Full Judgment Text
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PETITIONER:
OIL & NATURAL GAS CORPORATION LTD.
Vs.
RESPONDENT:
STATE BANK OF INDIA, OVERSEAS BRANCH, BOMBAY
DATE OF JUDGMENT: 21/07/2000
BENCH:
S. Rajendra Babu, J. & S.N. Phukan, J.
JUDGMENT:
J U D G M E N T
RAJENDRA BABU, J. :
Leave granted.
This appeal arises out of a suit filed to enforce a Bank
Guarantee against the respondent under Order XXXVII CPC. The
respondent filed an application seeking leave to defend the suit
unconditionally. That application having been allowed this
appeal is filed by special leave. Facts leading to this appeal
are as follows:
The appellant entered into a contract with a consortium of M/s
Saipem SPA/Snamprogetti of Italy for construction of a system of
undersea pipelines known as the Gas Lift Pipelines. The work
comprised of pre-engineering survey, design and engineering,
procurement, wrap and coat, fabrication, transportation, laying,
installation, testing and pre-commissioning of forty sub-marine
pipeline segments of approximately total length of 181.8 kms.
The contract price was to the tune of US $63,875,000 plus Indian
Rs. 8,06,00,000/-. The scheduled completion date of the entire
works subject to any requirements in the contract specifications
as to the time of completion of any part of the work before
completion of the whole, the whole of the work was to be
completed by April 30, 1991. The contract also provided for levy
of liquidated damages if the contractor failed to complete the
entire works or any part thereof comprising the total turn key
project before the respective scheduled completion date fixed for
the entire works or part thereof at a rate equal to 3% of the
total contract price for each months delay subject to a maximum
of 10% of the contract price. The contractor was obliged to
furnish a bank guarantee to cover liquidated damages for an
amount equivalent to 10% of the contract price not later than 4
months prior to the scheduled completion date. However, if the
projects completion date slips beyond the scheduled completion
date, the contractor shall get validity of said guarantee
suitably extended. In case, the contractor fails to provide the
guarantee for liquidated damages within the time stipulated
therein, the appellants shall be entitled to encash the
performance guarantee. All disputes arising out or in connection
with the contract shall be settled in accordance with the laws of
India and the exclusive jurisdiction of the courts in India. In
compliance with this requirement, the contractor had furnished a
bank guarantee from the State Bank of India, Overseas Branch,
Bombay, to cover liquidated damages claim. That guarantee was
for a sum of US $6,387,500 plus Indian Rs. 8,060,000/-. Through
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the said guarantee, the respondent Bank had unconditionally
undertaken as under :- Now therefore, in consideration of the
premises aforesaid and at the request of the contractor, we,
State Bank of India, Overseas Branch, Bombay, Bank organised
under the laws of India and having its registered/head office at
Calcutta (hereinafter called the Bank) so as to bind ourselves
and our successors and assignees, do hereby irrevocably and
unconditionally undertake to pay to you, the Company, on demand
in writing without demur or protest and irrespective of any
contest or dispute between your goodselves and the contractor and
without reference to the contractor, any sum of money at any time
or from time to time demanded by the Company upto an aggregate
limit of USD. 6,387,500/- (US Dollars six million three hundred
eighty seven thousand and five hundred only) plus INR 8,060,000/-
(Indian Rupees eight million sixty thousand only) on account of
any liquidated damages due from the contractor to the company.
We further agree that as between us and the company for the
purpose of this guarantee/undertaking, any notice of demand by
the company towards liquidated damages and any amount claimed on
account thereof, shall be final and binding as to the factum of
the L.D. and the amount payable by us to the company hereunder
relative thereto.
We further agree that this guarantee shall be governed by and
construed in accordance with Indian laws.
We further agreed that if the project completion date slips
beyond schedule completion date because of whatsoever reason we
shall extend validity of this guarantee suitably so as to keep it
valid for 180 days beyond actual completion date.
We further confirm that this guarantee has been issued with the
approval of Exchange Control Authorities in India and that the
issuance of the guarantee is in order and in accordance with the
laws and regulations in force in India
As a result of protracted correspondence and extension or
increase or decrease in value of Bank Guarantee the same was kept
alive from time to time. On March 17, 1993 after taking into
account the total delay of 306 days in completing the work, the
appellant assessed the liquidated damages as US $ 4,320,432 plus
Indian Rs. 55,15,959.00. Accordingly by letter dated March 17,
1993 the appellant advised the contractor to extend the bank
guarantee for a further period of six months. The contractor was
given certain options. The respondent Bank furnished an enhanced
value of US $ 4,320,432 plus Indian Rs. 5,515,959/- with
validity upto October 4, 1993 under a covering letter of the same
date. The appellant by its letter dated September 13, 1993
advised the contractor to extend the validity of the bank
guarantee and on September 23, 1993 the contractor got issued a
notice through a lawyer for referring the dispute to arbitration
and also appointed its arbitrator. Again the appellant on
September 27, 1993 informed the respondent Bank that the
contractor was separately advised vide its letter date September
13, 1993 to extend the validity of the bank guarantee and in case
the validity of the same is not extended on or before October 1,
1993, the said letter be treated as its notice invoking the said
bank guarantee. The contractor as well as the bank not having
honoured the terms of the bank guarantee, the appellant once
again asked the respondent bank to credit the said guarantee
along with interest from October 4, 1993. On December 3, 1993
the respondent Bank stated that (a) they have issued the
guarantee in question in favour of ONGC against the counter
guarantee of the Italian Bank Credito Italiano, Milan and the
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contractor obtained an order of injunction from an Italian Court
restraining Credito Italiano from making any payment to the
respondent Bank under the counter guarantee; (b) they are also
considering the question of validity or otherwise of the
appellants demand for the guaranteed sum under the liquidated
guarantee vide its letter dated September 27, 199; (c) in terms
of exchange control regulations, the rupee payment under the
guarantee shall be made only on receipt of re- imbursement from
the foreign bank in an approved manner, (d) since the matter is
subjudice, the appellant should wait until the issue is resolved.
