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PETITIONER: GENERAL ELECTRIC TECHNICAL SERVICESCOMPANY INC.

       Vs.

RESPONDENT: PUNJ SONS (P) LTD. AND ANOTHER

DATE OF JUDGMENT07/08/1991

BENCH: SHETTY, K.J. (J) BENCH: SHETTY, K.J. (J) RAMASWAMI, V. (J) II YOGESHWAR DAYAL (J)

CITATION:  1991 AIR 1994            1991 SCR  (3) 412  1991 SCC  (4) 230        JT 1991 (3)   360  1991 SCALE  (2)272

ACT:      Contract--Termination due to failure to comply specifi- cations--Bank guarantee--Claim for encashment--Liability  of Bank--Order  restraining Bank from making  payment--Legality of.

HEADNOTE:      The appellant’s contract with Indian Airlines  included the  construction and fabrication of air craft testing  cen- tre/engine  repair  centre in Delhi. For getting  that  work done,  the  appellant entered into a contract with  the  re- spondent-1.      As  per  the  contract, respondent-1  was  required  to provide  performance bond equal to 30 per cent of the  total value  of contract price, which was to be split up into  two performance bonds partly to be released on completion of the project, and the balance upon the expiration of the  warran- ty, and to furnish a Bank guarantee to secure the  mobilisa- tion advance of 25 per cent of contract value.      Respondent-II,  instead of furnishing the two  perform- ance bonds, wrote a letter for a revised proposal, which was accepted by the appellant.      As  the  respondent-1 failed to  complete  the  project within  the stipulated time, as per  contractual  specifica- tions, despite repeated opportunities, the appellant  termi- nated  respondent-1’s  right  to continue  the  project  and sought  for  encashment  of  the  Bank  guarantee  for   Rs. 1,06,12,500, which was issued to the appellant by the Bank.      The  respondent-I filed a suit for  injunction  against the appellant and the Bank in the High Court and obtained an ex-parte  injunction from the Single Judge, restraining  the Bank and the appellant from encashing the Bank guarantee.       When the ex-parte injunction was vacated, respondent-I preferred an appeal to the Division Bench of the High Court. The Division 413 Bench allowed the appeal, staying the encashment Of the Bank guarantee till the disposal of the respondent’s suit.     On  the  question, whether the Court  was  justified  in restraining  the  Bank from paying the appellant  under  the

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Bank guarantee at the instance of respondent-I, allowing the appeal of the appellant company, this Court,     HELD: 1. In the instant case, the High Court has miscon- strued the terms of the Bank guarantee and the nature of the inter-rights of the parties under the contract. The  mobili- sation advance is required to be recovered by the  appellant from  the running bills submitted by the respondent. If  the full  mobilisation advance has not been recovered, it  would be to the advantage of the respondent. Secondly, the Bank is not  concerned  with the outstanding amount payable  by  the appellant under the running bills. The right to recover  the amount  under  the  running bills has no  relevance  to  the liability of the Bank under the guarantee. The liability  of the  Bank  remained intact irrespective of the  recovery  of mobilisation  advance or the non-payment under  the  running bills.  The failure on the part of the appellant to  specify the remaining mobilisation advance in the letter for encash- ment  of  Bank  guarantee is of little  consequence  to  the liability of the Bank under the guarantee. The demand by the appellant  is under the Bank guarantee and as per the  terms thereof. The Bank has to pay and the Bank was willing to pay as  per the undertaking. The Bank cannot be  interdicted  by the Court at the instance of respondent-I in the absence  of fraud  or special equities in the form of  preventing  irre- trievable  injustice between the parties. The High Court  in the absence of prima facie case on such matters has  commit- ted  an  error in restraining the Bank  from  honouring  its commitment under the bank guarantee. [421E-422A]     U.P.  Cooperative Federation Ltd. v.  Singh  Consultants and Engineers (P) Ltd., [1988] 1 SCC 174, Followed.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 3087  of 1991.     From  the  Judgment and Order dated 23.11. 1990  of  the Delhi High Court in F.A.O. (O.S.) 123 of 1989. Kapil  Sibal, D.D. Thakur, Ms. Lira Goswamy,  A.K.  Mahajan, A.S.  Chandhoik, Ms. Meera Chibar and Dinesh Agnani for  the appearing parties. 414 The Judgment of the Court was delivered by     K.  JAGANNATHA  SHETTY, J. We grant  special  leave  and proceed to dispose of the appeal.     The  General Electric Technical Services Company  (‘GET- SCO’) had entered into a contract with Indian Airlines which included,  inter alia, the construction and  fabrication  of air craft testing centre/engine repair centre in Delhi.  The GETSCO  in turn entered into a contract with M/s  Punj  Sons (P) Ltd. respondent-1 for getting that work done for  Indian Airlines.  As per the contract respondent-I was required  to provide  performance bond equal to 30 per cent of the  total value  of contract price which was to be split up  into  two performance bonds partly to be released on completion of the project, and the balance upon the expiration of the  warran- ty.  The  respondent-I was also required to furnish  a  bank guarantee to secure the mobilisation advance of 25 per  cent of  the  contract value. On 28  October,  1986  respondent-1 furnished  the  bank guarantee to  secure  the  mobilisation advance  of Rs. 1,86,00,000. The guarantee was furnished  by Hongkong & Shanghai Bank (’the Bank’) respondent-2.     Respondent-I  instead of furnishing the two  performance bonds,  as  agreed upon, wrote a letter dated  3  September, 1987, as follows:

