pendency of any arbitration proceedings or the imminence of any reference to arbitration of the disputes between the parties. however, any demand which is outside the terms of the guarantee bond and any payment without strict compliance with the terms of the band would not give discharge to the paying bank. - - it is well settled that the performance guarantees or performance bonds, a comparatively recent specie of banker's commercial credit, variously described as 'a new type of commercial credit' or 'a new business transaction' or 'a new creature',and..........arbitration act and raise common questions as to the nature of the obligation of a bank under a bank guarantee or performance guarantee, the legal incidents of such a guarantee and the extent to which a court may interfere in the payment of the amount which the bank has bound itself to do, during the pendency of a reference of the disputes under the primary agreement to arbitration or of the arbitration proceedings pursuant to it.(2) the primary contracts, containing the arbitration clause, in cases of 1. ass. 3302, 3303, 3312, 3020 and 3371 of 1981, were entered into between uppal engineering construction company pvt. ltd , and the central warehousing corporation. the primary contract in the case of i.a. 4316/81, containing the arbitration clause, was entered into between banwari lal.....
Judgment:

H.L. Anand, J.

(1) These are six applications (I.A. 4316/82 in Suit No. 1392-A/81, I.A. 3302/81 in Suit No. 1090-A/81, I.A. in Suit No. 1091-A/81, I.A. No. 1093/81, A.I. 3020/31 in Suit No. 852/81 and I.A. 3371/81 in Suit No. 1108/81) under Section 41 read with Schedule I[ of the Arbitration Act. 1940 and Order 39 Rules 1 and 2 read with Section 151 of the Code of Civil Procedure, in six different petitions u/s 20 of the Arbitration Act and raise common questions as to the nature of the obligation of a bank under a bank guarantee or performance guarantee, the legal incidents of such a guarantee and the extent to which a Court may interfere in the payment of the amount which the bank has bound itself to do, during the pendency of a reference of the disputes under the primary agreement to arbitration or of the arbitration proceedings pursuant to it.

(2) The primary contracts, containing the arbitration clause, in cases of 1. Ass. 3302, 3303, 3312, 3020 and 3371 of 1981, were entered into between Uppal Engineering Construction Company Pvt. Ltd , and the Central Warehousing Corporation. The Primary contract in the case of I.A. 4316/81, containing the arbitration clause, was entered into between Banwari Lal Radhey Mohan and the Punjab State Co-operative supply and Marketing Federation guarantees in all these cased are in almost indentical terms and contain in unequivocal terms, an undertaking' to pay without any demur merely on demand from the respondents stating that the amount claimed was due and payable by way of loss or damages caused to or would be caused to or suffered by the respondents by reason of any breach of the petitioners to perform the agreement.' It is further stipulated that any demand made on the bank shall be conclusive as regards the amount due and payable by the the bank under this guarantee.

(3) The first question is as to the nature of the obligation of the bank under these guarantees and as to their legal incidents. It is well settled that the performance guarantees or performance bonds, a comparatively recent specie of Banker's commercial credit, variously described as 'a new type of commercial credit' or 'a new business transaction' or 'a new creature', and 'the life blood of international commerce' has many similaries to a letter of crenit and stand on a similar footing to a letter of credit. Such guarantees, even through having their genesis in the primary contract between the parties, are nevertheless ''autonomous' and independents contracts and a bank 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 supplier and the customer, nor with the question whether the supplier has performed his contracted obligations or not, nor with the question whether the supplier has performed his contracted obligations or not, nor with the default or not and the only exception is when there is a clear fraud, of which the bank has notice. These words, of Kerr, J. in R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. (1978) Q. B. 146, and approving these observations, of Lord Denning M.R. in the later case of Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. & anr. 1978 (1) Q, B. 159, have since found their eche in subsequent decisions both in England and in this country. Brown, L J. who concurred with master of Rools in the case of Edward Owen Engineering Ltd. (supra), went a step further and held that on the language of the guarantee with which the Court was concerned in that case, such guarantee had much more of the Characteristics of a promissory note than the characteristics of a guarantee.' These observations of Kerr, J. and Lord Denning M.R. were recently quoted with approval by the Supreme Courr in the case of United Commerctal Bank, : [1981]3SCR300 . The Court affirmed that 'A letter of credit sometimes resembles and is analogous to a contract of guarantee. ''The Supreme Court also reffirmed its earlier decision in the case Tarapore & Go. : [1969]2SCR920 , that the opening of a confirmed letter of credit constituted a bargain between the banker and the seller of the goods which imposed on the banker 'an absolute to pay' in its terms. It was observed that Courts usually refrain from interfering in the obligations 'arising out of a credit or a bank guarantees'. Following these decisions, the court has consistently applied the aforesaid princles to bank guarantees. This is how this Court has looked at the nature of the bank's obligations under the bank guarantees and inferred an absolute obligation of the bank to pay in accordance with its terms and cautioned against any judicial inference in such obligations except in rare cases of fraud. Reference may he made to Harprashad & Co. Ltd. v. Sudarshon Steel Mills and Ors., : AIR1980Delhi174 , Premier Tyre Ltd. v. State Trading Corporation, 1981 Rlr 138, Rawla Construction Co. v. U O.I. & Am. Aur 1977 Delhi 205 and Pesticides India v. State Chemicals and Pharmaceuticals Corporation of India Ltd., 1981 (1) Delhi 864.

