ESCORTS LIMITED v. MODERN INSULATORS LIMITED — 1987 DIGILAW 467 (DEL)

( 1 ) THIS is yet another case where an attempt has been made to see that a commitment made by the Bank to a beneficiary by virtue of a bank guarantee is not honoured despite the position in law being well settled and, possibly, well understood by all the parties. ( 2 ) BRIEFLY stated, the facts are that a contract had been entered into between the plaintiff and defendant 1 on 9th May, 1986 whereby the plaintiff was to supply to defendant 1, one 1000 KVA Diesel Generating Set which included one 1000 KVA Kirloskar Cummins Diesel Engine and other items. It was a part of the contract that the plaintiff was to erect and commission the said generating set. This set was warranted against any defect due to bad workmanship or defective material for a period of 24 months from the date of despatch or 5000 hours from the date of installation, whichever was earlier. Other parts had different periods of warranty. It is not necessary to give any greater details at this stage. ( 3 ) ONE of the terms of the contract was| that the plaintiff was obliged to furnish a bank guarantee for satisfactory performance of the diesel generating set which was to be supplied by the plaintiff. ( 4 ) PURSUANT to the aforesaid Purchase Order dated 9th May, 1986 a bank guarantee was furnished by defendant 2, at the instance of the plaintiff. Two of the material terms of the bank guarantee were as follows "now THIS DEED WITNESSES AS- FOLLOWS : 1. We agree to indemnify and keep indemnified the purchaser against any loss or damage caused to or suffered or would be caused or suffered by the purchaser to the maximum extent of Rs. 2,24,700. 00 (Rupees two lacs twenty four thousand seven hundred only) by reason of any shortfall in guarantee performance of working of machinery and equipment being supplied under the said contract. 2. We undertake to pay the amount due and payable under this guarantee without any demur, on a demand from purchaser stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by purchaser by reason of any shortfall in guaranteed performance, engineering and supply of machinery and equipment in the said contract. " ( 5 ) DEFENDANT 1 got the generating set installed by 29th Dec. 1986. According to the said defendant, the generating set which Was supplied did not give the requisite performance. On 14th April, 1987 the counsel for/defendant 1 wrote to defendant 2, inter alia, stating that the plaintiff had not carried out all the work as per the scope of supply and had also not successfully commissioned and handed over the diesel generating set till then though it was scheduled to be delivered and commissioned before 15th June, 1986. It was further alleged that defendant 1 had suffered heavy losses. The bank guarantee which was furnished was for a sum of Rs. 2,24,700. 00. By this notice dt. 14th April, 1987 the defendant-Bank was asked to pay; the said guaranteed amount within 15 days of the receipt of the notice. The Bank did not make the aforesaid. payment. Instead, the present suit for injunction was filed by the plaintiff, at whose instance the bank guarantee had been issued, in which it was prayed that a permanent injunction be issued restraining defendant 1 from recovering and defendant No. 2 from paying the aforesaid amount of Rs. 2,24,700. 00. ( 6 ) BY order dt. 25th May, 1987 ad interim ex parte injunction was issued. While granting this injunction, it was observed that the demand for enforcing the bank guarantee has to be made strictly in accordance with the terms thereof. The letter dt. 14th April, 1987 did not appear to be in the terms required by the bank guarantee and, therefore, an ex parte injunction was issued whereby defendant 2 was restrained from making any payment to defendant 1 pursuant to the notice of demand dt. 14th April, 1987. ( 7 ) THEREAFTER the present application; being under 0. 39, R. 4 has been filed in which it has been, inter alia, contended that pursuant to the aforesaid notice dt. 14th April, 1987 the counsel for the defendant had issued another notice dt. 23rd May, 1987 which was in terms of the Bank guarantee. The said defendant had also received a reply from defendant 2 to the effect that payment had not been made by the bank because defendant! 14th April, 1987 the counsel for the defendant had issued another notice dt. 23rd May, 1987 which was in terms of the Bank guarantee. The said defendant had also received a reply from defendant 2 to the effect that payment had not been made by the bank because defendant! 1 itself had not raised the demand and, secondly, on 25th May, 1987 the bank had received notice that a suit for permanent injunction had been instituted and that this Court had restrained the defendant-Bank from making any payment under the guarantee in question. ( 8 ) DEFENDANT No. 1 thereupon issued another notice dt. 22nd June, 1987 to the Bank. By this notice also the bank guarantee was sought to be invoked. It was stated in this notice that the bank should pay and remit to defendant 1 the guaranteed amount of Rs. 2,24,700. 