w w w . L a w y e r S e r v i c e s . i n



Heavy Engineering Corporation Limited v/s Standard Chartered Bank & Another

    A.P.D. No. 198 of 2016 With C.S. No. 38 of 2000

    Decided On, 08 May 2019

    At, High Court of Judicature at Calcutta

    By, THE HONOURABLE MR. JUSTICE SOUMEN SEN & THE HONOURABLE MR. JUSTICE RAVI KRISHAN KAPUR

    For the Appellant: Utpal Bose, Reetobrata Mitra, Bithika Mandal, Advocates. For the Respondents: R1, S.P. Sarkar, Sr. Advocate, K. V. Viswanathan, Advocate, R2, Pramod Kumar Drolia, Official Liquidator.



Judgment Text

Soumen Sen, J.

1. The appeal is directed against dismissal of the suit filed by the appellant for encashment of the bank guarantee.

A bank guarantee is a special contract and it has to be enforced according to its terms. If the bank guarantee is unconditional and payment should be made on demand, then the bank is under no obligation to find out whether any default is committed or whether any amount is due by the person at whose instance, the guarantee was issued and once the beneficiary invokes the bank guarantee and makes the demand the bank is obliged to make the payment. The bank guarantee is a standalone agreement between the bank and beneficiary and if the terms of the guarantee are unconditional and payable on demand, the bank cannot deny its obligation on a specious plea that there is a dispute between the constituent and the beneficiary. The bank is not concerned with the underlying contract between the parties to the contract. Bank guarantee is an independent document. Unless the execution of the bank guarantee is vitiated by fraud or there are instances of irretrievable injustice or prejudice likely to result from the invocation of the bank guarantee, the court would not insulate the bank from discharging its liability under a bank guarantee. However, what is of seminal importance is that the invocation of the bank guarantee has to be in accordance with the terms of the bank guarantee. If the invocation is not in accordance with the terms of the guarantee, the bank, on demand, is not required to make payment. When a dispute is raised as to whether the bank is justified in refusing to release the amount covered under the bank guarantee, the court is required to scrutinize if the invocation of the bank guarantee is in terms on the bank guarantee. The terms of the bank guarantees are to be strictly construed. It is the bank guarantee document which alone is important and no amount of oral evidence can be permitted to dilute and/or explain the terms of the guarantee which may be at variance with the agreed terms. The letter of invocation must speak for itself.

This discussion is essential having regard to the nature of the dispute with which the plaintiff and the defendant had approached the trial seeking adjudication with regard to their respective rights in relation to an unconditional bank guarantee payable on demand.

The dispute arose with regard to two bank guarantees furnished on behalf of the defendant no.2 by the defendant no.1 in favour of the plaintiff “as advance against supply of plant and equipment” by the plaintiff to the defendant no.2. In terms of two letters of intent, HEC-CS-1502-81 dated 19th May 1981 and HEC-CS-1502-81 dated 19th May 1981, two bank guarantees for Rs.71,35,100 and for Rs.20,32,500 were issued. The two bank guarantees are on identical terms, the only differences being in the dates and amounts. The said guarantees were furnished for and on behalf of the defendant no.2 towards advance payment of Rs.71,35,100 and Rs.20,32,500 respectively as “advance against supply of plant and equipment by the plaintiff to the defendant no.2” in terms of the two several letters of intent mentioned aforesaid.

Both the letter of intent is divided into 4 sections namely:

1. Gas Cleaning

2. Gas Compression & Dehydration

3. Utilities and services including telecommunication and unit substation.

4. Tar distillation plant including liquor treatment & effluent treatment plants.

The plaintiff intended to place an order for the complete work on a turnkey basis of the aforesaid four sections of the LTC plant at Dankuni at a total price of Rs.21.10 crores. The letter of intent dated 19th May, 1981 after describing the 4 sections of the LTC plant at Dankuni stated:

“The above price covers the complete design, supply of both indigeneous and imported equipment, erection and commissioning with requisite civil and structural works complete in all respects except land filling upto 4.00 M level, railways siding, roads & outside drawing and perphorial lighting which will only be outside your scope or work.

The break up of the total price of Rs.21.10 crores for purpose of billing is enclosed.

We have noted the terms of payment proposed by you in your letter dated 18.05.81. As we have indicated about the terms of payment agreed to by us, it will not be possible to consider you proposal for relaxation of the same. However, attempts will be made to consider some softening of payment terms later depending our own cash flows on this project.

Kindly let us have your detailed technical specifications etc to enable us to draw up a detailed contract for the work.

Kindly communicate your acceptance of this letter of intent and furnish us a bank guarantee on approved proforma to release the initial advance of Rs.15.64 lakhs to you”.

In pursuance of the letter of intent two bank guarantees have been furnished by the defendant no.1 on behalf of the defendant no.2 “as advance against the supply of plant and equipment”.

(emphasis supplied)

As stated above, the terms of the bank guarantees are identical and the obligation of the bank to pay under the guarantee is stated in Clause 2 of both the guarantee document which are on identical terms. Clause 2 of bank guarantee number 10001/83/108/G is reproduced below:

“We, Grindlays Bank P.L.C., 19 Netaji Subhas Road, Kolkata – 1 undertake the indemnify and keep the CORPORATION indemnified to the extent of Rs.71,35,100/- (Rupees seventy one lakhs thirty five thousand and one hundred only) against any loss or damage caused to or suffered by the CORPORATION by reason or any breach or failure by the said SUPPLIER, in due performance of the aforesaid contract, we shall forthwith on demand pay to the CORPORATION any sum or sums not exceeding Rs.71,35,100/- (Rupees seventy one lakhs thirty five thousand and one hundred only) without making prior reference to the said SUPPLIER with an exclusion of any action in court by SUPPLIER.”

(emphasis supplied)

On a plain reading of the said clause it appears that the bank would indemnify and keep the plaintiff indemnified for the sums cover under the said guarantee “against any loss or damage caused to or suffered by the corporation by reason of any breach or failure by the said supplier in due performance of the aforesaid contract.”

(emphasis supplied).

These facts are indisputed.

Keeping these facts in mind let us now examine the letter of invocation dated 6th November, 1998. The said letter is reproduced below:

“Dated the 6th November ‘1998

To

The Chief Manager

ANZ, Grindlays Bank Ltd.

19, Netaji Subhas Road

P.B. No. 2781 Cal- 700 001

Kind attention: Mr. Harish

Jhurani(Operations International Services) Officer

Sub:- Request for encashment of D.G. No. G1001/83/108G dt. 16.2.83 for Rs.71,35,100/- and DG No. G/1001/84/608 dt. 29.2.84 for Rs.20,32,500/-

Dear Sir,

Since a substantial amount is to be recovered from M/s. SCIL India Limited on account of contractual settlement of Dankuni Coal Complex Project, we hereby instruct you to proceed for encashment of the B.G. No. G1001/83/108G dt. 16.2.83 for Rs.71,35,100/- and DG No. G/1001/84/608 dt. 29.2.84 for Rs.20,32,500/- and remit the proceeds of encashment to us within 7 (seven) days from the date of receipt of this letter.

Kindly expedite the remittance of encashment proceeds through demand draft to be issued in favour of M/s. HEAVY ENGINEERING CORPORATION LIMITED, on S.B.I. Hatia, Panchi.

Kindly treat the matter as Most Urgent.

Thanking you,

Yours faithfully,

(S.K. CHAKRABORTY)

MANAGER (FINANCE) I/C.”

