IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION SUMMARY SUIT NO.2959 OF 1999 Union of India through Textile Commissioner, having their office at New C.G.O. Building, Post Bag No.11500, MUMBAI - 400 020. ...Plaintiffs Versus 1.M/s.Bhagwati Cottons Ltd., M/s.G.P.B. Fibres Ltd., (M/s.G.P.B. Fibres Ltd. has been amalgamated with Defendant No.1), Raja Bahadur Mansion, 20, Ambalal Doshi Marg, Fort, Mumbai - 400 023. 2.M/s.Indusind Bank Ltd., Indusind Bank House, Dadasaheb Bhadkamkar Marg, (Lamington Road), Mumbai - 400 004. ...Defendants ...... Mr.Zariwala with Mr.S.R.Rajguru i/b Mr.K.B.Rao for Plaintiffs. Mr.Prakash Shinde i/b M/s.M.Dhruva & Co. for Defendant No.2. ...... CORAM: A.M.KHANWILKAR, J. CORAM: A.M.KHANWILKAR, J. CORAM: A.M.KHANWILKAR, J. FEBRUARY 22, 2008. FEBRUARY 22, 2008. FEBRUARY 22, 2008. JUDGMENT : JUDGMENT : JUDGMENT : : 2 : 1. This Suit, filed on 8th April 1999, against the Defendants, is for recovery of sum of Rs.3,46,07,726/- (Rupees Three Crores Forty-six Lakhs Seven Thousand Seven Hundred & Twenty-six) with further interest on the principal sum of Rs.2,10,25,350/- (Rupees Two Crores Ten Lakhs Twenty-five Thousand Three Hundred Fifty) at the rate of 24% per annum from the date of filing of the Suit until payment/realisation thereof. The Suit is already decreed ex-parte against the Defendant No.1. It now proceeds against Defendant No.2 only. 2. The Plaintiffs assert that the Office of the Textile Commissioner in the Ministry of Textiles of India used to release quota of raw cotton and cotton wastes for exports from time to time as per the then prevailing exim policy. As per the quota released, the Textile Commissioner issues Memorandum in the beginning of each cotton year specifying the terms and conditions for export of raw cotton and cotton wastes. That the Defendant No.1 and GPB Fibres Limited were carrying on export business from the same premises. Later : 3 : on, said GPB Fibres Ltd. amalgamated with Defendant No.1 Company as per the order of the Company Judge dated 12th September 1997 in Company Petition No.382 of 1997 and connected proceedings. As per the said Scheme, all the debts and liabilities of GPB Fibres Ltd. have been taken over by the Defendant No.1 Company. It is stated that the present Suit has been filed against the Defendant No.1 not only in respect of the liabilities of Defendant No.1 but also the liability of said GPB Fibres Ltd. 3. According to the Plaintiffs for the cotton season 1995-1996, the Government of India had released cotton export quota of 0.10 lakhs bales (each of 170 kg.) extra long staple cotton in favour of private traders and State Co-operative Marketing Federation. Accordingly, the terms and conditions for export of raw cotton for the cotton season 1995-96 was prescribed in Memorandum-I dated 6th November 1995 issued by the Textile Commissioner, Mumbai. A Press Note and a Memorandum was issued on 9th January 1996 by the Textile Commissioner, Mumbai, inviting applications : 4 : for allotment of the said quota as per the terms and conditions specified in Memorandum-I dated 6th November 1995. 4. The Defendant No.1 as well as said GPB Fibres Ltd. submitted separate Applications in the prescribed form on 31st January 1996 together with original contract entered into by and between the Defendant No.1 and the foreign purchaser dated 23rd January 1996 and 25th January 1996 respectively, together with Legal Undertaking and a Bank Guarantee. By the said Legal Undertaking and the Bank Guarantee, the Defendant No.1 and GPB Fibres Ltd. agreed and undertook to fulfil the export obligation and realise foreign exchange and in case of failure, unconditionally and irrevocably agreed to pay to the Central Government a sum of Rs.1,03,79,600/- (Rupees One Crore Three Lakhs Seventy-nine Thousand Six Hundred) and Rs.1,06,45,750/- (Rupees One Crore Six Lakhs Forty-five Thousand Seven Hundred Fifty) respectively. Irrevocable Bank Guarantee was executed by Defendant No.2 Bank in favour of the President of India. As per Clause (4) of the said : 5 : Bank Guarantee, the Defendant No.2 agreed that the Guarantee shall remain in force for a period of six months after the last date of shipment as permitted by the Textile Commissioner, either by way of General Notice or specifically, till all the obligations of the exporter under or by virtue of the said Registration Certificate have been fully discharged to the satisfaction of the Government or the appropriate Authority for the time being authorised to perform the duties in that behalf, who in turn, certifies that the terms and conditions of the Registration Certificate have been fully and properly carried out by the exporter and accordingly discharged this guarantee. 