Gujarat Sidhee Cement Ltd. vs Caldyn Apparetabau Gmbh and Others

S.D. Dave, J.—The present appeal from order arises out of the orders passed by the learned Chamber judge, City Civil Court, Ahmedabad, on the Notice of Motion in Civil Suit No. 1133 of 1997 dated March 11, 1997, and March 14, 1997.

The appellant before me happens to be original defendant No. 1. Respondent No. 1 happens to be the original plaintiff. The rest of the respondents happen to be original defendants Nos. 2 and 3. The parties shall be referred to as per their nomenclature before the court below. The plaintiff, which can for the sake of brevity could be referred as "Caldyn" has filed Civil Suit No. 1133 of 1997, against the three defendants, namely Gujarat Cement Limited, State Bank of India, Commercial Branch, Ahmedabad and SGZ Bank, Germany. According to the plaintiff, they are a company registered under the German laws at Germany and happen to be the manufacturers and suppliers of Caldyn Systems, which are used for quenching of hot gases in a variety of industries. According to the plaintiff, somewhere in the early part of year 1995 defendant No. 1 formerly known as Cement Corporation of Gujarat Limited and now known as Gujarat Sidhee Cement Limited had approached the plaintiff for the supply of a quenching system, and after certain negotiations the plaintiff had agreed to supply the quenching system to defendant No. 1. Defendant No. 1 had placed the order under a letter dated May 20, 1995. In pursuance of,,the said purchase order the plaintiff had supplied the said system and has also installed the system at the plant of defendant No. 1 in or about November, 1995. The plaintiff had given a performance guarantee to defendant No. 1 and that defendant No. 3, SGZ Bank, had issued the performance guarantee on July 28, 1995, which was valid for a period of eight months, or sixty day, from the date of the commission. Anyhow the commissioning of the system was delayed substantially by the defendant as alleged by the plaintiff. The plaintiff had got the performance guarantee extended twice, which is said to be an action on the part of the plaintiff in goodwill. The system in question came to be commissioned in or about November 19, 1996. Defendant No. 1 after the commissioning of the system had informed the plaintiff that, there was a "Substantial Scale Formation". Because of this, according to the plaintiff, certain differences and disputes had arisen and that, it was the apprehension on the part of the plaintiff that, there could be the invocation of the performance guarantee by defendant No. 1 on the ground that there has been scale formation on the fan blades. It is in this set of circumstances that the plaintiff had approached the court by filing the suit and the notice of motion was taken out. In the application at exhibit 6 the plaintiff has prayed for the following reliefs.

"(A) That pending hearing and final disposal of this suit, the honourable court be pleased to restrain defendant No. 1 from recovering any amount from defendants Nos. 2 and 3 as guarantor and also restraining defendants Nos. 2 and 3 from making any payment to defendant No. 1 as guarantor.

(B) That pending hearing and final disposal of this suit, defendants Nos. 2 and 3 be restrained from making any payment to defendant No. 1 pursuant to the fraudulent invocation of the performance guarantee by defendant No. 1."

The court below has passed the orders on this application on March 11, 1997. It has been said in this order that, by way of an ad interim relief the amount of bank guarantee which is to be received by defendant No. 2 from defendant No. 3 is directed to be retained by defendant No. 2 and should not be disbursed till March 14, 1997. It was ordered that the matter should be posted for further hearing on March 14, 1997. This order therefore would go to show that the court below has said that defendant No. 2, State Bank of India who have got the amount from defendant No. 3 SGZ Bank should not be paid to defendant No. 1, Gujarat Sidhee Cement Limited. On March 14, 1997, the learned chamber judge has ordered below application exhibit 15 that, the matter should be placed on regular board of notice of motion for further hearing and rejoinder on March 17, 1997. It appears that the matter could not be heard and ultimately the appeal from order came to be filed.

The question before me is as to whether the court below was justified in ordering that the amount which would be lying with defendant No. 2 State Bank of India upon the payment being made by defendant No. 3 SGZ Bank, Germany, could be ordered to be retained with defendant No. 2 bank, and could be ordered not to be paid to defendant No. 1, who is the appellant before me. The whole question in my opinion centres round the approach to be adopted by the courts while deciding the question of the invocation of the guarantee.

Before proceeding ahead to examine the legality or otherwise of the orders under challenge, a reference requires to be made to the performance bank guarantee No. G-42617 given by SGZ Bank, Germany. This performance guarantee in the relevant portion runs thus :

"We, SGZ Bank Sudwestdeutsche Genossenschafts Zentralbank AG, Frankfurt/Main, waiving all rights of objection and defence arising from the principal debt, hereby irrevocably undertake to pay immediately to you, upon your first demand, any amount up to DEM 296,000 - (Deutsche Mark Two hundred ninety-six thousand)

upon receipt of your written request for payment and your written confirmation stating that Messers. Caldyn Apparatebau GmbH have not fulfilled their obligations in conformity with the terms of the above mentioned agreement."