00 which was stated to be due and payable to defendant 1 by the plaintiff "towards the losses and damages already caused to us by reason of shortfall in the guarantee performance, engineering and Supply of machinery and equipment". The defendant Bank still did not make any payment/despite the receipt of the aforesaid notice of demand dt. 22nd June, 1987 from defendant 1. ( 9 ) ON behalf of the plaintiff, it has been contended by Mr. Mathur that defendant 1 has played a fraudondefendant2. In support of his allegation, he has submitted that in the letter of demand dated 14th April, 1987 the reason for invoking the bank guarantee was that the plaintiff had not carried out all the work and had not successfully commissioned and handed over the generating set. This reason, it was submitted, was different from the one which was pleaded in the subsequent notices of demand dt. 23rd May, 1987 and 22nd June, 1987. The second ingredient of fraud, according to the learned counsel, was that on 29th Dec. 1986 the generating set had been commissioned and a commissioning report had been prepared and signed by defendant 1 s representative showing satisfactory installation and performance. Thirdly, it was stated that defendant 1 hadconcealed from the Court and from the Bank that some discussions had taken place between the representatives of the plaintiff; and the defendant on 21st Feb. 1987, minutes of which show that the defects, if any, had been removed. Thirdly, it was stated that defendant 1 hadconcealed from the Court and from the Bank that some discussions had taken place between the representatives of the plaintiff; and the defendant on 21st Feb. 1987, minutes of which show that the defects, if any, had been removed. It was, therefore, submitted by the learned counsel that because of the aforesaid fraud having been played and because defendant No. 1 had accepted the generating set and there was no defect in the same, this Court should restrain defendant No. 2 from paying the amount which has been guaranteed. ( 10 ) BEFORE dealing with the aforesaid submissions, it would be expedient to refer to the position in law with regard to enforcement of bank guarantees and letters of credit The Supreme Court of India and other Courts all over the world have had occasions to deal with the question of the obligation of the banks towards the beneficiaries whenever a letter of credit or a bank guarantee is issued and the right of the client of the bank, at whose instance the letter of credit or bank guarantee is issued, to get an order of injunction staying the operation of the said credit document. It is not necessary for me to i refer to all the decisions in any great detail because very recently the Supreme Court has had an occasion to deal with the same at great length. In U. P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. , (1987) 5 JT 406 (SC) the Supreme Court has reiterated that the bank must pay according to the guarantee which it has furnished, except in case of fraud or irretrievable injustice. The Court has observed that it is well settled that there should not be interference in trade. It has further been observed by the Court that commitments of banks must be honoured 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 being done, the Court should interfere". It has further been observed by the Court that commitments of banks must be honoured 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 being done, the Court should interfere". The Supreme Court approved the observations of Lord Diplock in the case of UCM (Investments) Ltd. v -Royal Bank of Canada, (1982) 2 All ER 720 wherein it was observed that "to this general statement of principle as to the contractual obligation of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representation of fact that to his knowledge are untrue. . . . . . . The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application to the maxim ex turpi causa non oriture actio or if plain English is to be preferred, fraud; unravels all , the courts will not allow their process to be used by a dishonest person to carry out a fraud. " ( 11 ) PERHAPS being aware of the aforesaid I position of law, Mr. Mathur sought to stress that this is a case where a fraud is being played by the beneficiary on the Bank. I am unable to agree with the aforesaid submission. Firstly, there is no such clear averment of fraud, as is sought to be contended before me, in the pleadings. A plea of fraud has to be based on facts. Fraud has to be pleaded and proved. I find that this is absent in the present case. ( 12 ) NEVERTHELESS, what has been alleged by the learned counsel for the plaintiff does not, to my mind, show that the defendant has deliberately and knowingly made false averments to the Bank, which is a necessary ingredient of fraud. Fraud has to be pleaded and proved. I find that this is absent in the present case. ( 12 ) NEVERTHELESS, what has been alleged by the learned counsel for the plaintiff does not, to my mind, show that the defendant has deliberately and knowingly made false averments to the Bank, which is a necessary ingredient of fraud. It is true that in the letter of 14th April, 1987 it has been stated by the counsel for defendant No. 1 that all the work has not been carried out by the plaintiff and the generating set has not successfully been commissioned and that this plea is different from the one which has been taken in the noticed 22nd June, 1987, in which it is stated that there has been a shortfall in the guarantee performance, but this does not mean that the so-called inconsistency amounts to a fraud being played. It is possible that the generating set may not have been commissioned within the stipulated period or may not have been successfully commissioned, and at the same time, may not be performing up to the requisite standard. The so-called inconsistency between the two letters, if any, does not in any way lead one to the conclusion that the defendant was seeking to play a fraud on the Bank. ( 13 ) THE Bank was perhaps right in not taking cognizance of the original letter of demand dt. ,14th April, 1987 primarily for the reason that the said letter of demand did not emanate from the beneficiary himself