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Bhushan Industrial Co. Pvt. Ltd. Vs. Cimmco International and anr. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtDelhi High Court
Decided On
Case NumberSuit Appeal No. 69 of 1981 and Interim Application No. 406 of 1981
Judge
Reported in[1983]54CompCas157(Delhi); ILR1981Delhi821
ActsCode of Civil Procedure (CPC), 1908 - Order 39, Rule 1
AppellantBhushan Industrial Co. Pvt. Ltd.
RespondentCimmco International and anr.
Advocates: Pratap Kishan,; Rameshwar Nath,; R.C. Jain,;
Excerpt:
.....was to pay to the plaintiff an advance amount of rs. 4,65,000 towards the price of goods against bank guarantee for the corresponding amount. under the advance guarantee, the bank had irrevocably and unconditionally undertaken to pay to the defendants, on demand in writing, the sum of rs. 4,65,000 in he event of plaintiff' failure to deliver the goods. the advance guarantee also provided that the decision of the defendant as to the liability under guarantee and the amount payable there under shall be final and binding on the bank. dispute arose between the parties as the plaintiff did not supply to the defendant the contracted quantity of plates on the ground that steel controller had not released the raw material and, thereforee, they were excused from performing the contract..........the amendment provided that cimmco would pay to bhushan an advance amount of rs. 4,65,000 against bank guarantee for the corresponding amount. pursuant to this amendment bhushan furnished to cimmco the bank guarantee dated february 16, 1979 issued by grindlays bank ltd., new delhi, for rs. 4,65,000. this was for a period of one year. where it expired it was renewed for a further period of one year with effect from february 16, 1980. (5) it is the admitted case of the parties that bhushsn did not supply to cimmco the contracted quantity of plates. disputes arose between the parties. the case of bhushan is that they applied to iron & steel controller for a release order of the raw material. this was never given. they were, thereforee, unable to supply the contracted goods. they rely on.....
Judgment:

Avadh Behari Rohtagi, J.

(1) This is a suit for permanent injunction.

(2) These are the facts. The defendant Cimmco International (hereinafter called 'Cimmco') entered into a contract dated June 20, 1978 (hereinafter called the 'export contract) with Sudan Railways for the supply of bearing plates and spikes of the value of Rs. 51,72,000. Subsequently on, Jan. 23, 1979 Cimmco entered into a contract with the plaintiff, Bhushan Industrial Company (P) Ltd., (hereinafter called Bhushan) in terms of which Bhushan was to supply certain quantity of bearing plates to Cimmco which Cimmco in their turn had agreed to supply to Sudan Railways under the export contract.

(3) For the due performance of the contract made between Cimmco and Bhushan, a performance guarantee dated February 17, 1979 issued by M[s. Grindlays Bank Ltd. New Delhi, defendant No. 2 for the amount of Rs. 1,44,000 was furnished by Bhushan to Cimmco. This guarantee was for a period of one year. It was revalidated on 22-4-1980 for a further period of one year commencing from 17-2-1980.

(4) On February 14, 1979, the contract between Cimmco and Bhushan was amended. The amendment provided that Cimmco would pay to Bhushan an advance amount of Rs. 4,65,000 against bank guarantee for the corresponding amount. Pursuant to this amendment Bhushan furnished to Cimmco the bank guarantee dated February 16, 1979 issued by Grindlays Bank Ltd., New Delhi, for Rs. 4,65,000. This was for a period of one year. Where it expired it was renewed for a further period of one year with effect from February 16, 1980.

(5) It is the admitted case of the parties that Bhushsn did not supply to Cimmco the contracted quantity of plates. Disputes arose between the parties. The case of Bhushan is that they applied to iron & steel controller for a release order of the raw material. This was never given. They were, thereforee, unable to supply the contracted goods. They rely on the force majeure clause in the contract and plead that they are excused from performing the contract. Cimmco, on the other hand, say that it was the responsibility of Bhushan to procure the raw material and that the release order was not issued by iron & steel controller is not a' sufficient answer to the breach of contract committed by Bhushan. There is an arbitration clause in the contract. The disputes arising between Cimmco and Bhushan will have to be settled by arbitration in accordance with the clause.

