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Vinay Engineering Vs. Neyvelilignite Corporation Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtChennai High Court
Decided On
Judge
Reported in[1987]62CompCas168(Mad)
AppellantVinay Engineering
RespondentNeyvelilignite Corporation Ltd. and anr.
Cases ReferredMaharashtra State Electricity Board v. Official Liquidator
Excerpt:
arbitration - bank guarantee - dispute regarding revocation of bank guarantee - bank has no defence in case of unconditional bank guarantee when it is sought to be revoked - whether guarantee is conditional or unconditional can be ascertained by construction of document - court cannot grant injunction restraining enforcement of bank guarantee except in case of fraud which had been noticed by bank and where special equity was in favour of beneficiary. - - of the initia to overcome the difficulties occurred regarding the provision of erection crane for which import licence is not possible for ve, transelektro is ready to supply one or two cranes which suit the purpose of erection works, on a lease basis against a payment in foreign exchange equal to rs. the crane being an essential.....shanmukham, j.1. in these appeals, three common question arise for consideration. they are : (1``) whether the three bank guarantees executed by the second respondent-bank in favour of the first respondent are independent contracts divorced from the contracts entered into between the appellant and the first respondent titled contract no. ii (2) whether they are conditional or unconditional contracts and (3) whether the first respondent's demand on the second respondent- bank when the former sought to enforce the bank guarantees is in conformity with the terms contained in these guarantees 2. the appeals are directed against the common order of maheswaran j. made in applications nos. 188 to 190 and 402 to 404 of 1983 dated april 30, 1983. in all these applications, the appellant was the.....
Judgment:

Shanmukham, J.

1. In these appeals, three common question arise for consideration. They are :

(1``) Whether the three bank guarantees executed by the second respondent-bank in favour of the first respondent are independent contracts divorced from the contracts entered into between the appellant and the first respondent titled contract No. II

(2) Whether they are conditional or unconditional contracts and

(3) Whether the first respondent's demand on the second respondent- bank when the former sought to enforce the bank guarantees is in conformity with the terms contained in these guarantees

2. The appeals are directed against the common order of Maheswaran J. made in Applications Nos. 188 to 190 and 402 to 404 of 1983 dated April 30, 1983. In all these applications, the appellant was the applicant while is against Application No. 403 of 1983 ; OSA No. 86 of 1983 is against Application No. 188 of 1983 ; OSA No. 87 of 1983 is against Application No. 189 of 1983 and OSA No. 88 of 1983 is against Application No. 404 of 1983. It may be noticed that no appeals were preferred against Application No. 190 and 402 of 1983.

3. The admitted facts that led to the filing of these interlocutory applications are set out below. Neyveli Lignite Corporation Ltd. proposed to start a second lignite mine at Neyveli with the approval of the Government of India. In view of the importance and urgency in the execution of the said proposal, a global tender was called for by the first respondent, Neyveli Lignite Corporation Ltd. Finally, the offer made by M/S. Transelektro was accepted by the first respondent. The contract between the first respondent and Transelektro is titled contract No. I. The said contract enabled M/S Transelektro to choose an Indian firm for erection work, and, accordingly, the applicant was selected as the Indian firm for erection work. Besides, Transelektro has a corporate agreement with EVT, West Germany. a tripartite agreement was concluded amongst Transelektro, EVT, West Germany, and the first respondent covering the scope of equipments under contract No. I and between the applicant and the first respondent under contra

(a) Initial advance of 10 per cent. on supplies ;

(b) 10 per cent. of erection charges to be made within one month from the date of the letter of intent ;

(c) 10 per cent. of the value of supplies within the next one month ;

(d) 55 per cent. against despatch of equipment ;

(e) 15 per cent. on receipt of equipment ;

(f) 10 per cent. on completion of the performance test ;

The contractor, namely, the appellant, was to furnish a bank guarantee to cover the advance amount to be paid under (a), (b) and (c) above with provision for pro rata reduction as contemplated by the contract. The contract provides for termination of the contract under two heads.