(emphasis supplied)

The defendant no.1 immediately upon receipt of the said letter denied its obligation to pay on the ground that the said guarantees specifically cover the advance to be made by the plaintiff to the defendant no.2 for supply of plant and equipment whereas the letter of invocation is on the ground that “a substantial amount is to be required from SCIL India Ltd. on account of contractual settlement of Dankuni Coal Complex Project.”

(emphasis added)

Mr. Utpal Bose the learned Senior Counsel appearing on behalf of the appellant while admitting that the said letter of invocation is defective has submitted that by the subsequent letters dated 19th December, 1998 and 28th December, 1998 the earlier defects were cured and the said two letters are in terms of the bank guarantee.

Accordingly the contention of the appellant that the bank had wrongfully or in breach of the terms of the guarantee has refused to encash the said bank guarantee is unsustainable and the case made out in paragraph 12 and 13 of the plaint is rejected. The said two paragraphs read:

“12. By its letter dated 6th November, 1998 to the defendant and received by the defendant on 13th November, 1998 the plaintiff, in the premises demanded the encashment of the said guarantees within seven days of receipt of the said letter by the defendant.

13. Wrongfully and in breach of the terms of the said guarantees by its letter dated 18th November, 1998 the defendant Bank refused to encash the same, purporting to contended that the claim of the plaintiff was not within the said guarantees.”

The content of the letter dated 19th December, 1998 is reproduced below:

“No.HDC/Proj/Fin/98-343

Dated the 19th December 1998

To

The Chief Manager

Corporate Banking

ANZ Grindlays Bank

19, Netaji Subhas Road

Post Box No. 2645

Calcutta – 700001

Dear Sir,

With reference to your St. Relationship Manager’s letter dtd. 7.12.98 regarding encahment of B.Gs issued by you on behalf of M/s. SCIL for a total value of Rs.91.68 lakhs you are very much aware that M/s. SCIL owes to H.E.C. Rs.139.90 lakhs due to defective supply of Plant & Equipment as well as non-supply of Plant & Equipment and also other contractual deficiencies which has caused loss as reflected in the handing over/taking over report of the DCC Project by CIL. You are also aware that HEC has gone out of the way in supporting SCIL and getting the Plant completed with minimum damage. It is within HEC’s full rights to invoke the BG as per Clause No. 2 of the BG’s which is reproduced below; (BG No.G1001/83/1084 dt. 16.8.83 for Rs.71,35,100.00 and BG No.G1001/84/608 dt. 29.8.84 for Rs.20,32,500.00).

“WE GRINDLAYS BANK PLC 19, Netaji Subhas Road, Calcutta – 700001 do hereby undertake the Indemnity of Rs. (RUPEES ……………………………) against any loss or damage caused to or suffered by the CORPORATION by reason or any breach or failure by the said SUPPLIER, in due performance of the aforesaid contract, we shall forthwith on demand pay to the CORPORATION any sum or sums not exceeding Rs. (RUPEES without making any prior reference to the said SUPPLIER with an exclusion of any action in court by SUPPLIER.

The failure of M/s. SCIL in fulfilling the contractual obligation which includes performance Guarantees of Plant & Equipment are very well documented by HEC & CIL. In fact, the unadjusted advance of SCIL on account of Plant & Equipment is far in excess of the loss suffered by HEC. The same has been brought down to Rs.139.90 lakhs after allowing credit for contractual settlement.

Although as per terms of BG we are not bound to explain you all these things but the above details are furnished so that good sense will prevail and we expect you to live up to your reputation and honour the beneficiaries claim for encashment.

Thanking you,

Yours

faithfully,

T.L.N. SOURI

GENERAL MANAGER (PROJECTS & MNTG)

(emphasis supplied)

This was followed by the letter dated 28th December, 1998 which is also reproduced below :

“No. GGM(CM)/ /98

28th Dec., 1998

To,

The Chief Manager,

ANZ GRINDLAYS Bank,

CALCUTTA.

(Attn: Shri Vasudeo Kundu)

Fax No. 033-2211196

Sub: Encashment of two Bank Guarantees Nos.

1) G/1001/83/108G for rs. 71,35,100/-

2) G/1001/84/608 for Rs. 20,32,500/-

Ref: Our letter dated 19.11.98

Dear Sir,

We have intimated vide our above letter to encash the above two Bank Guarantees issued by you on behalf of SCIL India Ltd., to HEC.

You are requested to encash the above Bank Guarantees and send the proceeds amounting to Rs.91,67,600/- within 3 days time. Kindly treat this as most urgent and failing on the part of the Bank to honour the beneficiaries demand will be viewed seriously.

Thanking you,

Yours

faithfully,

(L.M. Prasad)”

In the letter dated 19th December, 1998 the plaintiff alleged that the defendant no.2 owes to plaintiff Rs.139.90 lakhs due to defective supply of plant and equipment as well as non-supply of plant and equipment and also other contractual deficiencies which had caused loss as reflected in the handing over/taken over report of the DCC project by CIL. It further states that the defendant no.2 has failed to fulfil the contractual obligation which includes performance guarantee of plant and equipment. In its earlier communication dated 28th November, 1998 the quantification of claim of Rs.139.90 lakhs is on the premise that the defendant no. 2 did not perform the contract in full as is evident from clauses A(7) and B(2), which read:

“A-7. Taking into consideration the final contract value of SCIL including claims as settled by CIL as well as the total payment made to SCIL including amount of advance directly paid to SCIL and SCIL vendor and contractor’s payment for their portion of work, and the amount of deduction imposed by CIL on SCIL’s A/s, HEC will receive from SCIL to the extent of Rs.139.90 lakhs as on date.

Since the advance paid to SCIL was remaining unadjusted due to non performance of the contract in full, HEC has suffered a loss of Rs.139.90 lakhs as on date. To recover the said amount from M/s. SCIL, we have no other alternative but to proceed for encashment of BG immediately.

B-2. Clause no.5 of your BG stipulates that bank undertakes not to revoke this guarantee during its currency except with the previous consent from us in writing. Therefore your unilateral decision as to cancellation of BG, during its currency despite our enforcement of claim for encashment is a clear violation of the terms of BG.

It is, therefore, appears that you are deliberately avoiding your responsibility for accepting our valid claim for encashment although the same is binding to bank as per terms of BG and you are taking decision as per your own desire not to invoke the BG violating the above clauses. As per above terms of BG, you are not even empowered to justify the reasons for encashment of the same as it is beyond the jurisdiction of Bank. The decision for enforcing the claim for encashment is resting only with the beneficiary and not with the Bank as per clause No. 3 and 5. Bank will only act as per instruction of beneficiary of BG (HEC) as the BG was executed by the Bank to protect any losses or damaged caused to or suffered by the beneficiary by reasons of any breach or failure by M/S. SCIL as per clause 2 of BG.

Here M/S. HEC has suffered a loss of Rs. 139.90 lakhs by paying advances to M/S. SCIL for which no value of work was executed by M/S. SCIL and performance as stipulated in contract was not complied with.

Considering the above, breach/failure by your client to execute the contract and the substantial damage or loss suffered by HEC arising there from Bank is bound to accept the beneficiary’s claim for encashment of BG and there is no reason on the part of Bank either to reject the valid claim or to cancel the valid BG during its currency.

We have explained the above fact to your Bank several times at the time of seeking extension for validity period of BG. Now, we further firmly instruct you to proceed for encashment of the above two Bank guarantees and remit the encashment proceeds to us without any further delay otherwise we will be forced to take up the matter in the court of law and to the Reserve Bank of India for redressal.”

