Full Judgment Text
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1
IN THE HIGH COURT OF JUDICATURE
AT BOMBAY, NAGPUR BENCH, NAGPUR.
APPEAL AGAINST ORDER NO.85 OF 2011
1) Western Coalfields Limited,
Through it's CMD,
A Govt. Of India Undertaking,
having it's Registered
Office at Coal Estate,
Civil Lines, Nagpur01.
2) Western Coalfields Limited,
through it's General Manager
(Civil) Coal Estate,
Civil Lines, Nagpur01. .......... Appellants.
Original Defendant Nos.1 & 2
VERSUS
1) Rajesh s/o Nandlal Biyani,
Proprietor of M/s.Shree
Sai Construction Company,
A Registered Government
Contractor and Civil
Engineers, having it's
Head Office at
“Gokuldham” D.G.Tukum,
Tadoba Road,
Chandrapur442 401 (MS). .......... Respondent.
Original respondent No.1.
2) Oriental Bank of Commerce,
(Govt.of India Undertaking)
having it's Branch at
“Gold Sukh” Kasturba Chowk,
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Chandrapur,
Through it's Manager. .......... Respondents.
Original Defendant Nos.3.
Shri A.M.Gordey, Senior Advocate assisted by
Shri Deepak Gupta, Advocate for the
appellants/Original Defendant Nos.1 & 2.
Shri J.P.Pendse, Counsel for the respondent
no.1 original plaintiff.
CORAM : R. K.DESHPANDE, J.
DATE OF RESERVING THE JUDGMENT : 25/08/2011
DATE OF PRONOUNCING THE JUDGMENT : 06/09/2011.
JUDGMENT.
01) This appeal challenges the order 5.4.2011
passed by the Third Joint Civil Judge, Senior
Division, Nagpur, allowing the application Exh.5 for
grant of temporary injunction, restraining the
appellants from invoking the Bank Guarantees
furnished on 19.2.2008 filed in Special Civil Suit
No.236 of 2011 by the respondent no.1/plaintiff. The
appellants are the defendant nos.1 and 2, the
respondent no.1 is the plaintiff and the respondent
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no.2 is the Oriental Bank of Commerce and the
original defendant no.3.
02) The facts not in dispute are stated below
On 18.5.2007, the appellants/original
defendant nos.1 and 2 awarded the contract for the
work of diversion of Motaghat Nallah (PhaseII and
PhaseIII) at Padmapur Open Cast Mine of Chandrapur
area, to the respondent no.1/plaintiff. An Agreement
No.08/20072008 was entered into between the parties.
The total cost of contract was of Rs.13.95 Crores.
The period of completion of work prescribed under the
contract was from 23.7.2007 to 28.10.2008. On
10.10.2007, two Bank Guarantees of M/s.Mahesh
Merchant Bank Limited, Chandrapur, said to be a
Scheduled Bank, were furnished by way of performance
guarantees, by the plaintiff. During the progress of
work, the respondent no.1 substituted the aforesaid
two Bank Guarantees by two separate Bank Guarantees
dated 19.2.2008 of the Nationalized Bank i.e.
Oriental Bank of Commerce (the respondent no.2
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herein). One Bank Guarantee was for Rs.69,79,000/
whereas other was for Rs.1,54,94,580/. Thus, it was
for total amount of Rs.2,24,73,580/ that the two
guarantees were furnished and their validity is upto
19.11.2011. The respondent no.1 completed 40% of work
to the tune of Rs.5,95,96,000/ upto 28.10.2008 and
the balance 60% work, costing Rs.799.86 Lacs,
remained incomplete.
03) On 5.3.2009, the appellants issued a show
cause notice to the respondent no.1 asking as to why
the penal interest should not be recovered on the
amount of Rs.2,24,73,580/ for a period of five
months during which the contract was continued on the
basis of the forged and fake Bank Guarantees of non
existent bank i.e. M/s.Mahesh Merchant Bank Limited.
The respondent no.1 was called upon to deposit an
amount of Rs.16,85,528/ as penal interest @
18 % per annum, on the said amount for a period
of five months. It is not disputed that this amount
of penal interest has been recovered from the
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respondent no.1. By communication dated 16.9.2010,
the appellants terminated the contract for the reason
of furnishing of fake Bank Guarantees of non existent
bank by the respondent no.1. Thereafter, by
communication dated 17.2.2011, addressed to the
Oriental Bank of Commerce, the appellants invoked two
Bank Guarantees of total Rs.2,24,73,580/.
04) On 21.2.2011, the respondent no.1/plaintiff
filed Special Civil Suit No.236 of 2011 for a
declaration that the invocation of Bank Guarantees by
the appellants/defendant nos.1 and 2, was illegal and
for further declaration that the communication dated
17.2.2011 is not a valid demand. Further, the relief
of injunction is claimed, restraining the defendants
from invoking the Bank Guarantees and acting upon the
communication dated 17.2.2011. An application (Exh.5)
was also filed for grant of temporary injunction
under Order 39 Rule 1 and 2 read with Section 151 of
the Code of Civil Procedure. The Trial Court granted
exparte injunction on 21.2.2011, restraining the
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defendants from encashing the Bank Guarantees pending
the decision of the application at Exh.5. The plaint
was thereafter amended and in addition to the
existing reliefs, a decree for an amount of
Rs.5,16,69,618/ was claimed along with the damages
of Rs.1.00 Crore, against the appellants.
05) An exparte injunction granted by the Trial
Court on 21.2.2011, was as under
ORDER
1. Defendants No.1 and 2 are hereby
restrained from taking step from
encashing bank guarantee
No.OBC/CHP/BG/02020002808 dtd.19.2.08
for Rs.69,79,000/ valid upto 19.11.11
and bank guarantee
No.OBC/CHP/BG/02020002908 dtd.19.2.08
for Rs.1, 94,580/ valid upto 19.11.11
towards additional performance security
till their appearance and filing reply
to the application at exh.5.
2. Defendant No.3 and its employee etc.
are hereby restrained from making any
payment to defendant Nos.1 and 2 as per
above described bank guarantee till its
appearance and filing reply to the
application exh.5.
2. Issue notices to defendants No.1 to
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3 as to why above exparte adinterim
injunction should not be confirmed till
the decision of suit on P.F. r/o
8.3.11.
3. Plaintiff is directed to comply
mandatory provision of O.39 R.3(a)(b)
of Civil Procedure Code within
stipulated period of 24 hours.
4. Steno copy be provided to the party.
Nagpur (S.S.Deodhar)
rd
Date : 21.2.2011 3 Jt.C.J.Sr.Dn., Nagpur.
The Trial Court by an order impugned passed
on 5.4.2011, confirmed the exparte injunction granted
and continued the same, pending the decision of the
suit. The appellants are restrained from invoking the
Bank Guarantees and the defendant no.3 (respondent
no.2 Bank) is restrained from making payment of Bank
Guarantees. The Trial Court has held that the copies
of two Bank Guarantees of Nationalized Bank, viz; the
Oriental Bank of Commerce, issued on 19.2.2008, are
placed on record and the same are valid upto
19.11.2011. Out of these two Bank Guarantees, one is
for an amount of Rs.1,54,94,580/, which was valid
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upto 19.11.2011 and the other is for an amount of
Rs.69,79,000/, which was valid upto Rs.19.5.2009.
The letters dated 27.4.2009 and 28.4.2009, issued by
the appellants/defendant nos.1 and 2 show that the
Bank Guarantees are accepted and the respondent no.1
has extended its validity upto 19.11.2011.
06) The finding is recorded by the Trial Court
that the invocation was on the ground of submission
of fake Bank Guarantees of non existent Bank and not
on the ground of delay in completion of the work. It
is held that the case of the plaintiff is that the
said act was done by his Power of Attorney holder and
when the plaintiff came to know that the said Bank
Guarantees are not in order, he voluntarily replaced
the same and submitted the fresh Bank Guarantees
issued by the Oriental Bank of Commerce (the
respondent no.2), a Nationalized Bank, which are
accepted by the appellants along with the extensions
of their validity period. It has further been held
that at this stage, it cannot be said that the fake
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Bank Guarantees were furnished only with a view to
obtain the work. The appellants have recovered the
penal interest on account of submission of fake Bank
Guarantees for a period of five months and criminal
investigation will take its own course.
07) The Trial Court has further held that the
appellants/defendant nos.1 and 2 are required to show
that they are entitled to recover the security amount
from the respondent no.1/plaintiff because of the
failure to execute the contract or negligence on the
part of the plaintiffs in executing the same,
however, no such case has been made out. The Trial
Court has recorded a finding that the respondent
no.1/plaintiff has primafacie shown that there is no
fault on his part, in delay caused in completion of
the work and it is the appellants/defendant nos.1 and
2 and the State Government, who were unable to remove
the hindrances, as a result of which the respondent
no.1/plaintiff could not execute the work. The Trial
Court has, therefore, held that there is no question
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of recovery of any damages from the security deposit
in respect of which the Bank Guarantees were provided
and hence, the refusal to grant an injunction would
result in frustrating the claim of the plaintiffs.
Hence, the order has been passed.
08) From the pleadings of the parties, the
finding recorded by the Trial Court and the arguments
advanced before this Court, the undisputed factual
position needs to be culled out. The respondent no.1
has completed 40% of work to the tune of
Rs.5,95,96,000/ upto 28.10.2008. The invocation of
the Bank Guarantees in question is not on the ground
that the respondent no.1 has failed to complete 60%
of work, costing of Rs.799.86 Lacs, upto 28.10.2008.
It is the specific stand of the appellants in their
written statement that noncompletion of balance 60%
of work by the respondent no.1 upto 28.10.2008, is
totally irrelevant for the purposes of the
controversy involved in the present case. The Bank
Guarantees have been invoked only for the reason that
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the respondent no.1 has submitted fake Bank
Guarantees for total amount of Rs.2,24,73,580/ from
the non existent of M/s.Mahesh Merchant Bank Limited,
Chandrapur.
09) It is also not in dispute that on account of
loss of interest for submission of fake Bank
Guarantees on 10.10.2007 to 19.10.2008 i.e. for a
period of five months, the appellants have recovered
the amount of penal interest of Rs.16,85,220/ @ of
18% per annum on total amount of Bank
Guarantees Rs.2,24,73,580/. It is also not in
dispute that the offences are registered against the
respondent no.1 and others under Section 420, 468,
469, 470, 471 read with Section 34 of the Indian
Penal Code and the prosecution is in progress.
10) The Trial Court has recorded the finding
that on the basis of the report of the Committee
appointed by the appellants for removal of hindrances
and the finding is recorded about the failure of the
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appellants to discharge their obligations in respect
of (i) the forest land clearance for execution of the
work, (ii) the problems of villages of Ketadi and
Mashala have not been resolved, (iii) the P.W.D.
State Highway Road Bridge of Chandrapur Tadoba Road,
Near Padmapur Village is not completed, (iv) the
M.S.E.B. Bridge near Ketadi Village and also pipeline
works (Qty.81000 m3 approx)is not yet completed. It
has further recorded the finding that the Committee
appointed by the appellants has reported that it is
unlikely that the State Government authorities will
resolve the issue and allow to restart the work in
near future. It is also the finding that the
appellants and the State Government are unable to
remove the hindrances. All these findings recorded by
the Trial Court, have not been assailed in this
appeal.
11) Shri A.M.Gordey, the learned Senior Counsel,
has invited my attention to the preamble of the Bank
Guarantees to urge that it is unconditional and
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payable without any demur by the respondent no.2
Bank. He has also invited my attention to the
Condition No.1 under the Bank Guarantee, which states
that the Bank has agreed that the appellant Company
shall be the sole judge as to whether the respondent
no.1 has failed/neglected in performing any of the
terms and conditions of the said contract and the
decision of the appellant Company is made final and
binding upon the parties. He further submits that the
appellant, in whose favour the Bank Guarantees are
furnished by the respondent no.2 Bank, cannot be
prevented by way of an injunction, to enforce the
Bank Guarantees on the pretext that the conditions of
the agreement entered between the appellant and the
respondent no.1 have not been fulfilled. He submits
that the respondent no.1 Company cannot be the
aggrieved person having any locus to raise any
dispute in respect of nonfulfillment of the terms of
the Bank Guarantees. He further submits that any
dispute in respect of failure/negligence in
performing the terms and conditions of contract
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between the appellant beneficiary and the respondent
no.1 Company is immaterial and of no consequence.
