U.P. State Sugar Corporation vs M/S. Sumac International Ltd on 4 December, 1996
Date Of Judgement- 04/12/1996
Bench- M.M. Punchhi, Sujata V. Manohar
FACTS OF THE CASE-
The appellant, U.P. State Sugar Corporation, entered into an agreement with the respondent, M/s Sumac International Pvt. Ltd., dated August 2, 1989, under which the respondent agreed to design, prepare an engineering layout, and manufacture or procure and supply to the appellant the machinery and equipment for a complete sugar plant for the extension and modernisation of the appellant’s existing sugar plant at Rohana Kalan, District Muzaffarnagar, U.P. The respondent was ordered to establish a new plant of 2500 TCD at a new or adjacent site near to the appellant’s existing sugar mill. Clause 2.1 of the deal set the total contract price at Rs. 1780 lacs.
The agreement required the respondent to put up the plant and have it ready for commercial production by November 30, 1990. The agreement indicated that time was of the essence of the deal in this regard, and the repercussions were explicitly laid out in the contract if the response failed to do so. The reply was required to present a month-by-month progressive delivery report, as well as a PERT/CPM chart, per condition 3 of the contract. Clause 4 (delivery) requires the responder to finish all supplies by November 15, 1990, so that the facility may be commissioned by November 30, 1990. The respondent-seller was entitled to a reasonable commission under Clause 11.1.
ARGUMENTS-
Clause 15 requires the respondent-seller to provide the appellant with five bank guarantees as indicated. They were as follows:
- A bank guarantee for timely delivery of plant and machinery as specified in Clause 14.1, equal to 5% of the contract price as specified in Clause 2.1. This has to be provided within three and a half months of the agreement’s signing.
- The seller was required to provide a bank guarantee for the guaranteed performance of the plant and machinery in the amount of 5% of the contract price. This guarantee had to be provided eight months before the scheduled date of commissioning specified in Clause 4.1, or within six months of the signing of the agreement or within two and a half months of the opening of the Letter of Credit, whichever was earlier.
- Three bank guarantees for advance payments to be given by the appellant to the respondent under Clauses 13.2(a) to 13.3(c) were required, each for Rs.89 lacs, Rs.178 lacs, and Rs.89 lacs, representing 5%, 10%, and 5% of the contract price.
According to Clause 13.2, upon receipt of the first of these bank guarantees for Rs.89 lacs, the first tranche of advance would be paid within a week of the agreement’s signature. Alternatively, upon receipt of the second bank guarantee for Rs.178 lacs, the appellant would pay the second advance to the respondent within 2-1/2 months of the agreement’s signature, subject to the respondent providing various statements, certifications, and so on as specified in that provision. The third bank guarantee for Rs.89 lacs was to be provided against the advance to be paid by the appellant to the respondent within three and a half months of the agreement’s signature. These three bank guarantees are so for the advance payments required to be made by the appellant to the respondent.
All of these bank guarantees are payable on demand under Clause 15.5. It is expressly stated that the guarantor has no right to know the reasons for or to investigate or go into the merits of the demand invoking the bank guarantee, or to question or challenge the demand, or to require proof of the seller’s liability before paying the amount demanded. It is also stated that the invocation of the bank guarantee is binding on the responder and that the invocation of the bank guarantee is not impaired in any way by the fact that the respondent has launched a dispute or disputes regarding its liability.
As a result, the respondent provided four bank guarantees, one of which was a guarantee for timely delivery and the other three were bank guarantees for advance payment of price. The total amount covered by the bank guarantees ensuring advance payments is Rs.3.56 crores, which was paid as advance to the respondent by the appellant.
The contract was not completed within the time frame specified in the contract. Following that, at a conference on 1.10.1991 between the appellant and the respondent, the period for completion of this project was extended until May 1992, and a thorough chart was created to ensure completion by that date. Following that, the appellant granted no more extensions of time to the respondent. However, the respondent did not complete the job within the specified time frame.
JUDGEMENT-
The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country.
The Court once again reiterated that a confirmed bank guarantee/irrevocable letter of credit cannot be interfered with unless there is established fraud or irretrievable injustice involved in the case. Irretrievable injury has to be of the nature noticed in the case of Itek Corporation v. The First National Bank of Boston etc. (566 Fed Supp. 1210). On the question of fraud this Court confirmed the observations made in the case of U.P. Cooperative Federation Ltd. (supra) and stated that the fraud must be that of the beneficiary, and not the fraud of anyone else.
Clearly, therefore, the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the appellant and his claim that the time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the bank guarantees fraudulent. The High Court has also referred to the conduct of the appellant in invoking the bank guarantees on an earlier occasion on 12th of April, 1992 and subsequently withdrawing such invocation. The court has used this circumstance in aid of its view that the time was not of the essence of the contract. We fail to see how an earlier invocation of the bank guarantees and subsequent withdrawal of this invocation make the bank guarantees or their invocation tainted with fraud in any manner. Under the terms of the contract it is stipulated that the respondent is required to give unconditional bank guarantees against advance payments as also a similar bank guarantee for due delivery of the contracted plant within the stipulated period. In the absence of any fraud the appellant is entitled to realise the bank guarantees.
Written by Priyanka Davar an intern under Legal Vidhiya.
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