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D.T.H. Construction (P) Ltd. Vs. Steel Authority of India Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtKolkata High Court
Decided On
Case NumberSuit No. 399 of 1984
Judge
Reported inAIR1986Cal31
ActsContract Act, 1872 - Section 126
AppellantD.T.H. Construction (P) Ltd.
RespondentSteel Authority of India Ltd. and anr.
Appellant AdvocateBiswaroop Gupta, Adv.
Respondent AdvocateTapas Banerjee and ;Bimal Kumar Chatterjee, Advs. (for No. 1), ;Udayan Sen, ;Sudipta Sarkar, ;Somnath Chatterjee and ;Dipankar Ghose, Advs. (for No. 2)
Cases ReferredMotilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh
Excerpt:
- orderc.k. banerji, j.1.this is an application for injunction restraining the defendant no. 1, steel authority of india ltd. from enforcing or calling up the bank guarantee dated 31-8-1982 for rs. 30,00,000/- given by the defendant no. 2. united bank of india in favour of the defendant no. 1. the defendant no. 1 gave a contract to the plaintiff for dredging and deepening a reservior at durgapur. to enable the plaintiff to bring the machinery and start the work, the defendant no. 1 advanced rs. 30,00,000/- to the plaintiff. to secure the said advance of rs. 30,00,000/- paid by the defendant no. 1 to the plaintiff, the plaintiff gave the said bank guarantee through the united bank of india.2. mr. biswaroop gupta, learned counsel for the plaintiff, submitted the plaintiff was induced to.....
Judgment:
ORDER

C.K. Banerji, J.

1.This is an application for injunction restraining the defendant No. 1, Steel Authority of India Ltd. from enforcing or calling up the Bank Guarantee dated 31-8-1982 for Rs. 30,00,000/- given by the defendant No. 2. United Bank of India in favour of the defendant No. 1. The defendant No. 1 gave a contract to the plaintiff for dredging and deepening a reservior at Durgapur. To enable the plaintiff to bring the machinery and start the work, the defendant No. 1 advanced Rs. 30,00,000/- to the plaintiff. To secure the said advance of Rs. 30,00,000/- paid by the defendant No. 1 to the plaintiff, the plaintiff gave the said Bank Guarantee through the United Bank of India.

2. Mr. Biswaroop Gupta, learned Counsel for the plaintiff, submitted the plaintiff was induced to obtain the said contract by the defendant No. 1 by suppression of material facts, that the reservoir which was to be cleaned and deepened could not be deepened inasmuch as the bed of the reservoir which was shown in the plan given to the plaintiff as plain and without any undulations was formed and created by inundating a village with a Railway siding and various other structures and facilities for human habitation. It is not disputed by the defendant No. 1 that part of the reservoir contains portion of Railway rack and a village but the same were not unknown to the plaintiff. Various contentions have been raised by Mr. Gupta but the two main contentions which in my view are of substance at this interlocutory stage are that the conditions of the Bank Guarantee were not complied with by the defendant No. 1 in calling up the amount of the Bank Guarantee and further that the defendant No. 1 being aware of such defects requested for the extensions of the Bank Guarantee for another one year till December 31, 1984 by its letter dated 14/15th December, 1983. On this aspect Mr. Gupta firstly relied on the letter dated September 19, 1983 which is annexed to the affidavit-in-opposition filed on behalf of the defendant No. 1 affirmed by Gourhari Chandra on 9th of November, 1984. By the said letter a demand was made for payment of the entire amount of Rs. 30,00,000/- under the said Bank Guarantee and it was suggested in the said letter that the contractor having committed default in due compliance of the contract in question an amount of Rs. 30,00,000/- has become due and payable to Steel Authority of India Ltd., Account. Durgapur Steel Plant. Accordingly, in terms of the above quoted Bank Guarantee demand was made for payment of the said amount to Steel Authority of India Ltd. within three days from the date of the receipt of the said letter. Interest was also claimed @ 19% per annum. The demand was not met by the Bank. Thereafter by a letter dated 14/15th December. 1983 being Annexure 'F' to the petition the defendant No. 1 again wrote to the Bank as follows :

'Validities of the above mentioned Bank Guarantees are due to expire on 31-12-83. Contractual obligations of your client are yet to be fulfilled.