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              ".....               Sub: Jet Engine Test & Repair Centre at Palam               Finance September 3, 1987               Dear Sir,                         In  terms of above contract we  have               to submit two separate Bonds for  Mobilisation               advance & performance guarantee & 25% and  30%               of  the  Contract value.  Bank  Guarantee  for               mobilisation advance has already been  submit-               ted and we have not to submit the  Performance               Bonds for 30% of the Contract value. Since the               amount  of Performance Bond shall be  progres-               sively  utilised over the contract period,  in               order  to  reduce Bank  charges  and  marginal               money,  we would like to  suggest  alternative               proposals to meet with your requirements:               415               AA.  We propose to submit performance  guaran-               tees for 30% of the contract value duly signed               by  two directors in their  personal  capacity               and countersigned by Punj Sons (Pvt) Ltd. This               Performance bond shall include identical terms               &  conditions,  as  desired  in  your  format.               Similar Bond has already been accepted by  M/s               Hindustan  Petroleum Corporation  Ltd.  Bombay               for their Bombay-Pune Pipeline Project  valued               at Rs.7.05 crores.               BB. Alternatively, we would suggest submission               of  a  Composite Bank  gurantee  where  amount               vacated  by  Mobilisation  advance  shall   be               utilised by Performance Bank Guarantee amount.               This Guarantee shall at any time be valid  for               equivalent  to 30% of the contract  value,  to               cover  unrecovered  mobilisation  advance  and               Performance  Guarantee  amount  of  the   work               certified.                        We have submitted similar Bonds to  a               number of our customers to their entire satis-               faction.  May we request you to look into  the               above  arrangement and allow us to submit  the               above  Bond or Composite Bank Guarantee  under               this Contract.                        Thanking you and assuring you of  our               best services at all times....  "     GETSCO  has accepted the revised proposal  contained  in the aforesaid letter. Consequently, on 25 January  1988, the Bank   furnished  a  composite  bank  guarantee  for   Rs.2, 12,25,000. Out of this composite bank guarantee 15 per  cent being  Rs. 1,06,12,500 would remain in force until 30  June, 1988  and  the balance 15 per cent would remain  valid  till final acceptance certificate i.e. till 30 June 1989.     It  seems  respondent-1 failed to complete  the  project within the stipulated time as per contractual specifications despite repeated opportunities to rectify defects and  defi- ciencies prior to August 1988 and thereafter. GETSCO  termi- nated respondent-1’s right to continue the project and wrote a letter dated 17 April 1989 to the Bank seeking  encashment of  the bank guarantee dated 25 January 1988 for  Rs.  1,06, 12,500.  On the same day the bank issued a  cashier’s  order No.  2605  for Rs. 1,06, 12,500 in favour of GETSCO.  On  18 April  1989  the respondent-1 filed a  suit  for  injunction against  GETSCO and the Bank in the High Court and  obtained an ex-parte injunction at the residence 416    of  learned Single Judge restraining the Bank and  GETSCO