(emphasis supplied)

For the averments in support of subsequent invocation, Mr. Bose has referred to paragraphs 14 and 15 of the plaint, which read:

“14. In spite of several reminders thereafter from the plaintiff and the clear and unambiguous terms of said guarantees and the subsequent demands of the plaintiff, inter alia by letters dated December 19 and December 28 1998 the defendant bank has wrongfully not encashed the said guarantees for their respective sums or for any portion thereof, though the plaintiff was and still is absolutely entitled to the full amounts of the said guarantees.

15. The plaintiff thereafter, by its letter dated 22nd February, 1999 complained to the Banking Ombudsman Calcutta in respect of the wrongful conduct of the defendant Bank. However, by a letter dated 17th September, 1999 the plaintiff was informed that the Banking Ombudsman had rejected the plaintiff’s case, such rejection is unwarranted and/or arbitrary in the facts of the case.”

Per Contra Mr. Sarkar, learned Senior Counsel appearing on behalf of the defendant no. 1 has referred to the deposition of the witness of the plaintiff and submitted that it would be clearly evident from the evidence of the plaintiff that the enforcement was on account of alleged loss and damages arising out of contractual obligations not covered under the aforesaid two letters of intent. In this regard, the learned senior counsel has relied upon answer to Question Nos. 30, 36, 37, 76 and 77 of the plaintiff’s witness. On the construction of Bank guarantee, the learned senior counsel has referred to the decisions of the Queen’s Bench Division in Perrylease Ltd. v. Imecar AG and Ors. reported at [1987] 2 All ER 373 at page 378, where the statement made in Volume 20 of Halsbury’s Laws of England (4th Edition) para 143 is relied upon and quoted with approval. The said paragraph reads:

“The principles of construction governing contracts in general apply equally to contracts of guarantee. Dealing with a guarantee as a mercantile contract, the court does not apply to it merely technical rules, but construes it so as to reflect what may fairly be inferred to have been the parties’ real intention and understanding as expressed by them in writing, and so as to give effect to it rather than not…”

Mr. Sarkar submits that when the plaintiff initially invoked the bank guarantee, it did not allege that there is non-supply of the equipments under the aforesaid letters of intent but it is on account of “contractual settlement”. The perception of the letter of invocation at the time of trial is immaterial. In this regard, reliance has been placed on the observation in Perrylease (supra), which quoted with approval Prenn v. Simmonds reported at [1971] 3 All ER 237 (at 241), where Lord Wilberforce said that when construing a written contract –

“evidence should be restricted to evidence of the factual background known to the parties at or before the date of a contract, including evidence of the “genesis” and objectively the “aim” of the transaction.”

This brings us to the issue of construction of the bank guarantee. The principles of construction governing contracts in general apply equally to contracts of guarantee. Dealing with a guarantee as a mercantile contract, the court does not apply to it merely technical rules, but construes it so as to reflect what may fairly be inferred to have been the parties’ real intention and understanding as expressed by them in writing, and so as to give effect to it rather than not. As Steyn J said in Phillips v Dorintal Insurance Ltd.; (1987) 1 Lloyd’s Rep 482 at 485, to determine the meaning of a contract the person construing the contract cannot simply ‘turn to a dictionary’. Similarly, Lord Hoffmann said in Investors Compensation Scheme Ltd v. West Bromwich Building Society; (1998) 1 WLR 896 at 913, that the ‘meaning of words is a matter of dictionaries...; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean’.

In Utica City Nat Bank v Gunn; 222 NY 204 at 207, Cardozo J had no doubt that processes in construction are not affected by the mere fact that the contract is one of guarantee. From the perspective of construction principles in general, a contract of guarantee is no different from any other contract. (See Perrylease (supra). The contract must be construed as a whole, applying the perspective rule. (See Australian Joint Stock Bank Ltd. v. Bailey [1989] AC 396 at 399)

The strict application of contracts of guarantee is expressed in the strictissimi juris rule. That rule is usually traced back to the somewhat ambiguous statement of Lord Ellenborough in Bacon v Chesney [(1816) 1 Stark 192: 171 ER 443]. He said that a claim against a surety is ‘strictissimi juris, and it is incumbent on the plaintiff to shew that the terms of the guarantee have been strictly complied with’. In ST Microelectronics NV v Condor Insurance Ltd.; (2006) 2 Lloyd’s Rep 525 at 530 Christopher Clarke J cited cases on both rules in reaching the conclusion that the ‘principle underlying’ the cases is one of ‘strict application’.

In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd.; (1987) 162 CLR 549 Mason ACJ, Wilson, Brennan and Dawson JJ said:

“At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. The doctrine of strictissimi juris provides a counterpoise to the law’s preference for a construction that reads a provision otherwise than a condition. A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety.”

Because it posits ambiguity, the first sentence suggests that the strictissimi juris rule is an analogous to the contra proferentem rule. (See Wardens and Commonalty of the Mystery of Mercers of the City of London v New Hampshire Insurance Co. [1992] 2 Lloyd’s Rep 365 at 368)

One particular situation where the strict rub of construction may apply is in respect of the interpretation of clauses (like exclusion clauses) which are designed to preserve the liability of the guarantor when he would otherwise be discharged under the general law.

The fact that the guarantee is given for a commercial purpose ought to be a sufficient basis for use of a commercial standard of application where it is necessary to infer the parties’ intention. It is surely within the competence of the court to adopt a construction of a document of a kind which is frequently abused, which may lessen that abuse, provided of course that the document is indeed not clear in its wording. The guarantee should be interpreted “as a whole as a commercial document” [Barclays Bank Plc v. Kingston 2006 (2) LLR 59]. In the instant matter the wordings of the bank guarantees are clear.

Given the nature of the risk undertaken by a guarantor, it is a reasonable inference that the parties intend requirements which directly qualify the creditor’s right to call upon the guarantor to be met exactly. In other words, the contract should be applied literally.

The modern theory of interpretation and construction of contracts subscribes to an objective theory of contract interpretation. This means that the subjective intentions of the parties are generally irrelevant as evidence of the meaning of the agreement as are details of their negotiations.

Lord Hoffmann gave his speech in Investors Compensation Scheme v West Bromwich Building Society, [1998] 1 W.L.R. 896. In what became the starting point for disputes about contractual interpretation he said:

“I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co, [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of ‘legal’ interpretation has been discarded. The principles may be summarized as follows.

i. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

ii. The background was famously referred to by Lord Wilberforce as the ‘matrix of fact’, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

iii. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

iv. The meaning which is a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (See Manai Investment Co Ltd v Eagle Star Life Assurance Co Ltd).

v. The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particular in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, the Antaios:

‘...if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’”

To these five principles, a sixth should now be added. In Re Sigma Finance Corp, [2009] UKSC 2, Lord Mance, approving Lord Neuberger’s dissenting judgment in the Court of Appeal, said at page 12:

“Lord Neuberger was right to observe that the resolution of an issue of interpretation in a case like the present is an iterative process, involving ‘checking each of the rival meanings against other provisions of the document and investigating its commercial consequences.”

The court will construe the words used by the parties in their agreement giving those words their natural and ordinary meaning. In Investors Compensation Scheme Ltd (supra), it was said that on occasion it may be possible to conclude that the parties must, for whatever reason, have used the wrong words or syntax, or something has gone wrong with the language. In broad terms this conclusion can be reached either because commercial common sense suggests it, or because of some further evidence in the surrounding circumstances. However, in most cases, as the UK Supreme Court has reiterated, the language of the contract itself will be of paramount importance:-

“the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.” [Arnold v Britton (2015) UKSC 36]

The principles by which contractual documents are construed are summarised in Investors’ Compensation Scheme Ltd. (supra) at 114, applied in the context of guarantees in Static Control Components (Europe) Ltd. v. Egan reported at [2004] 2 Lloyd’s Rep 429.

