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Synthetic Foams Limited v/s Simplex Concrete Piles (India)Private Limited

    Interim Application Appeal No. 4626 of 1986, Suit Appeal No. 1685 of 1986.

    Decided On, 06 November 1987

    At, High Court of Delhi

    By, THE HONOURABLE MR. JUSTICE MAHESH CHANDRA

    For the Appearing Parties: C.R. Iyer, V.P. Chaudhary, Vinay Bhasin, Advocates.



Judgment Text

MAHESH CHANDRA J.


(1) BY this order I propose to dispose of I. A. No. 4626 of 1986 filed under Order 39 rules I and 2 and Section 151 Civil Procedure Code by the plaintiff for restraining the defendant No. 4-bank from making any payment under the bank guarantee No. 59/85 in pursuance of the invocation dated 31st July, 1986 by defendant No. 1. The application is opposed on behalf of defendant No. 1. I have heard the learned counsel for the parties and after giving my considered thought to the matter before me I have come to the following findings :


(2) THE facts giving rise to this order are that the plaintiff M/s. Synthetic Foams Ltd. has filed a suit No. 1685 of 1986 for declaration and permanent injunction on the allegations that the plaintiff, a company registered under the Companies Act, 1956, are manufacturers of Thermal Insulation materials under the brand name of "multipurl"; that defendant No. 2. a Government of India undertaking, in the process of setting up a new project at Panchkula had appointed defendant No. 3, another Government of India undertaking, as consultant for that project and that defendant No. 4 is a banking institution and are bankers of the plaintiff company; that defendant No. I were appointed as Civil Contractors for the project by defendant No. 2 and it had invited quotations for ceiling insulation and the quotations of the plaintiff in this behalf were accepted and in consequence an order No. GID/nd/67/5281 dated 23rd August, 1985 was placed with the plaintiff company to carry out ceiling insulation with Multipurl-3 Panels for total ceiling area of 16,000 sq. meters; that according to the said order defendant No. I was to pay an advance equivalent to 5 per cent of the value of the order on submission of bank guarantee bond of the equivalent value, which was to remain valid till the advance was recovered from the work bills of the plaintiff; that the said advance was to be recovered from the running bills of the plaintiff @ 2? per cent and balance from its two last bills; that accordingly an advance of Rs. 1 lac was given by defendant No. I to the plaintiff and in pursuance thereof the plaintiff company furnished a bank guarantee No. 59/85 dated 17th September, 1985 from the Indian Overseas Bank; that the plaintiff company started execution of the contract on 26th November, 1985 and delivered at the site Multipurl P-3 Panels on various dates totalling 5,828. 88 Sq. Meters along with the necessary ancillary materials, tools, etc. under receipt of the Site Engineer of defendant No. 1; that the plaintiff company has executed ceiling insulation of a total area of 5,345 sq. meters in the fabrication building by the end of May, 1986 and the same was approved and accepted by defendants 1, 2 and 3 and in conse- quence erection of false ceiling had already started and was nearing completion; that the balance 484 Sq. Meters of panels was lying at site as no further site was made available to the plaintiff and no further material was also delivered at site; that the plaintiff was paid a total sum of Rs. 5,40,540. 00 towards running bills and their remains a balance of Rs. 110,881. 88 due to the plaintiff from defendant No. 1 towards the work already executed and completed by the plaintiff for defendant No. 1 which is still payable by defendant No. 1, that there was a devastating fire in the fabrication building around 4th June, 1986 and extensive damage was caused to the building and in view thereof defendant No. 1 suggested alternative type of Multipurl Panel involving a slight increase in the cost over Multipurl P-3 Penals vide its letter dated 21st July, 1986; that the plaintiff informed defendant No. 1 vide its letter dated 4th July, 1986 that approximately 2000 sq. meters of Multipurl P-3 Panels were ready but defendant No. 1 vide its letter No. BR/nd/667/5833 dated 30th July, 1986 informed the plaintiff that due to technical reasons and also due to increase in price NIDC/bel have decided not to use Multipurl P-3 in Production Building. This is for your information"; that on 1st August, 1986 defendant No. 4-bank wrote to the plaintiff enclosing a letter dated 31st July, 1986 from defendant No. 1 invoking the encashment of bank guarantee No. 59/85; that the said invocation of the bank guarantee by defendant No. 1 was unjustified, unwarranted, illegal, unlawful and fraudulent for the reasons stated in the plaint and hence this suit.


