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PETITIONER: OIL & NATURAL GAS CORPORATION LTD.

       Vs.

RESPONDENT: STATE BANK OF INDIA, OVERSEAS BRANCH, BOMBAY

DATE OF JUDGMENT:       21/07/2000

BENCH: S. Rajendra Babu, J. & S.N. Phukan, J.

JUDGMENT:

J  U  D  G  M  E  N  T RAJENDRA BABU,  J.  :

Leave granted.

This  appeal  arises  out  of  a suit filed  to  enforce  a  Bank Guarantee  against  the respondent under Order XXXVII  CPC.   The respondent  filed an application seeking leave to defend the suit unconditionally.   That  application  having  been  allowed  this appeal  is filed by special leave.  Facts leading to this  appeal are as follows:

The  appellant  entered into a contract with a consortium of  M/s Saipem  SPA/Snamprogetti of Italy for construction of a system of undersea  pipelines  known as the Gas Lift Pipelines.   The  work comprised  of  pre-engineering  survey, design  and  engineering, procurement,  wrap and coat, fabrication, transportation, laying, installation,  testing and pre-commissioning of forty  sub-marine pipeline  segments  of approximately total length of  181.8  kms. The  contract price was to the tune of US $63,875,000 plus Indian Rs.   8,06,00,000/-.  The scheduled completion date of the entire works  subject to any requirements in the contract specifications as  to  the  time of completion of any part of  the  work  before completion  of  the  whole,  the  whole of the  work  was  to  be completed by April 30, 1991.  The contract also provided for levy of  liquidated  damages if the contractor failed to complete  the entire  works  or any part thereof comprising the total turn  key project before the respective scheduled completion date fixed for the  entire  works or part thereof at a rate equal to 3%  of  the total  contract price for each months delay subject to a maximum of  10%  of  the contract price.  The contractor was  obliged  to furnish  a  bank  guarantee to cover liquidated  damages  for  an amount  equivalent to 10% of the contract price not later than  4 months  prior to the scheduled completion date.  However, if  the projects  completion date slips beyond the scheduled  completion date,  the  contractor  shall  get  validity  of  said  guarantee suitably  extended.  In case, the contractor fails to provide the guarantee  for  liquidated  damages within  the  time  stipulated therein,  the  appellants  shall  be   entitled  to  encash   the performance guarantee.  All disputes arising out or in connection with the contract shall be settled in accordance with the laws of India  and the exclusive jurisdiction of the courts in India.  In compliance  with this requirement, the contractor had furnished a bank  guarantee  from the State Bank of India,  Overseas  Branch, Bombay,  to  cover liquidated damages claim.  That guarantee  was for a sum of US $6,387,500 plus Indian Rs.  8,060,000/-.  Through

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the  said  guarantee,  the respondent  Bank  had  unconditionally undertaken  as  under :- Now therefore, in consideration of  the premises  aforesaid  and  at the request of the  contractor,  we, State  Bank  of  India, Overseas Branch, Bombay,  Bank  organised under  the laws of India and having its registered/head office at Calcutta  (hereinafter called the Bank) so as to bind ourselves and  our  successors  and assignees, do  hereby  irrevocably  and unconditionally  undertake to pay to you, the Company, on  demand in  writing  without  demur or protest and  irrespective  of  any contest or dispute between your goodselves and the contractor and without reference to the contractor, any sum of money at any time or  from  time to time demanded by the Company upto an  aggregate limit  of USD.  6,387,500/- (US Dollars six million three hundred eighty seven thousand and five hundred only) plus INR 8,060,000/- (Indian  Rupees eight million sixty thousand only) on account  of any liquidated damages due from the contractor to the company.

We  further  agree  that as between us and the  company  for  the purpose  of  this guarantee/undertaking, any notice of demand  by the  company towards liquidated damages and any amount claimed on account  thereof, shall be final and binding as to the factum  of the  L.D.  and the amount payable by us to the company  hereunder relative thereto.

We  further  agree that this guarantee shall be governed  by  and construed in accordance with Indian laws.

We  further  agreed  that if the project  completion  date  slips beyond  schedule completion date because of whatsoever reason  we shall extend validity of this guarantee suitably so as to keep it valid for 180 days beyond actual completion date.