4. Clause 40(1) enables the first respondent to terminate the contract on the basis of certificate issued by the consultants. Clause 40(6) provided that in case of termination of the contract, the first respondent shall give detailed reasons for relevant causes within thirty days proper to such a decision ; and/or notice to be intended to the appellant in order to enable the first respondent/consultant and the appellant to confirm and control all causes and facts for the proper solution of works. Clause 23(1) provides for arbitration in case of difference, disputes, etc. For the first 10 per cent. of initial advance on the price amount by the first respondent to the appellant, the second respondent bank executed bank guarantee No. 11/13 on March 12, 1981, for Rs. 1,45,25,602.50. For the second 10 per cent. of the initial advance made by the first respondent to the appellant, the second respondent bank executed bank guarantee No. 11/94 dated June 2, 1981, for Rs. 1,45,25,602.50 and for 10 per cent. of the initia

'To overcome the difficulties occurred regarding the provision of erection crane for which import licence is not possible for VE, Transelektro is ready to supply one or two cranes which suit the purpose of erection works, on a lease basis against a payment in foreign exchange equal to Rs. 75,00,000. This amount can be met by deducting an equivalent amount from the erection portion of VE's contract. Necessary help will be required from NLC will have no other financial liability in respect of the cranes except transfer of Rs. 75,00,000 from Vinay's contract to EE's contract in DMS. The detailed terms of payment regarding the leasing of the above crane shall bee discussed and mutually agreed upon.'

5. On December 8, 1982, the first respondent called upon the appellant to finalise the sub-contracting arrangement on or before December 20, 1982. The appellant is said to have finalised the sub-contracting arrangement which is also alleged to have been approved by the first respondent. On December 23, 1982, Transelektro sent a telex to the first respondent which is follows :

'Mr. K. S. Sastry, Director of Finance, NLC. This is to thank you before all for your all-out efforts to achieve progress in the matter of finalising the amendments during my stay. It is, however, with regret that I have to advise you that due to the last minute postponement by you of making binding commitment, we were incapable to achieve further extension of the option with the owners of the cranes. The owners went out of their way with us in accommodating you, but were not in a position to keep the matter in suspense any longer against ruling of authorities to use the cranes for a Government project. The crane being an essential element of the erection scheme, we only hope that your efforts in procuring the same will be successful, the more as it has enjoyed full support of KNW from its inception. KNW has been informed simultaneously.

Best regards.

Lindner,

Transelektro'.

The reply sent by the first respondent to Transelektro is dated December 24, 1982, and is extracted below :

'From K. S. Sastry, Director, Finance, NLC, for M/S. Transelektro.

Attn : Mr. Lindner.

We are in receipt of your telex dated December 24, 1982, through Ms. Khemka. To say the least, we are shocked and disappointed. This is not in accordance with the spirit of discussions or agreement reached so far. We have to reiterate that NLC have given you all necessary clearances to your entire proposals before the due date, viz., December 20, 1982, required by you including for cranes. In fact, but for our insistence and pressure, you would not have been able to finalise proposals and issue letters of intent to sub-contractors. Even during last meeting on December 19, 1982, I made it very clear that you should go ahead with complete proposals including leasing of cranes. we have to categorically state that as per contract, it is for Transelektro and Vinay Engg. to make necessary arrangements for crane required for the erection. This is also as per agreement reached at Frankfurt during discussions in October, 1982. NLC is not is a position or prepared to take responsibility for providing of the required c

Regards.

K. S. Sastry.'

On January 17, 1983, the First respondent wrote a letter to the second respondent bank invoking three bank guarantees, and demanding full payment on the ground that the appellant had failed to fulfill its obligations under the contract. In the meeting held on January 18, 1983, the first respondent had informed the appellant that Transelektro expressed its inability to provide erection crane which as essential for the appellant to carry out erection work ; and, therefore, directed the appellant to make alternative arrangements for erection crane or to find out sub-contractors for erection. On January 19, 1983, the first respondent issued notice of termination of contract No. II. As already stated, the first respondent on January 17, 1983, sought to enforce the bank guarantees. it is relevant to state here that the first respondent wrote three letters all dated January 19, 1983, to the Senior Manager, Bank of Baroda, New Delhi, demanding payment forthwith of the guarantee amount stating that the appellant had

