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2007 DIGILAW 573 (CAL)

COAL INDIA LTD v. BHARAT EXPLOSIVES LTD

2007-07-30

BISWANATH SOMADDER, PINAKI CHANDRA GHOSE

body2007
( 1 ) THIS is an application inter alia for stay of operation of the order passed by the Hon'ble First Court dated January 25, 2007 whereby the hon'ble First Court directed to continue with the interim order granted by the hon'ble Court. ( 2 ) IT appears that the interim order was granted by the Hon'ble First Court at the time of moving of the application in the suit by the petitioner when the hon'ble First Court directed to maintain the status quo in the matter of invocation of bank guarantee. ( 3 ) THE facts of the case briefly are as follows: the respondent/plaintiff filed a suit against the appellant/petitioner inter alia praying for a mandatory injunction directing the defendant Nos. 1 and 2 to make payment of the bulk loading explosives supplied by the respondent/plaintiff to the defendant Nos. 1 and 2 between 1st March, 2006 to 30th June, 2006 at the rates and terms and conditions contained in the running contract No. CIL/ c2d/sec. II/bulk Loading Explosives/2006-07/441 dated 2nd May, 2006. ( 4 ) IN the said application it was also prayed that the injunction was restraining the State Bank of Hyderabad from making and payment under the bank guarantee bearing No. BG/02/05-06 dated 31st May, 2005 for rs. 71,36,000/- or the extension thereof on 27th December, 2006 being Extension no. 13/06-07. ( 5 ) IT appears from the facts of the case that the respondent has been supplying bulk explosives to the defendant Nos. 1 and 2/appellant herein for several years. For such supply, respondent No. 1 and its subsidiaries issued notices inviting tender from its approved suppliers. The respondent/plaintiff was awarded a running contract for the period from March, 2004 to 25th February, 2005 by the appellant/petitioner for supply of bulk explosives to the subsidiaries of the respondent No. 1 at a price of Rs. 13,282/- per MT. ( 6 ) SINCE the running contract had not been finalized, the appellant/petitioner directed the respondent/plaintiff to continue with the supply from 1" March, 2005 till February, 2006. Till such time the running contract for the said period was finalized at the said rate. ( 7 ) IN terms of the said running contract the respondent furnished securities by way of bank guarantee bearing No. 02/05-06 dated 31st May, 2005 for rs. 71,36,000/- through its banker. Till such time the running contract for the said period was finalized at the said rate. ( 7 ) IN terms of the said running contract the respondent furnished securities by way of bank guarantee bearing No. 02/05-06 dated 31st May, 2005 for rs. 71,36,000/- through its banker. Subsequently, the respondent/plaintiff called upon the petitioner to give its consent for continuation of supply of bulk loading explosives against the running contract dated 18th May, 2005 even after 28th february, 2006 till 30th June, 2006 or until finalisation of new running contract, whichever is earlier. ( 8 ) IT further appears that the respondent even after execution of the running contract for 2005-06 by the respondent, the petitioner withheld the release and discharge of the security furnished by the petitioner and treated the same as security for the extended period of supply commencing from 1st March, 2006. On the request of the petitioner the respondent renewed the bank guarantee till 31st December, 2006. ( 9 ) SUBSEQUENT thereto, the petitioner requested the respondent to continue the supply of bulk explosives from 1st July, 2006 till 15th August, 2006 or till finalisation of the running contract, whichever is earlier and agreed to pay the price at the rate of running contract price for the year 2005-06. ( 10 ) IT further appears that in view of the running contract for the year 2006-07, the price fixed for bulk loading explosives was Rs. 12,880/- per MT which was much less than the price which was paid by the petitioner to the respondent at the rate of Rs. 16,700/- per MT. ( 11 ) IT is the case of the respondent that the petitioner by a letter dated 10th february, 2006 called upon the respondent to extend the validity of the bank guarantee for the period of a year it has further been stated that unless the bank guarantee is renewed and/or extended, the same should be invoked and the proceeds thereof should be remitted to the appellant/petitioner. ( 12 ) IT further appears that on 4th December, 2006 the petitioner once again called upon the bank to remit the proceeds of the bank guarantee to the appellant/petitioner. ( 12 ) IT further appears that on 4th December, 2006 the petitioner once again called upon the bank to remit the proceeds of the bank guarantee to the appellant/petitioner. ( 13 ) IT is the case of the respondent that even at the instance of the request made by the appellant/petitioner, the bank guarantee was extended by the respondent/plaintiff for a further period of 12 months, i. e. , till 31st December, 2007. In spite thereof, the appellant/petitioner wrongfully and illegally called upon the bank to invoke the said bank guarantee to the extent of Rs. 36,54,272. 