Please extend the validity of both the Bank Guarantees up to 31-12-84 with grace period up to 30-6-85 for lodgement of claim for the present and send us the letters of extension immediately.

In case, however, you are not in a position to extend the validity of the Bank Guarantees as requested please treat this letter as our demand for the full value of the Bank Guarantees amounting to Rs. 32.45 Lakh (Rupees thirty two lakh forty five thousand only) and remit the sum by a crossed cheque drawn in favour of 'M/s. Steel Authority of India Ltd.. A/C, Durgapur Steel Plant', immediately.'

3. Mr. Gupta submitted that by this letter the earlier Letter of Demand dated 19-9-1983 was given a go-by and the defendant No. 1 would be satisfied if the validity of the Guarantee had been extended. The concluding portion of the letter was a fresh demand but there was no allegation of default of the defendant No. 1 having suffered any loss or damages. In the earlier letter dated September 19, 1983 although default was alleged but there was no claim or allegation that the defendant No. 1 had suffered loss or damages. This is well settled, Mr. Gupta submitted, that to be a valid demand the same should be made in accordance with the terms and conditions of the Guarantee. That not being done the defendant No. 1 was not entitled to demand payment of the amount under the Guarantee.

4. The next point that was urged by Mr. Gupta was that of balance of convenience and on that ground the defendant No. 1 should not be allowed to call up the amount of the Guarantee and should be restrained by an injunction. Reliance was placed by Mr. Gupta on the letter dated 14/15th December 1983 where the defendant No. 1 asked for extension of the validity of the Guarantee up to 31-12-1984 with grace period up to 30-6-1985 and in case the Bank was not in a position to extend the validity of the Bank Guarantee then the Bank was asked to make payment of the full value of the Bank Guarantee. Mr. Gupta also pointed out that this was a claim not only for the Guarantee for Rs. 30,00,000/- but also for another Guarantee for Rs. 2,45,000/-. There could not be a combined demand with regard to the two guarantees. In this letter there was no compliance with the terms and conditions for calling up the Guarantee for Rs. 30,00,000/- and if the defendant No. 1 was satisfied with the extension of the period of the Guarantee which the plaintiff is agreeable to do, the defendant No. 1 should not be allowed to call up the Guarantee.

5. This application was also opposed on behalf of the United Bank of India and arguments were made firstly by Mr. Udayan Sen, thereafter by Mr. Sudipta Sarkar and then by Mr. Somnath Chatterjee and lastly by Mr. Dipankar Ghose. It was urged that the Bank was not liable to pay the amount under the said bank guarantee inasmuch as the main contract, in respect of which the advance was made by the defendant No. 1 to the plaintiff and as security whereof the bank guarantee was given by the United Bank of India, was a void contract, a contract impossible of performance. The plaintiff was induced to enter into the contract by suppression of material facts and by fraud and misrepresentation. A report was given by Dr. S. Basu Mullick, Professor, Department of Geological Science, Jadavpur University, on the invitation of the defendant No. 1 that the said tank could neither be dredged nor be deepened, as there were brick fields, railway tracks and rocks under the said tank which rendered performance of the contract impossible and therefore the contract was void under Section 54 of the Contract Act. At the request of the plaintiff, a constituent of the Bank, the bank gave the said guarantee on the basis that the contract was capable of performance and that the advance received by the plaintiff would be properly utilised in performance of the contract. Had the Bank been aware that the contract was impossible of performance the Bank would have never given the guarantee and therefore the guarantee was not enforceable. It was next urged that there was no valid demand. It is a settled principle that unless the demand for payment under the guarantee is made in accordance with the terms and conditions of the guarantee, the Bank has no liability to pay. Reference was made in this connection to Clauses (1) and (2) of the said guarantee which provided that the Bank would indemnify the defendant No. 1 against all losses and damages that may be caused to or suffered by the defendant No. 1 or in relation to the advance payment to be made by the defendant No. 1 to the plaintiff, by reason of any default or defaults on the part of the plaintiff in due supply of any plant, machinery or equipment or for carrying out any work under the said contract in respect of which such advance payment as aforesaid is to be made by the defendant No. 1 to the plaintiff or otherwise in the observance and performance of any of the terms and conditions relating thereto in accordance with the true intent and meaning thereof and in the event of any default or defaults on the part of the plaintiff as aforesaid the Bank shall forthwith on demand pay to the defendant No. 1 any sum or sums not exceeding the total sum of Rs. 30 lakhs as may be claimed by the defendant No. 1 to be due from the plaintiff by way of refund of such advance payment or any portion or portions thereof or otherwise as losses or damages of the defendant No. 1 by reason of such default or defaults on the part of the plaintiff. Clause (2) provides that notwithstanding anything to the contrary the decision of the defendant No. 1 whether the plaintiff has made any such default or defaults in payment of the amount or amounts which the defendant No. 1 is entitled to and had received will be binding on the Bank and the Bank shall not be entitled to ask the defendant No. 1 to establish its claim or claims under the guarantee but will pay the same forthwith without any objection. It was urged that there are two letters, first one is dated 19th September 1983 being Annexure 'A' to the affidavit-in-opposition filed on behalf of the defendant No. 1 affirmed by Gourhari Chandra on 9th November 1984 in which the defendant No. 1 wrote to the Bank inter alia as follows :

