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National Project Construction Corporation Ltd. Vs. G. Ranjan - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtKolkata High Court
Decided On
Case NumberC.O. Nos. 1817 to 1819 of 1984
Judge
Reported inAIR1985Cal23,[1986]60CompCas966(Cal),89CWN186
ActsContract Act, 1872 - Sections 20, 41 and 126; ;Code of Civil Procedure (CPC) , 1908 - Order 39, Rules 1 and 2
AppellantNational Project Construction Corporation Ltd.
RespondentG. Ranjan
Appellant AdvocateManotosh Mukherjee, ;Amaresh Chakravarty and ;Satyajit Banerjee, Advs.
Respondent AdvocateA.C. Bhabra, ;Ahim Chaudhury and ;S.K. Mitra, Advs.
DispositionRevision allowed
Cases ReferredIn Indian Cable Co. v. Plastic Products Engg. Co.
Excerpt:
- .....at the instance of the opposite parties, restraining the petitioner corporation from enforcing the bank guarantees executed in its favour. they involve identical questions of fact and law. this common judgment will, therefore, dispose of all the three cases. it will be sufficient if we refer to the material facts of c. o. no. 1817 of 1984 only. 2. the defendant-petitioner, the national projects construction corporation ltd. which is a government company within the meaning of companies act, 1956 entered into a contract with coal india ltd. for setting up , a housing complex at dankuni. hooghly. on or about 23rd february. 1982, the petitioner-corporation invited tender for construction of different buildings at dankuni coal complex and after negotiations an offer was made by the.....
Judgment:

Sudhir Ranjan Roy, J.

1. The above revisional applications arise out of three different orders of injunction issued at the instance of the opposite parties, restraining the petitioner Corporation from enforcing the Bank guarantees executed in its favour. They involve identical questions of fact and law. This common judgment will, therefore, dispose of all the three cases. It will be sufficient if we refer to the material facts of C. O. No. 1817 of 1984 only.

2. The defendant-petitioner, the National Projects Construction Corporation Ltd. which is a Government Company within the meaning of Companies Act, 1956 entered into a contract with Coal India Ltd. for setting up , a Housing Complex at Dankuni. Hooghly. On or about 23rd February. 1982, the petitioner-Corporation invited tender for construction of different buildings at Dankuni Coal Complex and after negotiations an offer was made by the plaintiff-opposite party. M/s. G. Ranjan, a firm, by their letter dated 22-4-82. A bi-lateral agreement was executed thereafter by and between the petitioner and the opposite party wherein it was provided, inter alia, that a mobilisation advance to the extent of 5% of the value of the contract will be paid to the opposite party contractor by the petitioner against production of Bank guarantee from a nationalised bank. It was agreed that an interest of 18.5% shall be charged against the mobilisation advance and the advance including interest shall be recovered on pro rata basis from the running bills of the opposite party and the recovery will be completed before 80% of the work is executed.

3. A letter of intent was issued by the petitioner on May 12. 1982 and on May 7, 1983 a provisional work order was issued, containing the terms and conditions including special terms and conditions of the contract.

4. The construction work of the buildings under the work order had to be completed within a specified time and the opposite party agreed to complete the said construction work within the time schedule as mentioned in the work order.

5. In terms of the agreement, a Bank guarantee was furnished in May 1982 by the Bank of Baroda. Tollygunge Branch, to the tune of Rs. 3,50,000/- in favour of the petitioner and the petitioner made an advance of the said sum to the opposite party by way of mobilisation advance. It was provided, inter alia, in the Bank guarantee that if the opposite party contractor failed to utilise the mobilisation advance for the purpose of the contract and/or the said advance of Rs. 3,50,000/-together with interest thereon, was not fully recovered by the petitioner-Corporation the Bank would unconditionally undertake to pay to the petitioner-Corporation on demand and without demur the said sum of Rs. 3,50,000/- with interest at the rate of 10% per annum.