5. The Plaintiffs assert that the Textile Commissioner, Government of India on 6th February 1996 permitted the Defendant No.1 and said GPB Fibres Ltd. to export 416.5 metric tons (2450 Bales of 170 Kg each) of extra long staple cotton. As per the said orders, the last date of shipment was to be 31st July 1996 and the Defendant No.1 and said GPB Fibres Limited were expected to earn foreign exchange worth US $ 29,23,830.00 : 6 : (Rs.10,37,95,965/-) and US $ 29,98,800.00 (Rs.10,64,57,400/-). It was further provided that if the Defendant No.1 and said GPB Fibres Ltd. failed to fulfil their obligation and realise the foreign exchange within the stipulated period, in that case, the amount recoverable from the Defendant No.1 by way of Bank Guarantee will be to the extent of Rs.1,03,79,600/- and Rs.1,06,45,750/- respectively. 6. It is the Plaintiffs’ case that the Defendant No.1 and GPB Fibres Ltd. failed and neglected to furnish particulars and supporting documents regarding export of goods as allocated to them within the stipulated period. As a result, the Plaintiffs, by letter dated 3rd January 1997 called upon the Defendant No.1 and GPB Fibres Ltd. to submit necessary documents to establish that they have complied with the export obligation, failing which, the Plaintiffs will be free to enforce the Bank Guarantee given by the Defendant No.2. Inspite of this requisition, the Defendant No.1 and GPB Fibres Ltd. failed and neglected to : 7 : submit any documents and particulars. With the result, the Plaintiffs addressed letter dated 15th May 1997 to Defendant No.2, calling upon them to make payment of Rs.1,03,79,600/- (Rupees One Crore Three Lakhs Seventy-nine Thousand Six Hundred) and Rs.1,06,45,750/- (Rupees One Crore Six Lakhs Forty-five Seven Hundred Fifty) as per the Bank Guarantee furnished by them on behalf of Defendant No.1 and GPB Fibres Ltd. 7. In response to the said communication, Defendant No.2 wrote to the Plaintiffs that the Bank Guarantees were valid only up to 31st January 1997 and the same could be invoked within the extended period of three months i.e. up to 30th April 1997. According to the Defendant No.2, the Plaintiffs having failed to do so, the Defendant No.2 was relieved and discharged from all the liabilities. 8. The Plaintiffs, thereafter, by letter dated 7th August 1997 called upon Defendant No.1 and said GPB Fibres Ltd. to make good the amount : 8 : of Rs.1,03,79,600/- (Rupees One Crore Three Lakhs Seventy-nine Thousand Six Hundred) and Rs.1,06,45,750/- (Rupees One Crore Six Lakhs Forty-five Thousand Seven Hundred Fifty) respectively. As the Defendant No.1 and GPB Fibres Ltd. failed and neglected to submit any proof of shipment against the export quota granted to them on 6th February 1996 by letter dated 27th/28th August 1997, the Plaintiffs informed the Defendant No.2 that in the light of the amendment to Section 28 of the Indian Contract Act, 1872, which came into force with effect from 8th January 1997, the Bank was not absolved of its obligation to make payment under the Bank Guarantees but was bound and liable to pay the amounts referred to therein. 9. The Defendant No.2 by letter dated 19th September 1997 reiterated their earlier stand that it stood relieved and discharged of its liability on and after 30th April 1997. The Plaintiffs, thereafter, wrote to Defendant No.1 and GPB Fibres Ltd. on 24th October 1997 calling upon them to pay the requisite amounts within ten days from the receipt of the said letter. : 9 : 10. The Defendant No.1 and said GPB Fibres Ltd., for the first time, as an afterthought, by their letter dated 2nd March 1998 informed the Plaintiffs that they were not in a position to export the goods on account of non-availability of good quality cotton. 11. The Plaintiffs by their letter dated 1st April 1998 informed the Defendant No.1 and said GPB Fibres Ltd. that explanation offered by them was not acceptable and was rejected. The said Defendant No.1 and GPB Fibres Ltd. were instead called upon to pay the amount along with interest at the rate of 24% on or before 15th April 1998. They, however, neglected and failed to pay the said amount. 12. The Plaintiffs received another letter from Defendant No.2 dated 27th February 1998 reiterating its earlier stand that claim against the Bank was untenable. Having realised that neither the Defendant No.1 and the said GPB Fibres Ltd. were coming forward to pay the requisite : 10 : amounts, nor the Defendant No.2 Bank was discharging its obligation under the Bank Guarantees, the Plaintiffs have filed composite Suit against both the Defendants for recovery of principal amount of Rs.2,10,25,350/- (Rupees Two Crores Ten Lakhs Twenty-five Thousand Three Hundred Fifty) and interest accrued thereon and further interest. 