12) In support of the proposition, Shri
A.M.Gordey, the learned Senior Counsel, has relied
upon the following decisions
(i)Himadri Chemicals Industries Limited Vs.
Coal Tar Refining Co., (2007) 8 SCC 110.
(ii)Vinitec Electronics Private Ltd. Vs. HCL
Infosystems Ltd., (2008) 1 SCC 544.
(iii)Mahatma Gandhi Sahakari Sakhar Karkhana
Vs. National Heavy Engineering Coop. Ltd.,
2007 DGLS (soft) 750 : 2007(6) S.C.C.470.
(iv)Mak Impex Chemicals P.Ltd. and another
Vs. Union of India and others, AIR 2003
Bombay 88.
(v)Maytas Infra Limited Vs. Utility
Energytech & Engineers Pvt.Ltd. & anr., 2009
B.C.I.133.
(vi)and the decision in Appeal Against Order
No.6/2011 delivered by me on 26.7.2011 in
the matter of Coal India Ltd. and another
Vs. Chintamani Agrotech (India) Ltd. and
others,
13) Inviting my attention to the letter dated
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18.5.2011 issued by the appellant awarding the
contract to the respondent no.1, Shri A.M.Gordey, the
learned Senior Counsel, has urged that the specific
condition in the contract was that the respondent
no.1 shall submit the valid Bank Guarantees of a
Nationalized/Scheduled Bank by way of
performance/additional performance security. The
respondent no.1 has submitted the fake Bank
Guarantees of non existent Bank and thus, it was the
violation of the terms and conditions of the contract
for which, the Bank Guarantees were invoked. He
further submits that the respondent no.1 has carried
out the work only to the extent of Rs.595.93 Lacs,
which is the 40% of the total work and the balance
60% of the work costing of Rs.799.86 Lacs remained
incomplete. He further submits that incomplete work
is to be awarded to the another contractor and
considering the inflation, the said cost is assessed
at Rs.1182.52 approximately and as such an additional
expenditure of Rs.382.66 Lacs, is legally recoverable
from the respondent no.1. He submits that it is thus
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a failure/negligence in performing the terms and
conditions of the contract by the respondent no.1,
that the amount as assessed has become recoverable
for which the Bank Guarantees have been invoked.
14) The contention of Shri J.P.Pendse, the
learned Counsel for the respondent no.1, is that the
preamble of the Bank Guarantees clearly indicate that
the contract of the Bank Guarantees in question, is a
conditional and contingent contract depending upon
the fulfillment of the conditions specified therein.
According to him, there should be a demand in writing
stating that there is a specified amount which is due
and payable by the respondent no.1 for the reason of
the failure/negligence in performing the terms and
conditions contained in the contract by the
respondent no.1. Referring to the letter dated
17.2.2011, impugned in the Special Civil Suit No.236
of 2011, he has urged that there is nothing on record
to show that any amount is due and payable by the
respondent no.1 to the appellant for the reason of
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failure/negligence in performing the terms and
conditions contained in the contract. He further
submits that there is no demand as contemplated in
the preamble of the said agreement, made in the
impugned communication dated 17.2.2011. According to
him, the terms of the contract of Bank Guarantees
have to be strictly construed and the compliance in
respect thereof needs to be seen. He submits that in
the absence of compliance with the terms of the Bank
Guarantees, the invocation causes an irretrievable
injury to the respondent no.1. He further submits
that the violation of the terms of the guarantee has
to be regarded as species of the same genus as fraud,
which disentitles a beneficiary to enforce the Bank
Guarantee.
15) In support of the plea that the Bank
Guarantees are conditional, Shri J.P.Pendse, the
learned Counsel for the respondent no.1, has relied
upon the decisions in the cases of
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(a) Hindustan Construction Co. Ltd. Vs.
State of Bihar and others with State of
Bihar and others Vs. Hindustan Construction
Co. Ltd. and others, reported in (1999) 8
SCC 436 .
(b) Vinitec Electronics Private Ltd. Vs. HCL
Infosystems Ltd., (2008) 1 SCC 544 .
(c) National Aluminium Co. Ltd., Vs.
M/s.R.S.Builders (India) Ltd. and others,
.
reported in AIR 1991 Orissa 314
16) In the decision of the Apex Court in
Hindustan Construction Co. Ltd. Vs. State of Bihar
and others , the order passed by the Single Judge of
this Court granting injunction restraining the
defendants from invoking the Bank Guarantees was
restored by modifying the decision of the Division
Bench of this Court vacating the injunction granted
by the learned Single Judge in respect of the
performance guarantee. Paras9, 10 and 14 of the said
judgment are relevant and the same are reproduced
below
Para9 : “What is important, therefore,
is that the bank guarantee should be in
unequivocal terms, unconditional and
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recite that the amount would be paid
without demur or objection and
irrespective of any dispute that might
have cropped up or might have been
pending between the beneficiary under
the bank guarantee or the person on
whose behalf the guarantee was
furnished. The terms of the bank
guarantee are, therefore, extremely
material. Since the bank guarantee
represents an independent contract
between the bank and the beneficiary,
both the parties would be bound by the
terms thereof. The invocation,
therefore, will have to be in
accordance with the terms of the bank
guarantee, or else, the invocation
itself would be bad.”
Para10 : “In the instant case, the
whole matter can be disposed of purely
on the basis of the terms of the bank
guarantee.”
Para14 : “This condition clearly
refers to the original contract between
HCCL and the defendants and postulates
that if the obligations, expressed in
the contract, are not fulfilled by HCCL
giving to the defendants the right to
claim recovery of the whole or part of
the “advance mobilisation loan”, then
the Bank would pay the amount due under
the guarantee to the Executive
Engineer. By referring specifically to
clause 9, the Bank has qualified its
liability to pay the amount covered by
the guarantee relating to “advance
mobilisation loan” to the Executive
Engineer only if the obligations under
the contract were not fulfilled by HCCL
or HCCL has misappropriated any portion
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of the “advance mobilisation loan”. It
is in these circumstances that the
aforesaid clause would operate and the
whole of the amount covered by the
“mobilisation advance” would become
payable on demand. The bank guarantee
thus could be invoked only in the
circumstances referred to in clause 9
whereunder the amount would become
payable only if the obligations are not
fulfilled or there is misappropriation.
That being so, the bank guarantee could
not be said to be unconditional or
unequivocal in terms so that the
defendants could be said to have had an
unfettered right to invoke that
guarantee and demand immediate payment
thereof from the Bank. This aspect of
the matter was wholly ignored by the
High Court and it unnecessarily
interfered with the order of
injunction, granted by the Single
Judge, by which the defendants were
restrained from invoking the bank
guarantee.”
It has been held that in order to ascertain
whether the Bank Guarantees are conditional or
unconditional, the terms of the Bank Guarantees are
extremely material. The Bank Guarantees
represent an independent contract between the Bank
and the beneficiary, and the parties would be bound
by the terms thereof. The invocation therefore, will
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have to be in accordance with the terms of the Bank
Guarantees or else the invocation itself would be
bad. The matter has to be disposed of purely on the
basis of the terms of the Bank Guarantees. If the
Bank Guarantees furnished were conditional then the
defendants have no unfettered right to invoke the
Bank Guarantees and to the demand immediate payment
thereof from the Bank.
17) In the decision of Vinitec Electronics
Private Ltd. Vs. HCL Infosystems Ltd. , the question
considered was whether the Bank Guarantees furnished
were unconditional and irrevocable. Paras16 and 22
of the said judgment are relevant and hence, the same
are reproduced below
Para16 : “Shorn of all the
embellishments, the question that
really arises for our consideration is
as to whether bank guarantee furnished
is an unconditional and irrevocable one
or a conditional one? It may not be
necessary to refer in detail the terms
and conditions of the contract except
to analyse the original clause of the
bank guarantee dated 10.8.2001 and as
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well as the subsequent amendment of the
relevant clause in the said bank
guarantee on 20.8.2001.”
: “In the present case the
Para22
amended clause does not refer to any of
the clauses specifically as such but on
the other hand the Bank had undertaken
responsibility to pay any sum or sums
within the guaranteed limit upon
receipt of written demand from the
Company. The operative portion of the
bank guarantee furnished by the Bank
does not refer to any of the conditions
for payment under the bank guarantee.
It is true that the bank guarantee
furnished makes a reference to the
principal agreement between the parties
in its preamble. Mere fact that the
bank guarantee refers to the principal
agreement in the preamble of the deed
of guarantee does not make the
guarantee furnished by the Bank to be a
conditional one unless any particular
clause of the agreement has been made
part of the deed of guarantee.“
It is thus reiterated that the clauses in
the Bank Guarantee are relevant and material for
determination as to whether the Bank Guarantees
furnished are unconditional, irrevocable one or
conditional one. On the interpretation of clauses, it
has to be decided as to whether the Bank Guarantees
furnished are unconditional or conditional. However,
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a word of caution is that the mere fact that the Bank
Guarantee refers to the principal agreement, does not
make the Bank Guarantee to be conditional one, unless
any particular clause of the agreement has been made
part of the deed of guarantee.
18) The Division Bench of the Orissa High Court
has also dealt with the question of conditional Bank
Guarantee in its judgment in National Aluminium Co's
case cited supra, and the relevant portion of the
paras6, 7, 8 and 11 of the said judgment delivered
by Hon'ble Shri B.L.Hansaria, C.J., (as he then was)
are reproduced below
Para6 : “If the bank guarantee be
conditional, the same becomes
enforceable upon the fulfilment of the
condition stipulated and in such a case
the beneficiary must allege in the
demand that the condition has been
fulfilled. The latest decision of the
Calcutta High Court is the one rendered
in National Thermal Power Corporation
Ltd. vs. Hind Galvanizing and
Engineering Co. Ltd., AIR 1990 Cal 421,
in which the Bench has stated that as
long as the demand of the beneficiary
is in terms of the bank guarantee, it
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is not a defence that under the parent
contract the beneficiary of the
guarantee is not entitled to the amount
from the bank.“
: “In Synthetic Foams Ltd. vs
Para7
Simplex concrete Piles (India) Pvt.
Ltd., AIR 1988 Delhi, 207, a learned
single Judge has stated that
misrepresentation, suppression of
material facts and violation of the
terms of the guarantee can be regarded
as species of the same genus as fraud
which would disentitle a beneficiary to
enforce the bank guarantee. It had been
earlier stated in M/s.B.L.R.Mohan v.
Punjab State Cooperative Supply &
Marketing Federation Ltd., AIR 1982
Delhi 357, by another learned single
Judge that the demand under the bank
guarantee must be in strict accord with
the terms of the guarantee.”
Para8 : “We may also refer to a recent
decision of the Punjab & Haryana High
Court in National Project Construction
Corporation Ltd. v. M/s.Sadhu and
Company, AIR 1990 P & H 300, tht the
demand under the bank guarantee has to
be in accordance with the eventualities
mentioned in the deed of guarantee, and
it is conclusive as regards the amount
due and payable by the bank.”
Para11 : “But then, the bank
guarantees at hand cannot be regarded
as absolutely unconditional inasmuch as
the payment under guarantees is
dependent upon the contractor
committing default in performing any of
the terms and conditions of the
contract or in the payment of any money
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due to the owner or in case the amount
at the specified rates cannot be
deducted from the running bills of the
contractor by the owner towards the
payment of Mobilisation Advance. As to
the fulfilment of those conditions, we
would state that the statement of the
beneficiary would be taken at its face
value unless the contractor be in a
position to establish that the stand of
the beneficiary is actuated by fraud,
misrepresentation, deliberate
suppression of material facts or the
like which would give rise to special
equities in favour of the contractor.
So, in the absence of a case of fraud,
misrepresentation, deliberate
suppression of material facts or the
like, to establish which a heavy onus
lies on the contractor, a bank
guarantee like the one at hand has to
be honoured by the bank and the
beneficiary cannot be restrained from
enforcement. Further, decision about
fraud, etc. has to be arrived at by the
court approached by the contractor to
restrain the beneficiary from enforcing
the bank guarantee. The court cannot
await for this purpose the finding of
the arbitrator.”
It has been held that if the Bank Guarantees
be conditional, the same become enforceable upon
fulfillment of the conditions stipulated and in such
a case, the beneficiary must allege in the demand,
that the conditions have been fulfilled. The
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violation of the terms of guarantee can be regarded
as the species of the same genus as fraud, which
disentitles a beneficiary to enforce the Bank
Guarantees. The demand for Bank Guarantees must be in
strict accord with the terms of the Bank Guarantees
and it has to be in accordance with the eventualities
mentioned in the deed of guarantee.