In the meanwhile, apart from engaging in correspondence both the
appellant and respondent appeared through counsel before the
Italian Court. It was contended that the bank guarantee is
autonomous, unconditional and they are bound to honour the same
irrespective of any counter guarantee they have from the Credito
Italiano and that any proceeding with regard to enforcement of
any such counter guarantee should not obstruct payment under the
guarantee given by the respondent bank. The respondent Bank
fearing that if the Italian Court order continuation of the
restraint order, it would be difficult for them to get
reimbursement from the Credito Italiano. In the alternative,
they invited the court to restrain them so that they can avoid
payment to the appellant under such guarantee and also an order
directing the appellant not to request for payment from the
respondent bank under the said bank guarantee. The Italian Court
on March 2, 1994 made an order which is as under :- Credito
Italiano, Milan branch, in the person of its legal representative
and the State Bank of India overseas Branch, Bombay, to abstain
from payment of any sum in execution of the agreement of
guarantee/counter guarantee arising between the parties
originating from relationship between Snam Progetti SPA and
Saipem SPA on the one side and Oil & Natural Gas Commission on
the other side arising from the Contract of the 6th March, 1990.
In the circumstances, aggrieved by the refusal to honour the bank
guarantee, the appellant filed a summary suit under Order XXXVII
of the Code of Civil Procedure before the High Court of
Judicature at Mumbai praying for a decree in a sum of US $
43,204,32 plus Indian Rs. 55,159,59 and interest on the said
amount at the rate of 18% per annum and pendente lite interest
till payment of realisation.
The High Court by order dated April 27, 1998 granted
unconditional leave to defend the suit on the following terms (i)
while invoking the bank guarantee, vide letter dated September
27, 1993 the amount of liquidated damage was not stated; (ii)
according to bank guarantee, a clear notice of demand towards
liquidated damage was to be given; (iii) the notice dated
September 27, 1993 was not a legal notice to communicate the
liquidated damages, and (iv) arbitration proceedings is pending
and the Italian Court is also seized of the matter. Aggrieved by
that order, the appellant has filed this appeal by special leave.
Shri Ashok H. Desai, the learned senior advocate appearing for
the appellant, submitted that none of the grounds stated by the
High Court could provide enough basis for granting an
unconditional leave to defend. He strongly placed reliance upon
the decision of this Court in Hindustan Steelworks Construction
Ltd. v. Tarapore & Co. & Anr., 1996 (5) SCC 34, and Larsen &
Toubro Limited v. Maharashtra State Electricity Board & Ors.,
1995 (6) SCC 68. After a survey of the decisions of this Court
in United Commercial Bank v. Bank of India, 1981 (2) SCC 766;
U.P. Coop. Federation Ltd. v. Singh Consultants & Engineers
(P) Ltd., 1988 (1) SCC 174; General Electric Technical Services
Co. Inc, v. Punj Sons (P) Ltd., 1991 (4) SCC 230, law as
applied in England in Elian and Rabbath v. Matsas and Matsas,
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(1966) 2 Lloyds Rep 495, CA. and a few American decisions, this
Court in Svenska Handelsbanken v. Indian Charge Chrome, 1994 (1)
SCC 502, declared the law that in case of confirmed bank
guarantee/irrevocable letters of credit it cannot be interfered
with unless there is fraud and irretrievable injustice involved
in the case and fraud has to be as established fraud. There
should be prima facie case of fraud and special equities in the
form of preventing irretrievable injustice between the parties.
Mere irretrievable injustice without prima facie case of
established fraud is of no consequence in restraining the
encashment of bank guarantee. Only in the event of fraud or
irretrievable injustice the court would be entitled to interfere
in a transaction involving a bank guarantee and under no other
circumstances. In that case, the contention put forth before
the court was regarding liquidated damages. The respondent had
to prove that liquidated damages quantified the same before
invoking the guarantee. It was also contended that the
invocation of the guarantee relating to advance and liquidated
damages was after the expiry of the period. In the absence of an
averment relating to fraud or irretrievable injustice, the court
held that the appellant will be able to claim relief before
arbitration by way of damages or amounts wrongly recovered and
irretrievable injustice can be said to exist. The learned single
Judge also held that the first respondent by separate letter
dated September 14, 1994 and May 10, 1994 addressed to the Bank
while requesting to extend the bank guarantee specifically stated
that if it was not so done, the communication should be treated
as notice for encashment of the bank guarantee and these
communications addressed to the respective banks prior to the
guarantee would serve the purpose of notice to the banks and so
it cannot be held that the invocation was after the date of
expiry of the said guarantees. The same is the principle stated
by this Court in Hindustan Steelworks Construction Ltd. v.
