Mir & Sons @APPELLANT@Hash State And Ors

01/ In this appeal, the appellant seeks the indulgence of this Court in setting aside the impugned order dated 31.03.2004, passed by the learned Principal District and Sessions Judge, Srinagar.

02/ The facts, chiseled in a nutshell, are that a Works Contract for the construction of the Additional Office accommodation at Old Secretariat, Srinagar, was awarded to the appellant by the respondent No. 2-Chief Engineer R&B Department, Kashmir, Srinagar, vide Allotment order No. 15612-16 dated 26.11.1992, on various terms and conditions. Condition No. 8 of the contract, which is germane to the issue, reads as under:

“The Department shall give a mobilization advance of R. 20.00 lacs against bank guarantee of an equal amount from a scheduled bank in Srinagar.

The Contractor shall give 2% rebate on the net payment made to him. However, in case the bank guarantee needs to be revoked then the amount outstanding against the contractor on account of advance shall be recovered together with 15% interest. This Clause shall be provided in the Bank guarantee”.

03/ It is submitted by the appellant that the construction work for which drawings were made available to him has been completed. Against the bill of charge raised by the appellant for completion of this part of the works contract a sum of Rs. 1.20 lacs being 15 % of the bill amount was paid on account of part repayment. The respondents are not providing the approved construction drawings for the rest of the work due to which the execution of the works contract did not make any headway beyond the stage of construction already done, as a consequence of which, the appellant has been incurring a recurring loss of a substantial amount. He has proceeded to state that a dispute has arisen between the parties which as per Clause 54 of the contract document is to be referred for arbitration to the Engineer-InCharge/Accepting Authority/Chief Engineer, whose decision in the matter shall be final and binding. According to the appellant, the arbitral proceedings will commence on the date on which a request for that dispute to be referred to the arbitration is received by the respondent and in this behalf the appellant has already made a formal request to the respondent. The respondents are taking undue advantage of the situation and are bent upon to invoke the bank guarantee which the appellant has submitted under the terms of the contract. The appellant preferred a motion before the learned Principal District Judge, Srinagar, under Section 9 of the Arbitration and conciliation Act 1997, to restrain the respondents to invoke the bank guarantee offered by J&K Bank for and on behalf of the bank under bank guarantee No. 34/02 dated 28.12.2002. The motion under Section 9 of the Act of 1997, came up for consideration before the Court of the learned Principal District Judge, Srinagar on 22.09.2003, when the learned Principal District Judge, Srinagar, on an overall consideration of the matter was pleased to pass the order in the matter, whereby notice was issued to the respondents for filing the objections with further direction not to take any step to invoke the bank guarantee furnished by the appellants. In response to the notice of motion, the respondent NOs. 2 to 5 entered appearance through counsel and pleaded that the application under Section 9 of the Act of 1997 is not maintainable until proceedings are pending in the matter either before the Arbitrator or in the form of a Suit. They also stated before the trial Court that the bank guarantee is independent of the main contract and that the bank is under an obligation to pay as and when the demand is made by the Government. These pleas found favour with the learned Principal District Judge, Srinagar, as a corollary to which he rejected the application of the appellants vide order dated 31.03.2004. It is pleaded that the order impugned herein this appeal, suffers from glaring error of law and jurisdiction and in sequel thereto is rendered bad and unsustainable in the eyes of law, as a corollary to which, the same is liable to be set aside under the appropriate order of this Court.

04/ Heard and considered.