6. The opposite party contractor having failed to adhere to the work schedule as agreed, the petitioner had no other alternative but to rescind the contract as, otherwise, the petitioner stood the risk of being penalised by the Coal India Ltd. for having failed to complete the construction work within the scheduled time. The contract between the petitioner and the opposite party was rescinded by a notice dated the 24th Sept. 1983. By another letter dated 18th/19th Oct. 1983 the petitioner directed the opposite party to deposit the balance sum of Rs. 2,65,400/- with interest @ 18.5% per annum which was lying with the opposite party as mobilisation advance, within 7 days from the receipt of the letter, failing which the petitioner would ask the Bank of Baroda, Tollygunge Branch, Calcutta, for making payment of the said sum against the Bank guarantee.

7. On receipt of the said letter, the opposite party filed a suit, being Title Suit No. 254 of 1983 before the learned Subordinate Judge. 3rd Court. Alipore under Section 20 of the Arbitration Act for filing of the Arbitration agreement and for reference of the dispute between the parties relating to and arising out of the contract to an Arbitrator, for appointment of an Arbitrator and for other reliefs. During the pendency of the said suit, the opposite party filed an application under Section 41 of the Arbitration Act for an order of injunction restraining the present petitioner. its servants and agents from taking any steps to enforce the Bank guarantee in respect of the mobilisation advance and for other reliefs.

8. In the said application, the present opposite party stated inter alia that the petitioner had rescinded the contract illegally and wrongfully, that the opposite party had a claim against the petitioner exceeding Rs. 19,00,000/- and that in the event of the petitioner's succeeding ultimately in establishing its claim before the Arbitrator, the said amount could be easily realised from the Bank which was fully secured by the Bank guarantee.

9. On the basis of the said application, the learned Subordinate Judge issued an ex parte order of ad interim injunction on 22-12-83 restraining the petitioner from enforcing the Bank guarantee dated May 29. 1982 till the disposal of the application. This order was ultimately made absolute on contest bv an order dated 11-5-84. While making the ex parte order of injunction absolute the learned Subordinate Judge was of the view that if the opposite party (present petitioner) is not allowed to enforce the Bank guarantee till final adjudication of the matter, no harm or inconvenience would be caused to it. On the other hand, the enforcement of the Bank guarantee at that stage would result in irreparable loss and injury to the petitioner (present opposite party) particularly if the dispute was ultimately decided in its favour and that there would also be multiplicity of proceedings if the prayer for injunction was not allowed.

10. It is against the said order of injunction dated 11-5-84 passed by the learned Subordinate Judge, 3rd Court, Alipore, that the petitioner has come up in revision.

11. Appearing in support of the revisional application it was contended by Dr. Mukherjee that the learned Subordinate Judge had no jurisdiction to restrain the petitioner-Corporation from enforcing the Bank guarantee executed by the Bank of Baroda in favour of the petitioner: at least, at the instance of the opposite party, who has no nexus therein; the privity of contract being between the Bank and the petitioner. It was further contended that the learned Subordinate Judge acted in excess of his jurisdiction illegally and with material irregularity in passing the impugned order inasmuch as the opposite party in the event of its succeeding in the suit can be easily compensated by damages and there is no possibility of its sustaining any irreparable loss or injury. The learned Judge also exercised jurisdiction not vested in him by law in passing the impugned order inasmuch as there is no allegation of fraud against the petitioner. According to Dr. Mukherjee, the Bank of Baroda, in view of the terms of the Bank guarantee has no other option but to pay the money to the petitioner-Corporation as demanded and as a matter of fact, no objection has also been raised by the Bank in the matter of making the payment. The opposite party being absolutely a third party to the said agreement, has no locus standi to restrain the petitioner from enforcing the Bank guarantee.