Lord Diplock in Pioneer Shipping Ltd. v. BTP Tioxide Ltd. reported at [1981] 2 All ER 1030 (at 1035) stated that:

“The object sought to be achieved in construing any commercial contract is to ascertain what were the mutual intentions of the parties as to the legal obligations each assumed by the contractual words in which they … choose to express them; or, perhaps more accurately, what each would have led the other reasonably to assume were the acts that he was promising to do or to refrain from doing by the words in which the promises on his part were expressed.”

The modern approach of the courts is to use all the available aids for the construction of written documents to seek out from the words used what they believe to have been the true intention of the parties when the guarantee was executed and not to be over-constrained by an interpretation based purely on internal linguistic considerations.

Extrinsic evidence may assist in this process in two distinct ways. First, extrinsic evidence of the factual situation is admissible and not necessary for the purpose of ascertaining whether particular words in the guarantee apply to that factual situation or whether that factual situation comes within particular words. Second, extrinsic evidence of the context in which the contract was made is admissible in order to construe the terms of the contract. A mercantile contract such as a guarantee is particularly susceptible of explanation by reference to the circumstances existing at the time it was made. (Halsbury’s Laws of England (Volume 49, Fifth Edition, 2008, Page 473).

Interpretation is intended to establish what the parties agreed, not to amend the words actually used by the parties to record what they both intended to record in their agreement. Indeed, rectification is available “where words of the document were purposefully used but it was mistakenly considered that they have a different meaning from their correct meaning as a matter of construction”. Despite this the courts have used interpretation as a tool to identify the practical commercial meaning that the parties, objectively speaking, must have intended despite how ordinarily those words would be read. (See Antaios v Salen Rederierna AB (The Antaios) [1985] A.C. 191).

In BCCI v Ali [2002] 1 A.C. 251, Lord Bingham of Cornhill summarized the principles as follows:

“To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties’ intentions the court does not of course inquire into the parties’ subjective states of mind but makes an objective judgment based on the materials already identified.”

As long ago as 1905, Wigmore described the history of the law of interpretation as “a progress from a stiff and superstitious formalism to a flexible rationalisim”. [Wigmore on Evidence, Volume 4, para 2462] Lord Hoffmann’s summary of principle has been seen by some judges, including himself, as no more than a step along the same road.

Lord Bingham, speaking extra-judicially, has commented that Lord Hoffman’s five principles are more a change of emphasis than a fundamental change.

In Chartbrook Ltd v Persimmon Homes Ltd [2009] A.C. 1101, Lord Hoffman himself said:

“As Lord Bingham pointed out, there was little in that statement of principle which could not be found in earlier authorities. The only points it decided that might have been thought in the least controversial were, first, that it was not necessary to find an ‘ambiguity’ before one could have any regard to background and, secondly, that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact that it was not, according to conventional usage, an ‘available’ meaning of the words or syntax which they had actually used.”

Lord Hoffman’s five principles have been adopted by the courts in Scotland, Ireland (with some qualification), Hong Kong, New Zealand and Singapore, although the High Court of Australia has taken a more cautious view.

In ICDL GCC Foundation FZ LLC v European Computer Driving Licence Foundation Ltd [2012 IESC 55], the Supreme Court of Ireland, while approving Lord Hoffmann’s five principles, has stressed that although evidence of surrounding circumstances is admissible it “will not normally be allowed to alter the plain meaning of words.”

In addition the court said that the fourth principle:

“should not be misunderstood as advocating a loose and unpredictable path to interpretation. A court will always commence with an examination of the words used in the contract.” In Equitable Life Assurance Society v Hyman [2000] 3 All E.R. 961, Lord Steyn said:

“The purpose of interpretation is to assign to the language of the text the most appropriate meaning which the words can legitimately bear.”

(See Hudson’s Building and Engineering Contracts, Atkin Chambers, 13th Edition; Lewson on The Interpretation of Contracts, 6th Edition)

Jack on Documentary Credits (4th Edition) has discussed the legal nature of an independent guarantee in paragraph 12.53. It reads:

“12.53 Independent guarantees are an autonomous obligation of the guarantor to pay against stipulated documents. In Edward Owen Engineering Ltd. v. Barclays Bank International ltd.(1) Lord Denning MR stated (2):

‘All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. They only exception is where there is a clear case of fraud of which the bank has notice.’

The position of fraud as the ‘only exception’ has come under challenge in recent years from the doctrines of unconscionability (see para 9.26 et seq) and illegality (see para 13.106 et seq).

1. 1978 QB 159

2. 1978 QB 159 at 171”

Mr. Sarkar has referred to Hindusthan Construction Co. Ltd. Vs. State of Bihar & Ors. reported in AIR 1999 SC 3710: (1999) 8 SCC 436 for the proposition that if the letter of invocation is not in terms of the bank guarantee, the bank is under no obligation to honour the said bank guarantee.

In Hindusthan Construction (supra), the Hon’ble Supreme Court referred to Clause 9 of the principal contract between the parties in order to come to a conclusion that the bank guarantee specifically refers to an original contract 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. It was found that the bank guarantee specifically refers to Clause 9 of the principal agreement and it is under those circumstances, the Hon’ble Apex Court had arrived at a conclusion that the amount covered by the bank guarantee becomes payable and the same could be invoked only in circumstances referred to in Clause 9 of the Principal Agreement. In the instant case, the bank guarantee refers to two letters of intent and the purpose of issuing the bank guarantee is to indemnify the plaintiff against any loss or damage caused to was suffered by the Corporation by reason of any breach or failure by the said supplier in due performance of the said contract (meaning thereby the breach has to occur in relation to the letter of intent specifically mentioned in the bank guarantee). The said two letters of intent as we observed earlier contains various matters which, inter alia include supply of plant and equipment and the bank guarantee is limited to any loss or damage caused to or suffered by the Corporation by reason of any breach or failure by the supplier in due performance of the said contract. The bank guarantee also unequivocally say that the bank shall forthwith ‘on demand’ pay the Corporation any sum or sums not exceeding the amounts mentioned in the bank guarantee without making any prior reference to the supplier. In my view, the bank guarantee is unconditional to the extent that on a communication received from the plaintiff that the plaintiff has suffered loss or damage by reason of any breach or failure by the supplier in due performance to the contract, namely supply of plant and equipment, specified in the two letters of intent, the bank is obliged to pay on demand the said sum without any prior reference to the defendant No.2 and without any proof of any actual loss or damage suffered by the plaintiff due to non-performance of the aforesaid contracts. However, in the letter of invocation, it has to state that it has suffered loss or damage by reason of breach or failure in due performance of the said contracts, namely nonsupply or defective supply of plant and machinery, without which the bank is not obliged to remit the amount.

There cannot be any doubt that the first letter of invocation suffers from defect and is not in accordance with the terms of the bank guarantee as mentioned earlier. This has been accepted by Mr. Bose during his argument. However, it needs to be seen whether two subsequent letters could be construed as a letter of invocation in terms of the bank guarantee. I have in the earlier part of this judgment referred to the two subsequent letters by which demand was made by the plaintiff for release of the fund covered under the two several bank guarantees.