19) In the context of the aforesaid position of
law laid down by the Apex Court, Section 126 of the
Indian Contract Act, 1872, regarding contract of
guarantee needs to be seen. The said provision of
Section 126 is, therefore, reproduced below
Section 126 . 'Contract of guarantee',
'surety', 'principal debtor' and
A 'contract of guarantee'
'creditor' “
is a contract to perform the promise,
or discharge the liability, of a third
person in case of his default. The
person who gives the guarantee is
called the 'surety'; the person in
respect of whose default the guarantee
is given is called the 'principal
debtor', and the person to whom the
guarantee is given is called the
'creditor'. A guarantee may be either
oral or written.”
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A contract of guarantee is a contract to
perform the promise or discharge the liability of a
third person in case of his default. The person who
gives the guarantee is called 'surety'; the person in
respect of whose default the guarantee is given is
called the 'principal debtor', and the person to whom
the guarantee is given is called the 'creditor'.
20) Section 31 of the Indian Contract Act, 1872,
defines the contingent contract and the same is
reproduced below
Chapter III : OF CONTINGENT CONTRACTS
“Section 31 . “Contingent contract”
defined. A “contingent contract” is a
contract to do or not to do something,
if some event, collateral to such
contract, does or does not happen.”
Section 32 of the said Act, deals with the
enforcement of the contracts contingent on an event
happening, and the same is also relevant hence,
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reproduced below
“Section 32. Enforcement of contracts
contingent on an event happening.
Contingent contracts to do or not to do
anything if an uncertain future event
happens, cannot be enforced by law
unless and until that event has
happened.
If the event becomes
impossible, such contracts become
void.”
A contract of guarantee is an independent
contract between the Bank and the beneficiary thereof
and if it is a contract, which permits the creditor
to invoke the Bank Guarantee upon happening of an
uncertain future event, then it becomes a 'contingent
contract' as defined under Section 31 and it cannot
be enforced by law unless and until that event has
happened, in view of the provision of Section 32.
Till happening of an event, it merely remains a
contract which is unenforceable. In case of such
contingent contract, the beneficiary has no
unfettered right to invoke the Bank Guarantees and to
demand immediate payment. The terms of such contract
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will have to be strictly construed and if it
prescribes the manner in which performance is to be
claimed, it will have to be seen as to whether the
performance is claimed, in the manner so prescribed.
If the invocation is not in accordance with the terms
and the manner prescribed, it would be bad. The
violation of the terms can be regarded as the species
of the same genus as fraud which disentitles a
beneficiary to invoke the Bank Guarantees.
21) In the light of the aforesaid position of
law, it is required to be found out from the terms of
the Bank Guarantees in question as to whether it is a
contingent or conditional contract or an
unconditional or irrevocable contract. A Proforma of
Bank Guarantee in lieu of security deposit relied
upon by both the parties in support of their rival
contentions contained under an Agreement No.08/2007
2008, is reproduced below
On Stamp of Rs.100
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PROFORMA OF BANK GUARANTEE IN LIEU OF
SECURITY DEPOSIT.
M/s.Western Coalfields Limited,
Coal Estate, Civil Lines, Nagpur.
Dear Sir,
1. In consideration of M/s.Western
Coalfields Limited, having its
Registered Office at Nagpur
(hereinafter called “The Company” which
expression shall unless repugnant to
the subject or context includes its
successors and assigns) having agreed
under the terms and conditions
contained in letter no..........
dated ....... Issued in favour of
M/s................ for ........
(hereinafter referred to as 'the
contract' to accept the Deed of
guarantee as herein provided for
Rs...... from the Schedule/Nationalized
Bank (whose branches are scheduled at
Nagpur) in lieu of security deposit to
made by M/s............... (here in
after called “the Contractor”) or in
lieu of deduction to be made from the
contractor's bill for due fulfillment
of the terms and conditions contained
in the said contract by the contractor,
we the ........... Bank (hereinafter
referred to as the said Bank) having
its Registered Office at ......... do
hereby undertake and agreed to pay the
company to the extent of Rs........ On
demand stating that the amount claimed
by the company is due and payable by
the contractor for the reasons of
failure/negligence in performing the
terms and conditions contained in the
contract by the buyer and to
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unconditionally pay the amount claimed
by the company on demand without any
demur to the extent aforesaid.
1. We .......... Bank agree that the
company shall be the sole judge as to
whether the said contractor has
failed/neglected in performing any of
the terms and conditions of the said
contract and the decision of the
company in this behalf shall be final
and binding on us.
2. We the said Bank further agree that
the Guarantee herein contained shall
remain in full force and effect
upto ....... And any claim received
after the said date shall in no case
bind the Bank.
3. The Company shall have the fullest
liberty without affecting in any way
the liability of the Bank under this
guarantee or indemnity from time to
time vary any of the terms and
conditions of the said contract or to
extend the time of performance by the
said contractor or to postpone any time
and from time to time any of the powers
exercisable by it against the said
contractor and either to enforce or to
forbear from enforcing nay of the terms
and conditions governing the said
contract or securities available to the
company and the said Bank shall not be
released from its liability under these
presents.
5. Notwithstanding anything contained
herein the liability of the said Bank
under this guarantee is restricted to
Rs.......... and this Guarantee shall
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come into force from the date hereof
and shall remain in full force and
effect till ........ Unless the written
demand or claim under this guarantee is
made by the Company with us on or
before........ all rights of the
company under this guarantee shall
cease to have any effect and we shall
relieved and discharged from our
liabilities hereunder.
5. The said contractor hereby covenants
with the company that the Company shall
retain a sum of Rs......... or such sum
as may be arrived at based on the
executed value of the work, as security
deposit for the fulfillment of the
contract to the satisfaction of the
Company.
IN WITNESS WHEREOF THE parties herein
have set their hands and seals the date
and year above written.
In consideration of the appellant
M/s.Western Coalfields Limited, (the company) having
agreed under the terms and conditions contained in
the letter dated 18.5.2007 issued in favour of the
contractor (M/s.Shree Sai Construction Company, the
respondent no.1) the deed of guarantee has been
executed by the Bank (Oriental Bank of Commerce, the
respondent no.2) for the fulfillment of the terms and
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conditions contained in the contract by the
contractor (the respondent no.1). The preamble of the
Bank Guarantee recites that the Bank (respondent
no.2) has undertaken and agreed to pay the Company
(M/s.Western Coalfields Limited), the amount
stipulated in each of the two Bank Guarantees on
demand stating that the amount claimed by it is due
and payable by the contractor for the reasons of
failure/negligence in performing the terms and
conditions contained in the contract by the
contractor (respondent no.1) and to unconditionally
pay the amount claimed by it on demand without any
demur.
22) From the contents of the Bank Guarantee it
is clear that the contract is already formed
containing the terms and conditions. Hence, the terms
of contract are extremely material and the same are
required to be looked into. The obligation of the
respondent no.2 Bank to make the payment of the
amount covered by the Bank Guarantees arises, only on
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the demand to be made in writing and this is apparent
from clause 5 under the Bank Guarantee, which speaks
about the written demand or claim under the Bank
Guarantee. The demand in writing must state exactly
the amount assessed as due and payable by the
respondent no.1 Company for the reason of
failure/negligence of the respondent no.1 Company in
performing certain specified terms and conditions
contained in the contract between the appellant and
the respondent no.1. If the demand is not in writing
stating the actual amount which is assessed and found
to be due and payable for the reason stated in the
Bank Guarantees, then there is no obligation to make
payment. Unless there is a failure/negligence in
performing the terms and conditions of contract, the
amount which becomes due and payable by the
respondent no.1 cannot be assessed and claimed.
Hence, it is a 'contingent contract' as defined under
Section 31 of the Contract Act and it becomes
enforceable only upon happening of the event
specified therein, as per Section 32 of the Contract
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Act.
23) The question is whether, in fact there is
such compliance of the conditions stipulated under
the Bank Guarantees in the present case. Undoubtedly,
it is by letter dated 17.2.2011, that there is a
demand made by the appellants to the respondent no.2
Bank for payment of the amount of Bank Guarantees
which has been impugned in the civil suit. The said
letter is relevant and the same is, therefore,
reproduced below
Ref No.NGP/WCL/Civil/6667/1106
Date 17.02.2011
To,
The Branch Manager
The Oriental Bank of Commerce,
“Gold Sukh”, Kasturba Chowk, Shree Ram
Market, Chandrapur442 401.
Sub : Encashment of Bank Guarantees.
Ref : A) BG NO.02020002908 dated
19.02.2008 for Rs.1,54,94,580/
and
B) BG No.02020002808
dated 19.02.2008 for
Rs.69,79,000/.
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Dear Sir,
Enclosed find herewith photo
copies of BG No.0202002808 dated
19.02.2008 for Rs.69,79,000/ and BG
No.0202002908 dated 19.02.2008 for
Rs.1,54,94,580/ both valid upto
19.11.2011 for encashment.
You are hereby requested to
send us an amount of Rs.2,24,73,580/
which is total amount of both the BG's
duly encashed through Demand Draft
drawn in favour of M/s.Western
Coalfields Limited payable at Nagpur.
On receipt of DD for the above
amount, the original Bank Guarantees
shall be returned to you.
Yours faithfully,
Sd/
17.2.11
General Manager (Civil Incharge
Copy to information to :
1. Director (Tech) P & P
2. Director (Fin)
Perusal of the contents clearly reflect that
there is no demand in writing as envisaged by the
Bank Guarantees in question. What is the exact amount
i.e. claimed by the appellant, which according to it,
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has become due and payable from the respondent no.1,
has not been stated. In fact, there is no assessment
of the amount which is said to have become due and
payable in terms of the Bank Guarantees. It is not
stated as to whether such amount has become due and
payable for the reasons of failure/negligence in
performing any of the specified terms and conditions
contained in the contract between the appellant and
the respondent no.1. The cause of action for seeking
enforcement of the obligation on the part of the
respondent no.2 Bank to make the payment of the
amount covered by the Bank Guarantees, has not at all
been disclosed. The claim for seeking enforcement is
also not in the manner prescribed under the contract
of Bank Guarantees. There is nothing to show that the
events specified for invocation of Bank Guarantees
have occurred. Hence, the invocation is not in
accordance with the terms and conditions prescribed,
the same is, therefore, bad and unenforceable. It is
not a case of mere reference to the terms of the
contract entered between the appellant and the
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respondent, but it is a case where the appellant
Company is required to process its claim by assessing
the amount due and payable by the respondent no.1 for
the reason of failure/negligence to perform the terms
and conditions contained in the contract, which forms
a condition precedent to seek enforcement of Bank
Guarantees. It is not a case of conferment of an
unfettered right to demand immediate payment upon the
appellant.
24) The requirement of unconditional payment of
the amount of Bank Guarantee without any demur, has
nothing to do with the compliance of the conditions
of Bank Guarantees and it only prohibits the
respondent no.2 Bank from raising any dispute as to
compliance or fulfillment of the terms and conditions
of the contract between the appellant and the
respondent no.1 Company. The respondent no.2 Bank
cannot insist for proof of failure or negligence of
respondent no.1 Company in performing the terms and
conditions contained in the contract. It is in this
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background that the Condition No.1 has been
incorporated in the Bank Guarantees agreeing, that
the appellant Company shall be the sole judge as to
whether the said contractor has failed/neglected in
performing any of the terms and conditions of the
said contract and the decision of the appellant
Company in this behalf shall be binding upon the
respondent no.2 Bank. Hence, on the basis of
condition no.1 in the Bank Guarantee it cannot be
urged that it is an unconditional Bank Guarantee and
confers an unfettered right upon the appellant to
invoke the Bank Guarantees and to demand immediate
payment.
25) Shri A.M.Gordey, the learned Senior Counsel
appearing for the appellant, has invited my attention
to the para7 of the written statement, which is
reproduced below
“ Para7) : The defendants submits that
the plaintiff only has carried out the
work to the extent of Rs.595.93 Lakhs
and the work to that extent of
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Rs.799.86 Lakhs is still incomplete
which has to be awarded to another
contractor and considering the
inflation the said cost is assessed at
Rs.1182.52 Lakhs approx and as such
the additional expenditure is arrived
at Rs.382.66 Lakhs which is legally
recoverable from the plaintiff and as
such to secure the amount from the
plaintiff, the Bank Guarantees are
invoked. It is worthwhile to submit
that the said figure is tentative and
is likely to increase manifold. The
defendants have also not calculated
the damage that may be caused due to
the delay in completion of the project
and if all the said assessments are
made, the amount recovered is nothing
but peanuts comparing to the size of
the work awarded to the plaintiff.”