and, secondly, was not in terms of the bank guarantee. Thereafter the letter dt. 22nd June, 1987 was written by the beneficiary himself and the demand was made in terms of the bank guarantee. There is nothing to indicate that the statements made in the letter of 22nd June, 1987 were knowingly false and have been fraudulently made. : ( 14 ) IT is true that a certificate acknowledging the satisfactory installation was issued on 29th December, 1986 by defendant 1 but successful installation of the generating set does no! mean that after installation there could be no occasion for defendant No. 1 to complain that it was not functioning up to the requisite standards. The Bank guarantee which was given at the instance of the plaintiff was, what may be termed as, a performance guarantee. mean that after installation there could be no occasion for defendant No. 1 to complain that it was not functioning up to the requisite standards. The Bank guarantee which was given at the instance of the plaintiff was, what may be termed as, a performance guarantee. It was to indemnify the defendant 1 if any loss or damage was suffered by reason of shortfall in guaranteed performance. This shortfall, if any, would only come to light after the installation of the generating set. Therefore, merely because there was a successful and satisfactory installation of thegenerating set on 29th December, 1986 cannot lead one to the conclusion that there can be no shortfall in the guaranteed performance in future. In fact the minutes of the meeting dt. 21st Feb. 1987, which were sought to be relied upon by the learned counsel for the plaintiff, themselves show that there were defects in the generating set as installed, and which defects had to be removed. It is possible that on 21st Feb. 1987 the defects may have been removed but this does not mean that subsequent thereto the performance of the set was up to the requisite standard. In any case, as far as the Bank is concerned, it has an obligation to make the payment on demand and without demur merely on defendant 1 stating that it has suffered a loss by reason of shortfall in the guaranteed performance, engineering and supply of machinery and equipment in the said contract. ( 15 ) IT is important to bear in mind that the bank guarantee has been furnished by defendant 2 at the instance of the plaintiff. The plaintiff must have been aware of the terms of the bank guarantee. It must have assented to the said terms. Having seen that such bank guarantee is furnished by defendant 2, which bank guarantee gave right to defendant 1 to demand payment merely on making a statement as envisaged by terms of the bank guarantee, the plaintiff, to my mind, cannot turn around and say that the defendant 2 should not honour the commitment which it has made the terms of the bank guarantee. lam not satisfied that in the present case any case has been made out of fraud or irretrievable injustice. In my view, therefore, the plaintiff is not entitled to any injunction as prayed for. lam not satisfied that in the present case any case has been made out of fraud or irretrievable injustice. In my view, therefore, the plaintiff is not entitled to any injunction as prayed for. ( 16 ) BEFORE parting, I cannot help but observe that defendant 2 does not, in this case, come out with flying colours. It is true that the letter dated 14th April, 1987 was defective and the Bank rightly did not make the payment pursuant thereto. It is also correct that the ex parte injunction was issued in the present case but the injunction which was issued was limited in nature. The injunction restrained the bank from making payment pursuant to the letter dt. 14th April, 1987 notwithstanding the fact that the prayer of the plaintiff for the grant of temporary injunction was much wider. The prayer of the plaintiff in I. A. 3566 of 1987 was that defendant 1 should be restrained from recovering and defendant 2 from paying the amount under the guarantee dt. 25th June, 1986 during the pendency of the suit. The ex parte injunction which was issued was limited and restricted to the demand dt. 14th April, 1987. By letter dt. 22nd June, 1987 written by the counsel for defendant 1, the full text of the order of injunction dt. 25th May, 1987 was communicated to the Bank. The Bank must have been aware that the injunction which was issued was limited in its operation and it refers only to the letter of demand dt. 14th April, 1987. When a valid demand had been raised on 22nd June, 1987 there is no reason why the Bank should have not honoured this demand. If the Bank had any doubts, it could have approached this Court for appropriate directions. The counsel for defendant 2 states that notice had been issued in I. A. 3566 of 1987 and, therefore, the defendant-Bank refrained from making the payment. This is hardly an excuse. Merely because an application for injunction is filed is not a ground for the Bank not to honour its commitment under the Bank guarantee, more so when only a limited injunction has been granted. This is hardly an excuse. Merely because an application for injunction is filed is not a ground for the Bank not to honour its commitment under the Bank guarantee, more so when only a limited injunction has been granted. I cannot help but get a feeling that in this case the Bank has tried, as far as possible, and possibly against all banking norms and certainly not in conformity with the uniform customs and practice, to help its client, namely the plaintiff. ( 17 ) FOR the aforesaid reason, I accordingly allow this application with costs. Costs to be borne by the plaintiff and defendant 2 equally. Counsel s fee Rs. 5,000. 00.