'Please take notice that the contractor named in above-quoted bank guarantee having committed default in due compliance of the contract in question an amount of Rs. 30 lakhs has become due and payable to Steel Authority of India Limited, Durgapur Steel Plant. Accordingly in terms of the above-quoted bank guarantee we do hereby demand payment of the said amount to us..........'

It was submitted that although it was alleged that default has been committed, there is no mention that any loss or damages have been suffered by the defendant No. 1. Mere default committed by the plaintiff will not entitle the defendant No. 1 to call for the amount of the guarantee or any part thereof. The defendant No. 1 has to allege that it has suffered loss and damages. Thus the demand was not in accordance with the terms of the guarantee. The other letter in this context is the letter dated 14th/15th December, 1983 which has been set out earlier. It was submitted that by this letter the defendant No. 1 gave a go-by to the previous demand notice and stated that it would be satisfied if the validity of the guarantee was extended up to 31st December 1984 with a grace period up to 30th June 1985. Only if the guarantee could not be extended then the said letter was to be treated as demand for the full value of the bank guarantee. It was urged that this could not be a demand at all in terms of the letter of guarantee. In any event, the Bank is agreeable to extend the validity of the letter of guarantee. Therefore there would be no question of any payment by the Bank. It was also urged that the full amount of the guarantee could not be demanded by the defendant No. 1 inasmuch as certain bills have been submitted by the plaintiff which has been accepted and paid by the defendant No. 1. Therefore under Clause 4 of the said bank guarantee the amount of the guarantee has to be reduced by 18.6% of the amount of the said bills and in this context a reference was made to paragraph 16 of the petition in which the first running bill submitted by the plaintiff to the defendant No. 1 for Rs. 2,45,000/- has been accepted and paid by the defendant No. 1. It was next urged that in the facts and circumstances of the case special equity arises and the Court will not allow the defendant No. 1 to call up the bank guarantee. Reliance was placed on a decision of Sabyasachi Mukharji, J. (as his Lordship then was) in Texmaco Ltd. v. State Bank of India reported in : AIR1979Cal44 . This was a case of a performance guarantee given by the State Bank of India. His Lordship discussed and noted various cases both Indian and English and observed that the position in law was that the bank was obliged to pay and to pay on what terms, depended on the terms of the bank guarantee or of the letter of credit as the case may be. The bank must pay according to guarantee on demand if so stipulated without proof or conditions. The exception was in case of fraud and his Lordship observed that there might be another exception in the form of special equity arising from a particular situation which might entitle a party to an injunction restraining the performance of the guarantee. If the stipulation was such that the bank should pay on demand; then in the absence of clear fraud the bank was bound to pay. Another decision relied on behalf of the Bank was a decision of the Privy Council in Jean Mackenzie v. Royal Bank of Canada, reported in 1934 A.C. 468 where the Judicial Committee observed that a contract of guarantee like any other contract, was liable to be avoided if induced by material misrepresentation, even if made innocently. By reason of suppression by the defendant No. 1 that the said reservoir was incapable of being dredged and deepened and also because of existence of railway lines, structures, brick field and rocky soil underneath the said reservoir, the plaintiff was induced to enter into the said contract and the bank in its turn because of material misrepresentation, that the contract between the plaintiff and the defendant No. 1 was capable of performance, was induced to enter into the said contract of guarantee, thus the said contract of guarantee was liable to be avoided by the bank. Although such misrepresentation might have been made by the plaintiff innocently, inasmuch as the plaintiff itself had no knowledge of the fact that the said contract between the plaintiff and the defendant No. 1 was incapable of performance, when the plaintiff entered into the said contract and induced the bank to give the said guarantee.

