Case: Dwarikesh Sugar Industries Limited Vs. Prem Heavy Engineering Works Private Limited and Another

2. Having been thwarted by orders of the court below in its attempt to get encashment of the bank guarantees, issued by the State Bank of India, Meerut Cantt. Branch (Respondent 2) Respondent 1 has led to the filing of this appeal by the aggrievedThe appellant and Respondent 1 had entered into an agreement on 27-7-1994 whereby Respondent 1 was to supply boiling house equipment the cost of which was Rs. 5.23 crores. The supply of equipment and material was to start from 15-9-1994 and the same was to be completed by 10-8-1995, as per the schedule of the supply agreed to by theAccording to one of the clauses of the aforesaid agreement Respondent 1 had agreed to furnish bank guarantees in favour of the appellant. Out of the above six, only four bank guarantees were furnished including Bank Guarantee No. 40/51 dated 1-12-1994 for a sum of Rs. 26, 15, 000 and Bank Guarantee No. 40/47 dated 24-11-1994 for a sum of Rs. 35 lakhs. These are the bank guarantees with which we are concerned in the presentBank Guarantee No. 40/51 was issued to ensure timely delivery of equipment and supply by Respondent 1. The relevant clauses of the said Bank Guarantee No. 40/51 are asconsideration of the premises the guarantor hereby unconditionally and irrevocably undertakes to pay to the purchasers on their first written demand and without demur such a sum not exceeding Rs. 26, 15, 000 (Twenty-six lakhs fifteen thousand only) as the purchasers may demand representing 5% (five per cent) of the contract price, and if the guarantor fails to pay the sum on demand the guarantor shall also pay on the sum demanded interest at the bank lending rates then prevailing reckoned from the date of demand till the date ofThe guarantor shall pay to the purchasers on demand the sum under clause 1 above without demur and requiring the purchasers to invoke any legal remedy that may be available to them, it being understood and agreed firstly that the purchasers shall be the sole judge of and as to whether the sellers have committed breach(es) of any of the terms and conditions of the said agreement and secondly that the right of the purchasers to recover from the guarantor any amount due to the purchasers shall not be affected or suspended by reasons of the fact that any dispute or disputes have been raised by the sellers with regard to their liability or that proceedings are pending before any tribunal, arbitrator(s) or court with regard to or in connection therewith, and thirdly that the guarantor shall immediately pay the aforesaid guaranteed amount on demand and it shall not be open to the guarantor to know the reasons of or to investigate or to go into the merits of the demand or to question or to challenge the demand or to know any facts affecting the demand, and lastly that it shall not be open to the guarantor to require the proof of the liability of the seller to pay the amount before paying the aforesaid guaranteed amount to the purchasers.The other Bank Guarantee No. 40/47 was originally issued for a sum of Rs. 51, 70, 000 for securing advance payment. The agreement contemplated the liability being gradually reduced and on 28-8-1995 this bank guarantee was reduced for a diminished amount of Rs. 33 lakhs. The relevant clause of this bank guarantee is asconsideration of the premises the guarantor hereby unconditionally and irrevocably undertakes to pay to the purchasers on their first written demand and without demur such a sum not exceeding Rs. 51, 70, 000 (Rupees Fifty-one lakhs seventy thousand only) as the purchasers may demand representing 10% (ten per cent) of the contract price, and if the guarantor fails to pay the sum on demand the guarantor shall also pay on the sum demanded interest at the bank lending rates then prevailing reckoned from the date of demand till the date of payment. Provided that liability of the guarantor hereunder shall reduce to the extent of the advance adjusted under clause 13 of the said agreementThe guarantor shall pay to the purchasers on demand the sum under clause 1 above without demur and requiring the purchasers to invoke any legal remedy that may be available to them, it being understood and agreed firstly that the purchasers shall be the sole judge of and as to whether the sellers have committed any breach(es) of any of the terms and conditions of the said agreement and secondly that the right of the purchasers to recover from the guarantor any amount due to the purchasers shall not be affected or suspended by reasons of the fact that any dispute or disputes have been raised by the sellers with regard to their liability or that proceedings are pending before any tribunal, arbitrator(s) or court with regard thereto or in connection therewith, and thirdly that the guarantor shall immediately pay the aforesaid guaranteed amount on demand and it shall not be open to the guarantor to know the reasons of or to investigate or to go into the merits of the demand or to question or to challenge the demand or to know any facts affecting the demand, and lastly that it shall not be open to the guarantor to require the proof of the liability of the seller to pay the amount before paying the aforesaid guaranteed amount to the purchasers.According to the appellant Respondent 1 did not supply the equipment at site within the time allowed, nor replaced any of the defective items which, according to the appellant, had resulted in the late commencement of the trial crushing in the mill. It is further the case of the appellant that it had to make direct purchases of many parts from other sources as Respondent 1 had failed to supply the equipment. Ultimately by letter dated 