6. Application No. 188 of 1983 is for an injunction restraining the second respondent bank from making any payment to the first respondent under the three bank guarantees, while application No. 189 of 1983 is for an injunction restraining the first respondent from invoking and receiving any payment under the said bank guarantees. The reliefs claimed in both the said applications are the same, and that is to restrain the first respondent from enforcing the three bank guarantees. The relief is again claimed in Application No. 404 of 1983, while what is claimed in Application No. 189 of 1983 is claimed in Application No. 403 of 2983. The learned judge finally dismissed all the four applications. Hence, these appeals by the same applicant in all these said applications.

7. The learned Advocate-General, appearing for the appellant, submitted that the bank guarantees are not independent contracts, and that, on the other hand, their enforcement depended on the applicant's latches, or default in its performance of contract No. II. and that, therefore, the first respondent's enforcement of these guarantees is arbitrary, illegal and fraudulent. The second contention is that the bank guarantees are conditional, and that unless the first respondent satisfied that the appellant had failed to perform its obligations under the contact, the first respondent is no entitled to invoke the bank guarantees,and to demand payments. It is also argued that in any event, the first respondent's demand for enforcement of bank guarantees is not in conformity with the terms therein.

8. In Maharashtra State Electricity Board v. Official Liquidator, : [1983]1SCR561 , the terms of the bank guarantee are set out pages 251 and 252 of 53 Comp Cas and are as follows :

'Pursuant to the above term, the company (in liquidation) offered on September 1, 1966, a bank guarantee for a sum not exceeding Rs. 50,000 given by the Canara Bank Ltd. (now known as Canara Bank and herein referred to as `the bank'). The relevant part of the said guarantee was as follows :

`'The Canara Bank Ltd.', hereby agrees unequivocally and unconditionally to pay, within 48 (forty eight) hours, on demand in writing, from the Maharashtra State Electricity board or any officer authorised by it in this behalf, of any amount up to and not exceeding Rs. 50,000 (rupees fifty thousand only) to the said Maharashtra State Electricity Board, Bombay, one behalf of M/S. Cochin Malleables (Private) Ltd., Trichur, who have tendered and/or contraced or may tender or contract hereafter for supply of materials, equipment or services to the Maharashtra State Electricity Board and have been exempted from payment of earnest money and/or security deposit against such tenders or contracts.''

While construing the bank guarantee, the following dictum was laid down by the Supreme Court (at pages 253 and 254 of 53 Comp Cas) :

'The principal question which arises for determination in this appeal relates to the effect of the liquidation proceedings on the right of the Electricity Board to recover from the bank the sum of Rs. 50,000 as per the terms of the bank guarantee. It cannot be disputed that th terms of the document on the basis of which the Electricity /Board has claimed the amount from the bank constitute a contract of guarantee and not a contract of indemnity. Under that document, the bank has undertaken to pay any amount not exceeding Rs. 50,000 to the Electricity Board within forty-eight hours of the demand. The payment of the amount guaranteed by the bank is not made dependent upon the proof of any default on the part of the company in liquidation. It may be that, in order to give the said guarantees, the bank had, in its turn, taken as security from the company in liquidation certain fixed deposit receipts and a certain rights in respect of those securities. There may also be some certain or counter-claims arising out

'The performance guarantees or performance bonds, a comparatively recent specie of banker's commercial credit have many similarities to a letter of credit and stand on a similar footing to a letter of credit. Such guarantees, even though having their genesis in the primary contract between the parties, are nevertheless `autonomous' and independent 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 is in default or not and the only exception is when there is a clear fraud, of which the bank has notice. In short, these guarantees impose an absolute obligation on the banks to pay on demand in their terms and the courts usually refrain from interfering with the obligation, except in rare cases of fraud.

The performance guarantee is an `autonomous' contract and imposes an `absolute obligation' on the bank in its terms. As such, 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 banks are bound to pay without demur irrespective of the pendency or 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...