48/ -. ( 14 ) ACCORDING to the respondent, the appellant/petitioner has committed fraud in invocation of bank guarantee and the said bank guarantee is nothing but a performance guarantee and such invocation will cause irretrievable injustice to the respondent and hence, filed a suit against the appellant inter alia praying that the Coal India Ltd. (hereinafter referred to as "the CIL") is not entitled to invoke the said bank guarantee. ( 15 ) IN the said suit the said application was filed and the status quo order was passed. It is the case of the appellant that there is no case of fraud as has been made out in the petition. ( 16 ) MR. Shaktinath Mukherjee, learned Senior Advocate appearing in support of this appeal contended before us that there is no question of any misrepresentation or acting fraudulently on the part of the CIL. He further submitted that the respondent moved a writ application in the month of november, 2006 praying for quashing of the said letter dated September 26, 2006 and also an injunction and to pass an interim order restraining the respondents from giving any effect or further effect and/or acting on the basis of the said letter dated 26th September, 2006 and from invoking the bank guarantee dated May 31st, 2005 amounting to Rs. 71,36,000/ -. The point of maintainability of the said writ application was kept open and the Hon'ble first Court was pleased to give the liberty that the respondent authorities, cil were at liberty to recover the amount, but it shall be kept in a separate account. Subsequently, the said writ application was dismissed on January 12, 2007. 71,36,000/ -. The point of maintainability of the said writ application was kept open and the Hon'ble first Court was pleased to give the liberty that the respondent authorities, cil were at liberty to recover the amount, but it shall be kept in a separate account. Subsequently, the said writ application was dismissed on January 12, 2007. ( 17 ) HE further contended that on November 10, 2006, the CIL wrote a letter to the Manager, State Bank of Hyderabad and requested to extend the validity of the concerned bank guarantee for a further period of one year with an additional claim period of 30 days. It was further requested that in the event the bank guarantee is not extended, the same letter may be treated as a notice for invoking the bank guarantee and further requested to remit the amount. Ultimately, on December 4, 2006 the CIL requested the Manager of the State bank of Hyderabad to remit the proceeds of the said bank guarantee to Rs. 71,36,000/- against the said bank guarantee by an A/c. payee demand draft in favour of the CIL. Subsequently, the bank failed to do so and neglected to pay the same in clear breach of the contract of bank guarantee in question. ( 18 ) SUBSEQUENTLY, on December 28, 2006 and on January 4, 2007 the CIL again requested for such invocation of the bank guarantee to the said bank. The CIL again January 16, 2007 requested the bank to remit the said amount in favour of the CIL. ( 19 ) THE matter was moved on January 16, 2007 and was directed to appear again on January 17, 2007 and an order of status quo was passed. Subsequent thereto time was extended and the Hon'ble Judge was pleased by directing to file affidavits in the matter. ( 20 ) MR. Mukherjee further submitted that the bank guarantee is an unconditional bank guarantee. Therefore, the bank is under obligation to discharge their liability. It is further pointed out that the respondent/plaintiff is amply protected in the suit even if they have suffered any damages. ( 20 ) MR. Mukherjee further submitted that the bank guarantee is an unconditional bank guarantee. Therefore, the bank is under obligation to discharge their liability. It is further pointed out that the respondent/plaintiff is amply protected in the suit even if they have suffered any damages. They shall have the decree in their favour but since then, the law is already been settled, the order of status quo cannot continue and further there is suppression of material facts as in the injunction petition the respondent never stated that the writ petition was filed and was dismissed. ( 21 ) HENCE, on that ground alone, i. e. , on the ground of suppression of material facts, the application should be dismissed and the said order should be vacated and Mr. Mukherjee relied upon the decisions reported in AIR 1999 Cal 229 (Hindustan Copper Ltd. vs. Rana Builders Ltd.); 1996 (5) SCC 34 (Hindustan steel Works Construction Ltd. vs. Tarapore and Co. and Anr.) and 2006 (6) SCC 293 (State Bank of India and Anr. vs. Mula Sahakari Sakhar Karkhana Ltd.) in support of his contention. ( 22 ) ON the contrary, Mr. Chatterjee, learned Senior Advocate appearing on behalf of the respondents drew our attention to the fact that it has been specifically stated in the bank guarantee that the bank undertook and agreed to indemnify and kept indemnified the purchaser from time to time to the extent of Rs. 71,36,000/- against any loss, damages caused and charges caused to or suffered by or that may be caused or suffered by purchaser by reason of breach or breaches by the said suppliers or any of the terms and conditions contained in the said contract and unconditionally to pay the amount claimed by the purchaser on demand without demur to the extent aforesaid. ( 23 ) HE further submitted that it has been specifically stated in the bank guarantee that it has indemnified the purchaser against any loss, damages caused charges and charges/expenses caused to or suffered by or that that may be caused. Therefore, it can be stated to be a contract of indemnifying the claim of the appellant. ( 24 ) MR. Therefore, it can be stated to be a contract of indemnifying the claim of the appellant. ( 24 ) MR. Chatterjee further vehemently submitted that the action on the part of the appellant/petitioner is nothing but would show that fraudulently the appellant/petitioner tried to invoke the said bank guarantee which would be