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Judgment
G.S. Sandhawalia, J.—This order shall dispose of Regular Second Appeals No. 4223, 4335 and 4336 of 1999 filed by M/s. Construction Consortium, Chandigarh (hereinafter referred to as "the contractor") and another set of Regular Second Appeals No. 4346, 4349, 4350 of 1999 and 750 of 2005 filed by the Punjab National Bank who were defendants since a common question of law is involved in these appeals and the parties are also the same. However, the facts have been taken from Regular Second Appeal No. 4223 of 1999. The appellants in all the appeals (except R.S.A. No. 750 of 2005) are aggrieved against the judgment and decree of the Lower Appellate Court vide which the appeal of the plaintiff/respondent/Board was allowed and the suit for recovery was decreed along with interest and the decreed amount which was subject matter of bank guarantee was ordered to be paid by the defendant-bank who was held entitled to recover the amount from the contractor. In R.S.A. No. 750 of 2005 the suit was decreed by the trial Court and upheld by the Lower Appellate Court.
The plaintiff Board initially filed a suit for mandatory injunction directing the defendants/appellants/bank to honour its commitment and realise the amount of bank guarantee in favour of the plaintiff-Board. The pleaded case was that the tenders were invited for the construction of office building (Shakti Bhawan) in Sector 6, Panchkula and on 7.4.1982 the work was allotted to defendants No. 5 and 6 the contractor for Rs. 91.16 lacs which was subsequently enhanced. An agreement was executed on 8.4.1982 in pursuance of which the contractor was required to give a bank guarantee for faithful execution of the work and six bank guarantees were got executed from defendant No. 4-bank to the value of Rs. 3 lacs in aggregate. The dispute in the said case pertained to the bank guarantee dated 24.9.1983 for the value of Rs. 18000/-. Out of six bank guarantees, two guarantees amounting to Rs. 50,000/- and Rs. 57000/- were released on 14.11.1983 and further security deposit of Rs. 40,000/- was to be released and no such bank guarantee was available and as such a sum of Rs. 10,000/- was retained from the bill of contractor by releasing Rs. 50,000/-. A fresh bank guarantee dated 18.9.1985 was executed and the amount secured in the bank guarantee was released. Defendants No. 5 and 6 were required vide letter dated 21.11.1985 to get the guarantee revalidated with a request to submit the extension by 15.12.1985 failing which the bank authorities could be approached to operate the bank guarantees. Defendants No. 5 and 6 the contractor did not file the reply to the said letter and the plaintiff Board had approached defendant No. 4 to operate the bank guarantee on 23.12.1985 and again on 31.12.1985 for remitting a sum of Rs. 2.60 lacs against the claim of the plaintiff-Board and defendant No. 4 responded to the request of the plaintiff-Board and remitted Rs. 2.60 lacs through a bank draft dated 4.1.1986 and the same was encashed by the Board on the request of defendant No. 5 vide letter dated 20.1.1986. However, thereafter settlement was arrived at between the parties and request was made for release of Rs. 60,000/- out of Rs. 2.60 lacs as part security cheque which request was accepted by the plaintiff-Board and a cheque for a sum of Rs. 60,000/- was issued on
21.1.1986. Thereafter, a sum of Rs. 2.03 lacs remained with the plaintiff-Board. In March, 1987, defendant No. 5 gave extension to the said bank guarantee vide letter dated 17.3.1987 which was valid upto 30.6.1987. A sum of Rs. 2 lacs which was lying with the plaintiff-Board was refunded to defendant No. 5 during March, 1987 after the receipt of the bank guarantee. Defendant No. 6 was requested on 25.5.1987 to get the guarantee revalidated requiring him to furnish extension upto 15.6.1987. However, a request was received from defendant No. 5 vide letter dated 6.6.1987 that income tax deduction certificate and a copy of the 30th running bill till date and photocopy of bank guarantee be sent to him before
12.6.1987. The plaintiff-Board acceded to the request and the required documents were sent vide letter dated 10.6.1987. However, defendant
No. 5 did not manage to get extension and the claim was lodged with the bank on 22.6.1987 and a telegram was sent on 26.6.1987 for encashment of the bank guarantee. Number of requests were made for encashment of the bank guarantee and a letter dated 3.8.1987 was received from defendant No. 4 requiring certain information/clarification. Defendant No. 4/bank wrote to the Board vide letter dated 7.8.1987 that they were not inclined to grant extension or to remit the amount of the bank guarantee. Accordingly a legal notice was issued on 12.10.1987 which was replied on 1.6.1988 by defendant No. 4. Thereafter, the suit was filed on 30.3.1989 praying for a decree of mandatory injunction directing release of amount of Rs. 18,000/- along with interest at the rate of 16% from the date of filing of suit till its realisation.