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from  encashing the bank guarantee. On 11 July 1989 the  ex- parte  injunction was vacated. On the same day  respondent-1 preferred an appeal to the Division Bench of the High  Court and obtained stay of encashment of he bank guarantee. On  23 November  1990, the Division Bench allowed the  appeal,  set aside  the  order  of learned Single Judge  and  stayed  the encashment  of the bank guarantee till the disposal  of  the respondent’s suit.     It seems to us that the Division Bench of the High Court has  misconstrued  the terms of the bank guarantee  and  the rights and liabilities of the parties thereunder. The  first bank guarantee dated 28 October, 1986 is in these terms:               "1.  In  consideration  of  General   Electric               Technical Services co. Inc. Cincinnati,  Ohio,               U.S.A.  C/o  M/s  P.L.  Jaitly  &  co.  IE/12,               Jhandewalan Extension, New Delhi  (hereinafter               called  the  owner)  having  agreed  to  grant               mobilisation  advance  of Rs.18,600,000   [Rs.               Eighteen million six hundred thousand only] to               M/s  Punj  Sons Pvt.  Ltd.,  Industrial  Area,               Kalkaji, New Delhi 110019 (hereinafter  called               Contractor) under the terms and conditions  of               Tender No. HB-040-I made by and between, owner               and Contractor for Indian Airlines Jet  Engine               Repair and Test Facilities Phase II  Construc-               tion  being  undertaken at the  Indira  Gandhi               International  Airport,  New Delhi  (here  in-               called the Agreement)  on  the  production  of               Bank   Guarantee  for  Rs.18,600,000   [Rupees               eighteen  million  six  hundred thousand only]               we,  Hongkong & Shanghai Banking  Corporation,               28  Kasturba  Gandhi  Marg,  New  Delhi-110001               (hereinafter called Bank) do hereby  undertake               to  pay to the Owner an amount  not  exceeding               Rs.  18,600,000  [Rs.  eighteen  million   six               hundred  thousand only], against any  loss  or               damage  caused  to  or suffered  or  would  be               caused  to or suffered by the owner by  reason               of  any breach by the Contractor of the  terms               and conditions-contained in the Agreement.               2. We, the Bank do hereby undertake to pay the               amount  due and payable under  this  Guarantee               with  demur, merely on demand from  the  owner               stating that the amount claimed is due by  way               of loss or damage caused to or would be caused               to  or suffered by the owner by reason of  any               breach               417               by  the  Contractor  of any of  the  terms  or               conditions  contained in the Agreement  or  by               reason of the Contractor’s failure to  perform               the  Agreement.  Any such demand made  on  the               Bank  shall  be  conclusive,  as  regards  the               amount due and payable by the Bank under  this               Guarantee.  However, our liability under  this               Guarantee shall be restricted to an amount not               exceeding   Rs.18,600,000   [Rupees   eighteen               million six hundred thousand only].               3. We, the Bank further agree that the Guaran-               tee herein contained shall remain in force and               effect  during the period that would be  taken               for the performance of the Agreement and  that               it  shall continue to be enforceable till  all               the due of the owner under or by virtue of the               Agreement have been fully paid and its  claims

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             satisfied  or  discharged or  till  the  owner               certifies that the terms and conditions of the               Agreement have been tully and properly carried               out  by  the Contractor and  accordingly  dis-               charges  the  Guarantee. Unless  a  demand  or               claim  under this Guarantee is made on  us  in               writing  on or before the date (named  in  the               Agreement  as the end of  the  warrant/mainte-               nance period) we shall be discharged from  all               liability under this Guarantee thereafter.               4.  We, the Bank further agree with the  Owner               that the owner shall have the fullest  liberty               without  our consent and without affecting  in               any  manner our obligations hereunder to  vary               any of the terms and conditions of the  Agree-               ment  or to extend time of performance by  the               Contractor  from time to time or  to  postpone               for  any time or from time to time any of  the               powers  exercisable by the owner  against  the               Contractor  and to forbear or enforce  any  of               the  terms  and  conditions  relating  to  the               Agreement  and we shall not be  relieved  from               our liability by reason of any such variation,               or extension being granted by the owner or any               indulgence  by the owner to the Contractor  or               by  any such matter or thing whatsoever  which               under  the law relating to sureties would  but               for this provision have effect of so relieving               us.               5. We, the Bank lastly undertake not to revoke               this Guarantee during its currency except with               the previous consent of the owner in writing.               418               Notwithstanding  anything  stated  above,  our               liability  under this Guarantee is  restricted               to  a  sum  of Rs.  18,600,000  [Rs.  eighteen               million six hundred thousand only]. Our  Guar-               antee  shall remain in force until  the  (date               named  in  the  Agreement as the  end  of  the               warrant/maintenance  period). Unless a  demand               is  lodged with us on or before that  date  13               day  of February 1988, all your  rights  under               the  said guarantee shall be forfeited and  we               shall  be  relieved and  discharged  from  all               liabilities thereafter."                   The relevant terms of the second composite               bank  guarantee dated 25 January 1988  are  as               follows:               "Bank Guarantee No. 86 NDH 918 dt.  28.10.1986               for  Rs.  1,86,00,000  favouring  M/s  General               Electric & Technical Services Co. Inc.               Under  the instructions from our  clients  M/s               Punj  Sons (Pvt) Ltd. M-13,  Connaught  Place,               New Delhi 110001, we hereby enhance the  value               of the above Bank Guarantee upto Rs.21,225,000               [Rupees twenty one million two hundred  twenty               five  thousand only] being 30% of the  revised               Lumpsum   Contract   value   of  Rs.70,750,000               [Rupees  seventy million seven  hundred  fifty               thousand only].               This Bank Guarantee shall act ’Composite  Bank               Guarantee’    for  Mobilisation  Advance   and               Performance  Bond where in Bank Guarantee,  to               the extent of amounts of Mobilisation  Advance               so  recovered, shall be utilised  towards  Two