12. On the other hand. Mr. Bhabra, appearing on behalf of the opposite party, contended that the Bank guarantee in question being a conditional guarantee and nol an absolute one could be enforced only on fulfilment of the conditions prescribed and it was the duty of the Bank to see that the conditions, as mentioned in the Bank guarantee, were properly fulfilled before making any payment to the petitioner against the Bank guarantee: that Clause 2 of the Bank guarantee which vests absolute and arbitrary powers to the petitioner in the matter of enforcement of the guarantee, thereby excluding the jurisdiction of the Court in the matter is against public policy and consequently not enforceable. According to him. as the opposite party will be vitally affected if the Bank guarantee is enforced, it has locus standi to obtain an order of induction restraining the petitioner from doing so.

13. The primary point for consideration here is the true nature and import of the Bank guarantee executed by the Bank of Baroda. Tollygunge Branch. Calcutta, in favour of the petitioner.

The relevant portion of the Bank guarantee which now stands extended up to May. 1484. is as follows : --

'We the Bank of Baroda I Tollygunge Branch. Calcutta), do hereby guarantee the due recovery by the Corporation of the said advance along with interest thereon as provided according to the terms and conditions of the Contract. If the said contractor fails to utilise the said advance for the purpose of the contract and/or the said advance together with interest thereon as aforesaid is not fully recovered by the Corporation, we the Bank of Baroda I Tollygunge Branch. Calcutta), hereby unconditionally and irrevocably undertake to pay to the Corporation on demand and without demur to the extent of the said sum of Rs. 3,50,000/- plus interest at the rate of 10% per annum and any claim made by the Corporation on us for the loss or damage caused to or suffered by the Corporation by reason of the Corporation not being able to recover in full the said sum of Rs. 3,50,000/- as aforesaid'.

14. It is clear from the above that the Bank guarantee furnished by the Bank is a conditional one and not absolute as rightly contended by Mr. Bhabra, appearing on behalf of the opposite party. The preconditions for its enforcement, as it appears, are (1) failure of the contractor to utilise the said advance for the purpose of the contract and or (2) the said advance together with interest thereon as aforesaid is not fully recovered by the Corporation.

15. The conditions, however, clearly and apparently, are independent of each other and as rightly contended by Dr. Mukherjee, appearing on behalf of the petitioner, fulfilment of any one of these conditions will entitle the petitioner to enforce the guarantee.

16. The petitioner, as we find, relies upon the second condition for enforcement of the Bank guarantee on the ground that out of the running bills of the opposite party only a part of the mobilisation advance has been recovered leaving a balance of Rs. 2,65,400/- including interest and this amount according to Dr. Mukherjee, is clearly recoverable by the enforcement of the Bank guarantee and the Bank has no other option but to pay the amount 'unconditionally' on demand 'without demur'. Incidentally, we may recall that it was not urged before us on behalf of the opposite party that out of the running bills, the entire amount of the mobilisation advance has been recovered leaving no balance as suggested by the petitioner.

17. The opposite party, however, has made certain counter-claims against the petitioner amounting to more than Rs. 19,00,000/- but that according to Dr. Mukherjee, has nothing to do with the Bank guarantee and is a matter to be decided by the Arbitrator as and when appointed by the learned Subordinate Judge.

18. It may also be that in order to give the Bank guarantee the Bank has in its turn taken certain securities from the opposite party, but these according to Dr. Mukherjee. are transactions totally independent of the Bank guarantee and in this connection he referred us to the decision of the Supreme Court in MSEB. Bombay v. Official Liquidator reported in : [1983]1SCR561 . Incidentally, that was also a case relating to the enforcement of a Bank guarantee. The Supreme Court observed (at page 1499 of the report) that 'it may be that in order to give the said guarantee the Bank had in its turn taken as security from the company in liquidation certain fixed deposit receipts and a certain quantity of imported zinc ingots and that the Bank had certain rights in respect of those securities. There may also he some claims or counter-claims arising out of the contracts of supply entered into between the Electricity Board and the company in liquidation. But the transactions viz. (1) the Bank guarantee executed by the Bank in favour of the Electricity Board. (2) the contracts of supply entered into between the Electricity Board and the company in liquidation and (3) the document under which the company in liquidation -had given a fixed deposit receipt and certain quantity of zinc ingots as security to the Bank for executing the letter of guarantee in favour of the Electricity Board are independent of each other in so far as their legal incidents are concerned'.