13. The Defendant No.1 remained ex-parte. Eventually, the Suit came to be decreed against Defendant No.1. The Defendant No.2 Bank, however, contested the claim of the Plaintiffs qua them by filing written statement. The Defendant No.2 Bank has reiterated its stand that the Bank Guarantees expired on 30th April 1997 on and from which date, the Bank stood relieved and discharged from all their liabilities. According to the Defendant No.2 Bank, the Plaintiffs were ill-advised to rely on Section 28 of the Indian Contract Act, 1872 which amendment had no impact on the contractual obligation qua the Defendant No.2 Bank. On the basis of the pleadings of the Plaintiffs and Defendant No.2, my predecessor proceeded to frame : 11 : in all 18 issues under order dated March 14, 2005, which reads thus: "1) Whether the plaintiff proves that there is any cause of action against defendant No.2? 2) Whether the amount of Rs.2,10,25,350/- is due and payable by the Defendant NO.2 with interest under the Bank Guarantee Bond dated 31st January, 1996, because of failure of Defendant No.1 to fulfil their Export obligations by 31st July, 1996 as specified in Export/Registration Certificate dated 6th February, 1996 and in paragraph 6(a) and 6(b) of the Memorandum I dated 6th November, 1995? 3) Whether in view of clause 5 of the Bank Guarantee Bond dated 31/1/1996, the period fixed for filing the claim/demand of BG amount by Plaintiff with the Defendant No.2 impliedly stands extended due to the applications dated 19/7/1996, 15/10/1996 & 12/12/1996 of the Defendant No.1 seeking for extension of the period fixed for fulfilling the export obligation beyond the original date of shipment period, i.e. 31/7/1996 and granting of 3 general extension in shipment period by Plaintiff firstly upto 31/10/1996, secondly upto 31/12/1996 and then finally upto 28/2/1997 by press note dated 29/8/1996, 30/10/1996 and 7/2/1997 respectively, so as to enable all the export defaulters including the Defendant No.1 to fulfil the export obligation within the said extended period. 4) Whether "the notwithstanding clause" mentioned at the end of the Bank Guarantee Bond dated 31st January, 1996, relieving and discharging the Defendant No.2 from the liability under the bank Guarantee on : 12 : failure of the Plaintiffs filing the Demand/Claim with the Defendant No.2 on or before the alleged expiry of the Claim period on 30th April, 1997, is void as per Section 28(b) of Indian Contract Act, newly added by Indian Contract (Amendment) Act No.1 of 1997 which came into effect on 8th January, 1997, when the Bank Guarantee was alive? 5) Whether the rights of the Plaintiffs to enforce the rights under the Bank Guarantee would subsist for the period of 30 years and liability of the bank under the said Guarantee Bond would also continue for the said period of 30 years? 6) Whether on account of demand/claim being lodged by the Plaintiffs with the Defendant No.2 by letter dated 15th May, 1997 i.e. after alleged expiry of guarantee on 30th April, 1997, the Defendant NO.2 is relieved and discharged from all liabilities under the said guarantee dated 31st January 1996, with effect from 30th April, 1997 (Paragraph 9 of the Written Statement of the Defendant No.2)? 7) Whether correct interpretation of Section 28 as amended on 8th January, 1997, does not stipulate that the clause restricting the period of invocation of the guarantee is void as contended in para 10 of the Written Statement of the Defendant No.2? 8) Whether as per amended Section 28, any agreement which restricts or discharges any party from any liability under or in respect of any contract of Guarantee on expiry of a specified period, so as to restrict any party from enforcing legal proceedings is void (as contended in para 11 of the Written Statement of the Defendant No.2)? : 13 : 9) Whether amended Section 28(b) does not imply that Bank Guarantee should not be invoked within the time period specified in the guarantee or that the same does not restrain the parties to provide in the contract of Guarantor, period for filing claim or for making demand within a particular period (Para 11 of the Written Statement of the Defendant No.2)? 10) Whether inspite of amendment of Section 28(b) of the Indian Contract Act, it is necessary for the parties to invoke Bank Guarantee by making demand in terms of time period specified therein or else the entire purpose of said clause in the Bank Guarantee shall be frustrated (Para 11 of the Written Statement of the Defendant No.2)? 11) Whether it is obligatory on the parties to invoke the Bank Guarantee by making demand within time period for enabling the party to file suit for recovery of the Guarantee amount from the defendant (Para 11 of the Written Statement of the Defendant No.2)? 12) Whether the contention that Defendant No.2 is bound and liable to make payment under the Bank Guarantee in spite of failure to make demand upon the Defendant No.2 within specified time limit i.e. on or before the 30th April, 1997, is not tenable (Para 13 of the written statement of the Defendant No.2)? 