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             Performance Bonds of 15% of the Contract value               each valid upto 30th June, 1988 and 30th June,               1989, respectively.               All  the  other terms and  conditions  of  the               original Guarantee will remain unchanged.               We,  the Hongkong & Shanghai Banking  Corpora-               tion,  28,  Kastruba Gandhi Marg,  New  Delhi-               110001,  hereby undertakes not to  revoke  the               Guarantee during the currency except with  the               previous consent of the General Electric               419               and Technical Services Company Inc.               Notwithstanding,  anything  contained   herein               before  our liability under this Guarantee  is               restricted to Rs.21,225,000 [Rupees Twenty One               Million Two Hundred Twenty five thousand only]               and the recovery of Mobilisation advance  from               Running  Bills Account will be  in  accordance               with the contract, the Guarantee against  such               amounts  of Mobilisation Advance as so  recov-               ered  shall  be  treated  towards  performance               Guarantee with the intent that after  recovery               of Mobilisation Advance in full, the Guarantee               shall  operate against the full value of  Per-               formance  Bond.  Out  of  the  said  guarantee               amount,   the   Bank   Guarantee   amount   of               Rs.10,612,500 [Rupees ten million six  hundred               twelve thousand & five hundred only] being the               15%  of  lumpsum value of the  contract  shall               remain  in  force till the completion  of  the               Project i.e. upto 30th June 1988 and the  Bank               Guarantee   for   the  balance   amount   i.e.               Rs.10,612,500 [Rupees ten million six  hundred               twelve  thousand five hundred only] being  15%               amount  shall remain in force till  final  ac-               ceptance certificate till 30th June, 1989.               NOTWITHSTANDING  anything contained  hereinbe-               fore  our liability under this Guarantee  will               be restricted to Rs.21,225,000 [Rupees  twenty               one million two hundred twenty five  thousands               only] until 30th June 1988 and will  automati-               cally  stand  reduced  from  Rs.21,225,000  to               Rs.10,612,500 (Rupees ten million six  hundred               twelve thousand and five hundred only) on 30th               June,  1988 without further reference to  you.               Our liability will continue only to the extent               of the balance amount of Rs.10,612,500 [Rupees               ten  million six hundred twelve  thousand  and               five  hundred only] after 30th June, 1988  and               will  be conditional upon a claim being  filed               with  us  in writing on or  before  30th  June               1989.  Thereafter  our  liability  under  this               guarantee  shall  stand  extinguished  and  we               shall  be  relieved and  discharged  from  all               liabilities thereunder."     The  second bank guarantee with which we  are  concerned makes a reference to the first guarantee. It states that the guarantee is a composite bank guarantee for mobilisation  of advance and performance bond. It further states that all the other terms and conditions of 420 the original Guarantee will remain unchanged. The  liability of   the   Bank    shall    automatically    reduce     from Rs.2,12,25,000   to Rs. 1,06, 12,500 on 30 June 1988,  which will  continue even after 30 June, 1988 and will  be  condi-