(3) THERE is not much dispute as to the facts alleged by the plaintiff where are not denied by defendant No. 1 in its written statement except that it is stated in reply to para 5 of the plaint that "the plaintiff had delivered at the site Multipurl P-3 panels totalling 5790 sq. metre only and total area executed by the plaintiff at the site was 5306 sq. Metres and the balance material i. e. 484 sq. metres remained at the site and was later damaged in fire. It has further been contended that part of the installation work carried out by the plaintiff was found to be unsatisfactory and defective in workmanship and a sum of Rs. 1,32,668. 50 had been withheld by defendants 2 and 3 on that score from the plaintiff. It has lastly been urged by defendant No. 1 that invocation of the bank guarantee was valid, justified, legal and in accordance with the agreement. Even otherwise the plaintiff has filed attested copies of relevant documents as annexures which go to establish the facts more or less as stated by the plaintiff. Defendant No. 1 also has filed copies of the letters dated 3rd May, 1986, 14th July, 1986, 29th July, 1986, 29th/30th July, 1986, 8th September, 1986 and 22nd October, 1986 written by it to the plaintiff apart from copy of letters dated 31st July, 1986 and 22nd August, 1986 written by it to defendant No. 4-bank invoking the bank guarantee.


(4) IN older to entitle ad interim injunction it is incumbent on the plaintiff to establish that the plaintiff has got a prima case; that the balance of convenience lies in the grant of ad interim injunction otherwise irreparable injury would be occasioned to it. In order to prove the prima facie case, learned counsel for the plaintiff has drawn my attention to the fact that even on the admission of defendant No. 1 Multipurl P-3 panels totalling 5790 sq. metre have been supplied by the plaintiff and the total area executed by the plaintiff at the site was at least to the tune of 5306 sq. metres while panels totalling 484 sq. mts. had remained at the site and were later damaged in fire. It is also to be noted that even according to the admission of defendant No. 1 a sum of Rs. 1,32,668. 50 had been withheld by defendants 2 and 3 from the plaintiff and in this view of the matter there is prima facie case that the interest of the defendant Nos. 1, 2 and 3 is squarely covered and consequently it would not be appropriate to allow defendant No. 1 now to invoke the guarantee as well which would be to the detriment of the plaintiff. It can also be taken that the plaintiff has all along been ready and willing to perform his part of the contract and but for the intervening devastating fire the plaintiff would have completed the job Keeping in view the documents placed on record by the plaintiff and the letters placed on record by the defendants coupled with admission of defendant No. 1 it can be safely concluded that the plaintiff certainly has established a prima facie case for grant of ad interim injunction prayed for. Once prima facie case is established balance of convenience would lie in maintaining the status quo and not permitting encashment of bank guarantee by defendant No. 1 otherwise the plaintiff would be put to a double loss; while on the one hand the amount due to the plaintiff to the tune of Rs. 1,32,668. 50 would remain withheld which would otherwise be payable to the plaintiff and on the other hand the bank guarantee would also be encashed and this would be more than irreparable injury to the plaintiff. In addition certain deductions towards part liquidation of performance advance have also been made by the defendants from the plaintiff's bills. This has further to be kept in mind that the plaintiff cannot prima facie be held to have defaulted in the execution of his contract. I, therefore, hold that the plaintiff is entitled to ad interim injunction prayed for.



