Gujarat Sidhee Cement Ltd. vs Caldyn Apparetabau Gmbh

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 the original defendant No. 1. The respondent No. 1 happens to be the original plaintiff. The rest of the

respondents happen to be the original defendant Nos. 2 & 3. The parties shall be referred to as per their nomenclature before the Court below.

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 Sidhee 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 the

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 the

defendant No. 1. The 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 had also installed the system at the plant of the defendant No. 1 in or about November 1995. The plaintiff

had given a Performance Guarantee to the defendant No. 1 and that the defendant No. 3 SGZ-Bank had issued the Performance Guarantee on

July 28, 1995, which was valid for a period of eight months, or sixth days from the date of the commission. Any how 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. The 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 the defendant No. 1 on the ground that there has been the 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 Ex. 6 the plaintiff has prayed for the following relief :

(A) That pending hearing and final disposal of this suit, the Honourable Court be pleased to restrain the defendant No. 1 from recovering any

amount from the defendant Nos. 2 and 3 as guarantor and also restraining the defendant Nos. 2 and 3 from making any payment to the defendant

No. 1 as guarantor.

(B) That pending hearing and final disposal of this suit, the defendant Nos. 2 and 3 be restrained from making any payment to the defendant No. 1

pursuant to the fraudulent invocation of the performance guarantee by the 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 the defendant No. 2 from the defendant No. 3 is directed to be retained by the

defendant No. 2 and should not be disbursed till 14th March 1997. It was ordered that the matter should be posted for further hearing on 14th

March 1997. This orders, therefore, would go to show that the Court below has said that the defendant No. 2-State Bank of India who has got

the amount from the defendant No. 3 SGZ-Bank should not be paid to the defendant No. 1 -Gujarat Sidhee Cement Limited. On March 14,

1997 the learned Chamber Judge has ordered below Application Ex. 15 that, the matter should be placed in regular Board of notice of motion for

further hearing and rejoinder on 17th March 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 the defendant No.

2-State Bank of India upon the payment being made by the defendant No. 3 SGZ-Bank, Germany, could be ordered to be retained with the

defendant No. 2 bank, and could be ordered not to be paid to the defendant No, 1, who is the appellant before me. The whole question in my

opinion centers 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 Sudwestdeutscha Genossenschhafts-Zentralbank A.G., 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 Messrs.

Caldyn Apparatebau GmbH have not fulfilled their obligations in conformity with the terms of the above mentioned agreement.

A bare look to the above said 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 upto DEM 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 above mentioned 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 above said 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 DEM 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 State Bank of India, Frankfurt to make the payment through 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 State Bank of India, Frankfurt branch to effect the payment through State

Bank of India, Ahmedabad branch, and for all the 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 the defendant No. 2, namely, the State

Bank of India, but Caldyin 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 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 Steel Workers Construction Ltd v.

G.S. Atwala and Co. (Engineers) Pvt. Ltd. 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 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 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 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 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 of 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 B.I.F.R. under 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 respects. Firstly, as has been said by the Supreme Court in case of Hindustan Steel

Workers Construction Ltd. (supra) 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 excepting the case of two exceptions.

11.1 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 B.I.F.R. 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 the Respondent No. 2 State Bank

of India to make the payment under the guarantee to Gujarat Sidhee Cement Limited. Appeal stands allowed with the above said orders. No

costs.

Learned Counsel Mr. Mehta at this stage urges that the implementation of this orders of mine should be stayed for a period of about eight

weeks so as to enable the 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 orders of mine shall stand stayed

for a period of six weeks hereof. Till the said period the amount lying with 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 above said amount in a fixed deposit account so as to asvoid the loss

in interest.