21-11-1995 written to Respondent 2, the appellant invoked the bank guarantee. The material portion of this letter was aswish to inform you that M/s. Prem Heavy Engineering Works (P) Ltd., Rani Mill, Delhi Road, Meerut have failed to fulfil the conditions of our agreement dated 27-7-1994 insofar as timely supply of the machinery and equipment under order withview of their failure, we hereby invoke the bank guarantee in terms of clauses 1, 2 and 3 of the aforesaid guarantee and hereby demand payment of Rs. 26, 15, 000 (Rupees Twenty-six lakhs fifteen thousand only). You are, therefore, required to issue a demand draft drawn in favour of our company payable at Najibabad for Rs. 26, 15, 000 (Rupees Twenty-six lakhs fifteen thousand only). The original guarantee is enclosed which may please be acknowledged."The respondent Bank did not make the payment, notwithstanding the receipt of the aforesaid letter dated 21-11-1995 but the effect which this letter had was that, on 23-11-1995, Respondent 1 filed Original Suit No. 1182 of 1995 before the Court of Civil Judge, Meerut, under Section 20 of the Indian Arbitration Act, 1940. In the said suit the appellant herein was impleaded as Defendant 1 while the State Bank of India was impleaded as Defendant 2. The only relief claimed in this suit was that the dispute between the parties should be referred to an arbitrator. Along with this suit Respondent 1 also filed an application for the grant of injunction restraining the appellant herein from encashing the aforesaid Bank Guarantee No. 40/51 which had been issued for a sum of Rs. 26, 15, 0009. It appears that there was some discussion between the representatives of the appellant and Respondent 1 in connection with the encashment of the said Bank Guarantee No. 40/51. Pursuant thereto letter dated 24-11-1995 was written by Respondent 1 to the appellant which was to the followingdiscussed with your managing director Shri G.R. Mararka today at your Delhi guest house, we confirm that we shall despatch balance parts except lime elevator direct from our works by 26-11-1995 and shall arrange despatch of balance fright oil after payment except air compressor by 27-11-1995. We shall ensure commissioning of the two cooling towers of one complete shall of twin crystallizer and F.M. Piping by 30-11-1995 and F.M. Tonor with Rouling by 10-12-1995. We request you to kindly keep the invocation of the above guarantee in abeyance till 10-12-1995."According to the appellant it was not aware that Original Suit No. 1182 of 1995, along with an application for injunction had already been filed by Respondent 1 a day earlier to the respondents letter dated 24-11-1995. Acting on the basis of the aforesaid letter of Respondent 1 the appellant wrote a letter dated 27-11-1995 to the Manager, State Bank of India, Meerut Cantt. After expressing its regret that the proceeds of the guarantee had not been paid to the appellant, it was stated in this letter that Respondent 1 had assured to make a complete supply of the ordered plant and machinery within next three or four days. In view of this it withdrew its letter of invocation dated 21-11-1995 but it was added that "it may, however, be noted that demand payment is being withdrawn without prejudice to our right of invocation under theApparently having succeeded in persuading the appellant to write the aforesaid letter dated 27-11-1995 withdrawing the letter of invocation, Respondent 1 on the very next day, i.e., 28-11-1995 obtained an ex parte injunction from the Court of Civil Judge, Meerut, restraining the appellant from encashing the aforesaid Bank Guarantee No.According to the appellant, Respondent 1 did not make the requisite supplies with the result that vide letter dated 9-1-1996, written to the Assistant General Manager, State Bank of India, Meerut, it invoked Bank Guarantee No. 40/51 by, inter alia, stating asper clause 14 of the supply agreement M/s. Prem Heavy Engineering Works (P) Ltd., Meerut has failed to deliver the equipments and its commissioning within the scheduled time-frameNow we hereby invoke the aforesaid guarantee for Rs. 26, 15, 000 (Rupees Twenty-six lakhs fifteen thousand only) being 5% of the contract value and enclose herewith the original guarantee for your record. Kindly hand over the demand draft in our favour payable at Najibabad, Distt. Bijnor, Uttar Pradesh towards the invocation amount."As on 28-11-1995 Respondent 1 had already obtained an ex parte injunction restraining the encashment of bank guarantee, no payment was made to the appellant by theRespondent 1 then filed another injunction application dated 12-1-1996 with regard to the second bank guarantee dated 24-11-1994 which was for a sum of Rs. 33 lakhs. It obtained an ex parte injunction in respect thereto on the same day. Being ignorant of this the appellant wrote a letter dated 16-1-1996 to the respondent Bank invoking the said Bank Guarantee No. 40/47. In the said letter it was stated that Respondent 1 had failed to deliver the equipment as per the terms of the agreement and that the appellant had bought equipment from various markets due to which the advance amount which had been paid to Respondent 1, in respect of which this bank guarantee had been issued, remained unadjusted. The Bank was accordingly required to pay the said amount of Rs. 33According to the appellant it is only after 16-1-1996 that it became aware of the filing of the aforesaid suit and the injunction application and it entered appearance in court on 18-1-1996 even though no notice had been served on it. As per the appellant, there was delay in the disposal of the injunction application, consequently it approached the High Court for appropriate directions and the Allahabad High Court vide order