Case: U. P. State Sugar Corporation Vs. Sumac International Limited

The appellant, U. P. State Sugar Corporation, entered into an agreement dated August 2, 1989, with the respondent, Sumac International Pvt. Ltd., under which the respondent agreed to design, to prepare an engineering lay-out and to manufacture or procure and supply to the appellant the machinery and equipment for a complete sugar plant for extension and modernisation of the appellants existing sugar plant at Rohana Kalan, District Muzaffarnagar, U. P. The respondent was required to set up a new plant of 2500 TCD at a new site or an adjoining site close to the existing sugar plant of the appellant. The total contract price was fixed under clause 2.1 of the contract at Rs. 1, 780 lakhsUnder the terms of the agreement the respondent was required to set up the plant and make it ready for commercial production by November 30, 1990. The agreement stated that in this regard time was of the essence of the contract and if the respondent failed to do so the consequences were also spelt out in the contract. Under clause 3 of the contract a monthwise progressive delivery report was to be submitted by the respondent and a PERT/CPM chart had to be submitted and adhered to. Clause 4 which dealt with delivery required the respondent to complete all supplies by November 15, 1990, so that the plant could be commissioned by November 30, 1990. Under clause 11.1, the respondent-seller was entitled to a reasonable extension of time as decided by the purchaser if the purchase order was expressly suspended for no fault of the sellerUnder clause 15 the respondent-seller was required to furnish to the appellant five bank guarantees as specified therein. These were :1. A bank guarantee for timely delivery of plant and machinery as provided in clause 14.1 representing five per cent. of the contract price referred to in clause 2.1. This was required to be furnished within 3 1/2 months of the signing of the agreement2. The seller was required to furnish a bank guarantee in respect of guaranteed performance of the plant and machinery for an amount representing 5 per cent. of the contract price. This guarantee was required to be furnished eight months before the scheduled date of commissioning mentioned in clause 4.1 or within six months from the date of the signing of the agreement or after 2 1/2 months of the opening of the letter of credit whichever of these dates was earlier3. Three bank guarantees in respect of advance payments to be made by the appellant to the respondent under clauses 13.2(a) to 13.2(c) were required to be for Rs. 89 lakhs, Rs. 178 lakhs and Rs. 89 lakhs, respectively, representing 5 per cent., 10 per cent. and 5 per cent. of the contract price respectivelyUnder clause 13.2 on receipt of the first of these bank guarantees for Rs. 89 lakhs the first instalment of advance would be paid within a week from the date of signing of the agreement. On receipt of the second bank guarantee for Rs. 178 lakhs the second advance would be paid by the appellant to the respondent within 2 1/2 months of the signing of the agreement subject to the respondent furnishing various statements, certificates, etc., as set out in that clause. The third bank guarantee for Rs. 89 lakhs was to be furnished against the advance to be paid by the appellant to the respondent within 3 1/2 months from the date of the signing of the agreement. These three bank guarantees are thus in respect of the advance payments required to be made by the appellant to the respondentUnder clause 15.5 all these bank guarantees are payable on demand. It is expressly provided that it shall not be open to the guarantor to know the reasons for or to investigate or to go into the merits of the demand invoking the bank guarantee or to question or challenge the demand or to require proof of the liability of the seller before paying the amount demanded. It is further provided that the invocation of the bank guarantee shall be binding on the respondent and that the invocation of the bank guarantee would not be affected in any manner by reason of the fact that any dispute or disputes had been raised by the respondent with regard to its liability. Nor would it be affected by the fact that proceedings were pending before any Tribunal, arbitrator or court with regard thereto.Accordingly, the respondent furnished, inter alia, four bank guarantees, one being a guarantee for due delivery and the other three being the bank guarantees in respect of advance payment of price. The total amount, covered by the bank guarantees securing advance payments is Rs. 3.56 crores, which amount was paid by the appellant to the respondent as advanceThe contract was not carried out within the time envisaged under the contract. Thereafter, at a meeting held on October 1, 1991, between the appellant and the respondent, the time for completion of this project was extended up to May, 1992, and a detailed chart was drawn up for the completion of the project by that date. No further extension of time has been given by the appellant to the respondent thereafter. The respondent, however, did not complete the said project within the extended periodBy their letter dated September 6, 1995, the State of U. P. through the Special Secretary, Government of U. P., informed the managing director of the appellant that it had been decided to transfer the Rohana Kalan (Muzaffarnagar Unit) of the appellant to the joint sector. As a result, the expansion project of this unit should be cancelled and appropriate action in accordance with law should be taken. Thereupon the appellant cancelled the agreement by its letter dated September 7, 1995, addressed to the respondent. The appellant claimed a refund of the advance payment of Rs. 3, 14, 78, 093 as unutilised and unadjusted amount of advance payment. The appellant, by its four letters all dated October 28, 1995, addressed to the respondent invoked the three bank