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Alliance Mills (Lessees) Pvt. Ltd. and anr. Vs. Union of India (Uoi) and ors. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtKolkata High Court
Decided On
Case NumberCivil Rule No. 3179 of 1984
Judge
Reported inAIR1985Cal112,[1986]59CompCas194(Cal)
ActsConstitution of India - Articles 14 and 226; ;Companies Act, 1956 - Section 617; ;Code of Civil Procedure (CPC) , 1908 - Order 39, Rule 1; ;Contract Act, 1972 - Section 126; ;Forward Contracts (Regulation) Act, 1952 - Sections 5, 11 and 14A
AppellantAlliance Mills (Lessees) Pvt. Ltd. and anr.
RespondentUnion of India (Uoi) and ors.
Appellant AdvocateBhaskar Gupta, ;Pratap Chatterjee and ;A.P. Agarwalla, Advs.
Respondent AdvocateN.C. Saha, Adv.
Cases ReferredUnited Commercial Bank v. Bank of India
Excerpt:
- .....should be deposited towards earnest money, either in the shape of cash or demand draft or a bank guarantee of a schedule bank in favour of the government company and should be furnished along with the tender. one of the conditions of the said contract is that in the case of any default by the petitioner either in quantity to be supplied or in the delivery period or in the event of any defect in the quality of gunny bags supplied, the government company is entitled to invoke, the bank guarantee and purchase the defaulted quantity at the prevailing market rate at the risk and responsibility of the petitioner. the loss or damages incurred would be recovered from the petitioner. the contract was entered in august 1983. the petitioner company furnished bank guarantee from allahabad.....
Judgment:
ORDER

Ajit Kumar Sen Gupta, J.

1. The petitioner company entered into a contract with Nizam Sugar Factory Ltd. of Hyderabad, a Government Company within the meaning of Section 617, Companies Act, 1956 (hereinafter referred to as the Government Company). The said contract was for supply of 12 lacs gunny bags by the petitioner company to the said Government Company at Hyderabad. One of the conditions of the contract was that a sum of Rs. 1,00,000/- should be deposited towards earnest money, either in the shape of cash or Demand Draft or a bank guarantee of a Schedule Bank in favour of the Government Company and should be furnished along with the tender. One of the conditions of the said contract is that in the case of any default by the petitioner either in quantity to be supplied or in the delivery period or in the event of any defect in the quality of gunny bags supplied, the Government Company is entitled to invoke, the Bank Guarantee and purchase the defaulted quantity at the prevailing market rate at the risk and responsibility of the petitioner. The loss or damages incurred would be recovered from the petitioner. The contract was entered in August 1983. The petitioner company furnished Bank Guarantee from Allahabad Bank, Calcutta, as and by way of earnest money of Rs. 1,00,000/-. The said Bank Guarantee is dt. 8-8-1983, and was to remain valid till 30-4-84. One of the clauses of the said Bank Guarantee is that the said Government Company shall have the right to demand payment under the said Bank Guarantee at any time in their discretion and Allahabad Bank bind themselves to pay to the Government Company the guaranteed amount of Rs. 1,00,000/- without raising any objection or making any reference to the petitioner. One other term of the said Bank Guarantee is that Allahabad Bank shall not raise any question on a demand being made by the Government Company and shall forthwith on demand pay the guaranteed amount to the Government Company.

2. It is alleged by the petitioners that due to the strike commenced at the petitioners' factory with effect from 16-1-1984, the petitioners could not fulfil the terms and conditions of the said contract. By a letter DA 13-2-1984, the Government Company cancelled the said contract in the following terms : --

'Sub : Supply of 'A' Twill bags.

Ref : Our Order No. P/RD/Gunnies/83-84/M/11765 dated 12-8-1983.

As per the terms of the above order you should have made supplies as per the schedule indicated below :--

October, 1983 - 2.00 lakh bagsDecember, 1983 - 2.62 lakh bagsJanuary, 1984 - 2.38 lakh bagsFebruary, 1984 - 3.28 lakh bags.To our dismay we found that at the end of December 1983, you have hardly supplied 2.00 lakh bags and you could supply a further quantity of 1.8 lakh bags approximately till 15-1-1984. Subsequently you informed us that you will not be able to supply any bags due to strike in the Jute Mills till normalcy returns. As you had failed to stick to the delivery schedule at least up to 15-1-1984 we were put to lot of inconvenience and forced to make alternative arrangement for keeping our factory running. Kindly treat our order for the balance quantity as cancelled, as we had already made alternative arrangements to meet our requirements.

This cancellation is issued without prejudice to the terms and conditions of our order.......'

3. By a letter D/- 14-3-1984, Allahabad Bank intimated the petitioner company that they have received a letter from the beneficiary of the Bank Guarantee (that is the Government Company) stating that the petitioners had failed to supply them bags as per terms of the order and that the Government Company has registered their claim for Rs. 1,00,000/- with the Allahabad Bank against the said Bank Guarantee. By the said letter, petitioner Company was requested to advise Allahabad Bank their instructions/comments and if nothing was heard regarding encashment of the Bank Guarantee within a week, then Allahabad Bank would have no other alternative but to remit the amount to the beneficiary of the guarantee to honour the commitment under the said Bank Guarantee. It is surprising that although it was specifically mentioned in the Bank Guarantee that before making the payment, no reference would be made to the petitioner company, even then, Allahabad Bank, for the reasons best known to them, without encashing the Bank Guarantee intimated the petitioner company about the demand made by the Government Company.