A bare look at the abovesaid provision in the performance bank guarantee would go to show that SGZ Bank have waived all rights of objection and defence arising from the principal debt and they have irrevocably undertaken to pay immediately to the Gujarat Sidhee Cement Limited upon their demand the amount up to DM 296,000. It is also clear that SGZ Bank has agreed in this performance bank guarantee that, upon the receipt of a written request from Gujarat Sidhee Cement Limited for payment and upon the written communication from them stating that Caldyn have not fulfilled their obligation in conformity with the terms of the abovementioned agreement, the payment shall be made. It is thus clear that, SGZ Bank while giving the performance bank guarantee has agreed and irrevocably undertaken to pay immediately the abovesaid amount upon the demand. This stand of SGZ Bank in this respect is eloquently clear as it emanates from the telefax dated March 27, 1997. This communication addressed to Gujarat Sidhee Cement Limited, the original defendant No. 1 says that, according to the provisions of the guarantee they have instructed the State Bank of India to remit DM 296,000, valid, April 1, 1997, in favour of Gujarat Sidhee Cement Limited through State Bank of India, Ahmedabad. SGZ Bank has taken the matter as settled after the above said instructions to the State Bank of India, Frankfurt. Therefore, this telefax says that SGZ Bank considered the matter as settled and closed on their file.

Therefore, it is apparent that SGZ Bank, under the performance bank guarantee in question had agreed and irrevocably undertaken to pay the above said amount immediately upon the first demand and that, this was to be done upon the written request of Gujarat Sidhee Cement Limited and upon the say that Caldyn have not fulfilled their obligation in conformity with the terms of the agreement. As indicated earlier, SGZ Bank has ''Instructed the State Bank of India, Frankfurt to make the payment through the State Bank of India, Ahmedabad branch and consequently thereupon they have taken the matter as settled and closed on their file. It is thus clear that the bank which had given the performance bank guarantee to make the payment under an irrevocable undertaking has already instructed the State Bank of India, Frankfurt branch to effect the payment through the State Bank of India, Ahmedabad branch, and for all purposes they have taken the matter as settled so far as SGZ Bank and Gujarat Sidhee Cement Limited are concerned.

It would be interesting to note that the amount as per the orders under challenge would be lying with defendant No. 2, namely the State Bank of India, but Caldyn wanted to injunct the plaintiff from having the money.

In my orders on Civil Application No. 3160 of 1997, in the present appeal from order, I have said that, it was open for the State Bank, the original defendant No. 2 to invoke the guarantee in terms of bank guarantee and to realise the amount, but the said amount shall be retained by the State Bank of India and could be disbursed only after further orders. I have said this in my order dated March 19, 1997.

The question therefore is, as to whether the court below was justified in saying that the amount to be sent by SGZ Bank to the State Bank of India for discharging their liability should be retained by the State Bank of India, Ahmedabad branch with them. In other words, whether the court below was justified in granting the injunction against the invocation of the guarantee and the realisation of the amount covered under the guarantee. The question shall have to be answered in the negative, regard being had to the reiteration of the principle in this respect by the Supreme Court of India time and again. A reference could be made to the pronouncement of the Supreme Court in Hindustan Steelworks Construction Ltd. v. G. S. Atwal and Co. (Engineers) Pvt. Ltd. [1996] 85 Comp Cas 270: [1996] 6 SCC 76. It was a case in which the bank guarantees were furnished by the bank to the appellant on behalf of the respondent. The guarantees were unconditional in nature making the appellant the sole judge regarding the question as to. whether any breach of contract occurred, and if so, what would be the amount of loss to be recovered by the appellant from the respondent. The Supreme Court pronouncement says that the High Court had erred in granting the injunction restraining the appellant till disposal of the arbitration proceedings, from realising the amount in question. So far as the facts before the Supreme Court are concerned, it shall have to be noticed that, under the guarantee there was a solemn promise under clause 4 to pay the sum to the appellant without demur. Clause 5 had said that the surety agrees and declares that the creditors shall be the sole judge of and as to whether there has been any breach of any of the terms and conditions of the contract and the extent of loss, damage, etc. This pronouncement of the apex court makes it clear that when the party has been made a sole judge regarding the question as to whether any breach of the contract has occurred or not and when there is a solemn promise and undertaking given in the bank guarantee that the amount shall be paid without demur, the invocation of the bank guarantee could not have been injuncted. The Supreme Court pronouncement in AIR 1997 1644 (SC) , also lays down a similar principle. While examining the question of the bank guarantee and the enforcement of the same, the Supreme Court has said that, when there is an irrevocable and unconditional bank guarantee payable on demand without demur and when such bank guarantee is sought to be encashed by the beneficiary, the bank would be bound to honour the guarantee irrespective of any dispute raised by the customer. Anyhow, this say has been made subject to two exceptions, i.e. (1) a fraud committed within the notice of the bank which would vitiate the very foundation of the guarantee of encashment of the bank guarantee, and (2) the encashing of the bank guarantee would result in irretrievable harm or injustice of the kind which makes it impossible for the guarantor to reimburse himself. It was a case in which there was a pendency of reference before the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985. The apex court says that, this would not be sufficient to constitute irretrievable injustice.