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tional upon a claim being filed with the Bank in writing  on or before 30 June 1989. In the first guarantee, the Bank has undertaken  to pay to GETSCO the amount  guaranteed  without any demur merely on demand stating that the amount is due by way  of loss  or damage caused to or would be caused  to  or suffered by GETSCO by reason of any breach committed by  the respondent  on any of the terms or conditions  contained  in the  agreement or by reason of respondent’s failure to  per- form the agreement. It is also provided that any such demand by  GETSCO made on the Bank shall be conclusive  as  regards the amount due and payable by the Bank under the  guarantee. The GETSCO has only sought to enforce the bank guarantee for the  balance amount of Rs. 1,06, 12,500 on a complaint  that respondent-1, has failed to perform the contract as per  the terms  and conditions. The Bank has undertaken to  pay  this sum  of money and it is a commitment of the Bank.  The  Bank must honour its commitment when demand is made. Indeed,  the Bank  was prepared to pay and has in fact issued  the  Cash- ier’s  order  as per demand from GETSCO, but the  Court  has directed the Bank not to pay under the guarantee.     The  question  is  whether the Court  was  justified  in restraining  the Bank from paying to GETSCO under  the  bank guarantee at the instance of respondent-1. The law as to the contractual  obligations under the bank guarantee  has  been well  settled in a catenae of cases. Almost all  such  cases have  been considered in a recent judgment of this Court  in U.P.  Cooperative Federation Ltd. v. Singh  Consultants  and Engineers  (P)  Ltd., [1988] 1 SCC  174  wherein  Sabyasachi Mukherji,  J.,  as he then was, observed (at 189)  ’that  in order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank  guar- antee,  there should be serious dispute and there should  be good  prima facie case of fraud and special equities in  the form  of  preventing  irretrievable  injustice  between  the parties.  Otherwise,  the very purpose  of  bank  guarantees would be negatived and the fabric of trading operations will get jeopardised’. It was further observed that the Bank must honour  the  bank guarantee free from  interference  by  the Courts.  Otherwise, trust in commerce internal and  interna- tional  would be irreparably damaged. It is only  in  excep- tional  cases that is to say in case of fraud or in case  of irretrievable injustice, the Court should interfere. In  the concurring opinion one of us (K. Jagannatha Shetty, J.)  has observed that whether it is a 421 traditional bond or performance guarantee, the obligation of the Bank appears to be the same. If the documentary  credits are  irrevocable  and independent, the Bank  must  pay  when demand  is made. Since the Bank pledges its own  credit  in- volving its reputation, it has no defence except in the case of  fraud.  The Bank’s obligations of course should  not  be extended  to  protest the unscrupulous party, that  is,  the party who is responsible for the fraud. But the banker  must be sure of his ground before declining to pay. The nature of the  fraud that the courts talk about is fraud of an  "egre- gious  nature as to vitiate the entire  underlying  transac- tion".  It  is fraud of the beneficiary, not  the  fraud  of somebody else.     The High Court has observed that failure on the part  of GETSCO  to make a reference to mobilisation advance  in  the letter  seeking  encashment of the bank guarantee  would  be tantamount  to suppression of material facts, in  the  sense that the mobilisation advance was, under the contract to  be recovered  from the running bills. It was  further  observed that  disclosure  of such facts would have put the  bank  to

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further  inquiry as to what was the amount covered by  those bills and what was the corresponding amount of the mobilisa- tion  advance and to what extent the amount covered  by  the bank  guarantee  remained payable. In any  event,  the  High Court said, that GETSCO could not demand full amount of  the bank  guarantee  on 17 April 1989. It seems to us  that  the High Court has misconstrued the terms of the bank  guarantee and  the nature of the inter-se rights of the parties  under the  contract.  The mobilisation advance is required  to  be recovered by GETSCO from the running bills submitted by  the respondent.  If the full mobilisation advance has  not  been recovered,  it would be to the advantage of the  respondent. Secondly,  the  Bank is not concerned with  the  outstanding amount payable by GETSCO under the running bills. The  right to  recover the amount under the running bills has no  rele- vance to the liability of the Bank under the guarantee.  The liability  of the Bank remained intact irrespective  of  the recovery  of mobilisation advance or the  non-payment  under the  running  bills. The failure on the part  of  GETSCO  to specify the remaining mobilisation advance in the letter for encashment of bank guarantee is of little consequence to the liability  of  the Bank under the guarantee. The  demand  by GETSCO  is  under the Bank guarantee and as  per  the  terms thereof. The Bank has to pay and the Bank was willing to pay as  per the undertaking. The Bank cannot be  interdicted  by the Court at the instance of respondent-1 in the absence  of fraud  or special equities in the form of  preventing  irre- trievable injustice between the parties. 422 The  High Court in the absence of prima facie case  on  such matters has committed an error in restraining the Bank  from honouring its commitment under the bank guarantee.     In  the result, we allow the appeal, set aside  the  im- pugned  judgment and order of the High Court. The  appellant is entitled to costs in this Court.       S.L.P. (Civil) No.-of 1991 (In CC-13 153/91)     Since we have set aside the order of the Division  Bench of  the  High  Court this Special Leave  Petition  does  not survive and is accordingly dismissed.        No costs. V.P.R.                                                Appeal allowed. 423