HIGH COURT OF HIMACHAL PRADESH AT SHIMLA RSA No. 524 of 2006 Reserved on: 19.4.2010 Decided on: 7.5.2010 The Bank of Rajasthan Ltd. ………Appellant. Versus Himachal Pradesh State Electricity Board and another ………Respondents. Coram: The Hon’ble Mr.Justice V.K. Ahuja, Judge. Whether approved for reporting? No. For the appellant: Mr.Ajay Kumar, Advocate. For respondent No.1: Mr.Trilok Jamwal, Advocate. V.K. Ahuja, J.: This is a regular second appeal filed by the appellant under Section 100 of the CPC against the judgment and decree of the court of learned Additional District Judge (Fast Track Court), Shimla, dated 21.8.2006, vide which he affirmed the findings of the learned Sub Judge (Senior Division), dated 14.6.2004, vide which the learned trial Court had decreed the suit of respondent No.1/plaintiff for a recovery of Rs.1,38,736/- with future interest at the rate of 9% per annum against the appellant. 2. Briefly stated the facts of the case are that respondent No.1 (hereinafter also referred to as the plaintiff) filed a suit for recovery of Rs.1,38,736/- as ______________________________ Whether reporters of local papers may be allowed to see the judgment? Yes. - 2 - against the appellant, who was impleaded as defendant while the present respondent No.2 was impleaded as proforma defendant. It was alleged by the plaintiff Board that defendant No.2 representing to be manufacturers of power and distribution transformers offered to supply to the plaintiff the transformers at various stations. The plaintiff on 14.11.1987 placed purchase order with defendant No.2 for the supply of transformers. The supply was to be made by defendant No.2 subject to the warranty that he was to replace free of cost with no transportation and insurance expenses to the purchaser up to the destination and in case there was a defect in the material, it was to be replaced by defendant No.2. The supply order also contained a condition regarding security deposit being 10% of the cost of material in the shape of cash/bank draft or bank guarantee. Defendant No.2 supplied to the plaintiff the said transformers subject to the aforesaid conditions and instead of cash security, defendant No.2 furnished bank guarantee of defendant No.1 which was duly executed by defendant No.1. The said bank guarantee was to remain in force during the performance of the agreement and till all the dues of the plaintiff were fully paid. The guarantee restricted the liability of defendant No.1 to Rs.92,800/-. 3. It was further alleged that defendant No.2 supplied the transformers to the plaintiff vide the purchase order and some transformers functioned abnormally but defendant No.2 failed to repair/replace the same - 3 - despite repeated reminders. The plaintiff invoked the bank guarantee and called upon defendant No.1 to encash the bank guarantee but to no avail, hence the suit filed by the plaintiff Board. Thus, it was alleged that defendant No.1, as per the terms and conditions of the guarantee, is liable to pay to the plaintiff the amount alongwith interest at the rate of 18% from 13.1.1993 till the date of filing of the suit. 4. Only defendant No.1 contested the suit. They took up the preliminary objection that the warranty cannot exceed the cost of correcting the defect or replacing the defective material. However, it was admitted that the Bank gave a guarantee of Rs.92,800/- in respect of this purchase order. It was also pleaded that the guarantee was given on the condition that the Board shall not make payment directly to the supplier and all the payments shall be made through the Bank. However, the Board flouted the said condition and made payments directly to the party. Defendant No.1 also denied that the transformers functioned abnormally or that defendant No.2 was ever called upon to repair or replace the same. On the other hand, defendant No.2 informed the Board that they had not received any complaint with respect to the transformers supplied under above order, hence they are not liable. 5. On the pleadings of the parties, the following issues were settled by the learned trial Court: - 4 - 1) Whether the plaintiff is entitled for the suit amount? OPP(onus & form objected to). 2) Whether suit in the present form is neither competent nor maintainable as alleged? OPD 3) Whether this court has no jurisdiction to entertain and determine the suit? OPD 4) Whether plaintiff has no cause of action? OPD 5) Whether plaintiff is estopped by his act, conduct etc., as alleged? OPD 6) Whether the suit is barred by limitation? OPD(2). 7) Whether the suit is bad for mis-joinder of parties? OPD(2) 8) Relief. 6. The parties led their evidence and the learned trial court vide its impugned judgment decided issues No.1 to 7 in favour of the plaintiff and as against defendants and consequently the suit of the plaintiff was decreed in full. On appeal, the said findings of the learned trial Court were affirmed by the learned First Appellate Court. 