(6) Cimmco have now written to Grindlays B?.nk to pay to them the amount of Rs. 1,44,000 under the performance guarantee. Similarly they have called upon the Bank to pay to them Rs. 4,65,000 due under the advance payment guarantee. Bhushan have brought this suit for permanent injunction restraining Cimmco from encashing the two .guarantees. They made an application under Order 39 Rules I and 2 of the Code of Civil Procedure for a temporary injunction. I issued a temporary injunction on February 9, 1981. Now I have heard counsel for both sides on the injunction application as well as the suit. This order will govern them both.

(7) 'THE only question raised in this suit is whether Cimmco are entitled to call upon the Grindlays Bank to pay the amount: of performance guarantee and the advance guarantee. I will take these two documents separately.

(8) Performance Guarantee The performance guarantee dated April 22, 1980 provides that Grindlays Bank undertake and agree to indemnify and keep indemnified Cimmo to the extent of Rs. 1,44,0001-

'AGAINST any loss, damage, costs, charges, and expenses to or suffered by or that may be caused or suffered by' Cimmco by reason of any breach or breaches by Bhushan of any of the terms and conditions of the contract and unconditionally pay the amount claimed by Cimmco on demand without demur to the extent aforesaid. In paragraph 2, the deed of guarantee goes on to say.

'WE,Gnndlays Bank Ltd., New Delhi further agree that if the supplier commits any breach of the terms and conditions of the said document and the Purchaser has become entitled to forfeit the earnest money or any part thereof, the bank hereby unconditionally and irrevocably agrees and undertakes to pay the Purchaser on demand without demur the amount of the earnest money required to be furnished by the supplier under the conditions of the said document in respect of which the breach is, committed to the extent of Rs. 1,44,0001-'

THIS performance guarantee describes Cimmco as the Purchaser and Bhushan as the Supplier. The document mentioned in this paragraph refers to the contract between the parties with the subsequent amendment thereto. It is this document which I have to construe. Does it cast an absolute obligation on the bank to pay the amount to Rs. 1,44,000 forthwith on demand Bhushan's complaint is that Grindlays Bank is being called upon to day this amount to Cimmco and that Cimmco are not entitled to ask for payment of Rs. 1,44,000 until it is established that Bhushan have committed breach of the contract.

(9) On a plain reading of the document is appears to me that Cimmco are not entitled to straightaway go to the bank and ask for payment of the amount of the performance guarantee. The amount becomes payable to Cimmco unconditionally and irrevocably, it is true, but only on the specific condition that Bhushan must first be held to have committed breach of the contract in terms of which Cimmco becomes entitled to forfeit the earnest money. The document specifically refers to the event of the breach of contract on which the earnest money can be forfeited by Cimmco. It is on the happening of this specific event that the right accrues. Whether Bhushan have committed breach of the contracted and whether Cimmco have become entit1ed to forfeit the earnest money are matters for the arbitrator to decide. Until Bhushan are held to have committed breach of contract Cimmco cannot go to the bank and ask for payment of the money. This is the plain meaning of the document. That the bank has undertaken to indemnify Cimmco against 'any loss damage, costs, charges and expenses to or suffered by or that may be caused or suffered by the purchaser by reason of any breach or breaches by the supplier of any of the terms and conditions contained in the said document' emphasises clearly that the liability of the bank to pay the amount arises on loss or damage sustained by Cimmco as a result of the breach of contract.

(10) The amount of Rs. 1,44,0001- has been described an earnest money in the contract. The characteristic of earnest money is that it is liable to be forfeited if the contract does not go forward and the party who paid the earnest money fails to perform his part of the contract. This is what this document in substance says.

(11) I, thereforee, hold that the plaintiff is entitled to permanent injunction to the effect that the bank will not pay the amount to Cimmco until it is held in the arbitration proceedings that Bhushan were in breach of the contract and that Cimmco are entitled to forfeit the earnest money. So much about the performance guarantee.

(12) Advance Guarantee Now I come to the advance guarantee. This document is very differently worded. It is in the form of a letter addressed by. the Bank to Cimmco. It is written in first person and active voice. Rs. 4,65,0001- is the advance amount paid by Cimmco to Bhushan towards the price of goods. This amount was paid to Bhushan on their furnishing this letter of guarantee. Under this advance guarantee the bank has irrevocably and unconditionally guaranteed to Cimmco the sum of Rs- 4,65,0001- and has undertaken to pay the same to them on demand in writing. The second paragraph of this letter contains substantially the entire transaction. That paragraph is in these terms :