Tarapore & Co. & Anr. (supra). It is held therein that
encashment of an unconditional bank guarantee does not depend
upon the adjudication of disputes. No distinction can also be
made between bank guarantee for due performance of a work
contract and a guarantee given towards security deposit for a
contract or any other kind of guarantee. Where the beneficiary
shall be the sole judge on the question of breach of primary
contract the bank shall pay the amount covered by the guarantee
on demand without a demur. In the absence of a plea of fraud,
guarantee had to be given effect to. Though these two decisions
pertain to grant of injunction for enforcement of bank guarantee,
the principle stated therein could be extended to understand the
nature of defence raised by the respondent Bank in the present
case. Whether the respondent Bank could at all raise such a
defence which is totally untenable. In the light of what is
stated above, in the absence of a plea relating to fraud, much
less of a finding thereto, we find that the court could not have
stated that the defence raised by the respondent Bank on the
grounds set forth earlier is sufficient to hold that
unconditional leave should be granted to defend the suit. In the
arbitration proceedings that were pending it was certainly open
to the parties concerned to adduce proper evidence and establish
as to what are the liquidated damages that are payable and if any
excess amount had been paid, the same would be recovered. So far
as the order made by the Italian Court for not enforcing the bank
guarantee is concerned, it must be stated that the said order
arose out of the counter guarantee with which the appellant had
nothing to do. In this context, it is brought to our notice that
the Foreign Exchange Manual, 1999 provided as under :- Reserve
Bank has likewise granted general permission to authorised
dealers vide the above Notification to give guarantees in favour
of persons resident in Indian in respect of any debt or other
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obligation or liability of a person resident outside India
subject to such instructions as may be issued by Reserve Bank
from time to time. Authorised dealers may accordingly give, on
behalf of their overseas Head Offices/branches/correspondents or
a bank of international repute guarantees/performance bonds in
favour of residents of India in connection with genuine
transactions involving debt liability or obligation of non-
residents provides the bond/guarantee is covered by a counter
guarantee of the overseas Head Office/ branch/correspondent or a
bank of international repute. Authorised dealers may make rupee
payments to the resident beneficiaries immediately when the
guarantee is invoked and simultaneously arrange to obtain the
reimbursement from the overseas bank concerned which had issued
the counter guarantee. Authorised dealers are well advised that
they should ensure that counter guarantees are properly evaluated
and their own guarantees against such guarantees are not issued
in routine manner. Before issuing a guarantee against the
counter guarantee from an overseas Head
Office/branch/correspondent or a bank of international repute,
authorised dealers should satisfy themselves that the obligations
under the counter guarantee when invoked, would be honoured by
the overseas bank promptly. If the authorised dealer desires to
issue guarantee with the condition that payment will be made
provided reimbursement has been received from the overseas bank
which has issued the counter guarantee, this fact should be made
clearly known to the beneficiary in the guarantee documents
itself. Cases whose payments are not received by the authorised
dealers when the guarantees of overseas banks are invoked;
should be reported to Reserve Bank indicating the steps taken by
the bank to recover the amount due under the guarantee.
Till the new Exchange Control Manual was introduced the position
was as follows :-
Reserve Bank has likewise granted general permission to
authorised dealers vide the above Notification to give guarantees
in favour of persons resident in India in respect of any debt or
other obligation or liability of a person resident outside India
subject to such instructions as may be issued from time to time.
Authorised dealers may accordingly give, on behalf of their
overseas Head Offices/branches/correspondents, performance bonds
or guarantees in favour of residents of India, in support of
tenders to be submitted for due performance of contracts or for
refund, in the event of contracts not being fulfilled, of advance
payments received, provided the bond or guarantee is covered by
counter guarantee of the Head Office/branch/correspondent.
Authorised dealers may make rupee payments to residents in
implementation of invoked bonds/guarantees issued in favour of
residents of India without, prior reference to Reserve Bank,
provided reimbursement has been received from the Head
Office/branch/correspondent abroad in an approved manner.
When, in fact, there is no defence for suit filed merely to rely
upon an injunction granted or obtained in their favour does no
carry the case of the respondent Bank any further. The only
basis upon which the respondent Bank sought for and obtained the
injunction is that in event the counter guarantee cannot be
honoured by reason of the injunction granted by the Italian court
the respondent Bank should be extended the similar benefit. But
a perusal of the Foreign Exchange Manual makes it clear that none
of the claims would be an impediment to make payment under the
Bank Guarantee in question. Therefore, in our view, the High
Court plainly erred in having granted leave to defend
unconditionally. We vacate that order and dismiss the
application filed by respondent Bank for leave to defend by
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allowing this appeal. Considering the nature of the case, we
order no costs.