The suit was contested by the bank on the ground that suit for recovery would lie and not the suit for mandatory injunction, the suit was barred by limitation and not maintainable apart from the jurisdiction and cause of action. It was admitted that six performance guarantees involving a total sum of Rs. 3 lacs have been furnished and two bank guarantees of the amount of Rs. 50,000/- and Rs. 57,000/- were released. However, bank guarantee furnished was a contract which had certain terms and conditions and could be invoked by the plaintiff Board by complying with these terms and conditions and, therefore, the bank was not liable. The plaintiff-Board had written for remitting Rs. 2.60 lacs as the bank guarantees and the same was done on 4.1.1986 in favour of the plaintiff. The work had been completed by defendant No. 5 to the extent of Rs. 1.31 lacs upto 9.5.1986 and certain changes have been made in the terms and conditions of the original contract without the consent of the answering defendant and in this manner no liability whatsoever remained with the answering respondent. Since the performance guarantee was in respect of the contract of Rs. 91.16 lacs and work has been got done for Rs. 1.31 lacs, therefore, the entire previous contract stood rescinded. The plaintiff Board had not specified the manner and quantum of the loss if any suffered by it, therefore, the bank in no manner was liable for the encashment of the guarantee. It was pleaded that the bank guarantee once invoked cannot be operated upon for the second time and that the plaintiff-Board admitted that certain terms and conditions of the original contract have been changed without the consent of the answering defendant. The consent and approval of the answering defendant was pre-requisite for changing the terms and conditions of the contract and in this manner no liability whatsoever remains with the answering defendant.
Similar plea was taken on behalf of respondents No. 5 and 6, the contractor and it was also admitted that litigation was pending between the parties and an Arbitrator had been appointed. It was submitted that the extension was wrongly granted by the answering defendant vide letter dated 17.3.1987 and a sum of Rs. 2 lacs which was lying with the plaintiff-Board was refunded to defendant No. 5. It was also admitted that defendant No. 6 was requested by the plaintiff-Board to get the bank guarantees revalidated upto 15.6.1987 and the said request was not acceded to as the same was contrary to the condition of the contract and the request was declined. The bank rightly did not invoke the bank guarantees; on the request dated 22.6.1987 and 26.6.1987 as two communications did not fulfill the necessary conditions to invoke the bank guarantees and was rightly ignored by the bank.
Thereafter, the suit of the plaintiff was amended and converted into a suit for recovery by the trial Court which allowed the amendment on
16.8.1991. The amended plaint came to be filed taking the same pleas. Written statements were filed to the said amended plaint taking the same defence. The trial Court framed the following issues:--
Whether the plaintiff is entitled to recovery of Rs. 18,000/-? OPP
Whether the plaintiff is entitled to an interest? If so at what rate? OPP
Whether the suit is time barred? OPD
Whether no cause of action accrued to the plaintiff? OPD
Relief.