13) Whether even if the Plaintiff did not invoke the Bank Guarantee within the time period stipulated, the Defendant No.2 can be held liable for the guarantee amount (Para 16 of the written statement of the Defendant No.2)? 14) Whether Section 28(b) makes only those agreements which restrict time period for enforcing the legal proceedings (by filing suit) because of non invocation of Bank : 14 : Guarantee within specified period as void and not the Clause which require invocation of Bank Guarantee within the specified period (Para 16 of the written statement of the Defendant No.2)? 15) Whether Section 28(b) of the Contract Act and provisions of Limitation Act come into play only if Plaintiffs would have invoked the Bank Guarantee within the stipulated time as mentioned in the non-obstante clause and then would have subsequently filed a suit or initiated legal proceedings. (Para 16 of the written statement of the Defendant No.2)? 16) Whether amended Section 28(b) of the Indian Contract Act provides that the Limitation Act would come into play only if the Plaintiff would have invoked the Bank Guarantee within the specified period and Defendant No.2 dishonoured the same? (Para 17 of the written statement of the Defendant No.2) 17) Whether the Government can enforce the rights under the Bank Guarantee within thirty years from the date of failure on the part of the Defendant No.2 to honour the Bank Guarantee.? 18) If so what decree/order.?" 14. The Plaintiffs have filed affidavit in lieu of examination-in-chief sworn by Bhupendra Ambalal Patel, Joint Textile Commissioner (Cotton) dated 3rd March 2004. The case made out in the Plaint is virtually restated in this affidavit. This evidence elaborates the relevant clauses of the Bank Guarantee and attempts to spell out as to : 15 : how the Defendant No.2 would be liable to discharge the obligation under the Bank Guarantees. 15. In Para 4 of the affidavit, it is stated that Clause 3(iii) of the Memorandum dated 6th November 1995 required shipment to be made only against irrevocable Letter of Credit. As per Clause 3(iv) of the said Memorandum, Bank Guarantee/Undertaking in the prescribed form of the value of 10% of the contracted price in case of raw cotton worked out in terms of rupee on the basis of ruling exchange rate on the date of preparation of the said Bank Guarantee/Undertaking was to be submitted. The said Bank Guarantee had to be valid up to six months, with a provision for additional three months claim period from the last date of shipment which was 31st July 1996. As per Clause 3(a)(v), the photocopy of RBI Code Number valid at the time of application was also required to be submitted. 16. In Paragraph 5 of the affidavit, requirement of Clause 5(a) of the said Memorandum is spelt out. Insofar as formalities regarding : 16 : Bank Guarantee, Clause 6(a) of the Memorandum dated 6th November 1995 is relevant. As stated in Para 6 of the affidavit, the Bank Guarantee was to be released within 45 days of shipment, if the exporter submitted the stated documents as proof of shipment and proof of receipt of contracted price. Clause 6(b) of the Memorandum dated 6th November 1995-highlighted in Para 7 of the affidavit- required that the non-shipment or part shipment or delay in submission of the documents referred to in clause 6(a) without any valid reason, would make the exporter liable for forfeiture of full or part Bank Guarantee/Undertaking amount. The affidavit goes on to elaborate the relevant clauses in Paragraphs 8 to 12 of the affidavit. In Paragraph 13 onwards, the witness has spoken about steps taken after issuance of Memorandum dated 6th November 1995 of issuance of Press Note and inviting applications including submission of application by Defendant NO.1 and said GPB Fibres Ltd. in response to the said invitation up to Paragraph 15. 17. In Paragraph 15 of the affidavit, the : 17 : witness has spoken about the formalities completed by the Defendant No.1 and said GPB Fibres Ltd., on which basis, Registration Certificate was issued in their favour in exporting the stated goods. Paras 16 to 20 of the affidavit specifically deal with the Bank Guarantees furnished by Defendant No.1 and GPB Fibres Ltd. The said Bank Guarantees have been executed by Defendant No.2 dated 31st January 1996 in favour of the Plaintiffs, whereby, the Defendant No.2 unconditionally and irrevocably undertook to pay to the Government amount not exceeding Rs.1,03,79,600/- (Rupees One Crore Three Lakhs Seventy-nine Thousand Six Hundred) and Rs.1,06,45,750/- (Rupees One Crore Six Lakhs Forty-five Thousand Seven Hundred Fifty) respectively against any loss or damage caused to or suffered by the Government by reason of any failure on the part of the exporter of any of the terms and conditions of Registration Certificate and Memorandum dated 6th November 1996. The Defendant No.2 Bank undertook to pay the amount due and payable under the Guarantee without any demur, protest and merely on demand from the Government stating that the amount claimed was due by way of : 18 : loss or damage caused or suffered by the Government by reason of breach of the exporter of any of the terms and conditions of the Registration Certificate and that the demand made on the Bank would be conclusive as regards the amount due and payable by the Bank under the said Guarantees. 