19. It was contended by Dr. Mukherjee that the Bank guarantee in the instant case executed by the Bank of Baroda in favour of the petitioner-Corporation, is an independent transaction and irrespective of any other claims and disputes between the parties, it could be enforced on its own and the petitioner could not be restrained from enforcing the said guarantee on any extraneous consideration. According to him, the entire mobilisation advance not having been recovered from the running bills of the opposite party till the date of the determination of the contract, the portion of the said advance together with interest which remained unrecovered, could be fully recovered by the petitioner in terms of the Bank guarantee and if it was ultimately found by the Arbitrator, as may be appointed by the learned Subordinate Judge, that no such amount was actually outstanding, the opposite party could easily be compensated to that extent by way of damages.

20. On the other hand. Mr. Bhabra, appearing on behalf of the opposite party, contended that the question whether the petitioner is lawfully entitled to enforce the Bank guarantee had to be decided by the Arbitrator in the Arbitration Proceedings and if pending the Arbitration Proceedings, the petitioner is allowed to enforce the Bank guarantee to realise the said sum of Rs. 2,65,400/- with interest thereon, the Arbitration Proceedings will become infructuous and the opposite party will suffer irreparable loss and injury. He further contended that the petitioner had no right to realise the mobilisation advance at this stage. Such advance was given -expressly for the purpose of mobilising resources which the opposite party had duly done. The Bank guarantee furnished was not a performance guarantee but was given to secure ultimate realisation of the mobilisation advance after the contract was carried out.

21. We may now examine the rival contentions of the parties.

22. The decision of the Supreme Court in MSEB v. Official Liquidator : [1983]1SCR561 (supra) makes it clear that the Bank guarantee executed by the Bank in favour of the petitioner stands independent of the other connected transactions, namely, the contract between the petitioner and the opposite party and the document under which the opposite party had given security to the Bank for executing the letter of guarantee. It also stands independent of any claim or counter-claim arising out of the contract between the petitioner and the opposite party.

23. That being so there is prima facie no reason according to us why the Bank guarantee cannot be enforced by the petitioner subject, of course, to the fulfilment of the conditions as laid down therein. Here, as we have seen that the contract between the petitioner and the opposite party has already been terminated. The amount of mobilisation loan advanced by the petitioner and the amounts recovered in that account through the running bills not being in dispute, the petitioner is entitled to fall back upon the Bank guarantee when the balance sum had not been paid. Petitioner's right to realise that balance is not dependent upon adjudication of the dispute raised and proposed to be referred to Arbitration. To this extent, the Bank guarantee can very well be enforced on its own terms irrespective of any other consideration.

24. The contention that the Bank guarantee furnished, is not a performance guarantee but was given to secure the ultimate realisation of the mobilisation advance only supports the contention of Dr. Mukherjee that such realisation has nothing to do with the disputes raised. We agree with him that liability to repay the loan is otherwise independent and is not subject to any condition which survives the termination. The contention that the question whether the petitioner is lawfully entitled to enforce the Bank guarantee has to be decided by the Arbitrator in the Arbitration Proceeding does not also appeal to us because according to us the Bank guarantee stands independently of any other transaction and its enforcement cannot be the subject-matter for arbitration. Such realisation will not affect or prejudice the case, if any of the parties in arbitration if ultimately a reference is made to Arbitration.