dated 10-5-1996 directed the Civil Judge, Meerut Cantt., to dispose of the suit within the time fixed byBy a detailed order dated 20-8-1996, the Second Civil Judge (Sr. Division), Meerut vacated the ex parte injunctions which had been granted and dismissed the injunction applications. In arriving at this conclusion it observed that Respondent 1 had not stated that the work had been completed and nor was there any allegation of cheating or fraud contained in the plaint which had been filed. The trial court referred to a number of decisions of this Court and came to the conclusion that there was no basis, in law, for the grant of any interim prohibitoryThe appellant on 22-8-1996 again approached the respondent Bank for the encashment of the bank guarantees, but withoutRespondent 1 then filed Revision Petition No. 257 of 1996 on 10-9-1996 before the Allahabad High Court challenging the order dated 20-8-1996 of the trial court. The Single Judge of the Allahabad High Court took up the revision petition and disposed it of on the same day and, after setting aside the order dated 20-8-1996 it remanded the matter back to the trial court for a fresh decision but, at the same time, directed that till the disposal of injunction application the bank guarantees in question shall not be invoked or encashed. The trial court was directed to hear the parties within fifteen days of the receipt of the order and to dispose of the injunction application within fifteen days thereafter. Needless to state, due to dilatory tactics adopted by Respondent 1, which is evident from the documents available on the record of this case, the said injunction applications have not been disposed of till date with the result that the injunction granted by the Single Judge of the High Court vide order dated 10-9-1996 stillWhile allowing the civil revision the Single Judge in his judgment did not think it necessary to refer to the judicial decisions which were cited before him. The Court observed that reference to the same was not necessary because the trial court, who had observed that the plaint did not contain any allegation with regard to fraud, had not noticed that allegation of fraud was contained in the injunction application. The learned Judge noticed that the liability of the Bank under the guarantee was absolute and that it was not supposed to question the authority of the beneficiary to encash the bank guarantee but observed that the same "could not be the guideline for allowing the defendant to encash the bank guarantee unless there was a finding that the defendant was having undue enrichment thereby"

Court's reasoning:
27. No plea was taken before the courts below, and no document has been shown to us by the respondents, which can prima facie indicate that the full amount of advance had been adjusted under clause 13 of the main contract between the appellant and Defendant 1. According to the appellants, the original guarantee was for Rs. 51, 70, 000 but the same, after adjustment of the advance, in terms of clause 13 of the main agreement, stood reduced to Rs. 33, 00, 000. This amount was still outstanding and, therefore, the bank guarantee had not come to an end and was rightlyComing to the allegation of fraud, it is an admitted fact that in the plaint itself, there was no such allegation. It was initially only in the first application for the grant of injunction that in a paragraph it has been mentioned that the appellant herein had invoked the bank guarantee arbitrarily. This application contains no facts or particulars in support of the allegation of fraud. A similar bald averment alleging fraud is also contained in the second application for injunction relating to Bank Guarantee No. 40/47. This is not a case where Defendant 1 had at any time alleged fraud prior to the filing of injunction application. The main contract, pursuant to which the bank guarantees were issued, was not sought to be avoided by alleging fraud, nor was it at any point of time alleged that the bank guarantee was issued because any fraud had been played by the appellant. We have no manner of doubt that the bald assertion of fraud had been made solely with a view to obtain an order of injunction. In the absence of established fraud and not a mere allegation of fraud and that also having been made only in the injunction application, the court could not, in the present case, have granted an injunction relating to the encashment of the bankIt is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be followed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decisions will not be of much importance was clearly a method adopted by it in avoiding to follow and apply the law as laid down by this Court. Yet another serious error which was committed by the High Court, in the present case, was not to examine the terms of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had taken the trouble of examining the documents on record, which had been referred to by the trial court, in its order refusing to grant injunction, the court would not have granted the interim injunction. We also do not find any justification for the High Court in invoking the alleged principle of unjust enrichment to the facts of the present case and then deny the appellant the right to encash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guarantee the applicability of the principle of undue enrichment has noWe are constrained to make these observations with regard to the manner in which the High Court had dealt with this case because this is not an isolated case where the courts, while disobeying or not complying with the law laid down by this Court, have at times been liberal in granting injunction restraining encashment of bank guarantees