I have already discussed the approach of the court in interpretation of commercial contracts and the bank guarantee is no less than a commercial document to be understood in the commercial sense. The intentions of the parties are of paramount consideration. The learned Single Judge, in our view, has restricted its examination to Annexure U being the first letter of invocation and has disregarded the subsequent letters and the evidence adduced in relation to the said subsequent correspondence exchanged by and between the parties. While I agree that contents of Annexure ‘U’ being the letter of invocation of the bank guarantee was not in terms of the bank guarantee but the subsequent invocation letters issued during the validity period of the bank guarantees would unmistakably show that those letters were in terms of the bank guarantees. After 6th November, 1998 and before 19th December, 1998, the respondent by a letter dated 7th November, 1998 extended both the guarantees up to 31st December, 1998 with a claim expiry date upto 30th June, 1999, all the letters invoking the bank guarantees were within the extended period of the bank guarantees. The said letters, in our view, need to be read with the answer to question No. 41 in examination-in-chief and answers Nos. 75, 76 and 77 during cross-examination. The answers are stated below:-

“41. Can you tell before My Lord, whether did the plaintiff invoke the Bank Guarantees?/Actually the contractor M/s. Simon Carves Ltd., was interested to complete of the job for the supply of equipment erection and commissioning and other contractual obligation. They have not performed as per the requirement of the contract. They have failed to supply the equipment. They have failed to discharge civil structural works erection and commissioning and other areas of contractual obligations. They have totally failed. Ultimately, they have left the job and left the site also. It was taking up by the plaintiff for completion of work and ultimately it was completed by the plaintiff and handed over to Coal India Limited. The defendant no. 2, Simon Carves Ltd, failed to do the job. Due to continuous wrongful, illegal and repeated refusal by ANZ Grindlays Bank for the claim of encashment of bank guarantee by the plaintiff. Plaintiff had no other alternative but to file the suit in this Court for recovery of the dues from the bank.

75. I am showing you clause-I of the bank guarantee being Exbt. – ‘D’ kindly you have a look at paragraph 1 – it is guarantee of performed, it is only supply of plant and machinery – is it correct?/ This has been clarified in paragraph 2. It is in due performance of the contract in 6th lines of the same.

76. I put it to you that this guarantee is only against securing advance granted by you to Simon Carves India Ltd. for supply of plant and machinery not for performance?/ I do not agree.

77. Can this guarantee by any stretch of imagination cover the performance not relating to supply of plant and machinery?/ It must relates to performance because it is expected that the supplier will supply the right plant and equipment as stipulated in the contract. But here what has happened that they have supplied the plant and equipment, but they have not completed their supply of plant and equipment. Whatever they have supplied, some of the plant and equipment have also subsequently detected as defective and the those defective equipment they have not replaced. So on the one hand they have not completed the supply on the other hand they have not replaced the defective plant and equipment so I consider their performance is not as per the stipulation of the contract.”

The learned Single Judge relied upon answer to question nos.76 and 77 and the evidence stated by the defendant in Paragraph 5 of the Written Statement which reads:-

“5. The defendant states that the aforesaid two guarantees are not at all unconditional guarantees and can be invoked by the plaintiff only on the ground of loss and/or damage suffered by the plaintiff on account of non-supply of the plant and equipment by SCIL and in no other circumstances the aforesaid guarantees could be invoked by the plaintiff.”

However, the learned Single Judge has overlooked the other evidence where, in our view, the plaintiff has clearly stated that the claim, inter alia, includes a claim due to non-supply of the materials. This statement is insufficient. The learned Single Judge has misconstrued the evidence on record and did not take into consideration the other letters of demand where the initial defect was cured.

Lord Denning once has said that bank guarantee is as good as cash. It is life blood of commerce. The law relating to invocation of bank guarantee is now well-settled. When in the course of commercial dealings and unconditional bank guarantee is given the beneficiary is entitled to realize the amounts covered under the bank guarantee in terms thereof irrespective of any pending dispute. The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The only two exceptions when the bank may refuse encashment of the said bank guarantee are fraud and irretrievable injury. The fraud must be of an egregious nature such has to vitiate the entire underlying transactions. The exceptional circumstances would include a case where it is proved to the satisfaction of the court that the bank knows that any demand for payment already made or which thereafter be made would be clearly fraudulent. However, in such an event, the evidence must be clear both as to the fact of fraud and as to the bank’s knowledge. (See Adani Agri Fresh Limited vs. Mahaboob Sharif & Ors.) reported at (2016)14 SCC 517). The exceptional circumstance has been discussed by one of us (Soumen Sen J.) in Rahee GPT (JV) & Ors. Vs. Union of India & Ors. reported at 2017 SCC Online Cal 17244 in paragraphs 14 to 18 of the said decision which read:-

“14. There cannot be any doubt that the bank guarantee is unconditional in terms and on demand the bank is obliged to pay the aforesaid sum. However, the special equity would come in since it appears prima facie that injustice would be caused at this stage without the issue being decided as to whether the contract was impossible to perform by allowing the defendant no.1 to appropriate the said amount during the pendency of the suit. The Courts in India exercise jurisdiction both in equity as well as at law but exercise of equity jurisdiction is always subject to the provisions of law. Equity jurisdiction can be exercised only when no law operates in the field. Injunction is a discretionary and equitable remedy intended to prevent injustice. The exercise of the jurisdiction must be principled, but the criterion is injustice (see MercedesBenz AG Vs. Leiduck, 1996 (1) A.C. 284)

15. The bank giving a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of use a bank guarantee is otherwise be defeated. The Courts, therefore, are extremely cautious and slow in granting an injunction to restrain the realization of a bank guarantee. The Courts, however, have carved out two exceptions, namely, fraud and irretrievable harm or injustice as grounds on which the encashment and/or enforcement of bank guarantee may be refused. A fraud in connection with a bank guarantee would vitiate the very foundation of such bank guarantee and, accordingly, if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under the head of irretrievable harm or injustice must be of such an exceptional and irretrievable nature as would override the terms of the bank guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases. (See Uttar Pradesh State Sugar Corpn. Vs. Sumac International Ltd., (1997) 1 SCC 568)

16. The third exception which is of recent origin is special circumstances or special equity which may at times overlap with the irretrievable harm or injustice on which encashment may be refused.

17. The limited categories on which the Court may refuse encashment of a bank guarantee or a performance guarantee are summarized below:-

(i) If there is a fraud in connection with the bank guarantee which would vitiate the very foundation of such guarantee and the beneficiary seeks to take advantage of such fraud.

(ii) The applicant, in the facts and circumstances of the case, clearly establishes a case of irretrievable injustice or irreparable damage.

(iii) The applicant is able to establish exceptional or special equities of the kind which would prick the judicial conscience of the Court.

(iv) When the bank guarantee is not invoked strictly in its terms and by the person empowered to invoke under the terms of the guarantee. In other words, the letter of invocation is in apparent violation to the specific terms of the bank guarantee.

18. The exceptional cases would be few but it could never be stated as an absolute proposition of law that under no circumstances the Court would injunct encashment/invocation of a bank guarantee which might have been furnished by a party as an independent contract. A beneficiary is not vested with an unquestionable or unequivocal legal right to encash the bank guarantee on demand. The obligation of the bank furnishing the bank guarantee to pay would be subject to a limited exceptional circumstance aforenoticed. As a matter of rule, the bank would be under obligation to encash the bank guarantee, once it is invoked in its terms. The exceptions aforenoticed are merely indicative of the kind of cases where the Court may injunct encashment of a bank guarantee. It is neither possible nor permissible to exhaustively classify the cases where the Court would not interfere and where the Court would judicially intervene in such matters.”

The bank guarantee is an independent and separate contract and is absolute in nature and the existence of any dispute between the parties to the contract is of no consequence. (See Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Co.) reported at (2007) 8 SCC 110, Mahatma Gandhi Sahakra Sakkare Karkhane Vs. National Heavy Engg. Coop. Ltd. & Anr. reported at (2007) 6 SCC 470), BSES Ltd. (Now Reliance Energy Ltd.) Vs. Fenner India Ltd. & Anr. reported at (2006)2 SCC 728 and Gangotri Enterprises Limited Vs. Union of India & Ors. reported at (2016)11 SCC 720.