However, such an obligation arises only if the conditions of the bond are satisfied and if the demand made on the bank is in strict 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.'

9. In Texmaco Ltd. v. State Bank of India, : AIR1979Cal44 , a learned judge of that court had stated the law thus (headnote) :

'Where though the guarantee was given for the performance by the party on whose behalf guarantee was given, in an orderly manner its contractual obligation, the obligation was undertaken by the bank to repay the amount on `first demand' and `without contestation' demur or protest and without reference to such party and without questioning the legal relationship subsisting between the party in whose favour guarantee was given and the party on whose behalf guarantee was given', and the guarantee also stipulated that the bank should forthwith pay the amount due `notwithstanding any dispute between the parties aforesaid', it must be deemed that the moment a demand was made without protest and contestation, the bank has obliged itself to pay irrespective of any dispute as to whether there had been performance in an orderly manner of the contractual obligation by the party. Consequently, in such a case, the party on whose behalf guarantee was given was not entitled to an injunction restraining the bank in performa

Even in respect of letters of credit, the following principles are settled by the Supreme Court in United Commercial Bank v. Bank of India, : [1981]3SCR300 .

'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 and a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or interms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail...It is only in exceptional cases that the courts will interfere with the machinery or irrevocable obligations assumed by banks. They are the life blood of international commerce..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.'

:

'No injunction could be granted under Order 39, rules 1 and 2, of the Code unless the plaintiffs establish that they had a prima facie case, meaning thereby that there was a bona fide contention between the parties or a serious question to be tried....A payment `under reserve' is understood in banking transactions to mean that the recipient of money may not deem it as his own but must be prepared to return it on demand. The deem it as his own but must be prepared to return it on demand. The deem it as his own but must be prepared to return it on demand. The balance of convenience clearly lies in allowing the normal banking transaction to go forward. Furthermore, the plaintiffs have failed to establish that they would be put to an irreparable loss unless an interim injunction was granted.'

10. In State Bank of India v. Economic Trading Co., : AIR1975Cal145 , cited by the learned Advocate-General, a Division Bench of the Calcutta High Court has observed as follows (headnote) :

'A bank guarantee has a dual aspect. It is not merely a contract between the bank and the beneficiary of the guarantee ; it is also security given to the beneficiary by a third party. In seeking to enforce the guarantee, the beneficiary, in effect seeks to realise the security furnished by the third party and the third party has, therefore, locus standi to challenge the enforcement of the guarantee. In the case of a letter of credit, however, courts are slow to interfere with its operation not merely on the ground of their importance in international trade but also on the ground that the beneficiary is assured of the payment by the bank once he has complied with the terms and conditions of the letter of credit irrespective of his non-compliance with the contract into which he had entered with the third party ; or in other words on the ground of autonomy of the letter of credit.'

The following principles are thus well-settled:

If the bank guarantees are unconditional, the bank has no defence when its guarantee is sought to be enforced. It is the document of guarantee that has to be scanned to ascertain whether the guarantee is conditional or otherwise, and whether it is an autonomous contract by itself. ordinarily, the court shall not grant an injunction restraining enforcement of such bank guarantees save where there is a clear case of fraud of which the bank had notice, and where the special equity was in favour of the beneficiary under the bank guarantee in the instant case, the appellant.

11. In other words, there is no absolute letter on the court to grant injunction.

12. Thus, the disposal of these appeals principally rests on the construction of the three bank guarantees. The terms and conditions of all the three bank guarantees are in identical terms except that in bank guarantee No. 11/121, the amount of guarantee is Rs.87,29,000 and the first respondent's advice under clause 3 related to erection and commissioning stipulated in the contract, that is, contract No.II. It is, therefore enough to extract guarantee No. 11/13.