It is urged that it is the amount of
Rs.382.66 Lacks, which has become due and payable by
the respondent no.1 for the reason of
failure/negligence in performing the terms and
conditions in the contract. Primafacie, it is not
possible to accept this argument for several reasons.
Firstly, this is not the demand in writing reflected
in the letter dated 17.2.2011 invoking the Bank
Guarantees which is already reproduced above.
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Secondly, it is an undisputed factual position, that
the invocation of the Bank Guarantees is not on the
ground that the respondent no.1 has failed to
complete 60% of work. On the contrary, specific stand
is that noncompletion of 60% of work is totally
irrelevant for the purposes of the controversy
involved in the case. Thirdly, the finding recorded
by the Trial Court about the failure of the
appellants to discharge their obligations in respect
of four items as are specified in para10 above, has
not been assailed along with the further finding that
the appellants and the State Government are unable to
remove the hindrances so as to enable the respondent
no.1 to complete the work. Fourthly, unless the
hindrances are removed by discharging the obligations
by the appellants and the State Government, it may
not be possible for any other contractor to complete
the remaining incomplete work to the extent of 60% of
work. Fifthly, the contract to complete the balance
60% of work is yet to be awarded to any other
contractor and lastly the amounts so assessed, is not
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for the reason of the alleged failure/negligence on
the part of the respondent no.1 in performing the
terms and conditions of the contract.
26) Shri A.M.Gordey, the learned Senior Counsel
appearing for the appellants and Shri J.P.Pendse, the
learned Counsel for the respondents have taken me
through the judgments relied upon by Shri A.M.Gordey,
the learned Senior Counsel, which are listed in
earlier paras and delivered by the Apex Court and by
this Court. In all these judgments, the finding is
recorded that the Bank Guarantees in question were
unconditional and in the light of such proof of fact,
that the Apex Court has laid down the principles for
grant of injunction in the matter of invocation of
the Bank Guarantees, which are contained in para14
of the decision in the case of Himadri Chemicals
Industries Limited Vs. Coal Tar Refining Co., (2007)
8 SCC 110, which is reproduced below
“Para14 : From the discussions made
hereinabove relating to the principles
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for grant or refusal to grant of
injunction to restrain enforcement of a
bank guarantee or a letter of credit,
we find that the following principles
should be noted in the matter of
injunction to restrain the encashment
of a bank guarantee or a letter of
credit:
(i) While dealing with an application
for injunction in the course of
commercial dealings, and when an
unconditional bank guarantee or letter
of credit is given or accepted, the
beneficiary is entitled to realise such
a bank guarantee or a letter of credit
in terms thereof irrespective of any
pending disputes relating to the terms
of the contract.
(ii) The bank giving such guarantee is
bound to honour it as per its terms
irrespective of any dispute raised by
its customer.
(iii) The courts should be slow in
granting an order of injunction to
restrain the realisation of a bank
guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter
of credit is an independent and a
separate contract and is absolute in
nature, the existence of any dispute
between the parties to the contract is
not a ground for issuing an order of
injunction to restrain enforcement of
bank guarantees or letters of credit.
(v) Fraud of an egregious nature which
would vitiate the very foundation of
such a bank guarantee or letter of
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credit and the beneficiary seeks to
take advantage of the situation.
(vi) Allowing encashment of an
unconditional bank guarantee or a
letter of credit would result in
irretrievable harm or injustice to one
of the parties concerned.”
There cannot be any dispute about the
proposition of law laid down by the Apex Court in the
aforesaid judgment, which follows several earlier
judgments of the Apex Court. The law of precedents is
well settled. A decision is an authority for what it
actually decides and not for what logically follows
from it. Every judgment must be read as applicable to
the particular of facts proved or assumed to be
proved and the exposition of law therein,
is governed or qualified or controlled by the facts,
which are held to be proved. The judgment is required
to be understood in the light of the facts of that
case and no more can be read into it, then what it
actually says. Once it is held in the facts of the
present case that it is a contingent contract of Bank
Guarantees, then the law down by the Apex Court in
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the judgments relied upon by Shri A.M.Gordey, the
learned Senior Counsel, ceases to apply.
27) The contention of Shri A.M.Gordey, the
learned Senior Counsel, is that the respondent no.1
is not competent to make any grievance about the non
fulfillment of the terms of the Bank Guarantees for
the reason that he is not a party to the contracts of
Bank Guarantees. According to him, it is only the
respondent no.2 Bank which can make a grievance about
nonfulfillment of the terms of the Bank Guarantees.
He submits that the respondent no.1 is neither a
person aggrieved nor has any locus standi to complain
about the violation of the terms of the Bank
Guarantees. The contention cannot be accepted. The
respondent no.1 is the principal debtor within the
meaning of Section 126 of the Contract Act. It is at
his instance that the conditional Bank Guarantees
have been furnished by the respondent no.2 Bank in
favour of the appellant creditor. It is the liability
of the respondent no.1 which is being discharged by
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the respondent no.2 Bank. Hence, the respondent no.1
has right to know and complain about the non
fulfillment of the conditions of the Bank Guarantees.
Merely because the respondent no.2 Bank has not
raised any objection about nonfulfillment of the
terms of the Bank Guarantees, that will not prevent
the respondent no.1 from raising any objection in
respect of it. Ultimately, the respondent no.2 would
obviously recover the amount that shall be paid to
the appellant, from the respondent no.1. Hence, the
respondent no.1 is competent and has locus to
challenge the invocation of the Bank Guarantees by
the appellants.
28) Now, coming to the contention of Shri
A.M.Gordey, the learned Senior Counsel, that there is
failure to comply with the conditions regarding
submission of valid Bank Guarantees of a
Nationalized/Scheduled Bank by way of
performance/additional performance security, it is
not in dispute that the respondent no.1 has submitted
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two fake Bank Guarantees of non existent Bank namely
M/s.Mahesh Merchant Bank Limited, Chandrapur, on
10.10.2007. The first Bank Guarantee of
Rs.69,79,000/ was by way of security for
performance of contract towards 5% of value of
awarded contract and the another was for
Rs.1,54,94,580/ towards additional performance
security deposit and retention money to be recovered
from the running bills. Undisputedly, these two Bank
Guarantees have been substituted by two fresh Bank
Guarantees of the same amount on 19.2.2009 issued by
the respondent no.2 Oriental Bank of Commerce, a
Nationalized Bank, which are valid upto 19.11.2011.
29) The claim of the respondent no.1 plaintiff
is that his Power of Attorney obtained fake Bank
Guarantees and submitted it to the appellant and as
soon as it was discovered, the respondent no.1 on his
own submitted fresh Bank Guarantees dated 19.2.2009
of the Nationalized Bank. The case of the appellant
is that the fact of submission of fake Bank
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Guarantees was discovered by the appellant. Keeping
aside such dispute at this stage, the fact remains
that the appellant has accepted the submission of
fresh Bank Guarantees, which are valid and operating
till 19.11.2011 and the penal interest of
Rs.16,85,220/ @ 18 % per annum on the total
amount of Bank Guarantees of Rs.2,24,73,580/ has
been recovered from the respondent no.1 for the
period five months from 10.10.2007 to 19.2.2008. The
termination of contract is by letter dated 16.9.2010
for the reason of furnishing fake Bank Guarantees of
the non existent Bank by the respondent no.1. Though
the discovery about the submission of fake Bank
Guarantees was on 19.2.2009 or may even be prior to
that, the termination is after lapse of 17 months.
The Bank Guarantees have not been invoked at the time
of termination of contract on 16.9.2010, but it is
after a lapse of five months on 17.2.2011. Thus,
primafacie it is a case of forgiveness and recovery
resulting into condonation of the violation of the
said term under the contract without resulting any
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financial loss or implications to the appellant.
30) The Trial Court has primafacie accepted the
case of the respondent no.1 plaintiff that the act of
submitting fake Bank Guarantees was done by the Power
of Attorney holder and as soon as it came to the
notice of the respondent no.1, he voluntarily
replaced the same with valid Bank Guarantees of a
Nationalized Bank i.e. the respondent no.2. The
finding is recorded that the extension of the period
of such Bank Guarantees has also been accepted by
the appellant and at this stage, it cannot be said
that the fake Bank Guarantees were furnished only
with a view to obtain the work. The Trial Court has
held that the appellants have covered the penal
interest on account of the submission of the Bank
Guarantees for a period of five months and the
criminal investigation pending against the respondent
no.1 will take its own course. No fault can be found
with such a view taken by the Trial Court.
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31) The entire conduct of the appellant and the
conspectus of facts depict that the invocation of the
Bank Guarantees is, primafacie not for the purpose
or the reason stated in the Bank Guarantees, but is
for some extraneous reasons, may be to cover up the
lapses on the part of the appellant in performing
their obligations. The contention of Shri J.P.Pendse,
the learned Counsel for the respondent no.1, that
the invocation of the Bank Guarantees could have been
only during the subsistence of contract or at the
most while terminating the contract on 16.9.2010,
sounds correct. Undisputedly, the invocation of the
Bank Guarantees is after lapse of five months from
the date of termination of contract. Primafacie in
my view, the invocation of the Bank Guarantees much
after the date of termination of contract, is an
after thought and not bonafide. The Trial Court has
recorded the finding that there is no fault on the
part of the appellant, in delay caused in completion
of the work and it is the appellants/defendant nos.1
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and 2 and the State Government, who were unable to
remove the hindrances as a result of which the
respondent no.1/plaintiff could not execute the work.
The Trial Court has held that in such a situation,
there is no question of recovery of any damages from
the security deposit in respect of which the Bank
Guarantees have been furnished and refusal to grant
an injunction would result in frustrating the
claim of the respondent no.1/plaintiff. In
the background of the facts of this case, I
do not find any fault with such a finding recorded
by the Trial Court.
32) Once it is held that the Bank Guarantees are
conditional or contingent and enforceable only upon
happening of certain events and that those events
have not yet happened, the Division Bench of the
Orissa High Court in its judgment in National
Aluminium Co's case cited supra, has held that the
violation of the terms of the guarantee can be
regarded as species of the same genus as fraud, which
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disentitles a beneficiary to enforce the Bank
Guarantees. Once it is held that the invocation of
the Bank Guarantees is not for the purposes or the
reasons mentioned in the Bank Guarantees, the refusal
to grant an injunction would result in causing an
irretrievable injury to the respondent no.1 as he
would be deprived of huge amount of Bank Guarantees
for the purposes of his business. Primafacie, it
would amount to an unjust enrichment of the
appellants/defendant nos.1 and 2. Hence, no fault can
be found with the order of injunction passed by the
Trial Court. However, it will be with a rider that
one month before the expiry of the validity period of
both the Bank Guarantees, the respondent no.1 shall
produce renewal of validity period of Bank
Guarantees, during the pendency of the suit. If such
renewal is not produced before the Trial Court, prior
to the period of 30 days of the expiry of the
validity period, the order of injunction granted by
the Trial Court and confirmed by this Court, shall
stand automatically vacated without further orders
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from Court and any payment, if any, made by the Bank
to the appellants/defendant nos.1 and 2 shall be
subject to the decision in the suit. In such
eventuality if the ultimate decision in the suit goes
in favour of the respondent no.1/plaintiff, then
there shall be an order of refund with interest @ 6%
per annum from the date of receipt of payment by the
appellants/defendant nos.1 and 2.
O R D E R
For the reasons stated above, the appeal
is partly allowed. The order of injunction
passed on 21.2.2011 and confirmed on 5.4.2011, by
the Third Joint Civil Judge, Senior Division, Nagpur,
in Special Civil Suit No.236 of 2011 is maintained
subject to the condition that during the pendency of
the civil suit, the respondent no.1 shall renew
the Bank Guarantees in question, 30 days before
the expiry of its validity period and failure to
produce, the extension/renewal of validity
period shall result in automatically vacating
the order of injunction passed by the Trial
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Court, without reference to the Court. No order
as to costs.