'THE said sum of Rs. 4.65,000 will be reduced automatically in proportion to each partial delivery of the goods made by Bhushan to you in terms of the aforesaid contract. This letter of Guarantee will become effective upon receipt of the said advance payment by Bhushan and will expire completely on the date of completion of deliveries of the goods of Bhushan in terms of the said contract of 16-2- 1981 whichever is earlier, Provided Always that if at the expiry of this guarantee any of the said goods remain undelivered by Bhushan to you we shall without any reference to Bhushan either extend the validity of this guarantee for the proportionate amount in respect of undelivered goods on receiving a request from your end for the period by which the delivery is expected to be completed or pay to you a proportionate sum in respect of such undelivered contracted goods. Subject always to the condition that if for any reason whatsoever you are called upon to refund the advance received by you from Buyer or any portion thereof notwithstanding what has been stated hereinafter, in that event, we shall pay to you on your first demand and without any reference to Bhushan and without any demur or contestation refund the advance that you have agreed to pay to Bhushan or any portion thereof what you might be called upon to refund to your buyer. The decision of Cimmco as to our liability under this guarantee and the amount payable there under shall be final and binding on us.'

(13) Now what has happened in this case is this. Sudan Railways agreed to buy from Cimmco plates and spikes. Cimmco in their turn agreed to purchase the plates from Bhushan. Sudan Railways, thereforee, are the foreign buyer. Cimmco is the seller. Bhushan is the supplier of Cimmco. This is the nature of the transaction. In order that the supplier may supply the goods of the export contract an advance of Rs. 4,65,0001- was paid by the seller to the supplier. If the supplier supplies the entire quantity of the goods, the entire sum of Rs. 4,65,0001- shall be adjusted towards the price of the goods. If a part delivery of the goods is made by the supplier to the seller then a proportionate part of Rs. 4,65,0001- will be adjusted. And in respect of the goods remaining undelivered by the supplier to the seller the bank will extend the validity of the guarantee for the proportionate amount in respect of the undelivered goods on receiving a request from Cimmco for the period by which the delivery shall be completed or to pay to Cimmco a proportionate sum in respect of the undelivered contracted goods. This is what the clause means.

(14) The advance guarantee contemplates three situations. First : If there is complete delivery of the goods the bank is discharged from the liability to pay under the guarantee. Second : If there is a part delivery of the goods, then the guarantee shall be either extended or a proportionate sum in respect of the undelivered contracted goods shall be paid by the bank. Third : In the event of non-delivery of the goods Cimmco will be entitled to claim from the bank the entire sum of Rs. 4,65,000. In the event of failure to deliver the goods the bank has dared unequivocally to this that they will pay Rs. 4,65,0001- to Cimmco on demand. 'The decision of Cimmco as to our liability under this guarantee and the amount payable there under shall be final and binding on us'. This is the key sentence.

(15) Cimmco have now addressed a letter to the bank asking them to pay the entire amount of Rs. 4,65,0001- on the ground that Bhushan have failed to deliver the goods under the contract of supply. The decision of Cimmco is final and binding on the bank. thereforee, in terms of the letter of advance guarantee the bank must pay. What is the reason or the performance or non-performance of the contract to deliver goods is not a question With which the bank is concerned. Whether Bhushan have committed breach of contract or Cimmco is in default are questions which have to be decided by the arbitrator. The guarantee does not constitute the bank a judge of these matters. These matters will go to the arbitrator for his decision. But the advance guarantee is independent of this dispute. It is autonomous in character. It is self-contained. The bank has undertaken to pay the amount of advance to Cimmco 'on your first demand and without any reference to Bhushan and without any demur and contestation'. It means this that the bank has agreed to pay unconditionally and irrevocably the amount of the advance in the event of Cimmco making a demand upon it.

(16) Who is to decide the question of default in the delivery of goods? A communication from Cimmco to the bank that Bhushan have failed to deliver the goods shall be final and binding. Such is the wide wording of the guarantee. The word of Cimmco is the final word on this question. If they write to the bank that Bhushan have failed to deliver the goods under the contract of supply, as has been done in this case, the bank is bound to pay. Such is the absolute character of the document. The bank is not concerned with the dispute between Bhushan and Cimmco. They are not concerned with the rights and wrongs of the parties. They have agreed to pay without 'demur or contestation' Bhushan may contest their liability but the bank has nothing to do with it. The bank has agreed to make payment on the happening of a specified event and that event is the default in the delivery of the goods. Of this default Cimmco has been made the sole judge under the guarantee by the parties. Neither Bhushan nor the bank can question their decision in so far as the advance guarantee is concerned.