guarantees in respect of the advance payments after giving credit to the respondent for material worth Rs. 42 lakhs which had been supplied till then. The appellant also invoked the delivery guarantee for Rs. 89 lakhs. The bank guarantees so invoked are : Bank guarantee No. 9/47, dated August 10, 1989, for Rs. 89 lakhs. In this bank guarantee credit for Rs. 42 lakhs has been given and the invocation of the bank guarantee is only for the balance sum of Rs. 47 lakhs. The second bank guarantee so invoked is No. 9/64, dated November 20, 1989, for Rs. 178 lakhs. The third bank guarantee is No. 9/70 of January 6, 1990, for Rs. 89 lakhs and the fourth, the delivery guarantee is No. 12/88, dated November 13, 1990, for Rs. 89 lakhs.On October 5, 1995, the respondent filed a petition under section 20 of the Arbitration Act for appointment of an arbitrator since the agreement between the parties provides 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, Senior Division, Muzaffarnagar, before whom these applications were filed, dismissed these applications. In revision, however, these applications have been allowed by the High Court and an injunction has been granted restraining the appellant from enforcing these bank guarantees. Hence, the appellant has come by way of the present appea

Court's reasoning:
Clearly, therefore, 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. There must be a fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the appellant and his claim that time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is a fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the bank guarantees fraudulent. The High Court has also referred to the conduct of the appellant in invoking the bank guarantees on an earlier occasion on April 12, 1992, and subsequently withdrawing such invocation. The court has used this circumstance in aid of its view that time was not of the essence of the contract. We fail to see how an earlier invocation of the bank guarantees and subsequent withdrawal of this invocation make the bank guarantees or their invocation tainted with fraud in any manner. Under the terms of the contract it is stipulated that the respondent is required to give unconditional bank guarantees against advance payments as also a similar bank guarantee for due delivery of the contracted plant within the stipulated period. In the absence of any fraud the appellant is entitled to realise the bank guaranteesThe mere fact that a reference underthe Sick Industrial Companies (Special Provisions) Act, 1985 is pending before the Board, is, in our view, not sufficient to bring the case within the ambit of the "irretrievable injustice" exception. Under the scheme of the said Act, the Board is required to make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company. Under section 16(4) where the Board deems it fit to make an inquiry or to cause an inquiry to be made in this connection, it may appoint one or more persons to be special directors for safeguarding the financial and other interests of the company or in the public interest. Under section 17 after making an inquiry, if the Board is satisfied that a company has become a sick industrial company, the Board may then decide, by an order in writing, whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time. If this is practicable, then the Board shall give such company the opportunity to make its net worth exceed the accumulated losses. Under sub-section (3) of section 17 if the Board decides that this is not practicable within a reasonable time, it may adopt measures specified in section 18 and provide for a scheme for appropriate measures in relation to that company. There can, therefore, be no presumption that the company will, in no circumstances, be able to discharge its obligations.Under section 22 on which the respondent relies, where in respect of an industrial company, an inquiry under section 16 is pending, or any scheme under section 17 is under preparation or a sanctioned scheme is under implementation or when an appeal under section 25 is pending, then no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or the appointment of a receiver in respect thereof can be proceeded with ; and no suit for the recovery of money or for the enforcement of any security against the industrial company shall lie or be proceeded with except with the consent of the Board or, as the case may be, the appellate authority. The respondent contends that its right to realise its claim, if established, would be affected by reason of section 22 of the said Act. There is no material before us to show that the appellant-company cannot make its net worth positive. No scheme has been framed under the said Act so far. Even under section 22 there is no absolute bar against any suit for the recovery of money. The suit cannot be proceeded with except with the consent of the Board or the appellate authority. Therefore, in an appropriate case, the Board or the appellate authority is entitled to give its consent to such a claim being proceeded with. This is not a situation of the kind envisaged in the case of Itek Corporation 566 Fed Supp. 12 10, where there was no possibility whatsoever of recovery of any amount from the purchaser. In the present case, there is a good possibility of such recovery. In any case, learned counsel for the appellant has, on instructions, very fairly stated that the appellant-company undertakes to earmark the amounts realised from the bank guarantees in question for the purpose of recovery of claims, if any, which the respondent may ultimately be found to be entitled to recover from the appellant. Any scheme which the Board may frame under the said Act will be subject to this undertaking given by the appellant to set apart the amounts realised under the bank guarantees in question for meeting any validly adjudicated claims of the respondent against the appellant under or arising from the said contract.