evident from the letter addressed by the appellant/petitioner requesting for extension of time for a period of a year. ( 25 ) HE further submitted that the appellant/petitioner, the CIL fraudulently concealed the fact that the CIL intended to change the terms and conditions of the said contract for the year 2006-07 and falsely induced the respondent to agree with the supply for the extended period commencing from 1st March, 2006. ( 26 ) MR. Chatterjee, however, placed his reliance on the decisions reported in 2006 (6) SCC 293 (supra); 2000 (6) SCC 385 (Oil and Natural Gas Corporation Ltd. vs. State Bank of India, Overseas Branch, Bombay) and 1995 (6) SCC 68 (Larsen and Toubro Ltd. vs. Maharashtra State Electricity Board and Ors.) in support of his contention. ( 27 ) IN the case of Hindustan Copper Ltd. (supra) the Court held that the principles that emerge from the decisions referred to are that 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 to the party approaching the Court in order to restrain the operation of bank guarantee. Otherwise, the very purpose of bank guarantee would be negatived and the fabric of trading operation will get jeopardized. The Hon'ble First Court has frowned upon the approach of the Court that has proceeded on the basis that the injunction sought was not against the bank but was sought against the appellant. The Hon'ble First Court has observed that the net effect of the injunction is to restrain the bank from performing the bank guarantee and that cannot be done. One cannot do indirectly what one is not free to do directly and further observed that the aggrieved party in such circumstances is not remedyless. He can sue for damages. The Court further held that the autonomy of bank guarantee/ irrevocable letter of credit was entitled to protection and except in very exceptional circumstances, the Court should not interfere with that autonomy. He can sue for damages. The Court further held that the autonomy of bank guarantee/ irrevocable letter of credit was entitled to protection and except in very exceptional circumstances, the Court should not interfere with that autonomy. The reasons stated are that bank guarantees involve many of the trading transactions. The commitments of banks must be honoured free from commerce, internal and international would be irreparably damaged. It is only in exceptional cases, that is to say in cases of fraud or in case of irretrievable injustice be done, the Court should interfere and fraud in relation to bank guarantee is fraud of exaggerated nature as to vitiate the underlying transaction. ( 28 ) IN the case of Tarapore and Co. (supra) the Hon'ble Supreme Court held that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. In case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary. Commitment of banks must be honoured free from interference by the Courts and it is only exceptional cases, that in case of fraud, or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the Court should interfere. ( 29 ) IN the case of SBI Overseas Branch, Bombay (supra) the Court held that an unconditional bank guarantee must be given effect to even where there is a dispute between the parties. ( 30 ) IN the case of Mula Sahakari Sakhar (supra) the Court construed the document itself and came to the conclusion that the document in question constitutes a contract of indemnity and not an absolute or unconditional bank guarantee and on such finding the appeal was allowed. ( 31 ) IN the case of Larsen and Toubro Ltd. (supra) the Hon'ble Supreme Court held that unless there is any fraud or irretrievable injustice, injunction against the enforcement of a bank guarantee cannot be granted by the Court except in the event of fraud or irretrievable injustice to the parties. ( 31 ) IN the case of Larsen and Toubro Ltd. (supra) the Hon'ble Supreme Court held that unless there is any fraud or irretrievable injustice, injunction against the enforcement of a bank guarantee cannot be granted by the Court except in the event of fraud or irretrievable injustice to the parties. ( 32 ) AFTER considering the facts of the case and the decisions cited before us we have come to the conclusion that the principle laid down in the case of the invocation of the bank guarantee and the instant bank guarantee which was furnished by the petitioner and extended till 31st December, 2007, we do not have any hesitation to hold that the bank undertook to pay unconditionally the amount so to be claimed by the CIL on demand and without demur. ( 33 ) IT would also be evident from the bank guarantee itself that if any demand is made on the bank by the CIL, that shall be conclusive under the guarantee. Further, in our opinion, the payment shall not be withheld on the ground that the supplier has disputed its liability to pay or has disputed the quantum "of amount or that any legal proceeding is pending between the purchaser and the supplier regarding the claim. ( 34 ) AFTER considering the facts as pleaded by the respondent on the ground of fraud or irretrievable injustice, we do not find that any prima facie strong case has been made out by the respondent by which it can call for an interim order from the Hon'ble First Court. ( 35 ) ACCORDINGLY, with utmost respect to His Lordship we are of the opinion that the Hon'ble First Court should not have interfered with the invocation of the said bank guarantee at this stage and furthermore, the respondent is amply protected by filing the suit. Hence, the interim order passed by the Hon'ble first Court is vacated. This appeal is allowed. Appeal allowed.