This decision assists learned counsel Mr. Raval in two aspects. Firstly, as has been said by the Supreme Court in the case of Hindustan Steel Works Construction Ltd. v. G. S. Atwal and Co. (Engineers) Pvt. Ltd. [1996] 85 Comp Cas 270: [1996] 6 SCC 76, when there is an irrevocable undertaking given by the bank under the guarantee payable on demand without demur, the invocation of the bank guarantee could not be injuncted except in the case of two exceptions.

The subsequent say of the Supreme Court in this decision would also assist learned counsel Mr. Raval for the appellant in view of the contention coming from learned counsel Mr. Ajay Mehta that, the appellant original defendant No. 1 Gujarat Sidhee Cement Limited is not financially a sound company and that a package of rehabilitation is being implemented under the orders of the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985. Accepting that, this is in fact the position, then also, it cannot be said that this fact situation would constitute irretrievable injustice.

The conclusion therefore would be that, the court below was not justified in the orders under challenge. The appeal requires to be allowed and the same is hereby allowed. The orders under challenge are lifted and therefore now, it would be open for respondent No. 2 State Bank of India to take the payment under the guarantee to Gujarat Sidhee Cement Limited. The appeal stands allowed with the above said orders. No costs.

Learned counsel Mr. Mehta at this stage urges that the implementation of this order of mine should be stayed for a period of about eight weeks so as to enable respondent No. 1 to approach the appropriate forum by taking out appropriate proceedings and to obtain suitable orders. Regard being had to the facts and circumstances of the case, I would say that, the implementation of the order of mine shall stand stayed for a period of six weeks hereof. Till the said period the amount lying with the State Bank of India shall remain with them. It would be appropriate if the appellant is granted the liberty to request State Bank of India to invest the abovesaid amount in a fixed deposit account so as to avoid the loss in interest.

The note for speaking to the minutes concerns my orders of Appeal From Order No. 129 of 1997, dated May 9, 1997. It was the appeal by the purchaser of certain equipment, namely, M/s. Gujarat Sidhee Cement Limited, against the orders pronounced by the City Court, Ahmedabad below, exhibit 5 in Civil Suit No. 1133 of 1997, dated March 11, 1997.

The note has been presented by learned counsel Mr. Ajay Mehta on the basis that, when the appellant purchaser is recovering the entire purchase price paid by them, the suppliers, who happen to be the clients of learned counsel Mr. Mehta, would be entitled to the return of all the equipment, which has been supplied by them to the appellant purchaser.

According to learned counsel, Mr. Mehta, "this entire aspect has not been clarified in the orders pronounced by me, and that, therefore, the same requires to be clarified."

Learned counsel, Mr. Ajay Mehta concedes very fairly that, this contention was never raised during the course of the hearing of the said appeal from order. It appears that the civil suit in question came to be filed by the client of learned counsel Mr. Mehta, seeking injunction against the invocation of a performance bank guarantee. The injunction came to be granted vide the orders dated March 11, 1997, below application exhibit 5. By allowing the said appeal from order, the abovesaid orders have been quashed and set aside. In that suit also the clients of learned counsel Mr. Mehta have not prayed for such a relief. Moreover, as being pointed out by learned counsel Mr. K. N. Raval for the appellant, an amount of more than Rs. one crore is being claimed by his clients by way of damages. The note for speaking to the minutes also speaks regarding the depreciation, etc. Learned counsel, Mr. Mehta has made it clear that, he would not insist on this aspect while taking into consideration the question regarding the return of the equipment. But, even if this aspect is not taken into consideration, at present it shall have to be appreciated that, the appellant wants to put a counter claim in a sum of more than Rs. 1 crore.

Because of this, the prayer coming from learned counsel, Mr. Mehta cannot be accepted. The same stands rejected. The note for speaking to the minutes stands disposed of, with these orders.