6. Dr. Tapas Banerjee and also his learned junior Mr. Bimal Kumar Chatterjee appearing for the defendant No. 1 submitted that there were no grounds for injunction. Under the bank guarantee if default was committed by the plaintiff, the defendant No. 1 was entitled to call up the guarantee. The defendant No. 1 by its letter dated 19th December 1983 gave notice to the bank that the plaintiff has committed default in due compliance with the contract in question and demanded payment of the amount under the bank guarantee. Under the said bank guarantee the bank was not entitled to raise any dispute as to whether the default has been committed by the plaintiff or not and under Clause 2 thereof the decision of the defendant No. 1 as to default and the amount or amounts to which the defendant No. 1 was entitled by reason of such default was binding on the bank and bank was not entitled to ask the defendant No. 1 to establish its claim or claims under the guarantee. The bank was to pay the same forthwith without any objection. The grounds made out for injunction are to be found in paragraphs 12, 18, 21, 26, 28, 33 and 35 of the petition. It was submitted that none of them was a valid ground for an injunction restraining the defendant No. 1 from calling up the amount of the bank guarantee. The law on this subject is well settled.

7. In Minerals & Metals Trading Corporation of India Ltd. reported in (1970) 74 Cal WN 991, a Division Bench of this Court observed that a bank guarantee has a dual aspect. It is not merely a contract between the party and the beneficiary of the guarantee; it is also a security given to the beneficiary by a third party. In seeking to enforce the bank guarantee, the beneficiary of the guarantee, in effect, seeks to realise the security furnished by the third party and the third parry therefore has locus standi to challenge the enforcement of the guarantee. But the Courts are slow to interfere with the operation of irrevocable letters of credit not merely on the ground of their importance in international trade but also on the ground that under the terms and conditions of their issue, the beneficiary who is often the seller, is assured of payment by the bank once he complies with the terms and conditions of the letter of credit irrespective of his non-compliance with the terms of the contract which he has entered with the buyer on the ground of autonomy of the letter of credit. A distinction was drawn by their Lordships between a bank guarantee and an irrevocable letter of credit. It was observed that in case an irrevocable letter of credit no third party came into the picture but in the case of a bank guarantee, by definition, third party is always on the scene. Unless there is some act of omission or commission on the part of the third party, payment under a bank guarantee does not become due. In other words, bank guarantee does not enjoy the autonomy of an irrevocable letter of credit. In the case of a bank guarantee there is always a question of contingency, on the occurrence of which the guarantee becomes enforceable.

8. It was submitted on behalf of the defendant No. 1 that this distinction between the bank guarantee and the irrevocable letter of credit is no more there in view of the latest decision of the Supreme Court in United Commercial Bank v. Bank of India reported in : [1981]3SCR300 . In this case the Supreme Court was considering a confirmed letter of credit and in that context observed that the same considerations apply to a bank guarantee. The Supreme Court quoted with approval the observations of Lord Denning M. R. in Elian v. Matsas (1966) 2 Lloyd's Rep 495 that a bank guarantee was very much like a letter of credit and the Courts will do their utmost to enforce it according to its terms and will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. The Supreme Court further observed that no injunction could be granted under Order 39 Rules 1 and 2 of the Code of Civil Procedure unless the plaintiff established that he had a prima facie case, meaning thereby, that there was a bona fide contention between the parties or a serious question to be tried.