(5) MY attention has further been drawn to the terms of guarantee Bond No. 59 of 1985 dated 17th September, 1985 (copy Annexure II) in this behalf in general and in particular to clause 1 and 3 thereof. Clause I thereof reads asunder :


"we. Indian Overseas Bank hereby agree and undertake that if in your opinion any default is made by M/s. Synthetic Foams Ltd. in performing any of the terms and/or conditions of the order or if in your opinion they commit any breach of the order or there is any demand by you against M/s. Synthetic Foams Ltd. then on notice to us by you, we shall on demand and without demur and without reference to M/s Synthetic Foams Limited immediately pay to you, in any manner in which you may direct, the said amount of Rs. 1,00,0001- (RUPEES ONE LAKH ONLY) or such portion thereof as may be demanded by you not exceeding the said sum and as you may from time to time require. Our liability to pay is not dependent or conditional on your proceedings against the M/s. Synthetic Foams Limited and shall be liable to pay the aforesaid amount as and when demanded by you merely on claim being raised by you and even before any legal proceedings are taken against M/s. Synthetic Foams Limited. "

Clause 1 reproduced above shows that this bank guarantee in fact would be available for invocation if "any default is made by M/s. Synthetic Foams Ltd. in performing any of the terms and/or conditions of the order" or if in the opinion of defendant No. 1 the plaintiff "commits any breach of the order or there is any demand" by defendant No. I against the plaintiff. The facts of this case are peculiar in so far as the completion of the contract by the plaintiff has been with held not due to any fault of the plaintiff but due to intervening fire which has taken place at the site and due to defendants 1, 2 and 3 in terminating this contract. There is nothing to suggest that the plaintiff has committed any default in the performance of the contract or any breach of the terms of the order whereas the perusal of letter (annexure V) filed by the plaintiff shows that the guarantee was sought to be invoked by defendant No. 1 on the ground that the plaintiff "have not fulfilled the obligation contained in the terms and conditions of the order" dated 23rd August, 1985 and "has committed a breach of the order" which appears to be misrep- resentation of facts. Furthermore Annexure III which is a letter dated 30th July, 1986 from defendant No. 1 to the plaintiff, shows that the contract has been cancelled by defendant No. 1 due to technical reasond and also due to increase in prices rather than due to any fault of the plaintiff. The said letter is a short letter and its operative part reads as under :"due to technical reasons and also due to increase in price NIDC/bel have decided not to use Multipurl P-3 in Production building. This is for your information".

Therefore in equity as well it is not just and proper to allow defendant No. 1 to invoke the guarantee.


(6) THE grant of ad interim injunction has been opposed by the learne counsel for defendant No. 1 in view of the law laid down in United Commercial Bank vs Bank of India and others, AIR 1981 S. C. 1426; Centax (India) Ltd. vs. Vinmar Impex Inc. and other, AIR 1986 S. C. 1924; Banwarilal Radhemohan Vs. Punjab St. Commissioner of Income Tax Supply and Mark Federation Ltd. 1982 R. L. R. 525 and Allied Resins and Chemicals Ltd. vs. Mineral and Metal? Tracing Corporation of India Ltd. and another, AIR 1986 Calcutta 346. Learned counsel for the plaintiff on the other hand relied upon M/s. Harprashad and Co. Ltd. vs. Sadarshan Steels Mills and others, AIR 1980 Delhi 174, M/s. Banerjee and Banerjee vs. Hindustan Steel Works Construction Ltd and others. AIR 1986 Calcutta 374 and National Project Construction Corporation Ltd. vs. M/s. G. Ranjan, AIR 1935 Calcutta 23. He has also relied upon United Commercial Bank (Supra). A perusal of these rulings would show that there is not much conflict in any of these rulings.


(7) IN United Commercial Bank (Supra) The Supreme Court had laid down that "the court usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of letter of credit or a bank guarantee between one bank and another". Quoting with approval from certain English judgments, the Supreme Court further held that 'a bank guarantee is very much like a letter of credit. The courts will do their utmost to enforce it according to its terms. They will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. . . . . . . . . But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction. A bank which gives a performance gua- rantee must honour that guarantee according to its terms. . . . . It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. . . . Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contract by litigation. . . . . . . . . . '.