We  further confirm that this guarantee has been issued with  the approval  of  Exchange Control Authorities in India and that  the issuance  of the guarantee is in order and in accordance with the laws and regulations in force in India

As  a  result  of  protracted  correspondence  and  extension  or increase or decrease in value of Bank Guarantee the same was kept alive  from  time to time.  On March 17, 1993 after  taking  into account  the total delay of 306 days in completing the work,  the appellant  assessed the liquidated damages as US $ 4,320,432 plus Indian  Rs.  55,15,959.00.  Accordingly by letter dated March 17, 1993  the  appellant  advised the contractor to extend  the  bank guarantee for a further period of six months.  The contractor was given certain options.  The respondent Bank furnished an enhanced value  of  US  $  4,320,432 plus  Indian  Rs.   5,515,959/-  with validity upto October 4, 1993 under a covering letter of the same date.   The  appellant  by its letter dated  September  13,  1993 advised  the  contractor  to  extend the  validity  of  the  bank guarantee  and on September 23, 1993 the contractor got issued  a notice  through a lawyer for referring the dispute to arbitration and  also  appointed  its  arbitrator.  Again  the  appellant  on September  27,  1993  informed  the   respondent  Bank  that  the contractor  was separately advised vide its letter date September 13, 1993 to extend the validity of the bank guarantee and in case the  validity of the same is not extended on or before October 1, 1993,  the said letter be treated as its notice invoking the said bank  guarantee.   The contractor as well as the bank not  having honoured  the  terms  of the bank guarantee, the  appellant  once again  asked  the  respondent bank to credit the  said  guarantee along  with  interest from October 4, 1993.  On December 3,  1993 the  respondent  Bank  stated  that  (a)  they  have  issued  the guarantee  in  question  in favour of ONGC  against  the  counter guarantee  of  the Italian Bank Credito Italiano, Milan  and  the

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contractor  obtained an order of injunction from an Italian Court restraining  Credito  Italiano  from making any  payment  to  the respondent  Bank under the counter guarantee;  (b) they are  also considering  the  question  of  validity   or  otherwise  of  the appellants  demand  for the guaranteed sum under the  liquidated guarantee  vide its letter dated September 27, 199;  (c) in terms of  exchange  control  regulations, the rupee payment  under  the guarantee  shall be made only on receipt of re- imbursement  from the  foreign bank in an approved manner, (d) since the matter  is subjudice, the appellant should wait until the issue is resolved. In  the meanwhile, apart from engaging in correspondence both the appellant  and  respondent  appeared through counsel  before  the Italian  Court.   It  was contended that the  bank  guarantee  is autonomous,  unconditional and they are bound to honour the  same irrespective  of any counter guarantee they have from the Credito Italiano  and  that any proceeding with regard to enforcement  of any  such counter guarantee should not obstruct payment under the guarantee  given  by  the respondent bank.  The  respondent  Bank fearing  that  if  the Italian Court order  continuation  of  the restraint   order,  it  would  be   difficult  for  them  to  get reimbursement  from  the Credito Italiano.  In  the  alternative, they  invited  the court to restrain them so that they can  avoid payment  to the appellant under such guarantee and also an  order directing  the  appellant  not to request for  payment  from  the respondent bank under the said bank guarantee.  The Italian Court on  March  2,  1994 made an order which is as under  :-  Credito Italiano, Milan branch, in the person of its legal representative and  the State Bank of India overseas Branch, Bombay, to  abstain from  payment  of  any  sum  in execution  of  the  agreement  of guarantee/counter   guarantee   arising   between   the   parties originating  from  relationship  between Snam  Progetti  SPA  and Saipem  SPA  on the one side and Oil & Natural Gas Commission  on the other side arising from the Contract of the 6th March, 1990.

In the circumstances, aggrieved by the refusal to honour the bank guarantee,  the appellant filed a summary suit under Order XXXVII of  the  Code  of  Civil  Procedure  before  the  High  Court  of Judicature  at  Mumbai  praying  for a decree in a sum  of  US  $ 43,204,32  plus  Indian Rs.  55,159,59 and interest on  the  said amount  at  the rate of 18% per annum and pendente lite  interest till payment of realisation.