9. The next case on this point is a decision of a single Judge of this Court in Road Machines (India) Private Ltd. v. Projects and Equipment Corporation of India Ltd. reported in : AIR1983Cal91 where D. K. Sen, J. observed that it is not necessary that a bank guarantee should be invoked in an exact and punctilious manner setting out the entire case of the beneficiary under the guarantee in the same way as setting out a cause of action in a plaint. A bank guarantee is a commercial document and is neither a statutory notice nor a pleading in a legal proceeding. A bank guarantee may be invoked in a commercial manner. The invocation would be sufficient and proper if the bank concerned understood that the guarantee was being invoked by the beneficiary in terms of the guarantee. Here the invocation of the guarantee was not strictly in the language of the guarantee and the learned Judge observed that to restrain the invocation of the guarantee merely on the ground of failure of the beneficiary to specifically state that the vendor had failed to fulfil its obligations under the contract would not benefit the vendor ultimately as it would be open to the beneficiary -- vendee to issue a letter forthwith in the required language of invocation. The said guarantee being irrevocable and unconditional, the vendor, save in exceptional circumstances which would entitle him to an injunction restraining invocation of the guarantee, was estopped from disputing the invocation of the guarantee.

10. The next case cited was a decision of a Division Bench of this Court to which I was a party in B. S. Ahuja Co, Private Ltd. v. Kaluram Mahadeo Prosad reported in : AIR1983Cal106 . This was also a case of an irrevocable letter of credit and it was observed that a bank issuing or confirming a letter of credit was not concerned with the underlying contract between the buyer, the beneficiary and the seller. The duties of the bank under a letter of credit are created by the document itself. Under an irrevocable letter of credit to pay his buyer, the customer could not instruct bank not to pay. The opening of a confirmed letter of credit constituted a bargain between the banker and the vendor of the goods which imposed on the banker an absolute obligation to pay. The same consideration applied to a bank guarantee. A letter of credit sometimes resembled and was analogous to a contract of guarantee. The bank which gave a performance guarantee was bound to honour that guarantee according to its terms. 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 obligation to pay. The Courts usually refrain from granting injunction to restrain performance of the contractual obligations arising out of letter of credit or a bank guarantee between one banker and another. In view of well-settled principle of balance of convenience, in the absence of clear case of fraud to the knowledge of the bank, the Court should not grant injunction restraining payment in terms of the letter of credit, as the letter of credit is an irrevocable one and has not yet been revoked. The next case cited was a decision of the Court of Appeal in England in Bache & Co. (London) Ltd. v. Banque Vernes ET Commerciale De Paris S.S. reported in (1973) 2 Lloyd's Law Reports 437. This was a case of a bank guarantee which contained a conclusive evidence clause. It was urged that this conclusive evidence clause was against public policy as it sought to oust the jurisdiction of the Court from enquiring into the rightness or wrongness of the amount claimed and makes the person authorised to certify the amount which may not be conclusive evidence. Lord Denning observed that the guarantee given was that such clause should be enforced and such a clause was not against public policy but on the contrary public policy was in favour of enforcing it. This does not lead to any injustice because if the figure should be erroneous, it is always open to the party affected to have it corrected by instituting proceedings against the brokers, in England or in France, to get it corrected as between them.

11. The next case cited was also a decision of the Court of Appeal in England in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. reported in (1978) 1 All ER 976. This was a case of a performance bond or guarantee. It was held that a performance guarantee was similar to a confirmed letter of credit. Where, therefore, a bank had given a performance guarantee it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default. The only exception to that rule was where fraud by one of the parties to the underlying contract had been established and the bank had notice of the fraud. Accordingly, as the defendants' guarantee provided for payment on demand without proof or conditions, and was in the nature of a promissory note payable on demand, and the plaintiffs had not established fraud on the part of the buyers, the defendants were required to honour their guarantee on the demand made by the Libyan bank.