On consideration of the evidence on record and the judicial decisions with regard to the interpretation of the bank guarantee, I am of the opinion, that the bank guarantees were properly invoked in law and the judgment needs to be set aside.

Accordingly, the judgment and decree passed on 15th October, 2016 is set aside. There shall be a decree for Rs.1,10,33,207.00/- as claimed in Paragraph 18 of the Plaint together with interest at rate of 8 per cent per annum on and from the date of institution of the suit till payment.

Urgent Photostat certified copy of this judgment, if applied for, be given to the parties on usual undertaking.

Ravi Krishan Kapur, J.

1. I have had the advantage of reading the draft judgment of my Learned Brother Justice Sen. Though I am in full agreement with the conclusion arrived at by my Learned Brother, I would add a few reasons of my own.

2. This is one of those rare cases where a suit for enforcement of a bank guarantee has ultimately gone to trial. 3. The instant appeal has been preferred against the judgment and decree dated 16.09.2015 (“the impugned decree”) passed in CS 38 of 2000 by a Learned Judge of this Court. By the impugned decree the Learned Judge has inter alia dismissed the suit as against the defendants. The suit is filed for recovery of money arising out of two separate bank guarantees.

4. The facts of the case are more or less indisputable and uncontested and the only question that arises for consideration is one of interpretation and construction. The case of the plaintiff as alleged in the plaint is that, the plaintiff is engaged in effecting design, supply and construction of industrial plants. In the course of business, the plaintiff was awarded a contract for, design, engineering supply erection and commission of the Dankuni Coal Complex by Coal India Ltd. By a letter dated 19.05.1981, the plaintiff placed an order on SCIL India Ltd. (formerly known as Simon Carves India Ltd. and hereinafter referred to as “SCIL”) for the complete design, supply erection and commissioning of requisite civil and construction works with a few minor exceptions. Pursuant to the letter of the intent, a formal Memorandum of Agreement dated 08.08.1985 was executed by and between SCIL. Thereafter, the plaintiff from time to time advanced an aggregate sum of Rs.3,44,56,600 for the said works against several bank guarantees furnished by SCIL. The instant suit pertains to two written guarantees being guarantee No.1001/83/108/G dated 16.02.1983 and guarantee No.G/1001/84/608 dated 29.08.1984 (hereinafter referred to as “the said guarantees”) for the sums of Rs.71,35,100 and Rs.20,32,500 respectively which were advanced to SCIL. The said guarantees furnished by the defendant bank were extended from time to time and revalidated. It is alleged in that plaint that, in breach of contract with the plaintiff, SCIL failed and neglected to duly complete the supply of equipment and the erection and commission of the same and further supplied defective equipment. Subsequently, the work had to be abandoned. In the premises, the plaintiff suffered huge losses and damages. Ultimately, a sum of Rs.139.90 lakhs was deducted from the plaintiff’s final bill which pertained to the apportioned work handed over to SCIL.

5. In view of the aforesaid, by a letter dated 06.11.1998, the plaintiff demanded encashment of both the said guarantees. The defendant bank refused to honour the said guarantees and diverse 35 correspondence was exchanged by and between the plaintiff and the defendant bank. The plaintiff made subsequent demands for encashment of the guarantee by letters dated 19.12.1998 and 28.12.1998 respectively. The plaintiff also complained by way of a letter 22.02.1999 to the Banking Ombudsman, Calcutta. Ultimately, the plaintiff was constrained to file the instant said suit for a decree of Rs.1,10,33,2207.07 along with interest being the aggregate sum of both the said guarantees.

6. The defendant bank filed its written statement and primarily took the defence that the invocation of the plaintiff of both the guarantees was not in accordance with either of the said guarantees and contrary to the terms thereof. Accordingly, the defendant bank was not liable to make payment to the plaintiff under either of the said guarantees. In paragraph 5 of the written statement, it is particularly alleged by the defendant bank that the said guarantees are not unconditional and could be invoked only on the ground of loss or damage suffered by the plaintiff on account of non-supply of plant and equipment by SCIL and under no other circumstances. The defendant bank also referred to the diverse correspondence exchanged between the plaintiff and the defendant bank. In brief, the primary defence of the defendant bank was that the invocation of the said bank guarantees was contrary to their terms or not in terms thereof.

7. In the above mentioned background, the following issues were framed by the Trial Court:

i.) Is the plaintiff entitled to invoke two bank guarantees being no.1001/83/108/G dated 16.02.1983 and G/1001/84/608 dated 29.08.1984?

ii.) Is the plaintiff entitled to a decree for Rs.1,10,33,207 against the defendant no.1?

iii.) Is the defendant no.1 entitled to challenge the validity of the invocation of the two bank guarantees?

iv.) Is the plaintiff entitled to a decree for further interest pendent lite and interest upon judgment as claimed?

v.) What relief, if any, is the plaintiff entitled to?

8. There was only one witness examined on behalf of the plaintiff. The defendant chose not to adduce any evidence at all. One Mr. Shankar Kumar Chakraborty, who was the General Manager, Finance of the plaintiff company came to depose on behalf of the plaintiff. He deposed that the contractor SCIL failed to perform its job and did not supply equipment for erection and commission and was also in breach of diverse other contractual obligation (Q. 41). He exhibited most of the letters which had been exchanged by the plaintiff and the defendant bank pertaining to invocation of both the bank guarantees. In cross-examination, he deposed that the said bank guarantees covered not only supply of plant and machinery but also their performance (Q. 75). He deposed that though SCIL supplied some of the plant and equipment the same were detected to be defective and SCIL had not replaced the same (Q. 77). He denied the suggestions that the bank guarantee could only be invoked for failure to supply the plant and machinery and in respect of their performance (Q.78).

9. By the impugned decree, the Learned Judge held that on a perusal of the contents of the letter dated 06.11.1998 bank (Exhibit U), the invocation of the bank guarantees by the plaintiff was not in terms of either of the said guarantees. The Learned Judge further held that the plaintiff had failed to make out a case against the defendant bank upon notice of the defence as stated in the paragraph 5 of the written statement. In view of the above, the Learned Judge found issue no.1 in favour of the plaintiff, issue no.3 in favour of the defendant bank and issue nos.4, 2 and 5 against the plaintiff. In the circumstances, the Learned Judge dismissed the suit filed against the defendant no.1 and with costs against the defendant no.2. It is pertinent to mention that the defendant no.2, SCIL was in liquidation and was represented by the Official Liquidator.

10. During the pendency of the suit, in an application for summary decree, conditional leave was granted to the defendant bank to defend the suit subject to the defendant bank making payment of the amount covered under the aforesaid two guarantees to the plaintiff. Furthermore, the plaintiff was directed to make a fixed deposit in its name with the defendant bank in a long term suitable interest bearing deposit to be renewed from time to time. The original receipts of these fixed deposits were to be submitted to the Registrar Original Side of this Hon’ble Court.

11. Counsel on behalf of the appellant argued that the impugned decree was liable to be set aside on the ground that the Learned Judge erred in passing the impugned decree both in law and on facts. He submitted that in passing the impugned decree the Learned Judge erred in his appreciation of the law on bank guarantees. He submitted that the Learned Judge gave no reasons in passing the impugned decree. He further submitted that on a construction of the correspondence exchanged by and between the parties pertaining to invocation of the said bank guarantees read along with the letters dated 06.11.1998, 07.11.1998, 18.11.1998, 28.11.1998, 07.12.1998 and 19.12.1998, it would be evident that the invocation of the said bank guarantees was in terms thereof and that the plaintiff was entitled to a decree as prayed for.

