Case: State Bank Of India  Vs. Mula Sahakari Sakhar Karkhana Ltd

the contract 32. Despite such conditions, holding that the guarantee in question was a performance guarantee, this Court opined: The Bank, in the above guarantee, no doubt, has used the expression agree unconditionally and irrevocably to guarantee payment to the Executive Engineer on his first demand without any right of objection, but these expressions are immediately qualified by following: ... in the event that the obligations expressed in the said clause of the above-mentioned contract have not been fulfilled by the contractor giving the right of claim to the employer for recovery of the whole or part of the advance mobilisation loan from the contractor under the contract. 33. 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 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. It was clearly held therein that the bank guarantee constitutes a separate, distinct and independent contract between the bank and the defendants. In this case, the document in question does not specifically refer to any particular clause of the contract. In fact the contract does not contain any clause requiring Pentagon to furnish any Bank Guarantee. 34. We may now consider the decision in Daewoo Motors India Ltd. v. Union of India and Others [(2003) 4 SCC 690] . The bank guarantee involved therein inter alia read as under: We, Times Bank Ltd., PTI Building, Parliament Street, New Delhi, 110 001 further agree that the demand made by the President of India any money so demanded notwithstanding any dispute raised by M/s Daewoo Motors India Ltd. in any proceeding before any court or tribunal; We, Times Bank Ltd., PTI Building, Parliament Street, New Delhi 110 001 further agree that the demand made by the President of India shall be conclusive as regards the amount due and payable by us under these presents as out of liability under these presents are absolute and unequivocal; 35. Construing the terms thereof, this Court held: From a perusal of the above clauses, it is abundantly clear that the bank guarantee furnished by the Bank is an unconditional and absolute bank guarantee. The Bank has rendered itself liable to pay the cash on demand by the President of India notwithstanding any dispute raised by M/s Daewoo Motors India Limited in any proceeding before any court or tribunal. It is worth noticing that the clause in the bank guarantee specifically provides that the demand made by the President of India shall be conclusive as regards the amount due and payable by the Bank under this guarantee and the liability under the guarantee is absolute and unequivocal. In the face of the clear averments, it is trite to contend that the bank guarantee is a conditional bank guarantee. Therefore, the Bank has no case to resist the encashment of the bank guarantee. Inasmuch as we have held that the bank guarantee is an unconditional bank guarantee, the case of Hindustan Construction Co. Ltd. v. State of Bihar is of no avail to the appellant. 36. The said decision, in the facts and circumstances of the case, cannot be said to have any application here. We are not oblivious of the decisions of this Court where, save and except the cases of fraud or irretrievable evil, the Bank has been held liable to pay the guaranteed amount without any demur whatsoever. In an instructive judgment, M. Jagannadha Rao, J. in Federal Bank Ltd. v. V.M. Jog Engineering Ltd. and Others [(2001) 1 SCC 663] referring to Uniform Commercial Practice of Documentary Credits and a catena of decisions of this Court as also the English Courts, dealt with a case where a fraud was alleged and observed: Thus, not only must fraud be clearly proved but so far as the bank is concerned, it must prove that it had knowledge of the fraud. In United Trading Corpn. S.A. v. Allied Arab Bank it was stated that there must be proof of knowledge of fraud on the part of the bank at any time before payment. It as also observed that it would be sufficient if the corroborated evidence of the plaintiff usually in the form of contemporary documents and the unexplained failure of a beneficiary to respond to the attack, lead to the conclusion that the only realistic inference to draw was fraud. [See also Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Another, (1997) 6 SCC 450 ] and M/s. BSES Ltd. (Now Reliance Energy Ltd.) v. M/s. Fenner India Ltd. & Anr. JT 2006 (2) SC 192 ] However, in this case, we have no doubt in our mind that the document in question constitutes a contract of indemnity and not an absolute or unconditional bank guarantee. The High Court, therefore, erred in construing the same to be an unconditional and absolute bank guarantee. RATE OF INTEREST 37.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]We have hereinbefore noticed the surrounding circumstances as pointed out by Mr. Naphade as contained in Clauses 15.2.4 and 15.2.5 of the contracts the letters exchanged between the parties dated 6.4.1985, 11.4.1985, 16.4.1985 leading to execution of the document dated 07.09.1985 by the First Appellant in favour of the cooperative societyWe are, however, unable to accept the submissions of the learned Senior Counsel that the bank guarantee must be construed in the light of other purported contemporaneous documents. A contract indisputably may be contained in more than one document. Such a document, however, must be a subject matter of contract by and between the parties. The correspondences referred to hereinbefore were between the cooperative society and Pentagon. The said correspondences were not exchanged between the parties hereto as a part of the same transaction. The Appellant understood that it would stand as a surety and not as a guarantorIn P.L. Bapuswami (supra), relied upon by Mr. Naphade, this Court was concerned with a question as to whether Ex.1 therein was a transaction of mortgage by conditional sale or a sale with a condition ofr in the light of Section 58(c) of the Transfer of Property Act. We are not concerned with such a case hereIt is one thing to say that the nature of a transaction would be judged by the terms and conditions together with the surrounding and/or attending circumstances in a case where the document suffers from some ambiguities but it is another thing to say that the court will take recourse to such a course, although no such ambiguity existsThe said decision, in the facts and circumstances of the case, cannot be said to have any application here. We are not oblivious of the decisions of this Court where, save and except the cases of fraud or irretrievable evil, the Bank has been held liable to pay the guaranteed amount without any demur whatsoeverHowever, in this case, we have no doubt in our mind that the document in question constitutes a contract of indemnity and not an absolute or unconditional bank guarantee. The High Court, therefore, erred in construing the same to be an unconditional and absolute bank guarantee.