12. The last case in the series is a decision of a Division Bench of this Court in National Project Construction Corporation Ltd. v. Ranjan reported in : AIR1985Cal23 . This was also a case of bank guarantee. Here the guarantee was a conditional one and was not an absolute guarantee. It was observed that the bank guarantee executed by the Bank in favour of the petitioner stands independent of other connected transactions, namely, the contract between the petitioner and the opposite party, and also 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 counterclaim arising out of the contract between the parties.

13. On behalf of the defendant No. 1 it was also urged that the contentions raised on behalf of the plaintiff were not tenable. Inasmuch as the order prayed for by the plaintiff petitioner is not against the Bank. No injunction restraining the bank from making the payment is prayed but what is asked for is an order of injunction against the defendant No. 1, its servants, or agents or assigns from calling up the bank guarantee or making any claim on the bank on the said bank guarantee. The defendant No. 1 has also filed a suit against the bank in the Burdwan Court and the right then there is no question of injunction restraining the bank from making payment. The bank can always refuse to make payment and if such refusal of the bank is illegal or wrongful appropriate orders would be made by the Burdwan Court in the suit filed by the defendant No. 1 against the bank. Here the bank is merely a pro forma party. Bank has been repeatedly urging fraud but there are no particulars of fraud either in the petition of the petitioner, that is D.T.H. Construction Pvt. Ltd. or in the petition filed by the bank. It has also been urged by the bank that the first notice given by the defendant No. 1 to the bank demanding payment under the bank guarantee dated 19th September. 1983 has been waived by the defendant No. 1 by its subsequent notice dated 14/15th December, 1983. Waiver is a question of fact and has to be specifically pleaded. There is no pleading of any waiver either in the petition of the petitioner D.T.H. Construction Pvt. Ltd. or in the petition filed by the bank.

14. In support of the above contention reliance was placed on a decision of the Supreme Court in Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh reported in : [1979]118ITR326(SC) . Here the Supreme Court observed that waiver was a question of fact and it must properly be taken and pleaded. No plea of waiver can be allowed to be raised unless it was pleaded and the factual foundation for it was laid in the pleadings.