12. Counsel on behalf of the defendant bank, submitted that the impugned decree was justified both in law and on facts and the instant appeal was liable to be dismissed. He submitted that the invocation of either of the said bank guarantees by the plaintiff was not in terms thereof and the bank was fully justified in not honouring the same. He placed reliance on the decision reported in Hindustan Construction Ltd. vs. State of Bihar AIR 1999 SC 3710 and PerryLease Ltd. vs. ImeCar AG and Others [1987] 2 ALL.E.R 373. He submitted that the principles of construction covering contracts in general are equally applicable to contracts of guarantee. He submitted that as a proposition of law, an invocation of a bank guarantee has to be in accordance with the terms thereof otherwise the invocation was bad in the law.

13. The primary issue raised in this appeal pertains to the construction of the said bank guarantees and the correspondence exchanged by and between the parties pertaining to invocation of the same. In this background, it is important to set out clause 1 and 2 of the said bank guarantees which are identical in nature. Clauses 1 and 2 which are similar (except for the amounts) in the said bank guarantees provide as follows:

i) In consideration of Messrs Heavy Engineering Corporation Limited a Government of India Enterprise, a Company registered under the Companies Act (hereinafter called the Corporation) having agreed to accept a Bank Guarantee from Messrs Simon Carves India Limited, Simon House, Transport Depot Road, Calcutta 700027 (hereinafter called the Supplier) on account of Advance Payment of a sum of Rs.71,35,100/- (Rupees Seventy One Lakhs Thirty Five Thousand and One Hundred Only) as advance against Supply of Plant and Equipment by the Corporation to Messrs Simon Carves India Limited in terms of Letter of Intent No.HEC/CS/1502/81 dated 19.05.1981.

ii) We, Grindlays Bank P.L.C., 19, Netaji Subhas Road, Calcutta-700001 do hereby undertake the Indemnity and keep the Corporation indemnified to the extent of Rs.20.32,500/- (Rupees Twenty Lakhs Thirty Two Thousand Five Hundred Only) against any loss or damage caused to or suffered by the Corporation by reason or any breach or failure by the said Supplier, in due performance of the aforesaid contract, we shall forthwith on demand pay to the Corporation any sum or sums not exceeding Rs.20,32,500/- (Rupees Twenty Lakhs Thirty Two Thousand Five Hundred Only) without making any prior reference to the said Supplier with an exclusion of any action in Court by Supplier.

14. The principles applicable to bank guarantees are well settled. The aim of the bank guarantee is to secure payment by substituting a “reliable pay master”. A contract of guarantee, in its true sense, is a contract whereby the guarantor promises the creditor to be responsible, in addition to the principal for the due performance by the principal of his existing or future obligations to the creditor, if the principal fails to perform those obligations. In Halsbury’s Laws of England : it has been defined that “a guarantee is an accessory contract by which the promisor undertakes to be answerable to the promissee for the debt, default or miscarriage of another person, whose primary liability to the promissee must exist or be contemplated.” (5th Edition, Para 1013).

15. There are various kinds of bank guarantees which cover a great deal of contingencies. There are bipartite and tripartite guarantees. There are continuing and limited guarantees. Although it is common for a guarantee to be limited in operation, a guarantee may also be entered into for an indefinite period. A continuing guarantee is one which extends to a series of transactions, whether or not over a limited period. A guarantee may in terms refer only to the obligations arising under an identified contract or even to a specific obligation. Then, there are guarantees payable on demand. A guarantee may contain an express stipulation that the surety is liable to make payment to the creditor “on demand”. In such an event, the obligation of the guarantor to pay does not arise until the demand has been made on him though his underlying liability arises on the date of the principal’s default. The demand is usually construed as a procedural requirement included for the guarantor’s protection. Then, there are guarantees which are limited in amount. The limitation may take effect in one or two different ways. The guarantee may be in respect of the whole of the liability, but with a limitation on the amount for which the surety is to be liable. Alternatively, it may cover only part of the total liability, coextensive for the amount of guarantee. It is a question of construction in each case which form a guarantee takes. (Law of Guarantees, Geraldine Andrews & Richard Millett, 7th Edition).

16. In practice, demand guarantees, performance bonds, performance guarantees and standby letters of credits have a similar legal character and resemble documentary credits in that they are primary in form, and generally conditional upon presentation of a written demand for payment together with any other stipulated documents. It is well settled that the issuing bank is not concerned as to whether there has been any actual default or fault on the part of its principal. In the classic words of Hirst, J in the decision reported in Sitorex Trade SA vs. Banque Indosuez [1986] 2 Lloyd’s Law Reports 146 the Learned Judge held that “the whole commercial purpose of a performance bond is to provide a security which is to be readily, and promptly and shortly available when the prescribed events occurred”. It was Donaldson L.J, who had said “irrecoverable letters of credit and bank guarantees given in circumstances such that they are equivalent to an irrecoverable letter of credit had been said to be the life blood of commerce(emphasis supplied). Thrombosis will occur if, unless fraud is involved the courts intervene and thereby disturb the mercantile practice of treating rights thereunder as being equivalent to cash in hand”. (Intraco Ltd. vs. Notis Shipping Corporation of lybraria :the Bhoja Trader [1981] 2 Lloyd’s Rep at 257).

17. There are various other considerations which apply to bank guarantees. In particular, the principles of the autonomy of the bank’s undertakings (mandate) and the application of doctrine of strict compliance was considered in IE Contractors Ltd. Vs. Lloyd’s bank PLC[1989] 2 Lloyd’s Report in 205 at 207 where Leggatt J, stated that “the demand must conform strictly in the terms of bond in the same way that the documents tendered under a letter of credit must conform strictly with the terms of the credit”. However, it has been repeatedly reiterated that the application of the principle of strict compliance depends in each case upon the construction of the guarantee or the bond and that the condition specified in each case must be strictly adhered to. There are also the well-known exceptions to the rule that the bank must honour its undertakings subject to the exception of fraud and special equity which have been discussed in a catena of decisions.

18. In Blest v Brown (1862) 4 De G.F. & J. 367 at 376, Lord Campbell stated: “It must always be recollected in what manner a surety is bound. You bind him to the letter of his engagement. Beyond the proper interpretation of that engagement you have no hold upon him. He receives no benefit and no consideration. He is bound, therefore, according to the proper meaning and effect of the written agreement he has entered into.” Subsequently, Stanley Burnton, J in the case of Barclays Bank v Kingston [2006]2 Llyods Report 59 held that “a guarantee should be construed as a whole as a commercial document to give it a sensible meaning.” The more recent cases adopt a business common sense approach whilst interpreting a guarantee. In Investors Compensation case and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 it was held that “…the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant…[T]he relevant reasonable person is one who has all the background knowledge which would have reasonably have been 44 available to the parties in the situation in which they were at the time of the contract.”

19. In India, the law relating to bank guarantees has been repeatedly reiterated by all the Courts including the Hon’ble Supreme Court. In National Highway Authority of India vs. Ganga Enterprises and Another (2003)7 SCC 410 it has been held at paragraph 10 as follows:

The law regarding enforcement of an “on-demand bank guarantee” is very clear. If the enforcement is in terms of the guarantee, then courts must not interfere with the enforcement of bank guarantee. The court can only interfere if the invocation is against the terms of the guarantee or if there is any fraud. Courts cannot restrain invocation of an ‘on-demand guarantee” in accordance with its terms by looking at the terms of the underlying contract. The existence or non-existence of an underlying contract becomes irrelevant when the invocation is in terms of the bank guarantee.