JUDGE
BrWankhede
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1
IN THE HIGH COURT OF JUDICATURE
AT BOMBAY, NAGPUR BENCH, NAGPUR.
APPEAL AGAINST ORDER NO.85 OF 2011
1) Western Coalfields Limited,
Through it's CMD,
A Govt. Of India Undertaking,
having it's Registered
Office at Coal Estate,
Civil Lines, Nagpur01.
2) Western Coalfields Limited,
through it's General Manager
(Civil) Coal Estate,
Civil Lines, Nagpur01. .......... Appellants.
Original Defendant Nos.1 & 2
VERSUS
1) Rajesh s/o Nandlal Biyani,
Proprietor of M/s.Shree
Sai Construction Company,
A Registered Government
Contractor and Civil
Engineers, having it's
Head Office at
“Gokuldham” D.G.Tukum,
Tadoba Road,
Chandrapur442 401 (MS). .......... Respondent.
Original respondent No.1.
2) Oriental Bank of Commerce,
(Govt.of India Undertaking)
having it's Branch at
“Gold Sukh” Kasturba Chowk,
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Chandrapur,
Through it's Manager. .......... Respondents.
Original Defendant Nos.3.
Shri A.M.Gordey, Senior Advocate assisted by
Shri Deepak Gupta, Advocate for the
appellants/Original Defendant Nos.1 & 2.
Shri J.P.Pendse, Counsel for the respondent
no.1 original plaintiff.
CORAM : R. K.DESHPANDE, J.
DATE OF RESERVING THE JUDGMENT : 25/08/2011
DATE OF PRONOUNCING THE JUDGMENT : 06/09/2011.
JUDGMENT.
01) This appeal challenges the order 5.4.2011
passed by the Third Joint Civil Judge, Senior
Division, Nagpur, allowing the application Exh.5 for
grant of temporary injunction, restraining the
appellants from invoking the Bank Guarantees
furnished on 19.2.2008 filed in Special Civil Suit
No.236 of 2011 by the respondent no.1/plaintiff. The
appellants are the defendant nos.1 and 2, the
respondent no.1 is the plaintiff and the respondent
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no.2 is the Oriental Bank of Commerce and the
original defendant no.3.
02) The facts not in dispute are stated below
On 18.5.2007, the appellants/original
defendant nos.1 and 2 awarded the contract for the
work of diversion of Motaghat Nallah (PhaseII and
PhaseIII) at Padmapur Open Cast Mine of Chandrapur
area, to the respondent no.1/plaintiff. An Agreement
No.08/20072008 was entered into between the parties.
The total cost of contract was of Rs.13.95 Crores.
The period of completion of work prescribed under the
contract was from 23.7.2007 to 28.10.2008. On
10.10.2007, two Bank Guarantees of M/s.Mahesh
Merchant Bank Limited, Chandrapur, said to be a
Scheduled Bank, were furnished by way of performance
guarantees, by the plaintiff. During the progress of
work, the respondent no.1 substituted the aforesaid
two Bank Guarantees by two separate Bank Guarantees
dated 19.2.2008 of the Nationalized Bank i.e.
Oriental Bank of Commerce (the respondent no.2
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herein). One Bank Guarantee was for Rs.69,79,000/
whereas other was for Rs.1,54,94,580/. Thus, it was
for total amount of Rs.2,24,73,580/ that the two
guarantees were furnished and their validity is upto
19.11.2011. The respondent no.1 completed 40% of work
to the tune of Rs.5,95,96,000/ upto 28.10.2008 and
the balance 60% work, costing Rs.799.86 Lacs,
remained incomplete.
03) On 5.3.2009, the appellants issued a show
cause notice to the respondent no.1 asking as to why
the penal interest should not be recovered on the
amount of Rs.2,24,73,580/ for a period of five
months during which the contract was continued on the
basis of the forged and fake Bank Guarantees of non
existent bank i.e. M/s.Mahesh Merchant Bank Limited.
The respondent no.1 was called upon to deposit an
amount of Rs.16,85,528/ as penal interest @
18 % per annum, on the said amount for a period
of five months. It is not disputed that this amount
of penal interest has been recovered from the
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respondent no.1. By communication dated 16.9.2010,
the appellants terminated the contract for the reason
of furnishing of fake Bank Guarantees of non existent
bank by the respondent no.1. Thereafter, by
communication dated 17.2.2011, addressed to the
Oriental Bank of Commerce, the appellants invoked two
Bank Guarantees of total Rs.2,24,73,580/.
04) On 21.2.2011, the respondent no.1/plaintiff
filed Special Civil Suit No.236 of 2011 for a
declaration that the invocation of Bank Guarantees by
the appellants/defendant nos.1 and 2, was illegal and
for further declaration that the communication dated
17.2.2011 is not a valid demand. Further, the relief
of injunction is claimed, restraining the defendants
from invoking the Bank Guarantees and acting upon the
communication dated 17.2.2011. An application (Exh.5)
was also filed for grant of temporary injunction
under Order 39 Rule 1 and 2 read with Section 151 of
the Code of Civil Procedure. The Trial Court granted
exparte injunction on 21.2.2011, restraining the
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defendants from encashing the Bank Guarantees pending
the decision of the application at Exh.5. The plaint
was thereafter amended and in addition to the
existing reliefs, a decree for an amount of
Rs.5,16,69,618/ was claimed along with the damages
of Rs.1.00 Crore, against the appellants.
05) An exparte injunction granted by the Trial
Court on 21.2.2011, was as under
ORDER
1. Defendants No.1 and 2 are hereby
restrained from taking step from
encashing bank guarantee
No.OBC/CHP/BG/02020002808 dtd.19.2.08
for Rs.69,79,000/ valid upto 19.11.11
and bank guarantee
No.OBC/CHP/BG/02020002908 dtd.19.2.08
for Rs.1, 94,580/ valid upto 19.11.11
towards additional performance security
till their appearance and filing reply
to the application at exh.5.
2. Defendant No.3 and its employee etc.
are hereby restrained from making any
payment to defendant Nos.1 and 2 as per
above described bank guarantee till its
appearance and filing reply to the
application exh.5.
2. Issue notices to defendants No.1 to
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3 as to why above exparte adinterim
injunction should not be confirmed till
the decision of suit on P.F. r/o
8.3.11.
3. Plaintiff is directed to comply
mandatory provision of O.39 R.3(a)(b)
of Civil Procedure Code within
stipulated period of 24 hours.
4. Steno copy be provided to the party.
Nagpur (S.S.Deodhar)
rd
Date : 21.2.2011 3 Jt.C.J.Sr.Dn., Nagpur.
The Trial Court by an order impugned passed
on 5.4.2011, confirmed the exparte injunction granted
and continued the same, pending the decision of the
suit. The appellants are restrained from invoking the
Bank Guarantees and the defendant no.3 (respondent
no.2 Bank) is restrained from making payment of Bank
Guarantees. The Trial Court has held that the copies
of two Bank Guarantees of Nationalized Bank, viz; the
Oriental Bank of Commerce, issued on 19.2.2008, are
placed on record and the same are valid upto
19.11.2011. Out of these two Bank Guarantees, one is
for an amount of Rs.1,54,94,580/, which was valid
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upto 19.11.2011 and the other is for an amount of
Rs.69,79,000/, which was valid upto Rs.19.5.2009.
The letters dated 27.4.2009 and 28.4.2009, issued by
the appellants/defendant nos.1 and 2 show that the
Bank Guarantees are accepted and the respondent no.1
has extended its validity upto 19.11.2011.
06) The finding is recorded by the Trial Court
that the invocation was on the ground of submission
of fake Bank Guarantees of non existent Bank and not
on the ground of delay in completion of the work. It
is held that the case of the plaintiff is that the
said act was done by his Power of Attorney holder and
when the plaintiff came to know that the said Bank
Guarantees are not in order, he voluntarily replaced
the same and submitted the fresh Bank Guarantees
issued by the Oriental Bank of Commerce (the
respondent no.2), a Nationalized Bank, which are
accepted by the appellants along with the extensions
of their validity period. It has further been held
that at this stage, it cannot be said that the fake
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Bank Guarantees were furnished only with a view to
obtain the work. The appellants have recovered the
penal interest on account of submission of fake Bank
Guarantees for a period of five months and criminal
investigation will take its own course.
07) The Trial Court has further held that the
appellants/defendant nos.1 and 2 are required to show
that they are entitled to recover the security amount
from the respondent no.1/plaintiff because of the
failure to execute the contract or negligence on the
part of the plaintiffs in executing the same,
however, no such case has been made out. The Trial
Court has recorded a finding that the respondent
no.1/plaintiff has primafacie shown that there is no
fault on his part, in delay caused in completion of
the work and it is the appellants/defendant nos.1 and
2 and the State Government, who were unable to remove
the hindrances, as a result of which the respondent
no.1/plaintiff could not execute the work. The Trial
Court has, therefore, held that there is no question
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of recovery of any damages from the security deposit
in respect of which the Bank Guarantees were provided
and hence, the refusal to grant an injunction would
result in frustrating the claim of the plaintiffs.
Hence, the order has been passed.
08) From the pleadings of the parties, the
finding recorded by the Trial Court and the arguments
advanced before this Court, the undisputed factual
position needs to be culled out. The respondent no.1
has completed 40% of work to the tune of
Rs.5,95,96,000/ upto 28.10.2008. The invocation of
the Bank Guarantees in question is not on the ground
that the respondent no.1 has failed to complete 60%
of work, costing of Rs.799.86 Lacs, upto 28.10.2008.
It is the specific stand of the appellants in their
written statement that noncompletion of balance 60%
of work by the respondent no.1 upto 28.10.2008, is
totally irrelevant for the purposes of the
controversy involved in the present case. The Bank
Guarantees have been invoked only for the reason that
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the respondent no.1 has submitted fake Bank
Guarantees for total amount of Rs.2,24,73,580/ from
the non existent of M/s.Mahesh Merchant Bank Limited,
Chandrapur.
09) It is also not in dispute that on account of
loss of interest for submission of fake Bank
Guarantees on 10.10.2007 to 19.10.2008 i.e. for a
period of five months, the appellants have recovered
the amount of penal interest of Rs.16,85,220/ @ of
18% per annum on total amount of Bank
Guarantees Rs.2,24,73,580/. It is also not in
dispute that the offences are registered against the
respondent no.1 and others under Section 420, 468,
469, 470, 471 read with Section 34 of the Indian
Penal Code and the prosecution is in progress.
10) The Trial Court has recorded the finding
that on the basis of the report of the Committee
appointed by the appellants for removal of hindrances
and the finding is recorded about the failure of the
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appellants to discharge their obligations in respect
of (i) the forest land clearance for execution of the
work, (ii) the problems of villages of Ketadi and
Mashala have not been resolved, (iii) the P.W.D.
State Highway Road Bridge of Chandrapur Tadoba Road,
Near Padmapur Village is not completed, (iv) the
M.S.E.B. Bridge near Ketadi Village and also pipeline
works (Qty.81000 m3 approx)is not yet completed. It
has further recorded the finding that the Committee
appointed by the appellants has reported that it is
unlikely that the State Government authorities will
resolve the issue and allow to restart the work in
near future. It is also the finding that the
appellants and the State Government are unable to
remove the hindrances. All these findings recorded by
the Trial Court, have not been assailed in this
appeal.
11) Shri A.M.Gordey, the learned Senior Counsel,
has invited my attention to the preamble of the Bank
Guarantees to urge that it is unconditional and
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payable without any demur by the respondent no.2
Bank. He has also invited my attention to the
Condition No.1 under the Bank Guarantee, which states
that the Bank has agreed that the appellant Company
shall be the sole judge as to whether the respondent
no.1 has failed/neglected in performing any of the
terms and conditions of the said contract and the
decision of the appellant Company is made final and
binding upon the parties. He further submits that the
appellant, in whose favour the Bank Guarantees are
furnished by the respondent no.2 Bank, cannot be
prevented by way of an injunction, to enforce the
Bank Guarantees on the pretext that the conditions of
the agreement entered between the appellant and the
respondent no.1 have not been fulfilled. He submits
that the respondent no.1 Company cannot be the
aggrieved person having any locus to raise any
dispute in respect of nonfulfillment of the terms of
the Bank Guarantees. He further submits that any
dispute in respect of failure/negligence in
performing the terms and conditions of contract
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between the appellant beneficiary and the respondent
no.1 Company is immaterial and of no consequence.