15. It is true that there is no pleading of waiver or of any particulars thereof either in the petition of the plaintiff or in the petition of the Bank. Although good deal of arguments have been made before me in favour of and against grant of an injunction from various aspects, but in my view, the whole question will depend on three documents viz; the Bank Guarantee, the letters of demand by the defendant No. 1 on the Bank dated 19-9-83 and dated 14/15-12-83. Under Clause 1 of the Bank Guarantee the Bank undertook the indemnify and to keep the defendant No. 1 indemnified to the extent of Rs. 30,00000/- for and against loss and damages that may be caused to or suffered by the defendant No. 1 or in relation to the advance payment to be made by the defendant No. 1 to the plaintiff, by reason of any default or defaults on the part of the plaintiff. It is further provided that in the event of default or defaults on the part of the plaintiff as aforesaid the bank shall forthwith on demand pay to the defendant No. 1 in sum or sums not exceeding in the total the said sum of Rs. 30,00000/- as may be claimed by the defendant No. 1 to be due from the plaintiff by way of such advance payment or a portion or portions thereof or otherwise as the loss and/or damages of the defendant No. 1 by reason of such default or defaults on the part of the plaintiff. By Clause (2) of the said Bank Guarantee the Bank agreed to accept the decision of the defendant No. 1 as to whether the plaintiff has made any such default or defaults and the amount or amounts to which the defendant No. 1 was entitled by reason thereof would be binding on the Bank and the Bank shall not be entitled to ask the defendant No. 1 to establish the claim or claims of the defendant No. 1 under the guarantee but will pay the same forthwith without any objection. Clause 4 however provides that the said guarantee, so far as it relates to any advance payment for works done be reduced by 18.6% of the value of each invoice for such completed works done if the invoice was handed over to and acknowledged by the defendant No. 1. Thus admittedly the defendant No. 1 was not entitled to, even if the other conditions were fulfilled, to the entire amount of the Bank Guarantee but the same was to be reduced by 18.6% of Rs. 2,45,000/-being the first on account running bill for works done submitted by the plaintiff to the defendant No. 1 and paid by the defendant No. 1. The guarantee was given by the bank to secure the advance payment made by the defendant No. 1 to the plaintiff on account of contract for dredging and deepening of the reservoir. The report of Mr. S. Basumullick, Professor Department of Geological Science, Jadavpur University does not say that the said work is impossible or incapable of performance but it states that it would be very difficult and impracticable to perform by adopting usual methods of dredging. Therefore the contention raised on behalf of the Bank that the main contract being incapable of performance, in respect of part performance whereof the guarantee was given rendered the guarantee void, under Section 56 of the contract, cannot be accepted. In any event the contract between bank and the defendant No. 1 was independent of the contract between the plaintiff and the defendant No. 1. The guarantee was given by the bank to the defendant No. 1 to secure the advance of Rs. 30,00000/- that was to be given by the defendant No. 1 to the plaintiff. There is no dispute that the defendant No. 1 has paid the said amount to the plaintiff. Even if the main contract between the plaintiff and the defendant No. 1 was entered into by the plaintiff on account of lack of knowledge of certain facts or of suppression of certain material facts by the defendant No. 1 or even because of misrepresentation made by the defendant No. 1, the bank could have no say in the matter. This is now well established by several decisions of this Court as well as of the Supreme Court and of the English Courts which have been noted earlier. If the notice of demand dated 19-9-83 was not strictly in accordance with the language of the bank guarantee that would not also be an excuse for the bank for non-payment of the amount due under the guarantee. If the bank has understood the purport of the notice, which no doubt the bank well understood, then the bank cannot be heard to say that there has been no statement in the notice that the defendant No. 1 has suffered loss and7or damages on account of the defaults committed by the plaintiff. Even if the notice was bad that will not help the bank ultimately because the defendant No. 1 could give a fresh notice strictly in compliance with the language and words of the guarantee to the bank. If there is substantial compliance with the terms of the guarantee in the notice that would be sufficient and if there be no defect in understanding the nature and purport of such notice by the Bank, the bank is bound to honour its commitment under the guarantee.

16. Now let us turn to the last document that is the letter dated 14/15-12-83 whereby the defendant No. 1 is said to have given a goby to its earlier demand contained in the letter dated 19-9-83 and made a fresh and at the same time a conditional demand, on account whereof the defendant No. 1 would be prevented from receiving payment under the bank guarantee.

17. It has been stated by the petitioner that the defendant No. 1 having realised that the conditions imposed by the bank guarantee have not been fulfilled, requested the bank to extend the bank guarantee by another one year, i.e. till 31st December, 1984 (bank guarantee was due to expire on 31-12-83) the relevant portion of the said letter dated 14/15-12-83 has already been set out. By the said letter the defendant No. 1 asked the bank to extend the validity of the bank guarantee up to 31-12-84 with grace period up to 30-6-85 and further stated that if the bank was not in a position to extend the validity of the bank guarantee as requested then the said letter was to be treated as a demand for full value of the bank guarantee amounting to Rs. 32.45 lakhs and request was made to remit the sum by cross cheque drawn in favour of the defendant No. 1. From the language and tenor of this letter it appears that defendant No. 1 gave out that it would be satisfied if the validity of the bank guarantee was extended by another year and in that event the amount of the bank guarantee would not be called up by the defendant No. 1 but if it was not so extended then the amount secured by the guarantee should be paid. If that is the position then there is no reason why the defendant No. 1 should be allowed to call up the bank guarantee when the learned counsel for the plaintiff and the bank both submitted that their clients were agreeable to renew the guarantee from year to year until further order of this Court. Thus equity lies in favour of the plaintiff in not allowing the defendant No. 1 to call up the bank guarantee.

18. There will be an order in terms of prayer (a) of the petition. The plaintiff is however directed to renew the bank guarantee from year to year until further orders. Costs, cost in the cause.


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