05/ In order to have a better understanding of the matters in controversy, the relevant excerpts of the order, impugned in this appeal, by which the learned Principal District & Sessions Judge, Srinagar, has rejected the application of the appellant, require to be reproduced herein below verbatim et literatim and these are as under:

“………..It is now well settled law that a bank guarantee can be uncashed on the terms and conditions provided in the guarantee on the assertion or happening of the specified events. The contract of bank guarantee is an independent contract between the banker and the beneficiary therein and is to be worked out independently of the dispute between the parties. Where under the bank guarantee the bank undertakes unconditionally to abide by its terms it can not be affected by dispute between the parties in the matter. In National Thermal Power Corporation Ltd. vs Flowerie Pvt. Ltd. 1996 SC 445 the Hon’ble Apex Court held that if the bank guarantee is unconditional and payable on deed it implies that the bank is liable to pay as and when the demand is made by the beneficiary.

Injunction restraining payment of bank guarantee can only be issued when there is a prima facie case of fraud giving rise to special equities to prevent irretrievable injustice between the parties.

In the present case the condition no.8 of Accepted Special conditions of the contract provides that the department shall give a mobilization advance of Rs. 20.00 lacs against bank guarantee of an equal amount from a scheduled bank in Srinagar. The condition as well as the bank guarantee shows that liability is absolute and unequivocal. Learned counsel for the applicant submits that the non-applicant cannot invoke the bank guarantee as the matter between the parties is in dispute and the applicant has applied for the referring the same to an arbitrator. Arbitrator is yet to be appointed and matter is required to be finally adjudicated upon and till that is done, the bank guarantee cannot be invoked. The argument cannot be accepted on the ground that the bank guarantee is independent of the main contract. The terms and conditions of bank guarantees are very clear and the bank is under an obligation to pay an and when the demand is made by the non-applicant. The applicant could not show any prima facie case as to whey the nonapplicants cannot invoke the bank guarantee furnished by him. In these circumstances I find no force in this application which is accordingly dismissed. File to go to records after due completion.”

06/ The order of the learned Sessions Judge, Srinagar, does not call for any interference. It is loud and clear. It is based on the law and reason and it has touched all the aspects of the matter with brilliance.

However, it is added that the bank guarantee, offered by the J&K Bank for and on behalf of the bank, inter alia, provides as under :

“……………We, the Jammu & Kashmir Bank Ltd., Dalgate, Srinagar, do hereby undertake to pay the amount due and payable under this guarantee without any demur, merely on a demand from the Government, any such demand to the Bank, shall be conclusive as regards the amount due and payable by the Bank under this Guarantee. However, our liability under this Guarantee shall be restricted to an amount not exceeding Rs. 18.80 lacs (Rupees Eighteen lacs eighty thousand only.)………….”

07/ From the above clause, incorporated in the bank guarantee, what gets revealed is that the Bank has undertaken to pay under the guarantee, without any demur, merely on demand from the Government, any such demand to the Bank, which shall be conclusive as regards the amount due and payable by the Bank under this guarantee restricted to an amount of Rs. 18.80 lacs. This clause creates a contractual nexus and renders the Bank directly liable to the Government to pay the amount if and when demanded. The contract, created between the Bank and the Government, is separate from, although ancillary to, the original contract between the Government and the petitioner, The Bank cannot rely upon the terms of the contract between the Government and the appellant, which might permit the Government to reject and refuse the payment therefor and, conversely, the appellant is not entitled to an injunction, restraining the Government from dealing with the guarantee. This position has been clarified with precision in the law laid down in the case titled M/s. Arvind Constructions Co. Pvt. Ltd. versus M/s. Kalinga Mining Corporation & others, reported in AIR

2007 SC 2144, paragraph (9) of which is relevant for consideration and is detailed below :

“9. Feeling aggrieved by the said decision, the appellant-company has filed this appeal. It is contended on its behalf that the appeal filed before the High Court was not by the Firm bearing Registration 71/1949, with which the appellant company had the agreement. The arbitration clause, which the appellant company has invoked was in the relation to that agreement, and hence the appellant before the High Court at the instance of the Firm bearing Registration 595/2005 was not maintainable. It was further contended that since the agreement relied upon by the appellant in the light of irrevocable Power of Attorney was co-terminus with the mining lease granted to the respondent Firm by the State Government, the same could not be terminated and would not come to an end by efflux of time. The entire approach made by the High Court to find otherwise was erroneous. It was further submitted that this was a case in which an agreement could be specially enforced in the light of section 10 & 42 of the Specific Relief Act. It was also faintly suggested that the powers under section 9 of the Act were independent of any restrictions placed by the Specific Relief Act and viewed in that manner, nothing stood in the way of the appellant-company being granted an order of injunction or at least an order to maintain status quo until the Arbitral Tribunal decided the dispute.”