The plaintiff-Board examined Sh. A.D. Arora, Senior Accounts Officer only witness who deposed that the bank guarantee was valid upto 31.12.1983 which thereafter was extended upto 31.12.1985. He further deposed about the various communications inter-se the parties and the bank had extended the bank guarantee upto 30.6.1987 and vide Ex. P8 the contractor was asked to extend the bank guarantee by 15.6.1987 failing which the claim would be lodged to the bank. The contractor failed to extend the bank guarantee and the claim was lodged with the bank to encash the bank guarantee on 22.6.1987 (Ex.P9). Thereafter, a telegram (Ex. P10) was sent on 26.6.1987 but the bank refused to encash the bank guarantee vide Ex. P11. Thereafter, legal notice (Ex. P12) was sent and the reply of the bank was Ex. P13 and then the suit came to be filed.
The trial Court dismissed the suit vide judgment and decree dated 4.4.1995 on the ground that the Board had not specified any loss or damage suffered by it on account of any defect in the work or on account of any breach of a contract between the parties. As per clause of the bank guarantee the quality workmanship and design of all the work done in the office building had been done in accordance with the prescribed specifications and the purchaser was to be indemnified. As per the trial Court the demand dated 22.6.1987 and the telegram dated 26.6.1987 were not sufficient for invocation of the bank guarantee as there was no reference to work being unsatisfactory and it was only mentioned that the contract had not been complied faithfully. Accordingly, the bank guarantee could not be invoked at the behest of the plaintiff-Board. The argument of the counsel for the plaintiff-Board that it was an unequivocal and unconditional undertaking to pay certain amount was rejected and the plaintiff was required to cite losses which it had incurred. Accordingly, the plaintiff-Board was not held entitled to recover a sum of Rs. 18,000/-. Under issue No. 2 interest was not to be paid since there was no entitlement to the principal amount. The suit was held to be within limitation under issue
No. 3 and there was no cause of action which arose to the plaintiff-Board under issue No. 4.
The plaintiff-Board preferred an appeal before the Lower Appellate Court which allowed the same vide judgment and decree dated 20.7.1999 on the ground that until there was a plea of fraud, the bank could not withhold the amount. Neither the Court could give an injunction in the absence of the same the work not being completed and the bank guarantee having not been revived, it was not necessary that the losses must be determined, thus, the plaintiff-Board was not required to specify the amount of losses and it was the duty of the bank to remit the amount.
Accordingly, the suit was decreed by holding as under:--
I have perused these authorities and find that the same are not applicable on the facts of the present case. In view of the law laid down in Ansal Engineering Projects Ltd. Vs. Tehri Hydro Development Corporation Ltd. and Another, and Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd., and another, the bank cannot withhold the amount unless, it is based on fraud. Even the courts cannot give injunction unless, it is based on fraud and equity.
In the present case, it is correct that the Bank has agreed to indemnify the plaintiff to the extent of Rs. 18000/-against all losses, damages costs, charges and expenses etc. However, the work being not completed from time to time, the bank guarantee was sought to be revived because bank guarantee was not going to be revived which was to expire on 30.6.1987, the plaintiff has required the bank to send the amount. It is not necessary that the loss must have been determined. It was suffice to say by the plaintiff that the contractor has not completed the work faithfully. In other words, the plaintiff was not required to specify the amount of losses because by that time, the losses might not have been calculated. It was the duty of the bank to remit the amount as demanded by the plaintiff. Neither there is any plea of fraud nor of equity.
As such, the order under challenge is set aside. The suit of the plaintiff which was initially for mandatory injunction but subsequently, it has been converted to be of recovery is decreed for a sum of Rs. 18,000/- with costs and 12% interest from the date of filing of the suit till the date of decree and further interest at the rate of 6% from the date of decree till realization. The cost of appeal is also allowed. The decree would be executable against defendants No. 1 to 4. If they have paid the amount to defendants No. 5 and 6, the bank would be entitled to recover the amount from defendants No. 5 and 6.
Resultantly, the said appeals were filed in which the execution of the order of the Lower Appellate Court was ordered to be stayed and thereafter the interim order was confirmed on admission except in R.S.A. No. 750 of 2005.
