Case: U.P. Co-Operative Federation Ltd Vs. Singh Consultants &amp; Engineers (P) Ltd

3. This is an appeal from the judgment and order of the learned Single Judge of the Allahabad High Court (Lucknow Bench) in Revision Petition No. 157 of 1986. It appears that the appellant, a State Government enterprise, on or about May 17, 1983 entered into a contract with the respondent - a private limited company for the supply and installation of a vanaspati manufacturing plant at Halduchaur in the District of Nainital, in the State of Uttar Pradesh. The contract bond contemplated, according to the appellant, guaranteed performance of work at various stages in accordance with the time schedule prescribed therein and provided for completion and commissioning of the plant after due trial run by May 15, 1984. The appellant contends that time was essentially and indisputably the essence of theThe contention of the appellant was that as per the terms and conditions of the contract bond, the respondent was to furnish a performance bank guarantee for Rs. 16.5 lakhs and yet another bank guarantee for Rs. 33 lakhs as security for the monies advanced by the appellant to the respondent for undertaking the work. Both these two guarantees as also the contract bond entitled the appellant to invoke them and call for their realisation and encashment on the respondents failing to perform the obligations for which the appellant was made the soleMay 15, 1984 was the date fixed for completion and commissioning of the plant after 15 days trial run for commercial production. It was alleged that between December 26, 1984 and January 28, 1985 the respondent defaulted at various stages and finally failed to complete the work within the stipulated time. The appellant invoked the two guarantees one after the other. The appellant thereafter on March 15, 1985 proceeded to have the plant completed and the plant was formally inaugurated. The appellant contends that the plant could actually be commissioned for commercial production in July/August 1985. The respondent on August 4, 1986 filed a petition under Section 41 ofthe Arbitration Act, 1940 (hereinafter called the Arbitration Act), in the Court of Civil Judge, Lucknow praying for an order restraining the appellant from realising and encashing the bank guarantees. The learned civil judge for the reasons indicated in his order dated August 8, 1986 declined to issue any injunction and dismissed theBeing aggrieved by the aforesaid decision, the respondent went up before the Allahabad High Court. The learned Single Judge of the Allahabad High Court, by the impugned judgment of February 20, 1987, allowed the revision petition and held that the invocation of the performance guarantees were illegal and further held the contentions of the appellant that the performance guarantees constituted independent and separate contracts between the guarantor bank and the beneficiary and created independent rights, liabilities and obligations under the guarantee bonds themselves, as being "technicalOn May 17, 1983, as mentioned hereinbefore, an agreement had been executed between the appellant and the respondent wherein it was decided asthe PCF (the appellant herein) has decided to set up a Vanaspati Plant of 62.5 M.T. per day vanaspati capacity, comprising of 70 M.T. per day hardening capacity based on 95 per cent of soya bean oil as raw oil 62.5 M.T. per day, post-refining capacity, 72 M.T. deodorization capacity and 72 M.T. filling and packing capacity, complete with all necessary utilities such as water and steam Distribution Equipments Oil Storage Section Electrification and Distribution Equipments Automatic Weighing filling and packing/sealing equipments and fire-fighting equipments etc., at Halduchaur, District Nainital (UP) lying at Bareilly - Haldwani road about 3.5 Kms. from Lalkuan towards Haldwani and the agreement furtherwhereas the seller (the respondent herein) has undertaken to provide technical know-how and fabricate, design, engineer, manufacture, procure, import, supply, erect, instal, give trial runs and commission the Vanaspati Complex as referred to above complete in all respects at Halduchaur District Nainital (UP) as per specifications contained at Annexures A to Q and signed by both the parties in token of incorporation as an integral part of this agreement with guaranteed performance on the terms and conditions hereinafter appearing and containedAnd whereas the contract price hereinafter mentioned is based on the sellers undertaking to commission and make ready for commercial production the said Vanaspati complex by May 15, 1984 and if the seller fails to do so the contract price shall stand reduce to the extent as hereinafterwhereas the contract price hereinafter mentioned is also based on the guaranteed performance of the said Vanaspati Complex as hereinafter provided and it is a term of this Agreement that if the said Vanaspati Complex fails to give the guaranteed performance as hereinafter specified, the contract price shall stand reduced to the extent hereinafterClause 1. 6 stipulated that the date of commissioning and handing over shall be the date on which the PCF takes over the complete plant after successful commissioning and fulfilling of guaranteed performance specified in the agreement. This clause furtherseller shall be deemed to have completed the erection and commissioning after giving successful trial runs for continuous period of 15 days with all the plants working simultaneously. However, the seller should fulfil the warrantees of individual plants separately also as given in the specifications. The complete warrantees/performance guarantees shall be demonstrated by the seller over a continuous period of 15The seller also agrees to exclude/include some of the machines/equipments/components from the plants as may be desired by the PCF during the course of this agreement, and cost of such machines/equipments/components on reasonable actual basis shall deducted/added to from the contract price and thus the reduced/increased contract price shall be paid by the PCF. However, the PCF should intimate such exclusion/inclusion within two months from the date of signing of the agreement. The said price of Rs. 1, 65, 00, 000 (Rs. one crore and sixty five lakhs only) shall be paid by the PCF to the seller in the followingOn or about June 25, 1983 two bank guarantees were executed by Bank of India, Ghaziabad and the bank guarantee numbered 17/16 provided, inter alia, astherefore, the Bank hereby