7. I have heard the learned counsel for the parties and have gone through the record of the case. 8. The submissions made by the learned counsel for the appellant were that the plaintiff had not suffered loss fully since only some of the transformers, allegedly were defective or needed replacement. It was submitted that the learned trial court had granted the decree for the recovery of the whole amount alongwith interest, which amounts to benefiting the plaintiff unnecessarily though they had not suffered the loss for the whole material. It was submitted that once some of the transformers or material was defective, they could have been compensated - 5 - for the cost of those defective transformers only and not for the remaining transformers, which were perfectly in order and were being used by the plaintiff. 9. On this point, the submission made by the learned counsel for the respondent were that the bank guarantee was given to the extent of 10% of the cost of transformers and in case some of the transformers are defective, it is for defendant No.2 to recover the excess amount received by the plaintiff Board by filing a suit or so and this dispute inter se the supplier i.e. defendant No.2 and the guarantor i.e. defendant No.1 is to be decided in between them only and the plaintiff Board was entitled, according to law, to invoke the bank guarantee to the full extent and that dispute cannot be decided as to the actual loss suffered by the plaintiff in between the plaintiff and defendant No.1 in this suit. 10. To substantiate his case, the learned counsel for the respondent had relied upon the decision, which decision was also cited by the learned trial court and therefore, a reference has to be made to the said decision as well as the other decisions relied upon by the learned counsel for the parties, during the course of arguments. 11. A perusal of the impugned judgment passed by the learned First Appellate Court shows that it referred to the judgment of the Apex Court in U.P. State Sugar Corporation versus Sumac International Ltd., (1997) 1 - 6 - Supreme Court Cases 568, the facts of which case are reproduced as under: “The appellant-Corporation entered into a contract with the respondent-Company for setting up a complete sugar plant. The contract contained stipulation regarding time for completion of the work. The respondent was also required to furnish bank guarantees for due delivery and for the advance price to be paid by the appellant to the respondent. The guarantees were irrevocable in nature, payable by the guarantor to the appellant on demand without demur. It was provided that the appellant shall be the sole judge of whether and to what extent the amount had become recoverable from the respondent or whether the respondent had committed any breach of the terms and conditions of the agreement. The bank guarantees further provided that the right of the purchaser to recover from the guarantor any amount shall not be affected or suspended by reason of any disputes that might have been raised by the respondent with regard to its liability or on the ground that proceedings were pending before any Tribunal, Arbitrator or Court with regard to such dispute. The guarantor shall immediately pay the guaranteed amount to the appellant-purchasers on demand. When the respondent failed to complete the work within the extended time granted, the appellant terminated the contract and invoked the bank guarantees. The respondent thereupon filed a petition under Section 20 of the Arbitration Act for appointment of an arbitrator since the agreement between the parties provided for arbitration. The respondent also filed two applications for interim relief under Section 41(b) of the Arbitration Act seeking interim stay against encashment of the bank guarantees. The Civil Judge dismissed the applications but in revision, the High Court allowed the same and granted an injunction restraining the appellant from enforcing the bank guarantees. 12. It was held as under: “When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms - 7 - thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.” (Paras 12 and 16). 13. Therefore, it has been clearly held in the above case that the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. The plea raised in that case is material for the grant of injunction against the encashment of bank guarantee and in that context the above observations were made by their Lordships. 14. Reliance was placed by the learned counsel for the appellant on the decision in General Manager, - 8 - Taluka Agricultural Produce Co-operative Marketing Ltd. versus Arbitrator, Deputy Registrar of Co-operative Societies, Raichur District and others, AIR 1998 Karnataka 354. In that case the bank guarantee was given to secure delivery of rice or payment of value of paddy supplied to milling agent and not as damages for non-performance of agreement. There was a default in the delivery of certain quantity of rice by the milling agent. It was held that the bank guarantee could be enforced only to the extent of undelivered rice and not for the entire sum. Moreso, when penalty was also allowed under agreement for such non- delivery of rice. It was also observed that the penalty at the rate of Rs.100/- per day is unenforceable without any pre-estimate and on the basis of surmises or whims of parties, moreso when there was no proof as to the extent of loss or damages suffered by the owner. 