'Advance Payment Guarantee No. 11/13. Pursuant to the contract hereinafter referred to as 'the contract; which Messrs Vinay Engineering, a sole proprietary unit of Priya Engineering Company LTd., B-6/4 (2nd Floor), Community Center, Safdarjung Enclave, New Delhi-110 029, hereinafter referred to as 'the contractor' have concluded with Neyveli Lignite Corporation Ltd., Neyveli, hereinafter referred to as 'the purchaser' on October 18,1980, the contractors have undertaken to manufacture and supply indigenous equipment ex- works in India and erect and commission indigenous equipments and also the equipments manufactured and supplied by M/s Transelektro of Budapest, hungary, for 3 Nos. of steam generators with auxiliaries for Neyveli Second Thermal Power Station, particularly listed in the purchaser's letters of intent, Lr. No. 2700/K/H.II.T/80-276, dated October 18, 1980, of the contract as per the prices indicated hereunder against each:

Rs.(a) Supplies-ex-works 14,52,56,025(b) Erection, testing and commissioning 8,72,90,000(c) Service charges 38,90,798---------------Total 23,64,36,823--------------- (rupees twenty-three crores, sixty-four lakhs, thirty-six thousand and eight hundred and twenty-three only).

2. According to the said contract, the purchaser has undertaken to make an advance payment of Rs. 1,45,25,602.50 (rupees one crore forty- five lakhs, twenty-five thousand and six hundred and two and paise fifty only) being the first initial advance payment of 10 per cent. for supplies of indigenous equipments of the contract value against issuance of an advance payment guarantee by a bank.

3. For this advance payment, we, the undersigned, Bank of Baroda, hereby guarantee to the effect that we irrevocably undertake to pay to the purchase upon the purchaser's first demand, and without demur, the amount paid by the purchaser in advance or part thereof but not exceeding Rs. 1,45,25,602.50 (rupees one crore, forty-five lakhs, twenty-five thousand and six hundred and two and paise fifty only) provide the purchaser advises us that the contractor has failed to fulfill his delivery obligations stipulated in the said contract.

4. This advance payment guarantee will become effective only us soon as the amount of Rs. 1,45,25,602.50 has been received at the free disposal of the contractor.

5. This guarantee shall be valid till March 11, 1984, and the purchaser has the right to encash the bank guarantee up to 60 days from the said date. Unless a claim has been lodged or action taken against us under this guarantee before the said date, we, the Bank of Baroda, shall be deemed to have discharged our liability, and no action shall lie against us thereafter.

6. Further, we, the undersigned Bank of Baroda, hereby undertake to furnish suitable fresh bank guarantee for advance payment at the instance of the contractor for such reduced sum reckoning the proportionate progress of supplies/work carried out by the contractor as intimated by the purchaser so as to make the guarantee continous till the obligations under the said contract have been fulfilled by the contractor. However, the entire period of guarantee form the date of first inssuance shall not be more than 60 months.

7. Our liability will be deemed to be reduced pro rate as and when adjustments are made against the running bills submitted by the contractor.

8. In any case, our liability, under this advance payment guarantee shall not exceed Rs. 1,45,25,602.50 (rupees one crore, forty-five lakhs, twenty-five thousand and six hundred and two and paise fifty only.)

9. This guarantee deed must be returned to us duly discharged upon the expiration of the guarantee.

10. Letter of intent No. 2700/K/H III/80-276, dated October 18, 1980, is enclosed.'

13. A plain reading of clause 3 unmistakably points out that the bank guarantee are irrevocable, and that on the first respondent's demand and on the first respondent advising the second respondent that the appellant has failed its delivery obligations in respect of bank guarantees 11/13 and 11/94 and failed to fulfill its obligations of erection and commissioning as regards bank guarantee 11/21, the bank is bound to make the payments forthwith. It is relevant to notice that what was enough for the first respondent to enforce the bank guarantee is to advise the second respondent that the appellant had filed to fulfill his delivery obligations in respect of the first two bank guarantees, and failed to fulfill its obligations of erection and commissioning in respect of bank guarantee 11/121, notwithstanding whether such advice is well founded or not. We shall emphasis that whether such advice by the first respondent to the second respondent is valid or not, is not the concern of the second respondent-bank, but it