guarantees to make unconditional payment of Rs. 16.5 lacs (Rupees sixteen lacs fifty thousand only) to the Federation on demand at its office at Lucknow without any further question or reference to the seller on the sellers failure to fulfil the terms of the sale on the following terms andThe sole judge for deciding whether the seller has failed to fulfil the terms of the sale, shall be the PCF(B) This guarantee shall be valid up to twelve months from the date of issue, i.e. up to June 24, 1984(C) Claims, if any, must reach the Bank in writing on or before expiry date of this guarantee after which the Bank will no longer be liable to make payments to the PCF(D) Banks liability under this guarantee deed is limited to Rs. 16.5 lacs (Rupees sixteen lacs fifty thousand only)(E) This guarantee shall not be revoked by the Bank in any case before the expiry of its date without written permission of theThe bank guarantee No. 17/15 of the said date further went on to provide aswhereas to secure the said advance, the seller requested the Bank to furnish a bank guarantee of the said amount of Rs. 33 lacs (Rupees thirty three lacs) in favour of the PCF and the bank accepted the said request and agreed to issue the required bank guarantee in favour of thetherefore, in consideration of the aforesaid advance of the said sum of Rs. 33 lacs (Rupees thirty three lacs only) to be paid by the PCF to the seller as aforesaid the Bank hereby agrees and guarantees to make unconditionally immediate payment to the Federation at its office at Lucknow of the sum of Rs. 33 lacs (Rupees thirty three lacs only) or any part thereof, as the case may be, due to the PCF from the seller at any time on receipt of the notice of demand without any question or reference to the PCF or to the seller on the sellers failure to fulfil the terms of said advance on the following terms andThe PCF shall be sole judge to decide whether the seller has failed to fulfil any terms and conditions of the said advance and on account of the said failure what amount has become payable to the PCF under this guarantee(2) This guarantee shall be valid up to May 15, 1984 (Fifteenth May 1984) after which period this guarantee shall stand cancelled and revoked(3) The claims of the PCF, if any, under this guarantee, must reach the Bank on or before the date of expiry of this guarantee and after the date of expiry, no claim will be entertained by the Bank(4) The Bank shall not revoke this guarantee in any case before its expiry date of May 15, 1984 except with the written permission of theI have set out in extenso the terms in order to highlight the fact that under the terms agreed to between the parties, there is no scope of injunction

Court's reasoning:
13. The trial court in its judgment held that the Bank should be kept to fulfil its obligations and commitments and the court should not come in the way. But that principle was distinguished by the High Court on the ground that the respondent was seeking relief against the U.P. Cooperative Federation Ltd. and the subject matter of the dispute itself being as to whether the bank guarantee could be invoked and encashed. The High Court was of the view that even otherwise it cannot be doubted that the appellant cannot be permitted to take advantage of illegally invoking a bank guarantee on a technical plea that the guarantee was independent of the contract involving only the bank and the opposite party at pleasure. The High Court was of the view that prima facie it appeared that the plant was handed over after a trial run and that the commercial production had started and this has not been assailed as a fact. The High Court was of the view, that in these circumstances this cannot be said that the invocation order was final and irrevocable. The High Court was further of the view that having taken over the possession of the plant it was necessary to consider all the aspects and held that the bank guarantees could not be invoked. The High Court was of the view that it was not a question of restraining the performance of any bankI am, however, unable to agree. The principles upon which the bank guarantees could be invoked or restrained are well settled. Our attention was also drawn to several decisions of the High Court as well as of this Court. Reference had also been made to some of the English decisions. So far as the position of English law is concerned, the principles by now are well settled. I will refer to some of the decisions and explain theIn the instant case, the learned Judge has proceeded on the basis that this was not an injunction sought against the bank but this was the injunction sought against the appellant. But the net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated man in such circumstances is not remedyless. The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. In this case, there cannot be any basis for apprehension that irretrievable damages would be caused if any. I am of the opinion that this is not a case in which injunction should be granted. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well settled principle of the law in England. This is also a well settled principle of law in India, as I shall presently notice from some of the decisions of the High Court and decisions of thisIn the instant case, there was no fraud involved and no question of irretrievable injustice wasMr. Tarkunde submitted before us that in this case the grievance of the appellant was that there was delay in performance and defective machinery had been supplied. He submitted that if at this stage appellant was allowed to enforce the bank guarantee, damage would be done. He submitted before us that appellant could not be permitted to take advantage of illegality by invoking the bank guarantee. But in my opinion these contentions cannot deter us - in view of the principle well settled that there should not be interference in trade. This is not a case where irretrievable injustice would be done by enforcement of bank guarantee. This is also not a case where a strong prima facie case of fraud in entering into a transaction was made out. If that is the position, then the High Court should not have interfered with the bankIn the aforesaid view of the matter, this appeal must be allowed. The judgment and order of the Allahabad High Court dated February 20, 1987 must be set aside and the order of the learned Civil Judge, Lucknow dated August 8, 1986In the facts and circumstances of the case parties will bear their own costs of this appeal