12) In support of the proposition, Shri
A.M.Gordey, the learned Senior Counsel, has relied
upon the following decisions
(i)Himadri Chemicals Industries Limited Vs.
Coal Tar Refining Co., (2007) 8 SCC 110.
(ii)Vinitec Electronics Private Ltd. Vs. HCL
Infosystems Ltd., (2008) 1 SCC 544.
(iii)Mahatma Gandhi Sahakari Sakhar Karkhana
Vs. National Heavy Engineering Coop. Ltd.,
2007 DGLS (soft) 750 : 2007(6) S.C.C.470.
(iv)Mak Impex Chemicals P.Ltd. and another
Vs. Union of India and others, AIR 2003
Bombay 88.
(v)Maytas Infra Limited Vs. Utility
Energytech & Engineers Pvt.Ltd. & anr., 2009
B.C.I.133.
(vi)and the decision in Appeal Against Order
No.6/2011 delivered by me on 26.7.2011 in
the matter of Coal India Ltd. and another
Vs. Chintamani Agrotech (India) Ltd. and
others,
13) Inviting my attention to the letter dated
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18.5.2011 issued by the appellant awarding the
contract to the respondent no.1, Shri A.M.Gordey, the
learned Senior Counsel, has urged that the specific
condition in the contract was that the respondent
no.1 shall submit the valid Bank Guarantees of a
Nationalized/Scheduled Bank by way of
performance/additional performance security. The
respondent no.1 has submitted the fake Bank
Guarantees of non existent Bank and thus, it was the
violation of the terms and conditions of the contract
for which, the Bank Guarantees were invoked. He
further submits that the respondent no.1 has carried
out the work only to the extent of Rs.595.93 Lacs,
which is the 40% of the total work and the balance
60% of the work costing of Rs.799.86 Lacs remained
incomplete. He further submits that incomplete work
is to be awarded to the another contractor and
considering the inflation, the said cost is assessed
at Rs.1182.52 approximately and as such an additional
expenditure of Rs.382.66 Lacs, is legally recoverable
from the respondent no.1. He submits that it is thus
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a failure/negligence in performing the terms and
conditions of the contract by the respondent no.1,
that the amount as assessed has become recoverable
for which the Bank Guarantees have been invoked.
14) The contention of Shri J.P.Pendse, the
learned Counsel for the respondent no.1, is that the
preamble of the Bank Guarantees clearly indicate that
the contract of the Bank Guarantees in question, is a
conditional and contingent contract depending upon
the fulfillment of the conditions specified therein.
According to him, there should be a demand in writing
stating that there is a specified amount which is due
and payable by the respondent no.1 for the reason of
the failure/negligence in performing the terms and
conditions contained in the contract by the
respondent no.1. Referring to the letter dated
17.2.2011, impugned in the Special Civil Suit No.236
of 2011, he has urged that there is nothing on record
to show that any amount is due and payable by the
respondent no.1 to the appellant for the reason of
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failure/negligence in performing the terms and
conditions contained in the contract. He further
submits that there is no demand as contemplated in
the preamble of the said agreement, made in the
impugned communication dated 17.2.2011. According to
him, the terms of the contract of Bank Guarantees
have to be strictly construed and the compliance in
respect thereof needs to be seen. He submits that in
the absence of compliance with the terms of the Bank
Guarantees, the invocation causes an irretrievable
injury to the respondent no.1. He further submits
that the violation of the terms of the guarantee has
to be regarded as species of the same genus as fraud,
which disentitles a beneficiary to enforce the Bank
Guarantee.
15) In support of the plea that the Bank
Guarantees are conditional, Shri J.P.Pendse, the
learned Counsel for the respondent no.1, has relied
upon the decisions in the cases of
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(a) Hindustan Construction Co. Ltd. Vs.
State of Bihar and others with State of
Bihar and others Vs. Hindustan Construction
Co. Ltd. and others, reported in (1999) 8
SCC 436 .
(b) Vinitec Electronics Private Ltd. Vs. HCL
Infosystems Ltd., (2008) 1 SCC 544 .
(c) National Aluminium Co. Ltd., Vs.
M/s.R.S.Builders (India) Ltd. and others,
.
reported in AIR 1991 Orissa 314
16) In the decision of the Apex Court in
Hindustan Construction Co. Ltd. Vs. State of Bihar
and others , the order passed by the Single Judge of
this Court granting injunction restraining the
defendants from invoking the Bank Guarantees was
restored by modifying the decision of the Division
Bench of this Court vacating the injunction granted
by the learned Single Judge in respect of the
performance guarantee. Paras9, 10 and 14 of the said
judgment are relevant and the same are reproduced
below
Para9 : “What is important, therefore,
is that the bank guarantee should be in
unequivocal terms, unconditional and
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recite that the amount would be paid
without demur or objection and
irrespective of any dispute that might
have cropped up or might have been
pending between the beneficiary under
the bank guarantee or the person on
whose behalf the guarantee was
furnished. The terms of the bank
guarantee are, therefore, extremely
material. Since the bank guarantee
represents an independent contract
between the bank and the beneficiary,
both the parties would be bound by the
terms thereof. The invocation,
therefore, will have to be in
accordance with the terms of the bank
guarantee, or else, the invocation
itself would be bad.”
Para10 : “In the instant case, the
whole matter can be disposed of purely
on the basis of the terms of the bank
guarantee.”
Para14 : “This condition clearly
refers to the original contract between
HCCL and the defendants and postulates
that if the obligations, expressed in
the contract, are not fulfilled by HCCL
giving to the defendants the right to
claim recovery of the whole or part of
the “advance mobilisation loan”, then
the Bank would pay the amount due under
the guarantee to the Executive
Engineer. By referring specifically to
clause 9, the Bank has qualified its
liability to pay the amount covered by
the guarantee relating to “advance
mobilisation loan” to the Executive
Engineer only if the obligations under
the contract were not fulfilled by HCCL
or HCCL has misappropriated any portion
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of the “advance mobilisation loan”. It
is in these circumstances that the
aforesaid clause would operate and the
whole of the amount covered by the
“mobilisation advance” would become
payable on demand. The bank guarantee
thus could be invoked only in the
circumstances referred to in clause 9
whereunder the amount would become
payable only if the obligations are not
fulfilled or there is misappropriation.
That being so, the bank guarantee could
not be said to be unconditional or
unequivocal in terms so that the
defendants could be said to have had an
unfettered right to invoke that
guarantee and demand immediate payment
thereof from the Bank. This aspect of
the matter was wholly ignored by the
High Court and it unnecessarily
interfered with the order of
injunction, granted by the Single
Judge, by which the defendants were
restrained from invoking the bank
guarantee.”
It has been held that in order to ascertain
whether the Bank Guarantees are conditional or
unconditional, the terms of the Bank Guarantees are
extremely material. The Bank Guarantees
represent an independent contract between the Bank
and the beneficiary, and the parties would be bound
by the terms thereof. The invocation therefore, will
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have to be in accordance with the terms of the Bank
Guarantees or else the invocation itself would be
bad. The matter has to be disposed of purely on the
basis of the terms of the Bank Guarantees. If the
Bank Guarantees furnished were conditional then the
defendants have no unfettered right to invoke the
Bank Guarantees and to the demand immediate payment
thereof from the Bank.
17) In the decision of Vinitec Electronics
Private Ltd. Vs. HCL Infosystems Ltd. , the question
considered was whether the Bank Guarantees furnished
were unconditional and irrevocable. Paras16 and 22
of the said judgment are relevant and hence, the same
are reproduced below
Para16 : “Shorn of all the
embellishments, the question that
really arises for our consideration is
as to whether bank guarantee furnished
is an unconditional and irrevocable one
or a conditional one? It may not be
necessary to refer in detail the terms
and conditions of the contract except
to analyse the original clause of the
bank guarantee dated 10.8.2001 and as
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well as the subsequent amendment of the
relevant clause in the said bank
guarantee on 20.8.2001.”
: “In the present case the
Para22
amended clause does not refer to any of
the clauses specifically as such but on
the other hand the Bank had undertaken
responsibility to pay any sum or sums
within the guaranteed limit upon
receipt of written demand from the
Company. The operative portion of the
bank guarantee furnished by the Bank
does not refer to any of the conditions
for payment under the bank guarantee.
It is true that the bank guarantee
furnished makes a reference to the
principal agreement between the parties
in its preamble. Mere fact that the
bank guarantee refers to the principal
agreement in the preamble of the deed
of guarantee does not make the
guarantee furnished by the Bank to be a
conditional one unless any particular
clause of the agreement has been made
part of the deed of guarantee.“
It is thus reiterated that the clauses in
the Bank Guarantee are relevant and material for
determination as to whether the Bank Guarantees
furnished are unconditional, irrevocable one or
conditional one. On the interpretation of clauses, it
has to be decided as to whether the Bank Guarantees
furnished are unconditional or conditional. However,
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a word of caution is that the mere fact that the Bank
Guarantee refers to the principal agreement, does not
make the Bank Guarantee to be conditional one, unless
any particular clause of the agreement has been made
part of the deed of guarantee.
18) The Division Bench of the Orissa High Court
has also dealt with the question of conditional Bank
Guarantee in its judgment in National Aluminium Co's
case cited supra, and the relevant portion of the
paras6, 7, 8 and 11 of the said judgment delivered
by Hon'ble Shri B.L.Hansaria, C.J., (as he then was)
are reproduced below
Para6 : “If the bank guarantee be
conditional, the same becomes
enforceable upon the fulfilment of the
condition stipulated and in such a case
the beneficiary must allege in the
demand that the condition has been
fulfilled. The latest decision of the
Calcutta High Court is the one rendered
in National Thermal Power Corporation
Ltd. vs. Hind Galvanizing and
Engineering Co. Ltd., AIR 1990 Cal 421,
in which the Bench has stated that as
long as the demand of the beneficiary
is in terms of the bank guarantee, it
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is not a defence that under the parent
contract the beneficiary of the
guarantee is not entitled to the amount
from the bank.“
: “In Synthetic Foams Ltd. vs
Para7
Simplex concrete Piles (India) Pvt.
Ltd., AIR 1988 Delhi, 207, a learned
single Judge has stated that
misrepresentation, suppression of
material facts and violation of the
terms of the guarantee can be regarded
as species of the same genus as fraud
which would disentitle a beneficiary to
enforce the bank guarantee. It had been
earlier stated in M/s.B.L.R.Mohan v.
Punjab State Cooperative Supply &
Marketing Federation Ltd., AIR 1982
Delhi 357, by another learned single
Judge that the demand under the bank
guarantee must be in strict accord with
the terms of the guarantee.”
Para8 : “We may also refer to a recent
decision of the Punjab & Haryana High
Court in National Project Construction
Corporation Ltd. v. M/s.Sadhu and
Company, AIR 1990 P & H 300, tht the
demand under the bank guarantee has to
be in accordance with the eventualities
mentioned in the deed of guarantee, and
it is conclusive as regards the amount
due and payable by the bank.”
Para11 : “But then, the bank
guarantees at hand cannot be regarded
as absolutely unconditional inasmuch as
the payment under guarantees is
dependent upon the contractor
committing default in performing any of
the terms and conditions of the
contract or in the payment of any money
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due to the owner or in case the amount
at the specified rates cannot be
deducted from the running bills of the
contractor by the owner towards the
payment of Mobilisation Advance. As to
the fulfilment of those conditions, we
would state that the statement of the
beneficiary would be taken at its face
value unless the contractor be in a
position to establish that the stand of
the beneficiary is actuated by fraud,
misrepresentation, deliberate
suppression of material facts or the
like which would give rise to special
equities in favour of the contractor.
So, in the absence of a case of fraud,
misrepresentation, deliberate
suppression of material facts or the
like, to establish which a heavy onus
lies on the contractor, a bank
guarantee like the one at hand has to
be honoured by the bank and the
beneficiary cannot be restrained from
enforcement. Further, decision about
fraud, etc. has to be arrived at by the
court approached by the contractor to
restrain the beneficiary from enforcing
the bank guarantee. The court cannot
await for this purpose the finding of
the arbitrator.”
It has been held that if the Bank Guarantees
be conditional, the same become enforceable upon
fulfillment of the conditions stipulated and in such
a case, the beneficiary must allege in the demand,
that the conditions have been fulfilled. The
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violation of the terms of guarantee can be regarded
as the species of the same genus as fraud, which
disentitles a beneficiary to enforce the Bank
Guarantees. The demand for Bank Guarantees must be in
strict accord with the terms of the Bank Guarantees
and it has to be in accordance with the eventualities
mentioned in the deed of guarantee.