(8) IN M/s. Tarapore and Co. Madras vs. M/s. V/o Tractor- export Moscow and another, AIR 1970 S. C. 891 it was held by the Supreme Court that 'an irrevocable letter of credit has a definite implication. . . . . . . . Except under very exceptional circumstances, the courts should not interfere with that mechanism'. On facts it was held that the facts pleaded in their plaint did not amount to a plea of fraud. What were those exceptional circumstances was not brought out by the Supreme Court.


(9) IN Centax (India) Ltd. (Supra) the Supreme Court followed United Commercial Bank case (Supra) by saying 'we do not see why the same principles should not apply. . . . . . . . . . . . '.


(10) IN Banwarilal Radhemohan (Supra) it was held that a contractor offering guarantee by its bankers in lieu of cash security deposit cannot object if the other party demands from the bank in terms of the bond. The only exception is the rarest cases of obvious fraud of which bank must have notice. It was further held therein that the bank before honouring must see that demand is in terms of guarantee (like occurrence of actual or expected loss etc.) and if demand makes no mention of latter then bank or contractor have to refuse. Even in Allied Resins and Chemicals Ltd. (Supra) it was accepted that for grant of injunction we are only concerned with prima facie case and balance of convenience. In our opinion, 'it all depends on the facts of each and every case and the language of the particular documents irrespective of the question whether it is a bank guarantee or a letter of credit. The question is whether the terms and conditions for enforcement of this bank guarantee have been complied with or not'.


(11) IN M/s. Harprashad and Co. Ltd. (Supra) a Division Bench of this court has held that "while the law generally stated is that liability arising out of the unilateral contracts of commercial credits, such as letters of credit, bank guarantees and performance bonds is absolute, the intention of the parties as gathered from a reasonable construction of the language of the particular contract must ultimately govern the decision as to the arising of the liability thereunder. The terms of a particular document may even constitute an exception to the general rule". It has further been held therein that "there is a distinction between absolute liability as when the money under the bank guarantee is payable on demand like a promissory note and the absolute liability which arises after the terms of the bank guarantee are fulfilled. In the instant case the intention of the parties according to the language of the bank guarantee was that the absolute liability should arise only after the terms of the bank guarantee are fulfilled. The duty of the beneficiary in making the demand on the bank is like the duty of the plaintiff to disclose the cause of action in the plaint. Just as a plaint is liable to be rejected for non-disclosure of the cause of action, a demand by the beneficiary of the bank guarantee is liable to be rejected by the bank if it does not state the facts showing that the conditions of the bank guarantee have been fufilled. It is only after this obligation is performed by the beneficiary that the liability of the bank becomes absolute. The terms of the bank guarantee having not been fulfilled the amount under the bank guarantee has not become due for payment to the beneficiary". Likewise in M/s. Banerjee and Banerjee (Supra) it has been held that "the bank guarantees and the Letters of Credit (L/c) are given by the bankers at the instance of one of the parties to the main contract and pursuant to the express terms of the main contract. Therefore, the contractor at whose request the bank guarantee is given or the L/c is opened, has nexus therein. He cannot be said to be a total stranger to the contract of guarantees of L/c. A wrongful or fraudulent enforcement of the bank guarantee will vitally affect the contractor. Hence if the guarantee is enforced by fraud, misrepresentation, deliberate suppression of material facts, or the like, that will give rise to a special equity in favour of the contractor who will then have the right to stop its enforcement by obtaining an order from court. But for obtaining an order from court, a very strong prima facie arguable case in support of the contention that there is a fraud or special equity, must be made out. The courts will not interfere with the enforcement of unconditional or conditional bank guarantees or letters of credit on the mere allegation of fraud or special equity. If the guarantee is a conditional 'one, it becomes enforceable upon fulfilment of the conditions stipulated and the beneficiary must have alleged in the demand letter that the conditions have been fulfilled. Otherwise the bank will not be liable to pay. As a matter of fact, if the conditions are not fulfilled, it is the duty of the bank to refuse payment". It has further been held therein that "by enunciating the general principle of non-interference by courts in respect of guarantee and L/c, the courts only intended that the international trade and commerce should function smoothly without interference from court. At the same time, the courts expected that the merchants and traders in international trade and commerce will honour their respective commitments and the business honesty would be maintained. By the theory of non-interference in cases of L/cs and guarantees, certainly the courts did not intend that international trade and commerce should flourish and thrive by adopting dishonest unscrupulous practice. These trade practices and the commitments by the banks are treated on a different level by the courts and are allowed to function without interference from courts only with the view that the trust in international commerce is not damaged in any way and not for encouraging mala fide activities of unscrupulous traders. If 80, fraud or the special equity arising out of the peculiar situation of the case could not have been made exceptions to the general principles of non-interference by courts. Therefore the guarantees and L/cs must be enforced in accordance with the terms of the documents only which ipso facto excludes the possibility of enforcement of these documents contrary to their terms".