18. Paragraphs 18 and 19 of the affidavit highlight the terms of Clause (4) of the Bank Guarantee. Clause (5) of the Bank Guarantee is highlighted in Para 20 of the affidavit. The witness has then proved all the relevant documents appended to the affidavit. In the ultimate analysis, the witness has deposed about the primary liability of Defendant No.1 and said GPB Fibres Ltd. to make good the amount and on their failure, it was open to the Plaintiffs to claim such amount from the Defendant No.2 Bank, which was assured to be paid by the Bank by way of two bank guarantees. 19. The witness has filed supplementary affidavit of evidence in lieu of examination-in-chief dated 7th April 2005. By this : 19 : affidavit, the Plaintiffs have produced copy of the Office Memorandum No.9/7/75-B.O. III dated 20th July 1982 of Government of India, Ministry of Finance, Department of Economic Affairs (Banking Division), which provides that Government Departments/Public Sector Undertakings should return the expired Guarantees within a reasonable period (viz. three months) after the fulfilment of the contract or expiry of the Guarantee period and that, as the Bank Guarantees given by the Banks are their contingent liabilities, it may be ensured that the Guarantee Bonds are returned to the banks concerned soon after the relevant contracts are fulfilled or on expiry of the Guarantee periods and in any case, within a period of three months of expiry, which would mean that if the original Bank Guarantee is not returned by Government Departments to the Bank, the contingent liability of the Bank continues. The said document has been proved by the witnesses. 20. Significantly, the Defendant No.2 has not chosen to cross-examine the Plaintiffs’ witnesses : 20 : nor the Defendant NO.2 has examined any witness in support of its claim. The Defendant No.2 has chosen not to cross-examine the Plaintiffs’ witness on account of the fact accepted by the Plaintiffs that the Bank Guarantee was invoked on 15th may 1997 after the date of maturity i.e. 30th April 1997. That position is recorded in order dated July 11, 2007. 21. Counsel appearing for Plaintiffs and Defendant No.2 instead, proceeded with the oral arguments. Besides, oral arguments, Counsel appearing for the Plaintiffs as well as Defendant No.2 have filed their written submission, reiterating the arguments canvassed at the hearing and invite Judgment on that basis. 22. After having considered the pleadings and materials on record and the oral submissions made by the Counsel for the parties, although, as many as eighteen issues have been framed by my predecessor, I shall proceed to examine issues 2 to 17 together, as the rival stand in the context of those issues is overlapping. Before doing so, I : 21 : shall straight away deal with the Issue No.1. Although this issue has been framed, no serious argument was canvassed at the time of oral arguments. ISSUE NO.1 : 23. As this issue has been formally framed, I shall answer the same with reference to the averments in the Plaint. The fact whether the Plaintiffs have made out any cause of action against the Defendant No.2 will have to be considered in the context of the averments in the Plaint. As mentioned earlier, the Plaintiffs have filed this composite Suit though under the provisions of Order XXXVII of the Code of Civil Procedure, 1908 (‘C.P.C.’), it is founded on cause of action not only against the Defendant No.1 but GPB Fibres Ltd. which has later on amalgamated with Defendant No.1. On account of the amalgamation, the liabilities of GPB Fibres Ltd. are taken over by the Defendant No.1. As a result, the present Suit proceeds not only against the liabilities of the Defendant No.1 but also the : 22 : liabilities of said GPB Fibres Ltd., both to be discharged by the Defendant No.1. 24. Insofar as Defendant No.2 is concerned, the case of the Plaintiffs is that the liability of Defendant No.2 in respect of the same and series of transactions arise out of the unconditional and irrevocable Bank Guarantees executed by Defendant No.2 in favour of the Plaintiffs to discharge the obligation on behalf of Defendant No.1 and said GPB