19) In the context of the aforesaid position of
law laid down by the Apex Court, Section 126 of the
Indian Contract Act, 1872, regarding contract of
guarantee needs to be seen. The said provision of
Section 126 is, therefore, reproduced below
Section 126 . 'Contract of guarantee',
'surety', 'principal debtor' and
A 'contract of guarantee'
'creditor' “
is a contract to perform the promise,
or discharge the liability, of a third
person in case of his default. The
person who gives the guarantee is
called the 'surety'; the person in
respect of whose default the guarantee
is given is called the 'principal
debtor', and the person to whom the
guarantee is given is called the
'creditor'. A guarantee may be either
oral or written.”
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A contract of guarantee is a contract to
perform the promise or discharge the liability of a
third person in case of his default. The person who
gives the guarantee is called 'surety'; the person in
respect of whose default the guarantee is given is
called the 'principal debtor', and the person to whom
the guarantee is given is called the 'creditor'.
20) Section 31 of the Indian Contract Act, 1872,
defines the contingent contract and the same is
reproduced below
Chapter III : OF CONTINGENT CONTRACTS
“Section 31 . “Contingent contract”
defined. A “contingent contract” is a
contract to do or not to do something,
if some event, collateral to such
contract, does or does not happen.”
Section 32 of the said Act, deals with the
enforcement of the contracts contingent on an event
happening, and the same is also relevant hence,
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reproduced below
“Section 32. Enforcement of contracts
contingent on an event happening.
Contingent contracts to do or not to do
anything if an uncertain future event
happens, cannot be enforced by law
unless and until that event has
happened.
If the event becomes
impossible, such contracts become
void.”
A contract of guarantee is an independent
contract between the Bank and the beneficiary thereof
and if it is a contract, which permits the creditor
to invoke the Bank Guarantee upon happening of an
uncertain future event, then it becomes a 'contingent
contract' as defined under Section 31 and it cannot
be enforced by law unless and until that event has
happened, in view of the provision of Section 32.
Till happening of an event, it merely remains a
contract which is unenforceable. In case of such
contingent contract, the beneficiary has no
unfettered right to invoke the Bank Guarantees and to
demand immediate payment. The terms of such contract
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will have to be strictly construed and if it
prescribes the manner in which performance is to be
claimed, it will have to be seen as to whether the
performance is claimed, in the manner so prescribed.
If the invocation is not in accordance with the terms
and the manner prescribed, it would be bad. The
violation of the terms can be regarded as the species
of the same genus as fraud which disentitles a
beneficiary to invoke the Bank Guarantees.
21) In the light of the aforesaid position of
law, it is required to be found out from the terms of
the Bank Guarantees in question as to whether it is a
contingent or conditional contract or an
unconditional or irrevocable contract. A Proforma of
Bank Guarantee in lieu of security deposit relied
upon by both the parties in support of their rival
contentions contained under an Agreement No.08/2007
2008, is reproduced below
On Stamp of Rs.100
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PROFORMA OF BANK GUARANTEE IN LIEU OF
SECURITY DEPOSIT.
M/s.Western Coalfields Limited,
Coal Estate, Civil Lines, Nagpur.
Dear Sir,
1. In consideration of M/s.Western
Coalfields Limited, having its
Registered Office at Nagpur
(hereinafter called “The Company” which
expression shall unless repugnant to
the subject or context includes its
successors and assigns) having agreed
under the terms and conditions
contained in letter no..........
dated ....... Issued in favour of
M/s................ for ........
(hereinafter referred to as 'the
contract' to accept the Deed of
guarantee as herein provided for
Rs...... from the Schedule/Nationalized
Bank (whose branches are scheduled at
Nagpur) in lieu of security deposit to
made by M/s............... (here in
after called “the Contractor”) or in
lieu of deduction to be made from the
contractor's bill for due fulfillment
of the terms and conditions contained
in the said contract by the contractor,
we the ........... Bank (hereinafter
referred to as the said Bank) having
its Registered Office at ......... do
hereby undertake and agreed to pay the
company to the extent of Rs........ On
demand stating that the amount claimed
by the company is due and payable by
the contractor for the reasons of
failure/negligence in performing the
terms and conditions contained in the
contract by the buyer and to
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unconditionally pay the amount claimed
by the company on demand without any
demur to the extent aforesaid.
1. We .......... Bank agree that the
company shall be the sole judge as to
whether the said contractor has
failed/neglected in performing any of
the terms and conditions of the said
contract and the decision of the
company in this behalf shall be final
and binding on us.
2. We the said Bank further agree that
the Guarantee herein contained shall
remain in full force and effect
upto ....... And any claim received
after the said date shall in no case
bind the Bank.
3. The Company shall have the fullest
liberty without affecting in any way
the liability of the Bank under this
guarantee or indemnity from time to
time vary any of the terms and
conditions of the said contract or to
extend the time of performance by the
said contractor or to postpone any time
and from time to time any of the powers
exercisable by it against the said
contractor and either to enforce or to
forbear from enforcing nay of the terms
and conditions governing the said
contract or securities available to the
company and the said Bank shall not be
released from its liability under these
presents.
5. Notwithstanding anything contained
herein the liability of the said Bank
under this guarantee is restricted to
Rs.......... and this Guarantee shall
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come into force from the date hereof
and shall remain in full force and
effect till ........ Unless the written
demand or claim under this guarantee is
made by the Company with us on or
before........ all rights of the
company under this guarantee shall
cease to have any effect and we shall
relieved and discharged from our
liabilities hereunder.
5. The said contractor hereby covenants
with the company that the Company shall
retain a sum of Rs......... or such sum
as may be arrived at based on the
executed value of the work, as security
deposit for the fulfillment of the
contract to the satisfaction of the
Company.
IN WITNESS WHEREOF THE parties herein
have set their hands and seals the date
and year above written.
In consideration of the appellant
M/s.Western Coalfields Limited, (the company) having
agreed under the terms and conditions contained in
the letter dated 18.5.2007 issued in favour of the
contractor (M/s.Shree Sai Construction Company, the
respondent no.1) the deed of guarantee has been
executed by the Bank (Oriental Bank of Commerce, the
respondent no.2) for the fulfillment of the terms and
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conditions contained in the contract by the
contractor (the respondent no.1). The preamble of the
Bank Guarantee recites that the Bank (respondent
no.2) has undertaken and agreed to pay the Company
(M/s.Western Coalfields Limited), the amount
stipulated in each of the two Bank Guarantees on
demand stating that the amount claimed by it is due
and payable by the contractor for the reasons of
failure/negligence in performing the terms and
conditions contained in the contract by the
contractor (respondent no.1) and to unconditionally
pay the amount claimed by it on demand without any
demur.
22) From the contents of the Bank Guarantee it
is clear that the contract is already formed
containing the terms and conditions. Hence, the terms
of contract are extremely material and the same are
required to be looked into. The obligation of the
respondent no.2 Bank to make the payment of the
amount covered by the Bank Guarantees arises, only on
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the demand to be made in writing and this is apparent
from clause 5 under the Bank Guarantee, which speaks
about the written demand or claim under the Bank
Guarantee. The demand in writing must state exactly
the amount assessed as due and payable by the
respondent no.1 Company for the reason of
failure/negligence of the respondent no.1 Company in
performing certain specified terms and conditions
contained in the contract between the appellant and
the respondent no.1. If the demand is not in writing
stating the actual amount which is assessed and found
to be due and payable for the reason stated in the
Bank Guarantees, then there is no obligation to make
payment. Unless there is a failure/negligence in
performing the terms and conditions of contract, the
amount which becomes due and payable by the
respondent no.1 cannot be assessed and claimed.
Hence, it is a 'contingent contract' as defined under
Section 31 of the Contract Act and it becomes
enforceable only upon happening of the event
specified therein, as per Section 32 of the Contract
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Act.
23) The question is whether, in fact there is
such compliance of the conditions stipulated under
the Bank Guarantees in the present case. Undoubtedly,
it is by letter dated 17.2.2011, that there is a
demand made by the appellants to the respondent no.2
Bank for payment of the amount of Bank Guarantees
which has been impugned in the civil suit. The said
letter is relevant and the same is, therefore,
reproduced below
Ref No.NGP/WCL/Civil/6667/1106
Date 17.02.2011
To,
The Branch Manager
The Oriental Bank of Commerce,
“Gold Sukh”, Kasturba Chowk, Shree Ram
Market, Chandrapur442 401.
Sub : Encashment of Bank Guarantees.
Ref : A) BG NO.02020002908 dated
19.02.2008 for Rs.1,54,94,580/
and
B) BG No.02020002808
dated 19.02.2008 for
Rs.69,79,000/.
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Dear Sir,
Enclosed find herewith photo
copies of BG No.0202002808 dated
19.02.2008 for Rs.69,79,000/ and BG
No.0202002908 dated 19.02.2008 for
Rs.1,54,94,580/ both valid upto
19.11.2011 for encashment.
You are hereby requested to
send us an amount of Rs.2,24,73,580/
which is total amount of both the BG's
duly encashed through Demand Draft
drawn in favour of M/s.Western
Coalfields Limited payable at Nagpur.
On receipt of DD for the above
amount, the original Bank Guarantees
shall be returned to you.
Yours faithfully,
Sd/
17.2.11
General Manager (Civil Incharge
Copy to information to :
1. Director (Tech) P & P
2. Director (Fin)
Perusal of the contents clearly reflect that
there is no demand in writing as envisaged by the
Bank Guarantees in question. What is the exact amount
i.e. claimed by the appellant, which according to it,
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has become due and payable from the respondent no.1,
has not been stated. In fact, there is no assessment
of the amount which is said to have become due and
payable in terms of the Bank Guarantees. It is not
stated as to whether such amount has become due and
payable for the reasons of failure/negligence in
performing any of the specified terms and conditions
contained in the contract between the appellant and
the respondent no.1. The cause of action for seeking
enforcement of the obligation on the part of the
respondent no.2 Bank to make the payment of the
amount covered by the Bank Guarantees, has not at all
been disclosed. The claim for seeking enforcement is
also not in the manner prescribed under the contract
of Bank Guarantees. There is nothing to show that the
events specified for invocation of Bank Guarantees
have occurred. Hence, the invocation is not in
accordance with the terms and conditions prescribed,
the same is, therefore, bad and unenforceable. It is
not a case of mere reference to the terms of the
contract entered between the appellant and the
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respondent, but it is a case where the appellant
Company is required to process its claim by assessing
the amount due and payable by the respondent no.1 for
the reason of failure/negligence to perform the terms
and conditions contained in the contract, which forms
a condition precedent to seek enforcement of Bank
Guarantees. It is not a case of conferment of an
unfettered right to demand immediate payment upon the
appellant.
24) The requirement of unconditional payment of
the amount of Bank Guarantee without any demur, has
nothing to do with the compliance of the conditions
of Bank Guarantees and it only prohibits the
respondent no.2 Bank from raising any dispute as to
compliance or fulfillment of the terms and conditions
of the contract between the appellant and the
respondent no.1 Company. The respondent no.2 Bank
cannot insist for proof of failure or negligence of
respondent no.1 Company in performing the terms and
conditions contained in the contract. It is in this
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background that the Condition No.1 has been
incorporated in the Bank Guarantees agreeing, that
the appellant Company shall be the sole judge as to
whether the said contractor has failed/neglected in
performing any of the terms and conditions of the
said contract and the decision of the appellant
Company in this behalf shall be binding upon the
respondent no.2 Bank. Hence, on the basis of
condition no.1 in the Bank Guarantee it cannot be
urged that it is an unconditional Bank Guarantee and
confers an unfettered right upon the appellant to
invoke the Bank Guarantees and to demand immediate
payment.
25) Shri A.M.Gordey, the learned Senior Counsel
appearing for the appellant, has invited my attention
to the para7 of the written statement, which is
reproduced below
“ Para7) : The defendants submits that
the plaintiff only has carried out the
work to the extent of Rs.595.93 Lakhs
and the work to that extent of
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Rs.799.86 Lakhs is still incomplete
which has to be awarded to another
contractor and considering the
inflation the said cost is assessed at
Rs.1182.52 Lakhs approx and as such
the additional expenditure is arrived
at Rs.382.66 Lakhs which is legally
recoverable from the plaintiff and as
such to secure the amount from the
plaintiff, the Bank Guarantees are
invoked. It is worthwhile to submit
that the said figure is tentative and
is likely to increase manifold. The
defendants have also not calculated
the damage that may be caused due to
the delay in completion of the project
and if all the said assessments are
made, the amount recovered is nothing
but peanuts comparing to the size of
the work awarded to the plaintiff.”