The   High   Court  by  order   dated  April  27,  1998   granted unconditional leave to defend the suit on the following terms (i) while  invoking  the bank guarantee, vide letter dated  September 27,  1993  the amount of liquidated damage was not stated;   (ii) according  to  bank guarantee, a clear notice of  demand  towards liquidated  damage  was  to  be given;  (iii)  the  notice  dated September  27,  1993  was not a legal notice to  communicate  the liquidated  damages, and (iv) arbitration proceedings is  pending and the Italian Court is also seized of the matter.  Aggrieved by that order, the appellant has filed this appeal by special leave. Shri  Ashok H.  Desai, the learned senior advocate appearing  for the  appellant, submitted that none of the grounds stated by  the High   Court  could  provide  enough   basis  for   granting   an unconditional  leave to defend.  He strongly placed reliance upon the  decision of this Court in Hindustan Steelworks  Construction Ltd.   v.  Tarapore & Co.  & Anr., 1996 (5) SCC 34, and Larsen  & Toubro  Limited  v.  Maharashtra State Electricity Board &  Ors., 1995  (6) SCC 68.  After a survey of the decisions of this  Court in  United  Commercial Bank v.  Bank of India, 1981 (2) SCC  766; U.P.   Coop.  Federation Ltd.  v.  Singh Consultants &  Engineers (P)  Ltd., 1988 (1) SCC 174;  General Electric Technical Services Co.   Inc,  v.   Punj  Sons (P) Ltd., 1991 (4) SCC  230,  law  as applied  in  England in Elian and Rabbath v.  Matsas and  Matsas,

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(1966) 2 Lloyds Rep 495, CA.  and a few American decisions, this Court in Svenska Handelsbanken v.  Indian Charge Chrome, 1994 (1) SCC  502,  declared  the  law that in  case  of  confirmed  bank guarantee/irrevocable  letters of credit it cannot be  interfered with  unless there is fraud and irretrievable injustice  involved in  the  case  and fraud has to be as established  fraud.   There should  be prima facie case of fraud and special equities in  the form  of preventing irretrievable injustice between the  parties. Mere   irretrievable  injustice  without   prima  facie  case  of established  fraud  is  of  no  consequence  in  restraining  the encashment  of  bank  guarantee.  Only in the event of  fraud  or irretrievable  injustice the court would be entitled to interfere in  a  transaction involving a bank guarantee and under no  other circumstances.   In  that case, the contention put forth  before the  court was regarding liquidated damages.  The respondent  had to  prove  that  liquidated damages quantified  the  same  before invoking  the  guarantee.   It  was   also  contended  that   the invocation  of  the guarantee relating to advance and  liquidated damages was after the expiry of the period.  In the absence of an averment  relating to fraud or irretrievable injustice, the court held  that  the  appellant will be able to  claim  relief  before arbitration  by  way of damages or amounts wrongly recovered  and irretrievable injustice can be said to exist.  The learned single Judge  also  held  that the first respondent by  separate  letter dated  September 14, 1994 and May 10, 1994 addressed to the  Bank while requesting to extend the bank guarantee specifically stated that  if it was not so done, the communication should be  treated as  notice  for  encashment  of  the  bank  guarantee  and  these communications  addressed  to the respective banks prior  to  the guarantee  would serve the purpose of notice to the banks and  so it  cannot  be  held that the invocation was after  the  date  of expiry  of the said guarantees.  The same is the principle stated by  this  Court  in Hindustan Steelworks  Construction  Ltd.   v. Tarapore  &  Co.   &  Anr.  (supra).  It  is  held  therein  that encashment  of  an unconditional bank guarantee does  not  depend upon  the  adjudication of disputes.  No distinction can also  be made  between  bank  guarantee  for due  performance  of  a  work contract  and  a guarantee given towards security deposit  for  a contract  or any other kind of guarantee.  Where the  beneficiary shall  be  the  sole judge on the question of breach  of  primary contract  the bank shall pay the amount covered by the  guarantee on  demand  without a demur.  In the absence of a plea of  fraud, guarantee  had to be given effect to.  Though these two decisions pertain to grant of injunction for enforcement of bank guarantee, the  principle stated therein could be extended to understand the nature  of  defence raised by the respondent Bank in the  present case.   Whether  the  respondent Bank could at all raise  such  a defence  which  is  totally untenable.  In the light of  what  is stated  above,  in the absence of a plea relating to fraud,  much less  of a finding thereto, we find that the court could not have stated  that  the  defence raised by the respondent Bank  on  the grounds   set   forth  earlier  is   sufficient  to   hold   that unconditional leave should be granted to defend the suit.  In the arbitration  proceedings that were pending it was certainly  open to  the parties concerned to adduce proper evidence and establish as to what are the liquidated damages that are payable and if any excess amount had been paid, the same would be recovered.  So far as the order made by the Italian Court for not enforcing the bank guarantee  is  concerned, it must be stated that the  said  order arose  out of the counter guarantee with which the appellant  had nothing to do.  In this context, it is brought to our notice that the  Foreign Exchange Manual, 1999 provided as under :-  Reserve Bank  has  likewise  granted  general  permission  to  authorised dealers  vide the above Notification to give guarantees in favour of  persons  resident in Indian in respect of any debt  or  other