08/ In another case titled Mahatma Gandhi Sahakara Sakkare Karkhane versus National Heavy Engineering Corporation Ltd. & another, reported in AIR 2007 SC 2716, this aspect has been elucidated further at paragraph 16, which is reproduced herein below :

“16. The main question that arises for our consideration is whether the bank guarantee in question is a conditional one or not. Before we proceed further it would be appropriate to have a look at the relevant clauses of the agreement dated 1st November 2000.

16.3.1: If the sellers fail to commission the plant according to the schedule of commissioning which is to be worked out mutually to enable the commissioning of the plant within the schedule time, fixed or extension allowed by the purchasers, if any, thereof the sellers shall pay penalty by an amount equal to ½% ( Half per cent) of the contract price for every completed week of delay, but not exceeding 3% of the total contract price.

16.3.2 : To secure the obligations under clause 16.3.1, the sellers shall furnish to the purchasers, bank/insurance guarantees in the form set out by the purchasers as provided in clause 17.4 here in after.

17.9: The bank/insurance guarantee(s) required to be furnished by the sellers under the provisions hereof to secure the timely delivery, erection, commissioning, as well as for performance of the plant and machinery supplied by the sellers or for any other purpose under the provisions hereof shall be in the form of purchasers after mutual discussions between the purchasers and sellers which form(s) shall invariably include the provisions that the decision of the purchasers as to whether there has been any loss or damage or default and or negligence on the part of the sellers will be final and binding on the sellers, that the right of the purchasers shall not be affected or suspended by reasons of the fact that any dispute or disputes have been raised by sellers with regard to their liability or that proceedings are pending before any tribunal, Arbitrator(s) or Court with regard thereto or in connection therewith, that the Guarantee shall pay to the purchasers the sum under the guarantee(s) without demur on first demand and without requiring the purchasers to invoke any legal remedy that may be available to them, that it shall not be open to the guarantee to know that reasons of or to investigate to go into the merits of the demand or to question or to challenge the demand or to know any facts affecting the demand or to require proof of the liability of the sellers before paying the amount demanded by the purchasers under the guarantee(s). In case of invocation of any bank guarantee by the purchasers, the same should be countersigned by the Commissioner for Cane Development and Director of Sugar of the concerned State Government.

The Bank/Insurance guarantee or guarantees required to be furnished by the sellers under the provisions hereof to secure timely delivery, erection, commissioning as well as for performance of the plant and machinery supplied by the sellers or for any other purpose under the provisions hereof shall be for such period as may cover the period of complete supply, erection and commissioning and performance respectively, as the case may be, as stipulated under the agreement. If however, the period of agreement is extended due to Force Majeure or sellers not fulfilling their obligations under the agreement or for any other reasons whatsoever, sellers shall have such guarantees extended upto the corresponding extended period and failure of the sellers to do so will amount to a breach of the contract and in no case the extension of the period of the contract shall be construed as waiver of the right of the purchasers to enforce the guarantee.”

09/ In view of the law laid down above, the contract of the bank guarantee is an independent contract between the bank and the beneficiary therein and has no nexus or relation with the contract between the Government and the appellant. The bank is bound to abide by the terms incorporated in the guarantee and is liable to pay as an when the demand is raised by the beneficiary. Therefore, this appeal sans merit. It entails dismissal and is, accordingly, dismissed along with connected IAs.