(4) Counsel for Banwari Radhey Mohan, nevertheless sought to justify a restraint with regard to the encashment of the of the guarantee on the ground that notwithstanding the terms of the guarantee the respondent could not be allowed to be a judge in its own cause and that in view of the reference of the disputes, arising out of the primary contract, to arbitration or on account of the imminence of such a reference, the enforcement of the guarantee should await ultimate verdict in arbitration. Counsel also sought to invoke the principle audi altermmpartem to contractual relations between the parties and urged that the respondent could not call upon the bank to pay on the basis that there has been a loss or there was likely to be any injury or loss eniailing the liability of the petitioner without a reasonable opportunity to the petitisoner of being heard with regard to the liability and/ or quantum before the bank could be called upon to pay. There is no substance in any of these contentions, the bank had furnished the guarantees, at the instance of the petitioner, in widest possible terms with eyes upon and in complete awareness of the rights and obligations of the parties under the bank guarantee. By persuading the respondent to accept the bank guarantee in lieu of cash security, otherwise provided for in the contract to ensure performance, petitioner had taken an advantage and would, thereforee, be estopped from going back on the terms of the guarantee. It has already been pointed out above that the guarantee it an 'autonomous' contract and imposes an 'absolute obligation' on the bank in its terms and the bank was bound to pay when called upon to do so as long as the terms are compled with except in case of obvious fraud) of which the bank has notice. The existence of disputes between the parties under the primary contract or the possibility of a reference of these disputes to arbitration or of the pendency of proceedings on such a reference, have absolutely no relevance to the obligation of the bank under the guarantee. The principle of audi alterem partem has no application to contractual relationship particularly, ' where the parties have themselves entered into the arrangement in terms of which the banker of a party at bound to pay without demur to the other on mere demand. The enforcement of a guarantees or the payment by bank of any amount under the guarantee is, however, not conclusive of the rights and obligations of the parties under the primary contract and the bank ultimately abides the eventual ajudication of the disputes. It would, thereforee be stretching the principle of audi alterem partem beyond the strain it can stand to apply it to contractnral relations between the partics. It is also good to remember in this context that the system of banker's commercial credit, whether of letter of credit or of performance guarantees, have played a pivotal role in the developments of commerce and trade, both international and internal fields, arid any strain on the system would recoil ultimately on the parties seeking to cause it. If the bank guarantees are thereforee, not enforced even though, liable to be enforced in its terms and cease to be acceptable as alternatives to security deposits, it will be inconductive to the development of international as well as inland trade and commerce. The decision of a Id. Single Judge of this Court in the case of Diwan Suraj Prakash Chopra and Sons 0.M.P. 45/81, which has relied upon on behalf of the petitioner, and in which a restraint on the bank to pay was held justified merely because of the pendency of the arbitration proceedings, appears, with respect, to be contrary to the long line or decisions referred to above. The Id Judge has himself taken a contrary view in the cas of pesticides India (Supra) I would perhaps have suggested a reference of the question to a larger Bench but for the clear legal position that emerges on a review of the decisions of the English Courts, the Supreme Court and a number of decisions of the Decision Banches of this Court.

(5) I have, thereforee, no hesitation in holding that these guarantees impose an absolute obligation on the banks concerned to pay on demand in their terms and unless the case falls within pay of the exceptions the banks arc bound to pay without demur irrespective of the pendency of any arbitration proceedings or the imminence of any reference to arbitration of the disputes between the parties, arising out of the primary contract between the parties.

(6) It is, however, eqally well-settled that while the obligation of the bank under a bank guarantee is absolute, such an obligation arises only if the conditions of the bond are satisfied and if the demand made on the bank is instrict accord with its terms. Any demand which is outside the terms of the guarantee bond and any payment by the bank without strict compliance with the terms of the bond would be beyond the scope of the bond and would not give discharge to the paying banker.