15. Reliance was also placed upon the decision in BSES Ltd. (now Reliance Energy Ltd.) versus Fenner India Ltd. and another, (2006) 2 Supreme Court Cases 728. The observations made in paras 18, 22, 24 and 26 are relevant and are being reproduced below: “It is not possible to accept the contention of the respondent that the bank guarantees were given only for the purpose of security as against the advance paid to it. Under the “wrap-around agreement”, the appellant had the right to encash any or all the guarantees for any breach in any of the terms of the four contracts. Hence, it is not possible to accept the respondents’ contention that some of the bank guarantees were only for securing the advances. As regards the contention of the respondent that the performance was duly satisfied, it - 9 - is held that the evidence on record is precisely to the contrary. Indeed, as per the terms of the bank guarantee itself, the appellant is the best judge to decide as to when and for what reason the bank guarantees should be encashed. Further, it is no function of the Bank nor of the Supreme Court, to enquire as to whether due performance had actually happened when, under the terms of the guarantee, the respondent Bank was obliged to make payment when the guarantee was called in, irrespective of any contractual dispute between the appellant and the respondent.” The observations made in paras 28 and 30 are also relevant, which are being reproduced below: “In the present case, there was no “egregious fraud” so as to fall within the first exception. Moreover, arbitration proceedings were pending. Once of the disputes referred to arbitration was whether the bank guarantees were null and void and unenforceable. Permanent injunction was sought therein to restrain the appellant from encashing the bank guarantees. Therefore, there was no situation of “irretrievable injustice” if the appellant was allowed to encash the bank guarantees. For justice can always be rendered to the respondent, if it succeeds before the arbitrators. Nor was there any special equity in favor of the first respondent, when there was in fact a dispute that performance was prima facie not satisfactory, which enabled the appellant to encash all or any of the four bank guarantees. Therefore, it is held that the High Court erred in interfering with the bank guarantees and in granting injunction as sought for.” 16. The decision in Dwarikesh Sugar Industries Ltd. versus Prem Heavy Engineering Works (P) Ltd. and another, AIR 1997 Supreme Court 2477, was also relied. In that case, an injunction was sought restraining the Bank to encash the guarantee. The guarantee providing for payment on demand or without demand. It was observed that the - 10 - beneficiary made sole judge as to whether there was breach of contract to supply equipment on stipulated dates or not. The beneficiary making demand in terms of the guarantee. It was held that the bank was under obligation to honour its obligation. It could not in law avoid the payment. The court ought not to have issued injunction retraining the bank from honouring its obligation. 17. Coming to the facts of the present case, I may quote the condition in the bank guarantee as under: “We, The Bank of Rajasthan Ltd., do hereby undertake to pay the amount due and payable under this guarantee without any demur, merely on a demand from HPSEB, stating that the amount claimed is due to any of the losses or damage caused to or would be caused to or suffered by the HPSEB by reason of any breach by the said contractor of any of the terms or conditions contained in the said agreement or by reason of the said contractor failure to fulfill the said agreement. Any such demand made on the Bank shall be conclusive as regards the amount due and payable by the Bank under this agreement. However, our liability under this guarantee shall not exceed to an amount of Rs.92800.00.” 18. It is, therefore, clear that the guarantor was to pay the amount due and payable under the guarantee without any demur, merely on a demand from the HPSEB for any loss or damage suffered by the plaintiff for breach of any of the conditions contained in the said agreement. In case there was any non-compliance of the terms and conditions of the agreement i.e. in case no transformer had been supplied at all, there would be a breach of the conditions and the plaintiff was entitled to invoke that - 11 - guarantee and recover the full amount. However, in the present case, the dispute is only in regard to the part of the transformers supplied that these were damaged or were defective and had not been replaced by defendant NO.2 inspite of demand. The question arises as to whether this Court can determine the dispute in between the plaintiff and defendant No.1 as to the actual loss suffered by the plaintiff. It is true that the plaintiff cannot be enriched by invoking the bank guarantee in full, but there