Counsel for the contractor has submitted that it was a conditional bank guarantee (Ex.P3) and relied upon Ex. P9 that the demand did not show any loss suffered, the suit had been filed by the Board after two years and the judgments referred to by the Appellate Court were pertaining to injunction.
Counsel for the Board on the other hand submitted that the Appellate Court was well justified in reversing the judgment of the trial Court and since the bank guarantee had not been extended, the Board was well within its right to ask for encashment before its expiry as the work was still not completed. It was further contended that the bank guarantee was an independent contract itself. Reliance has been placed upon the judgments referred to by the Lower Appellate Court to support the contention.
Since the dispute now primary revolves around the bank guarantee it is to be seen whether the bank guarantee was a conditional bank guarantee or the Board had an absolute right to seek its encashment. A perusal of the record would go on to show that the bank guarantees were initially executed for the work which was allotted on 7.4.1982 and were enforced till 31.12.1983 and under the clause security deduction of the said allotment letter, the bank guarantee was to be furnished and could be withheld by the purchaser/Board till the time work was completed in good condition and in accordance with the specifications. However, thereafter the same were extended and a sum of Rs. 2.60 lacs was also encashed by the Board and Rs. 60,000/- as part security cheque was demanded by the contractor vide Ex. P6 on 20.1.1986. Thereafter, the contractor was paid a sum Rs. 2 lacs by the Board vide Ex. P6/A. After that the bank renewed the bank guarantee (Ex. P7) on 17.3.1987 uptill 30.6.1987 on the same terms and conditions of the original bank guarantee. On 25.5.1987(Ex.P8) the plaintiff Board wrote to the contractor that the four bank guarantees for a sum of 2,03000/- which had been submitted as security deposit were expiring on 30.6.1987 and since the construction had not been completed for which the security had been deposited, a request was made for getting the validity of four bank guarantees extended. The renewal/extension was requested by 15.6.1987 failing which the Board would approach the bank authorities to operate the bank guarantees. Since the extension was not granted, the Board then approached the bank on 22.6.1987 (Ex. P9) and thereafter telegram was sent on 26.6.1987(Ex.P10) on account of the contractor not completing the work faithfully for which the bank guarantees had been furnished.
In both the correspondence, it was mentioned that in case the validity of the bank guarantees have been extended suitably, the extension letters separately for each bank guarantee on non-judicial stamp paper of the value for which the original bank guarantee was furnished may be sent to the office of the Board and claim for the remittance of the amount against the said bank guarantees may be considered as withdrawn. Thus, the plaintiff-Board was wanting extension of the bank guarantees since the same were expiring on 30.6.1987 and in the alternative asked for the encashment of the same since the work was still going on. The bank instead of extending the bank guarantees or encashing the same, took a new defence vide letter dated 7.8.1987(Ex.P11) that the bank guarantees once invoked could not be operated upon second time and the bank had already stood absolved. The Board was blamed for changing the nature of the contract for which the bank issued bank guarantees. Resultantly, the plaintiff-Board was forced to serve a notice dated 12.10.1987 (Ex.P12) upon bank and the contractor specifying that a sum of Rs. 2,60,000/- earlier encashed was refunded and the bank guarantee remained operative and alive and valid upto 30.6.1987 and their claim was justified. It was, however, specified that the contract had not been completed within stipulated period. The said notice was replied to on 1.6.1988 (Ex.P13) stating that the bank guarantees once revoked and cancelled could not be operated upon second time and the bank had paid the amount of the bank guarantees on 4.1.1986. Resultantly, the suit came to be filed.