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obligation  or  liability  of  a person  resident  outside  India subject  to  such instructions as may be issued by  Reserve  Bank from  time to time.  Authorised dealers may accordingly give,  on behalf  of their overseas Head Offices/branches/correspondents or a  bank  of international repute guarantees/performance bonds  in favour  of  residents  of  India   in  connection  with   genuine transactions  involving  debt  liability or  obligation  of  non- residents  provides  the bond/guarantee is covered by  a  counter guarantee  of the overseas Head Office/ branch/correspondent or a bank  of international repute.  Authorised dealers may make rupee payments  to  the  resident beneficiaries  immediately  when  the guarantee  is  invoked and simultaneously arrange to  obtain  the reimbursement  from the overseas bank concerned which had  issued the  counter guarantee.  Authorised dealers are well advised that they should ensure that counter guarantees are properly evaluated and  their own guarantees against such guarantees are not  issued in  routine  manner.   Before  issuing a  guarantee  against  the counter      guarantee     from        an      overseas      Head Office/branch/correspondent  or  a bank of international  repute, authorised dealers should satisfy themselves that the obligations under  the  counter guarantee when invoked, would be honoured  by the  overseas bank promptly.  If the authorised dealer desires to issue  guarantee  with  the condition that payment will  be  made provided  reimbursement has been received from the overseas  bank which  has issued the counter guarantee, this fact should be made clearly  known  to  the beneficiary in  the  guarantee  documents itself.   Cases whose payments are not received by the authorised dealers  when  the  guarantees  of overseas  banks  are  invoked; should  be reported to Reserve Bank indicating the steps taken by the bank to recover the amount due under the guarantee.

Till  the new Exchange Control Manual was introduced the position was as follows :-

Reserve   Bank  has  likewise   granted  general  permission   to authorised dealers vide the above Notification to give guarantees in  favour of persons resident in India in respect of any debt or other  obligation or liability of a person resident outside India subject  to such instructions as may be issued from time to time. Authorised  dealers  may  accordingly give, on  behalf  of  their overseas  Head Offices/branches/correspondents, performance bonds or  guarantees  in  favour of residents of India, in  support  of tenders  to be submitted for due performance of contracts or  for refund, in the event of contracts not being fulfilled, of advance payments  received, provided the bond or guarantee is covered  by counter   guarantee  of   the  Head  Office/branch/correspondent. Authorised  dealers  may  make  rupee payments  to  residents  in implementation  of  invoked bonds/guarantees issued in favour  of residents  of  India  without, prior reference to  Reserve  Bank, provided   reimbursement   has  been   received  from  the   Head Office/branch/correspondent abroad in an approved manner.

When,  in fact, there is no defence for suit filed merely to rely upon  an injunction granted or obtained in their favour does  no carry  the  case  of the respondent Bank any further.   The  only basis  upon which the respondent Bank sought for and obtained the injunction  is  that  in event the counter  guarantee  cannot  be honoured by reason of the injunction granted by the Italian court the  respondent Bank should be extended the similar benefit.  But a perusal of the Foreign Exchange Manual makes it clear that none of  the  claims would be an impediment to make payment under  the Bank  Guarantee  in question.  Therefore, in our view,  the  High Court   plainly  erred  in  having   granted  leave   to   defend unconditionally.    We   vacate  that   order  and  dismiss   the application  filed  by  respondent Bank for leave  to  defend  by

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allowing  this  appeal.  Considering the nature of the  case,  we order no costs.