(7) In the case of I.A. 4316/81) on the exparate interim injunction being granted by this Court, the respondents have not as yet taken recourse 'to the guarantee bond. The question whether the demad in this case is in conformity with the bond or not does not, thereforee, arese. Such a question would arise only after the respondents take recourse to the bond and call upon the bank to pay. The interim order is liable to be vacated so as to entitle the respondent to take recourse to the guarantee in accordance with its terms. The further interim relief by way of mandatory order for the payment of the balance amount was not pressed for obvious reasons.

(8) In the case of other applications, notices in different terms have been issued by the respondent to the bank concerned and the further question that falls fur decision is, if these notices are in terms of the bonds or not. In I. A. 3302/81, a notice of demand to the bank concerned claims that the contractor has 'abandoned the work' and calls upon the bank 'to pay the amount of Rs. 49.000.00 i. e. amount of the above-referred bank guarntee today itself by way of demand draft payable at State Bank of India, Hussain Ganj,Lucknow.' In 1. As. 3303/81 and 3312/81, the demands are in the same terms. In I. A. 3020/81, the notice of demand runs thus :

'THEsaid contractor has abandoned the work totally causing great damage to us. The contractor has also not discharged obligations under the terms and conditions of the agreement thus constituting breach of contract agreement. The said contract has not been concluded till date. In view of above we demand the proceeds of the said bank guaran tees, amounting to Rs. 70,000.00 (Rs. Seventy thousand only) payable to us and issue necessary demand draft in favor of personal Ledger a/c of Executive Engineer, Central Warehousing Corporation, Muzaffarnagar, within seven days of issue of this letter.'

In I. A. 3371/81, the notice of demand runs thus :

'WEhereby invoke the above guarantee as compensation for demages caused or likely to be caused to the Government Corporation by a reason of breach/contract by M/s. Uppal Engg. Const. (Pvt.) Ltd. to perform the relevant agreement and demand that the amount of Rs. 29,500.00 (Rupees twenty nine thousand live hundred only) (i. e. the amount of abovereferred Bank Guarantee Bond) be remitted immediately to us by way of Bank Draft payable at Sbi, Hussainganj Branch, Lucknow, within 10 days from the receipt of this letter.'

(9) By the bank guarantees, the banks concerned under took 'to pay to the Corporation the amount not exceeding the amount of the guarantee' against any loss or damage caused to or suffered or would be caused to or suffered by the Corporation by reason of any breach by the said contractors, if any, on the terms and conditions contained in the said agreement. The bank further agreed 'to pay the amount due and payable under this guarantee without any demur merely on demand from the Corporation stating that the amount claimed is due by way of loss or damage caused or would be caused to or suffered by the Government by reason of any breach by the said contractors failure to perform such agreement. Any such demand made on the bank shall be conclusive regards the amount due and payable by the bank under this guarantee.' The terms of the guarantee, thereforee, in the first instance, visualise a specific amount which may be claimed by the Corporation. Secondly, such amount must be claimed only by way of loss or damage either caused or that may be caused or suffered by Government. Thirdly, such loss or damage whether or to be caused caused must arise out of the breach by the contractor in the performance of his obligation under the contract. Lastly, the demand the amount due and payable by the respondent is conclusive as regards bank under the guarantee.

(10) The notices of demand in I. As. 3301/81, 3302/81 and 3312/81 merely require the bank to pay the amount apparently because the respondent claimed that the contractor had 'abandoned the work'. There is, however, no reference to either any loss that may have been caused or may beapprehended. These notices of demand, thereforee, do not conform to the terms of the guarantee and a restraint on the bank to pay on the basis of these demands would be justified. The same cannot, however, be said of the other two demands, even though, these two notices of demand are far from satisfactory in the language in which they are couched. These two notices of demand, however, do refer to the damage caused or likely to be caused to Government on account of the breach by the contractor, besides specifying the amount demanded of the bank, and even though unhappily worded, could be reasonably construed as conforming to the terms of the guarantee. Any restraint on the bank in these two cases, would be unjustified. It would, however, be open to the Corporation to invoke the guarantees in the other four cases by demanding the amount in terms of the guaran tees, an option of which was was given to the Counsel for the respondent at the hearing of these applications but was not availed of by it.

(11) In the result, 1. A. 4316/81 fails and is hereby dismissed, leaving the respondent in that case free to invoke the guarantee in accordance with its terms, if so advised. I. As. 3371/81 and 3020/81 fail and are hereby dismissed, leaving the bank free to make the payment in accordance with the terms of the guarantee. Exparte interim orders made earlier in these applications are hereby vacated.

(12) I. As. 3302/81, 3303/81 and 3312/81 succeed and the interim orders are made absolute and the banks are restrained from making the payment under the guarantees on the basis of the subsisting notices of demand. Respondents would, however, be free to have recourse to the guarantees on the basis of fresh notices of demand in terms of the guarantees.

(13) In view of the peculiar circumstances, parties are left to bear their respective costs.


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