25. In MSEB. Bombay v. Official Liquidator : [1983]1SCR561 (supra) the Bank under the Bank guarantee in question undertook to pay the Electricity Board any sum up to Rs. 50,000/- and in order to realise it all that the Electricity Board had to do was to make a demand and within 48 hours of such demand the Bank had to pay the amount to the Electricity Board which was not under any obligation to prove any default on the part of the Company in liquidation before the amount demanded was paid. 'The Bank' according to the Supreme Court, 'cannot raise the plea that it is liable only to the extent of any loss that may have been sustained by the Electricity Board owing to any default on the part of the supplier of goods, i.e.. the Company in liquidation. The liability is absolute and unconditional The fact that the Company in liquidation, i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank. i.e., the guarantor'.

26. In the instant case, too the liability is absolute once the terms and conditions of the Bank guarantee are fulfilled and is wholly independent of the disputes proposed to be raised.

27. Mr. Bhabra in this connection referred us to Clause 2 of the Bank guarantee which is as follows : --

'We, Bank of Baroda further agree that the Corporation shall be the sole judge of and as to whether the said contractor has not utilised the said advance of any part thereof for the purpose of the contract and the extent of loss or damage caused to or suffered by the Corporation on account of the said advance together with interest not being recovered in full and the decision of the Corporation that the said contractor has not utilised the said advance or any part thereof, for the purpose of the contract and as to the amount or amounts of loss or damage caused to or suffered by the Corporation shall be final and binding on us.'

28. He contended that the above clause, which makes the petitioner the judge of its own cause and takes away the jurisdiction of a Court of law, is against public policy. And in support of his contention he referred us to page 68 of Broom's Legal Maxim's (tenth edition), where it has been observed that 'it is a fundamental rule in the administration of justice, that a person cannot be the judge in a cause wherein he is interested and, therefore, in the reign of James I, it was solemnly adjudged that the King cannot take any cause, whether civil or criminal out of any of his Courts, and give judgment upon it himself: but it must be determined and adjudged in some Court of justice according to the law and custom of England: and the judges informed the King that no King, after the conquest, assumed to himself to give any judgment in any case whatsoever which concerned the administration of justice within his realm; but they were solely determined in the Courts of justice.'

29. Mr. Bhabra also referred us to the English decision in Bache & Co. v. Banque Vernes reported in (1973) 2 Lloyd's Rep 437. In that case the defendants, who were the trading company's bankers, gave the guarantee which contained a 'conclusive evidence' clause providing (inter alia) :

Notice of default shall from time to time be given by (plaintiff) to (defendants) and on receipt of any such notice (defendants) will forthwith pay the amounts stated therein as due. such notice of default being as between (plaintiffs and defendants) conclusive evidence that (defendants') liability hereunder has accrued in respect of the amount claimed.

30. Lord Denning, M. R., at page 440 of the report observed that 'this commercial practice (of inserting conclusive evidence clauses) is only acceptable because the Bankers or brokers who insert them are known to be honest and reliable men of business who are most unlikely to make a mistake'.

31. Such a point in our opinion does not really arise for our consideration because the Bank against which the guarantee is being enforced is not disputing the claim and secondly because the assessment of liability by the corporation does not really become final so far as the contractor is concerned.

32. The impugned Bank guarantee thus being prima facie enforceable according to us, we are next to consider whether the learned Subordinate Judge properly exercised his jurisdiction in injuncting the petitioner from enforcing the Bank guarantee.

33. In United Commercial Bank v. Bank of India : [1981]3SCR300 , the facts were somewhat different. There the question arose regarding performance of contractual obligations arising out of a letter of credit or Bank guarantee between one Bank and another and while laying down that the Court should normally 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, the Supreme Court cited cases to emphasize that a Bank which gives a performance guarantee must honour the guarantee according to its lerms :

'A letter of credit sometimes resembles and is analogous to a contract of guarantee. In Elian v. Matsas, (1966) 2 Lloyd's Rep 495. Lord Denning, M. R. while refusing to grant an injunction stated :

...... 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.'