(17) This kind of guarantee is a now creature in our law. It is a new business transaction in the world of commerce. It is a product of the merchantile genius of the commercial community. Such guarantees have recently come into vogue. They are the life blood of international commerce. Merchants find them useful in their business both inland and overseas.

(18) Bhushan wanted advance to enable them to supply goods. Cimmco asked Bhushan to furnish a bank guarantee which they did. The object of the document is to provide security to Cimmco in respect of the advance they paid to Bhushan. I have dealt with these kinds of guarantees in the recent decision of Pesticides India versus State Chemicals and Pharmaceuticals, (Suit No. 336-A decided on 13-2-1981).

(19) It all depends on the wording of the document. If the document is absolute in character them the bank must pay. They made a promise to pay on demand without 'demur or contestation'. They gave that promise. Now a demand has been made. The bank must honour it. This court cannot interfere with the obligations of the bank. Nor can Bhushan prevent the bank from honouring it's promise. As I said in Pesticides, a guarantee of this kind is much more of the characteristics of a promissory note than the characteristics of a guarantee. It is virtually a promissory note payable on demand. It has many similarities to a confirmed letter of credit.

(20) The bank is not concerned with the rights and wrongs of the underlying disputes but only with the performance of the obligations which they have themselves confirmed. The letter of advance guarantee is couched in unqualified terms. It is not subject to disputes such as there may be between the seller and the supplier. These promises must be allowed to be honoured, free from interference by the courts. Except in clear cases of fraud of which the banks have notice, the course will leave the merchants to settle their disputes under the primary contract by litigation or arbitration as available to them or stipulated in the contracts.

(21) Counsel for Bhushan argued that I should have regard to the special equities of the case. He referred me to the principal contract between Cimmco and Sudan Railways for the supply of goods and the guarantee given by Cimmco to the foreign buyer. The refrain of his argument was that until Sudan Railways do not foreclose the guarantee of Cimmco this court should not allow Cimmco to foreclose the guarantee of Bhushan. In this connection be pointed out that Rs. 4,65,000 was received by Cimmco from the foreign buyer which was passed on by Cimmco to Bhushan. So long as Cimmco's banker does not pay Rs. 4,65,000 to Sudan Railways, equity does not demand that Bhushan be asked to pay Rs. 4,65,000 to Cimmco. This was the burden of the argument. I cannot accept this argument. The foreign buyer has made a demand on Cimmco's banker, Punjab & Sind Bank, to pay the guarantees amount. But, generally speaking, with the dispute between Cimmco and Sudan Railways, we are not concerned in this litigation. The foreign buyer and the Indian seller will fight their own independent battle here, there or in foreign lands. We are only concerned with the contract of guarantee furnished by Bhushan and the obligations of the guarantor there under.

(22) The advance payment guarantee stands on a similar footing as a letter of credit. The bank which gave the guarantee must honour it according to its terms. It is not concerned in the least, with the relations between the foreign buyer, the seller or the supplier all along the lines; nor with the question whether the supplier has performed his contracted obligations or not: nor with the question whether the supplier is in default or not. . The bank must pay according to its guarantee on demand, as stipulated. These guarantees, whether they are of earnest or advance, have to be interpreted on their own terms and if the terms, wide as they are as in the case of advance payment. impose an absolute obligation then the bank is bound to pay to Cimmco. Bhushan's remedy is to have the dispute with Cimmco resolved through arbitration as there is an arbitration clause.

(23) So unlike the earnest guarantee my conclusion on the advance guarantee is that the bank is bound to pay the amount of Rs. 4,65,000.00 to Cimmco.

(24) For these reasons there will be an injunction against the bank not to pay the performance guarantee of Rs. 1,44,0001- till the arbitrator decides the dispute and holds Bhushan guilty of breach of contract and Cimmco entitled to forefeit the earnnest. As regards the advance guarantee the plaintiffs are not entitled to injunction. In view of the divided success, the parties are left to bear their own costs of the suit.

(25) Counsel for the plaintiff prays for ten days' time to enable him to take the matter in appeal to a higher court. This request is opposed. I think I ought to give ten days' time. I do so. The bank will not pay the amount of advance guarantee to Cimmco till 9th of April 1981. March 30,1981.


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