It is necessary to note that the contractor and the bank did not produce any evidence to corroborate the stand taken in their correspondences and in the written statement and accepted the statement of the official (Sh. A.D. Arora, Sr. Accounts Officer) of the plaintiff-Board. Thus, the Board was able to prove that the earlier bank guarantees which had been encashed by them was refunded to the contractor and in pursuance of the same, the bank guarantees had been again extended on the same terms and conditions. It is necessary to refer to the terms and conditions of the bank guarantees on which heavy reliance have been placed on part of Clause 3 by the trial Court. A completing reading of the bank guarantee would go on to show that the guarantees were against the security deductions for the work to be executed and were to be withheld by the Board till such time the work was completed in good condition and in accordance with the specification of the same to guarantee the payment of the retention money on bills submitted against execution of work from time to time. It was only on the request of the contractor, the Board had agreed not to retain the security of the contract price of all the work done and in lieu thereof to accept bank guarantee from the guarantor for the true performance of the said allotment order. The guarantor further agreed that the Board shall be sole Judge whether the work had been done according to the prescribed specification, design and workmanship as laid down in the allotment letter and the extent of loss/damage, cost charge or expenses suffered or incurred by the Board on account thereof, the bank shall immediately on receipt of any claim or claims from the said purchaser pay to the Board to the extent of the amount specified. The guarantee was to remain valid from the start of the work till 31.7.1983 and thereafter as noticed above the same was extended/continued and the bank had no power to discharge the same except with previous consent of the Board. The bank had also agreed that the Board would have full liberty to enforce any term and condition of the said allotment order and bank could not be relieved from its liability by reasons of any variation or any extension being granted to the said contractor. Thus, a complete reading of the bank guarantee would go on to show that it was to continue till pendency of the work and the parties had agreed that the Board could have encashed the bank guarantee at any time subject to its discretion. The relevant portion of the bank guarantee reads as under:--
Whereas the contractor has inter alia agreed with the purchaser to execute the work ""construction of H.S.E.B. Office building, Sector 6, Panchkula on the terms and conditions contained in the allotment order No. Ch.8/PKC-4 dated 7.4.1982 placed by the purchaser on the contractor and accepted by the contractor.
And whereas under clause "security deduction" of the said allotment order the contractor if present is required to furnish additional bank guarantee for a sum of Rs. 75,000/-( Rs. Seventy five thousands only) being the security against the above work which but for this guarantee would be withheld by the purchaser till such time that the work is completed in good conditions and in accordance with the specification of the same to the guarantee the payment of the retention money on bills submitted against execution of work from time to time upto a maximum amount the sum of
Rs. 75000/- (Rs. Seventy Five thousand).
And whereas at the request of the contractor the purchaser has agreed not to retain security of the contract price of all the work done and in lieu thereof to accept bank guarantees from the guarantor for the true performance of the said allotment order by the said contractor on the terms and conditions herein contained. Now this deed, therefore, witnesses and it is hereby agreed by and between the parties hereto as following:--
The guarantor hereby guarantees to the purchaser the quality workmanship and design of all the work done of H.S.E.B. Office building Panchkula in accordance with the prescribed specifications and the terms of the said allotment order and agrees to indemnify and keep indemnified the said purchaser to the extent of Rs. 18000/- ( Rs. Eighteen thousands only) in the aggregate against all losses, damages, costs, charges and expenses which may be suffered or incurred by the purchaser on account of any defect in the work done or on account of any breach of the said allotment order in the execution of the work. The guarantor further agrees that the said purchaser shall be sole Judge whether the work has been done according to the prescribed specification design and workmanship as laid down in the said allotment order and the extent of loss/damage, cost charge or expenses suffered or incurred by the purchaser on account thereof and the guarantor shall immediately on receipt of any claim or claims from the said purchaser pay to the said purchaser to the extent of the amount specified above.
The guarantor further agrees that this guarantee shall remain in the full force and effect upto 31.7.83 from the date of start of work by the said contractor under the said allotment order.
The guarantor also agrees and undertakes no to revoke this guarantee before the same is discharged as aforesaid except with the previous consent of the said purchaser in writing.