20. In U.P State Sugar Corporation vs. Sumac International Ltd. (1997)1 SCC 568 it has been held at paragraph 12 as follows:

The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country.

21. In General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd. [(1991) 4 SCC 230] it has also been held that:

“[T]he Bank must honour the bank guarantee free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice, the court should interfere. … The nature of the fraud that the courts talk about is fraud of an ‘egregious nature as to vitiate the entire underlying transaction’. It is fraud of the beneficiary, not the fraud of somebody else.”

22. The aforesaid principles have been repeatedly recognized and followed in numerous decisions of the High Courts as well as the Supreme Court.

23. The main contention of the defendant bank was that the letter of invocation did not stipulate that the loss or damage had occurred pertaining to the supply of plant and equipment. Moreover, it was contended on behalf of the defendant bank that the guarantee did not extend to the obligation of performance under the contract for supply of plant and equipment.

24. In the light of the aforesaid principles, the only question which arises for consideration is whether the plaintiff had invoked the guarantee in terms thereof. On a bare peru

Please Login To View The Full Judgment!

sal of either of the guarantees as a whole, it appears that the same covered advance against supply of plant and equipment. Moreover, Clause 2 of the guarantee clearly and categorically contemplates loss or damage caused or suffered by the plaintiff by reason of any breach or failure by SCIL in due performance of the aforesaid contract. The nature of guarantee given by SCIL, the defendant no.2 is peculiar, inasmuch as the said guarantees were given to the plaintiff to indemnify the plaintiff to the extent of the amount of advance which had been paid by the plaintiff to the defendant no.2. 25. As a proposition of law, I am of the view that the entire correspondence exchanged by and between the plaintiff and the defendant bank has to be construed as a whole to ascertain the real intention and understanding of the parties as expressed by them in writing. Moreover, in interpreting the contract of guarantee and the letters exchanged by and between the parties in invoking the guarantee, a business common sense approach ought to be adopted. 26. I am also of the view that, the guarantees in the instant case were conditional guarantees, specific in nature and limited in amount. The terms of the guarantee categorically covered money which the plaintiff had advanced against supply of the plant and equipment by SCIL. Moreover, the said guarantees covered any loss and damage caused to or suffered by the plaintiff in due performance of the contract for supply of plant and equipment. 27. I am of the view that reading the guarantee document as a whole and in particular, Clauses 1 and 2 of the guarantee document, it would be evident that the guarantees were to cover the advance which had been paid by the plaintiff against supply of plant and equipment to SCIL. The said guarantees also covered loss or damage caused to or suffered by the plaintiff by reason of any breach or failure by SCIL in due performance of the aforesaid contracts i.e. against the contract for supply of plant and equipment. 28. In order to examine the invocation by the plaintiff of the said guarantees, it is important to ascertain the intention of the parties from the correspondence that has been exchanged by and between them pertaining to invocation of the said guarantee. The initial letter of invocation was written by the plaintiff dated 6.11.1998 (Exhibit U). This letter per se was inadequate and did not enumerate any condition for invocation of the said guarantees save and except a reference to “a substantial amount to be recovered from SCIL”. However, what is important is the correspondence that was thereafter exchanged between the parties. By a letter dated 18.11.1998 (Exhibit W), the defendant bank categorically informed the plaintiff that the guarantees were specifically issued covering the advance made by the plaintiff to SCIL “for supply of plant and equipment.” Accordingly, since the guarantee has not been invoked on account of non-supply of plant and equipment, the defendant bank was not liable to make payment under the said guarantee. Thereafter, by an elaborate letter dated 28.11.1998 (Exhibit X), the plaintiff spelt out in detail the ground for encashment of the bank guarantee, the terms of the bank guarantee and the fact that loss and damage had been suffered by the plaintiff by SCIL not discharging its contractual obligations. 29. By a further letter dated 7.12.1998 (Exhibit Y), the defendant bank reiterated that the guarantee was limited only against failure by SCIL to supply plant and equipment and did not cover performance of the contract. This was followed by a letter dated 19.12.1998 (Exhibit Z), by the plaintiff, inter alia, informing the defendant bank that due to defective supply of plant and equipment as well as non-supply of plant and equipment and also other contractual deficiencies of SCIL, losses had been suffered by the plaintiff. 30. In the deposition adduced on behalf of the plaintiff, the sole witness of the plaintiff categorically deposed in examination-inchief that since SCIL had failed to supply equipment, erection and commissioning and other contractual obligations as per the contract, the plaintiff had suffered loss and damages (Question 41). In cross-examination, the witness further deposed that there was failure on the part of SCIL in supplying the plant and equipment and that SCIL had not completed the supply of plant and equipment under the contract. Moreover, the plant and equipment supplied by SCIL was detected as defective and this was not replaced by SCIL. Thus, the plaintiff had duly informed the defendant bank that losses had been incurred both on account of supply of plant and equipment and on account of performance of the supply of plant and equipment. 31. I am of the view that, on a proper reading of the letters exchanged by and between the plaintiff and the defendant bank pertaining to invocation of the said guarantees, the conditions of the guarantee had been duly complied with and I find that there was proper and lawful invocation of the said guarantees by the plaintiff. Moreover, the oral evidence given on behalf of the sole witness of the plaintiff categorically confirmed that the said guarantees were invoked on the ground of non-supply of plant and equipment and this covered not only failure to supply but also performance of such plant and equipment. 32. Accordingly, I find that the Trial Court erred in passing the impugned judgment and decree. I also find that the defendant bank was not entitled to challenge the validity of the invocation of the said guarantees and the defendant bank should have made payment of the said amounts covered under the two guarantees in terms of the letters exchanged between the parties. 33. I am of the view, that the fact that defendant no.3 had gone into liquidation and the defendant bank was most probably not covered are oblique and extraneous reasons for the defendant bank not honouring either of the said guarantees. I am of the view that on adopting a proper business and commonsense approach, it would be evident from the correspondence exchanged by and between the plaintiff and the defendant bank pertaining to invocation of the two guarantees and the evidence adduced on behalf of the plaintiff that any reasonable person would appreciate what the parties meant both at the time of entering into of the contract and at the time of invocation of the said guarantees. 34. I find no merit in the submission made on behalf of the defendant bank that save and except the letter of invocation dated 6.11.1998 being Exhibit ‘U’ to the proceeding, the subsequent correspondence exchanged between the parties pertaining to the invocation of the said guarantee could not have been looked into. It is now well-settled that merely because the exact words about loss or damage were not employed in the first invocation, a party is not precluded from re-invoking the bank guarantee by way of subsequent correspondence. (‘H. Mitra Pvt. Limited &Anr. vs. United Bank of India & Ors.’ 2010 SCC Online Cal 138). 35. I also find merit in the argument of the appellant that the learned Judge in passing the impugned judgment and decree did not assign any reasons whatsoever. It is now well-settled that judicial orders need to meet the twin tests of “why” and “what”. It is the “why” that sustains the “what”. Reasons are the safeguard against the ipsi dixit of the decision making process. They discuss how the judicial mind has been applied to the matter in issue and convey the nexus between the matters that have been considered and the conclusion based thereon. The justification and the reasonableness of a conclusion depend on the reasons given in support thereof (‘Uniworth Resorts Limited vs. Ashok Mittal & Anr.’ (2007) 4 CHN 712). I am of the view that the impugned judgment and decree has no element of “why” for the “what” therein to stand on. 36. For the foregoing reasons I concur with the conclusions of Justice Sen.
O R