14. So too, it is not possible to construe these documents having any link with contract No. II in their enforcement as contended by the learned Advocate-General. It is easy to perceive that in such a case, the bank guarantee will lose its efficacy in banking operations. For, any dispute touching the contract as such had to be settled by the arbitrator , and if so, these documents shall not be enforced until then. The plain tenor of these documents will repel such a contention. Indeed, out approach finds support from the dictum of the Supreme Court in Maharashtra State Electricity Board v. Official Liquidator , : [1983]1SCR561 . The form of guarantee considered by the Supreme Court is almost similar to those under our consideration except that in the instant case, the first respondent had to advise that the appellant either failed to fulfill its delivery obligations or its erection and commissioning obligations. Though in its three letters all dated January 17, 1983, the first responden

15. There is yet another material factor that has to be noticed at this stage. Clause 7 of the bank guarantee stipulates that the second respondent's liability will be reduced pro rate as and when adjustments are made against the running bills submitted by the appellant. Fortunately, for the first respondent, it had by ;its letter dated January 25, 1983, addressed to the Senior Manager, Bank of Baroda, New Delhi, referred to various bank guarantee, its demands in this letters dated January 17, 10983, its demand in its branch office dated January 19, 1983, and gave credit to the pro rate amount to be adjusted, i.e., 10 per cent of the value of supplies accepted for adjustment in the guarantees in respect of guarantees number 11/13 and 11/94. It is common ground that at that time , there was no amount to be adjusted in respect of the third bank guarantee. It is useful to point out that after such adjustment, the amount due under each of the bank guarantee is Rs. 1,39,13,768.24 while in respect of the third, the wh

16. There is yet another vital feature to be noticed in this case. The bank guarantee came to the executed in respect of advance payments made by the first respondent to the applicant well in advance. By the enforcement of these guarantees , the first respondent is only trying to recall its advance payments. This, in our view, will disable the appellant from claiming any equity much less special equity. Above all, its is significant to point out that at the time of payment of these advances by the first respondent to the appellant, it was on the expectation that the appellant was to manufacture 22,000 tonnes of structures with their own steel while by virtue of the joint proposal made by Transelektro on September 30, 1982, which we had occasion ;to refer to , the appellant's obligation was reduced to 3,450 tonnes. Thus, we have no hesitation to conclude that the appellant is not at all entitled to invoke equite to his support. In other words, no special equity can be invoked by the appellant to sustain the relie

17. It may not be out of place to refer to the telex sent by the Transelektro on December 23, 1982, to the first respondent. We had in fact extracted the said documents earlier. It is seen from the said document that Transelektro had expressed its inability to provide the crane to the appellant without which erection work could not be done. No doubt, the learned Advocate-General submitted that by virtue of joint proposal made by Transelektro and the appellant on September 30, 1982, which was accepted by the first respondent , the appellant was relieved of its obligations to procure the crane; and that, therefore, if Transelektro were unable to procure such a crane, the appellant is nor to be blamed at all and that, therefore, the first respondent cannot complain that the appellant had not fulfilled its obligations. Though it may not be germane, yet as the matter was argued, we propose to deal with the same. Th relevant part of the joint proposal is in paragraph 2(b) and we have already extracted the same. Assumi

18. It was also contended by the learned Advocate-General that one of the issues to be decided by the arbitrator is whether the first respondent is entitled to invoke the bank guarantees or any of then because of the termination of the contract by the first respondent's notice dated January 19, 11983, being invalid that, therefore, the matter is within the exclusive jurisdiction of the arbitrator; and that it is not expedient on the part of this court to collaterally decide that issue. The mere fact that that was also one of the points left to the arbitrator, will in no way remain a fetter on the absolute right inhered in the first respondent to enforce the bank guarantee for the reasons already stated. We may add that if it were to be found that the invocation of the bank guarantee by the first respondent is not valid , it will not clothe either the appellant or the second respondent to successfully resist the enforcement of the unconditional bank guarantees by the first respondent as explained by us; and that

19. The result is all these appeals fail and are dismissed, but, in the circumstances of the case, without costs.

20. We have followed the principles of law as settled by the Supreme Court. So the leave orally asked for is declined.


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