34. A Division Bench of this Court in Minerals & Metals Trading Corporation v. S. Sethu (1970) 74 Cal WN 991 had occasion to deal with the question regarding issue of an order of injunction restraining enforcement of a Bank guarantee and at page 1000 of the report made these observations :

'A Bank guarantee like any other contract is no more or no less than what the parties make it. Payment under a bank guarantee like payment under a letter of credit becomes due only on compliance with the terms on which the Bank is to pay under the respective documents. Nobody has ever claimed that a letter of credit becomes payable until and unless the conditions of payment are satisfied, likewise, conditions for payment under a bank guarantee have to be satisfied before payment can be legitimately claimed. In order to issue a temporary injunction restraining the enforcement of a bank guarantee the Court has to come to the conclusion that having regard to the terms and conditions of the guarantee payment under the guarantee has not become due or at least there is a fair and arguable prima facie case for such a contention'.

35. In two Single Bench decisions of this Court similar view of the matter has been taken. In Indian Cable Co. v. Plastic Products Engg. Co. : AIR1979Cal370 , it has been observed that in the absence of allegation of fraud the terms of the Bank guarantee must be strictly observed and the purchaser was not entitled to injunction restraining the Bank from making the payment under the Bank guarantee.

36. In the instant case, the learned Subordinate Judge has neither considered whether the terms and conditions of the guarantee have been fulfilled nor whether the opposite party has made out a fair and arguable prima facie case against such fulfilment.

37. Incidentally, we may record here that there is no allegation of fraud against the petitioner.

38. In Texmaco Ltd, v. State Bank of India : AIR1979Cal44 , the Bank guarantee was practically on similar terms as in the instant case and the Bank took the obligation to repay the amount on 'first demand' and 'without contestation, demur or protest and without reference to Texmaco and without questioning the legal relationship subsisting between STC and Texmaco'. In that context, the learned single Judge observed that 'as in my opinion, the moment a demand is made without protest and contestation, the Bank has obliged itself to pay irrespective of any dispute as to whether there has been performance in an orderly manner of the contractual obligation by the party'.

39. It was further observed that 'in that view of the matter, the terms of the guarantee oblige the bank to pay to the STC on demand being made and the extistence of the dispute as to the due performance or orderly performance is irrelevant on this aspect of the matter. There is no question of any fraud or any equity entitling the plaintiff to an injunction. If that is the position then, in my opinion, the plaintiff is not entitled to an injunction in this application'.

40. In the instant case what actually weighed with the learned Subordinate Judge in injuncting the petitioner from enforcing the Bank guarantee was that the enforcement of the guarantee will result in injury to the opposite party and also to multiplicity of proceedings consequent to his being forced to take legal actions in case the proceeding was ultimately decided in his favour.

41. While doing so. he. as we find, failed to appreciate properly the legal incidents and import of the Bank guarantee and also that the loss or injury, if any to the opposite party could be estimated in money value. He also failed to consider that as all the disputes arising out of the contract between the parties will ultimately be referred to arbitration, multiplicity of proceedings could not normally be inferred. And in that way he failed to exercise properly the jurisdiction vested in him by law.

42. It may be recalled here that the impugned order of injunction was issued by the learned Subordinate Judge at the instance of the opposite party, who technically is a third party to the Bank guarantee executed by the Bank in favour of the petitioner. The question whether such a third party has locus standi to challenge the enforcement of the guarantee as raised by Dr. Mukherjee obviously becomes more academic in view of the decision we have already taken regarding the validity and propriety of the impugned order of injunction. And, accordingly, we do not consider it necessary to enter into the said controversy in the present proceeding.

43. In the view we have taken of the matter, we must hold that in the instant case the learned Subordinate Judge acted in improper exercise of jurisdiction in restraining the petitioner from enforcing the Bank guarantee by an order of injunction and, accordingly, the impugned order of injunction passed by him on May 11, 1984 cannot be substained.

44. The revisional application, accordingly, succeeds and the impugned order of injunction is hereby set aside.

45. No order is made for costs.

Anil Kumar Sen, J.

46. I agree.


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