(12) THUS the consistent view of the courts in the case of invocation of bank guarantees and enforcement thereof by the beneficiaries is that the court would usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of letter of credit or a bank guarantee and it would be only in exceptional cases and that too when there are allegations of fraud that an interim injunction would be issued restraining the bank from making the payment under the bank guarantee. Cases involving allegations of misrepresentation or suppression of material facts or violation of the terms of the guarantee cannot be treated differently and as such where there are allegations of misrepresentation or suppression of material facts or violation of the terms of guarantee, the courts would not hesitate in granting an interim injunction. In this context, misrepresentation or suppression of material facts or violation of the terms of the guarantee can be treated as species of the same genus as fraud. What is necessary is that there exists special equity in favour of the plaintiff to grant of injunction. No doubt an obligation of a bank under the bank guarantee is absolute, but such an absolute obligation arises only if the conditions of the bond are satisfied and if the demand made on the bank is in strict accord with its terms and there is no element of fraud, misrepresentation or suppression of material facts involved but where there are allegations of fraud, misrepresenta- tion or suppression of facts made by the party against the beneficiary and there is prima facie evidence to suggest that there is some truth in these allegations then there would possibly be no absolute bar operating against the courts from grantin

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g an interim injunction restraining the bank from making the payment on the basis of the bank guarantee. Similar would be the position where the demand made by the beneficiary is in violation of the conditions of the bond or is not in strict accord with its terms keeping in view the nature of obligation of the bank the terms of the bank guarantee would have to be strictly construed in such cases. (13) COMING to the facts of the case in hand, defendant No. 1 has invoked the bank guarantee in the instant case by suppression of material facts which even borders on fraud in so far as it has not disclosed that the contract had been cancelled by defendants without any fault or mistake of the plaintiff and rather on different grounds. A perusal of Annexure III letter dated 30th July, 1986 from defendant No. 1 to the plaintiff shows that it is due to technical reasons and also due to increase in price that the contract has been cancelled which means that it is not for any default of the plaintiff. Defendant No. 1 has further with held the fact that a sum of Rs. 1,32,668. 50 is still payable from the defendants which has been withheld for insufficrent reason by defendants 2 and 3 from plaintiff which by itself shows that the guarantee is being invoked for insufficient reasons. It has also not been brought out that some amount of advance has already been recovered by defendants 1, 2 and 3 from the bills of the plaintiff. It has also not been disclosed that the plaintiff has all along been ready and willing to perform his part of the contract. The plaintiff would have in fact completed the contracted job but due to intervening devastating fire which took place at the site of the contract. Furthermore the invocation of the bank guarantee would be available only if any default is made by the plaintiff in performance of the contract and it is difficult to accept that any default has in fact been made by the plaintiff keeping in view that the plaintiff was prevented by the defendants 1, 2 and 3 from performing his part of the contract. All these facts go to show have given rise to special equity in favour of the plaintiff. (14) KEEPING in view my discussion above, I find that the present case is a fit one to grant ad interim injunction prayed for and accordingly ad interim injunction as prayed for is issued in favour of the plaintiff and against the defendants.
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