It is urged that it is the amount of
Rs.382.66 Lacks, which has become due and payable by
the respondent no.1 for the reason of
failure/negligence in performing the terms and
conditions in the contract. Primafacie, it is not
possible to accept this argument for several reasons.
Firstly, this is not the demand in writing reflected
in the letter dated 17.2.2011 invoking the Bank
Guarantees which is already reproduced above.
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Secondly, it is an undisputed factual position, that
the invocation of the Bank Guarantees is not on the
ground that the respondent no.1 has failed to
complete 60% of work. On the contrary, specific stand
is that noncompletion of 60% of work is totally
irrelevant for the purposes of the controversy
involved in the case. Thirdly, the finding recorded
by the Trial Court about the failure of the
appellants to discharge their obligations in respect
of four items as are specified in para10 above, has
not been assailed along with the further finding that
the appellants and the State Government are unable to
remove the hindrances so as to enable the respondent
no.1 to complete the work. Fourthly, unless the
hindrances are removed by discharging the obligations
by the appellants and the State Government, it may
not be possible for any other contractor to complete
the remaining incomplete work to the extent of 60% of
work. Fifthly, the contract to complete the balance
60% of work is yet to be awarded to any other
contractor and lastly the amounts so assessed, is not
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for the reason of the alleged failure/negligence on
the part of the respondent no.1 in performing the
terms and conditions of the contract.
26) Shri A.M.Gordey, the learned Senior Counsel
appearing for the appellants and Shri J.P.Pendse, the
learned Counsel for the respondents have taken me
through the judgments relied upon by Shri A.M.Gordey,
the learned Senior Counsel, which are listed in
earlier paras and delivered by the Apex Court and by
this Court. In all these judgments, the finding is
recorded that the Bank Guarantees in question were
unconditional and in the light of such proof of fact,
that the Apex Court has laid down the principles for
grant of injunction in the matter of invocation of
the Bank Guarantees, which are contained in para14
of the decision in the case of Himadri Chemicals
Industries Limited Vs. Coal Tar Refining Co., (2007)
8 SCC 110, which is reproduced below
“Para14 : From the discussions made
hereinabove relating to the principles
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for grant or refusal to grant of
injunction to restrain enforcement of a
bank guarantee or a letter of credit,
we find that the following principles
should be noted in the matter of
injunction to restrain the encashment
of a bank guarantee or a letter of
credit:
(i) While dealing with an application
for injunction in the course of
commercial dealings, and when an
unconditional bank guarantee or letter
of credit is given or accepted, the
beneficiary is entitled to realise such
a bank guarantee or a letter of credit
in terms thereof irrespective of any
pending disputes relating to the terms
of the contract.
(ii) The bank giving such guarantee is
bound to honour it as per its terms
irrespective of any dispute raised by
its customer.
(iii) The courts should be slow in
granting an order of injunction to
restrain the realisation of a bank
guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter
of credit is an independent and a
separate contract and is absolute in
nature, the existence of any dispute
between the parties to the contract is
not a ground for issuing an order of
injunction to restrain enforcement of
bank guarantees or letters of credit.
(v) Fraud of an egregious nature which
would vitiate the very foundation of
such a bank guarantee or letter of
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credit and the beneficiary seeks to
take advantage of the situation.
(vi) Allowing encashment of an
unconditional bank guarantee or a
letter of credit would result in
irretrievable harm or injustice to one
of the parties concerned.”
There cannot be any dispute about the
proposition of law laid down by the Apex Court in the
aforesaid judgment, which follows several earlier
judgments of the Apex Court. The law of precedents is
well settled. A decision is an authority for what it
actually decides and not for what logically follows
from it. Every judgment must be read as applicable to
the particular of facts proved or assumed to be
proved and the exposition of law therein,
is governed or qualified or controlled by the facts,
which are held to be proved. The judgment is required
to be understood in the light of the facts of that
case and no more can be read into it, then what it
actually says. Once it is held in the facts of the
present case that it is a contingent contract of Bank
Guarantees, then the law down by the Apex Court in
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the judgments relied upon by Shri A.M.Gordey, the
learned Senior Counsel, ceases to apply.
27) The contention of Shri A.M.Gordey, the
learned Senior Counsel, is that the respondent no.1
is not competent to make any grievance about the non
fulfillment of the terms of the Bank Guarantees for
the reason that he is not a party to the contracts of
Bank Guarantees. According to him, it is only the
respondent no.2 Bank which can make a grievance about
nonfulfillment of the terms of the Bank Guarantees.
He submits that the respondent no.1 is neither a
person aggrieved nor has any locus standi to complain
about the violation of the terms of the Bank
Guarantees. The contention cannot be accepted. The
respondent no.1 is the principal debtor within the
meaning of Section 126 of the Contract Act. It is at
his instance that the conditional Bank Guarantees
have been furnished by the respondent no.2 Bank in
favour of the appellant creditor. It is the liability
of the respondent no.1 which is being discharged by
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the respondent no.2 Bank. Hence, the respondent no.1
has right to know and complain about the non
fulfillment of the conditions of the Bank Guarantees.
Merely because the respondent no.2 Bank has not
raised any objection about nonfulfillment of the
terms of the Bank Guarantees, that will not prevent
the respondent no.1 from raising any objection in
respect of it. Ultimately, the respondent no.2 would
obviously recover the amount that shall be paid to
the appellant, from the respondent no.1. Hence, the
respondent no.1 is competent and has locus to
challenge the invocation of the Bank Guarantees by
the appellants.
28) Now, coming to the contention of Shri
A.M.Gordey, the learned Senior Counsel, that there is
failure to comply with the conditions regarding
submission of valid Bank Guarantees of a
Nationalized/Scheduled Bank by way of
performance/additional performance security, it is
not in dispute that the respondent no.1 has submitted
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two fake Bank Guarantees of non existent Bank namely
M/s.Mahesh Merchant Bank Limited, Chandrapur, on
10.10.2007. The first Bank Guarantee of
Rs.69,79,000/ was by way of security for
performance of contract towards 5% of value of
awarded contract and the another was for
Rs.1,54,94,580/ towards additional performance
security deposit and retention money to be recovered
from the running bills. Undisputedly, these two Bank
Guarantees have been substituted by two fresh Bank
Guarantees of the same amount on 19.2.2009 issued by
the respondent no.2 Oriental Bank of Commerce, a
Nationalized Bank, which are valid upto 19.11.2011.
29) The claim of the respondent no.1 plaintiff
is that his Power of Attorney obtained fake Bank
Guarantees and submitted it to the appellant and as
soon as it was discovered, the respondent no.1 on his
own submitted fresh Bank Guarantees dated 19.2.2009
of the Nationalized Bank. The case of the appellant
is that the fact of submission of fake Bank
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Guarantees was discovered by the appellant. Keeping
aside such dispute at this stage, the fact remains
that the appellant has accepted the submission of
fresh Bank Guarantees, which are valid and operating
till 19.11.2011 and the penal interest of
Rs.16,85,220/ @ 18 % per annum on the total
amount of Bank Guarantees of Rs.2,24,73,580/ has
been recovered from the respondent no.1 for the
period five months from 10.10.2007 to 19.2.2008. The
termination of contract is by letter dated 16.9.2010
for the reason of furnishing fake Bank Guarantees of
the non existent Bank by the respondent no.1. Though
the discovery about the submission of fake Bank
Guarantees was on 19.2.2009 or may even be prior to
that, the termination is after lapse of 17 months.
The Bank Guarantees have not been invoked at the time
of termination of contract on 16.9.2010, but it is
after a lapse of five months on 17.2.2011. Thus,
primafacie it is a case of forgiveness and recovery
resulting into condonation of the violation of the
said term under the contract without resulting any
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financial loss or implications to the appellant.
30) The Trial Court has primafacie accepted the
case of the respondent no.1 plaintiff that the act of
submitting fake Bank Guarantees was done by the Power
of Attorney holder and as soon as it came to the
notice of the respondent no.1, he voluntarily
replaced the same with valid Bank Guarantees of a
Nationalized Bank i.e. the respondent no.2. The
finding is recorded that the extension of the period
of such Bank Guarantees has also been accepted by
the appellant and at this stage, it cannot be said
that the fake Bank Guarantees were furnished only
with a view to obtain the work. The Trial Court has
held that the appellants have covered the penal
interest on account of the submission of the Bank
Guarantees for a period of five months and the
criminal investigation pending against the respondent
no.1 will take its own course. No fault can be found
with such a view taken by the Trial Court.
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31) The entire conduct of the appellant and the
conspectus of facts depict that the invocation of the
Bank Guarantees is, primafacie not for the purpose
or the reason stated in the Bank Guarantees, but is
for some extraneous reasons, may be to cover up the
lapses on the part of the appellant in performing
their obligations. The contention of Shri J.P.Pendse,
the learned Counsel for the respondent no.1, that
the invocation of the Bank Guarantees could have been
only during the subsistence of contract or at the
most while terminating the contract on 16.9.2010,
sounds correct. Undisputedly, the invocation of the
Bank Guarantees is after lapse of five months from
the date of termination of contract. Primafacie in
my view, the invocation of the Bank Guarantees much
after the date of termination of contract, is an
after thought and not bonafide. The Trial Court has
recorded the finding that there is no fault on the
part of the appellant, in delay caused in completion
of the work and it is the appellants/defendant nos.1
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and 2 and the State Government, who were unable to
remove the hindrances as a result of which the
respondent no.1/plaintiff could not execute the work.
The Trial Court has held that in such a situation,
there is no question of recovery of any damages from
the security deposit in respect of which the Bank
Guarantees have been furnished and refusal to grant
an injunction would result in frustrating the
claim of the respondent no.1/plaintiff. In
the background of the facts of this case, I
do not find any fault with such a finding recorded
by the Trial Court.
32) Once it is held that the Bank Guarantees are
conditional or contingent and enforceable only upon
happening of certain events and that those events
have not yet happened, the Division Bench of the
Orissa High Court in its judgment in National
Aluminium Co's case cited supra, has held that the
violation of the terms of the guarantee can be
regarded as species of the same genus as fraud, which
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disentitles a beneficiary to enforce the Bank
Guarantees. Once it is held that the invocation of
the Bank Guarantees is not for the purposes or the
reasons mentioned in the Bank Guarantees, the refusal
to grant an injunction would result in causing an
irretrievable injury to the respondent no.1 as he
would be deprived of huge amount of Bank Guarantees
for the purposes of his business. Primafacie, it
would amount to an unjust enrichment of the
appellants/defendant nos.1 and 2. Hence, no fault can
be found with the order of injunction passed by the
Trial Court. However, it will be with a rider that
one month before the expiry of the validity period of
both the Bank Guarantees, the respondent no.1 shall
produce renewal of validity period of Bank
Guarantees, during the pendency of the suit. If such
renewal is not produced before the Trial Court, prior
to the period of 30 days of the expiry of the
validity period, the order of injunction granted by
the Trial Court and confirmed by this Court, shall
stand automatically vacated without further orders
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from Court and any payment, if any, made by the Bank
to the appellants/defendant nos.1 and 2 shall be
subject to the decision in the suit. In such
eventuality if the ultimate decision in the suit goes
in favour of the respondent no.1/plaintiff, then
there shall be an order of refund with interest @ 6%
per annum from the date of receipt of payment by the
appellants/defendant nos.1 and 2.
O R D E R
For the reasons stated above, the appeal
is partly allowed. The order of injunction
passed on 21.2.2011 and confirmed on 5.4.2011, by
the Third Joint Civil Judge, Senior Division, Nagpur,
in Special Civil Suit No.236 of 2011 is maintained
subject to the condition that during the pendency of
the civil suit, the respondent no.1 shall renew
the Bank Guarantees in question, 30 days before
the expiry of its validity period and failure to
produce, the extension/renewal of validity
period shall result in automatically vacating
the order of injunction passed by the Trial
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Court, without reference to the Court. No order
as to costs.
JUDGE
BrWankhede
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