4. In the writ application the petitioner company have challenged the enforcement of the Bank Guarantee by the Government Company. Upon the said application on 29-3-1984, A. K. Janah, J. granted ad interim order in terms of prayers (g), (h) and (i) which are to the following effect:

(g) Injunction restraining respondent 2 and/or its servants or agents and/or assigns from demanding or receiving any amount under the purported Bank Guarantee D/- 8-8-1983 and from giving any effect to the purported demand DA 13-2-1984;

(h) Injunction restraining respondent 3 from making any payment under the Bank Guarantee DA 8-8-1983;

(i) Injunction restraining respondents 2 and 3 from giving any effect to the purported demand DA 13-2-1984 and from acting in reliance thereof.

5. The petitioners have asked for extension of the said interim order on the same application. It has been submitted that notice has been served upon the Government Company as well as on Allahabad Bank. No one, however, appears on behalf of the respondents.

6. It has been contended by Mr. Bhaskar Gupta, learned counsel appearing for the petitioner company, that the contracts for trading and the sale or purchase of jute goods are subject to the provisions of Forward Contracts (Regulation) Act, 1952 (hereinafter referred to as the said Act) and Bye-laws of the East India Jute and Hessian Exchange Limited (hereinafter referred to as the said Exchange). The contract between the petitioner company and the Government Company was not in compliance with the provisions of the bye-laws of the said Exchange or the said Act and as such the said contract was and is void. Consequently the said Bank Guarantee which was issued or furnished in consideration of entering into the said agreement is also void and no effect can be given thereto. In support of his contention Mr. Gupta has relied on a decision of the Supreme Court in the case of Megna Mills Co. Ltd. v. Ashoka Marketing Ltd reported in : [1971]2SCR751 . It was laid down there that if the contract is not in accordance with the provisions of the said Act or the Bye-laws of the said Exchange and is not in form prescribed, the contract would be void and illegal. It was further held by the Supreme Court in that case that literal compliance with the prescribed form may not be essential but if the contract does not contain all the terms and conditions set out in the form the contract would be void. It has nowhere been alleged that either the petitioner company or the Government Company is a member of the said Exchange. Assuming that the FCR Act, 1952 and the Bye-laws of the said Exchange are applicable it has not been shown that the contract entered into in this case is not in the prescribed form. Nor it is the case of the petitioner that all the terms and conditions of the contract have not been set out in the tender. On the contrary, all the terms and conditions of the contract are contained in the tender documents.

7. Mr. Gupta has also cited another decision of the Supreme Court in the case of Jaikishan Dass Mull v. Luchhiminarain Kanoria & Co., reported in : AIR1974SC1579 which has reiterated the principles laid down in the case of Megna Mills Co. Ltd. (supra).

8. In my judgment, this application is thoroughly misconceived. There was a concluded contract by and between the petitioner and the Government Company. I am prima facie satisfied that FCR Act, 1952 has no application in this case. In any event in absence of any particulars as to how and in what manner the contract in this case was not in compliance with the said Act and the Bye-laws of the said Exchange, I am unable to hold that the contract has not been entered into in compliance with the provisions of the said Act and the Bye-laws. The petitioner company has acted upon the contract and only after it has committed breach and the contract has been terminated by the Government Company the petitioner has come with the story that the contract is void not being in conformity with the provisions of the said Act and the Bye-laws.

9. There is a breach of contract on the part of the petitioner company and accordingly the Government Company terminated the contract. Whether that termination is right or wrong cannot be decided by this Court in this jurisdiction. It has not been alleged that the Government Company acted arbitrarily in terminating the Contract. On the contrary, in the letter D/- 13-2-1984, the reasons have been given why the Government Company was compelled to cancel the contract. I am also not satisfied that any writ will lie in the instant case against the Government Company inasmuch as the Government Company in the matter of entering or cancelling the contract or enforcing the Bank Guarantee is not discharging any, statutory function. Merely because fifty one per cent of the paid up share capital of the Government Company is held by State of Andhra Pradesh will not make it amenable to the writ jurisdiction. The rights and obligations of the parties must be governed by the contract and no question of any violation of Article 14 of the Constitution or any other provision of Constitution arises. I am also of the view that the Government Company was and is entitled to invoke the Bank Guarantee in terms of the contract. It has been laid by the Supreme Court in the case of United Commercial Bank v. Bank of India reported in : [1981]3SCR300 that the courts usually refrain from granting injunction to restrain performance of contractual obligations arising out of Letter of Credit or a Bank Guarantee. In view of the Banker's obligations under the Bank Guarantee to pay, his customer cannot instruct him not to pay. 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. A bank which gives a performance guarantee must honour that guarantee according to its terms. There are no exceptional circumstances in this case to justify the interference with the implementation of the Bank Guarantee. I am not satisfied that the invocation of the Bank Guarantee by the Government Company is wrongful, illegal or arbitrary. After entering into a contract with the Government Company for supply of gunny bags and after having acted upon the said contract and having failed to perform its part of the obligations, the petitioner company cannot now contend that the said agreement was not legal or valid in view of the provisions of FCR Act, 1952, and the Bye-laws of the East India Jute & Hessian Exchange Limited. This is not a case in which writ court should exercise its discretion and grant the injunction.

10. I am prima facie satisfied that no ground has been made out for the interim order being continued till the disposal of the Rule. I, therefore, vacate the interim order D/- 29-3-1984 and direct Allahabad Bank, respondent 3 to forthwith make payment of the amount covered by the Bank Guarantee to respondent 2. In the event the Rule succeeds, respondent 2 shall refund the said amount covered by the Bank guarantee to the petitioner. Advocate on Record of respondent 2 is directed to communicate this order to Allahabad Bank, respondent 3 forthwith.

11. Let a plain copy of this order countersigned by the Assistant Registrar (Court) be given to the Advocate appearing for the party.


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