are two reasons that the plaintiff was entitled to invoke the guarantee clause to the full. 19. The first reason is that as per the allegations made by the plaintiff Board itself, the bank guarantee was given to the extent of 10% of the cost of the transformers and not for the whole supply of transformers to be made by defendant No.2 to the plaintiff. There is nothing on the record to show that the defect in the transformers or which needed replacement was or was not beyond 10% of the total cost of the transformers supplied by defendant No.2. Therefore, if there is any dispute upto 10% or so, it is not for the court to calculate the amount of loss suffered by the plaintiff. This is more so because the quality of the transformers supplied was different with different rates and this Court cannot determine the question as to which of the transformers were defective, how much was their cost and, therefore, the plaintiff was entitled to invoke the bank guarantee. It was for defendant No.1 to have raised a dispute with the plaintiff - 12 - by supplying the data or evidence that the cost of the transformers, which were defective, was this much and they are liable to pay this much amount only in which they have failed since they had not raised this dispute with the plaintiff at any time by specifying the cost and by claiming a specific issue in this regard that they were entitled to the loss to this extent only. Once there was a bank guarantee for the whole amount and there is dispute in between the plaintiff and the supplier i.e. defendant No.2, it is in between them only and defendant No.2 is at liberty to recover the excess amount realized by the plaintiff by replacing the transformers or deducting the amount of the said transformers, but in so far as the guarantor is concerned, he had given the guarantee for this much amount and he is entitled to reimburse the amount to the plaintiff. 20. No reference was made during the course of arguments by the learned counsel for the parties to the evidence led by the parties before the learned trial Court. The reason being that there is no dispute in between the parties that only part of the transformers were found to be defective or needed replacement and not all and the dispute raised is only as to whether the bank guarantee to the full could be encashed by the plaintiff or to a limited extent being the value of the transformers which needed to be replaced. The question raised was legal only and, therefore, there is no necessity to refer to the evidence in detail, which was also not referred to in detail. - 13 - However, I may make a reference to the statement of PW-1 Suresh Kumar, Executive Engineer, who admitted that out of 124 transformers supplied under the supply order dated 14.11.1987, three transformers were defective and needed replacement. 21. There may be dispute in regard to the number of defective transformers, but that is not to be determined by this Court and, therefore, there is no necessity to refer to the evidence in detail in this regard or decide the question since the question raised is only legal as to the extent of the liability of the appellant. In so far as the arguments raised by the learned counsel for the appellant were concerned during the course of arguments that the plaintiff had violated the terms and conditions of the agreement since they made the payment directly to the party i.e. defendant No.2 and not through the Bank and as such they are not liable. No such specific issue was claimed during the course of trial before the learned trial Court though this plea was taken by the appellant in his written statement. But once no such specific issue was claimed or evidence led and no findings were given by the learned trial Court in regard to the effect of violation of this condition of the agreement in question, this plea cannot be raised at this stage or decided in the absence of any findings having been insisted upon and given by the learned trial Court. Therefore, the appellant cannot take any benefit of such a plea raised before this Court for the first time, suffice to say that the plaintiff was entitled - 14 - to the recovery of the whole amount not exceeding the guarantee amount, which included the interest awarded by the Court and they are liable to pay the interest exceeding the amount of guarantee once they had not paid the amount inspite of demand by the plaintiff. Therefore, no infirmity could be pointed out in the judgment passed by the learned trial Court decreeing the suit of the plaintiff in full, which findings of the learned trial Court were also upheld by the learned First Appellate Court and as such there is no merit in the appeal filed by the appellant. It is for defendant No.2 to recover the excess amount paid to the plaintiff in pursuance of the bank guarantee invoked by them and it is not for this Court to decide the question of actual loss suffered by the plaintiff. 22. In view of the above discussion, the appeal filed by the appellant is dismissed. However, the parties are left to bear their costs. May 7, 2010. (V.K. Ahuja), (TILAK) Judge.