The guarantor hereby further agrees that the said purchaser shall have the full liberty without effecting in any manner the obligation of the guarantor hereunder with or without the consent of the guarantor to every/any of the terms of the said allotment order by the contractor from time to time or to postpone for any time or from time to time any of the power exercisable by the said allotment against the said contractor and either to forbear or enforce any of the terms and conditions relating to the said allotment order & the guarantor shall not be relieved from his liability by reasons of any variation or any extension being granted to the said contractor or for any/forbearance, act or omission on the part of the said contractor or any indulgence by the said allotment to the said contractor or any such matter or thing whatsoever which under the law relating to sureties would but for this provision have effect of so relieving the guarantor. Nor shall it be necessary for the said allotment to sue the said contractor before suing the said guarantor for the amount/damages due under the deed of guarantee.
Thus, from the reading of the above bank guarantee as discussed, a complete contract had been written between the parties which was to be honoured. On account of non grant of extension which was firstly prayed for by the Board and due to the extension which was not done by the contractor from the Bank, the Board opted for the encashment which was refused and thus violated the terms and conditions of the bank guarantees. The right of the Board to encash the bank guarantee thus was absolute and there was no fraud or irretrievable injury which could be imputed by which the bank could deny the encashment.
The Apex Court in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., specifically held that it is not for the bank concerned to see whether the fault lay between the supplier and the customer and the bank must pay according to the tenor of its guarantee, on demand, without proof or condition. Relevant paragraphs of the judgment reads as under:--
This Court was concerned with the bank guarantee and referred to the previous decision of this Court in Tarapore and Co. Vs. V/O Tractoroexport and Another, Supreme Court 891 : (1969) 2 SCR 920. This Court found that this case was covered. The court observed that the court should not, in transaction between a banker and banker, grant an injunction at the instance of the beneficiary of an irrevocable letter of credit, restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank, acting on behalf of the beneficiary against a document of guarantee, indemnity at the instance of the beneficiary.
On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the court should interfere.
Mr. Tarkunde submitted before us that in this case the grievance of the appellant was that there was delay in performance and defective machinery had been supplied. He submitted that if at this stage appellant was allowed to enforce the bank guarantee, damage would be done. He submitted before us that appellant could not be permitted to take advantage of illegality by invoking the bank guarantee. But in my opinion these contentions cannot deter us in view of the principle well settled that there should not be interference in trade. This is not a case where irretrievable injustice would be done by enforcement of bank guarantee. This is also not a case where a strong prima facie case of fraud in entering into a transaction was made out. If that is the position, then the High Court should not have interfered with the bank guarantee.
Similar observations was also made in AIR 1997 1644 (SC) wherein it was held that law relating to the invocation of the bank guarantees was well settled and in the course of commercial dealings, the beneficiary is entitled to realise the said bank guarantee in terms thereof in respect of pending dispute otherwise purpose of giving bank guarantee would be defeated. The bank had to first pay and only exception was where there was a clear fraud of which the bank had notice which had to be egregious in nature. The said view thereafter had been followed in State Bank of India and Another Vs. Mula Sahakari Sakhar Karkhana Ltd., and M/s. BSES Ltd. (now BSES Ltd. (Now Reliance Energy Ltd.) Vs. Fenner India Ltd. and Another, . In Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Company, the order of the learned Single Judge vacating the interim order whereby injunction had been granted from receiving any payment under a letter of credit was upheld keeping in view these principles.
In Ansal Engineering Projects Ltd. Vs. Tehri Hydro Development Corporation Ltd. and Another, it was held that the whole purpose behind the bank guarantee was to ensure free flow of commerce and trade and faith in the commercial banking transactions and the bank guarantee was an independent and distinct contract and was not qualified by the underlying transaction and validity of the primary contract. Relevant portion of the judgment reads as under:--
It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is (sic) pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the Bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. The Bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commence and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor.
It is equally settled law that in terms of the bank guarantee the beneficiary is entitled to invoke the bank guarantee and seek encashment of the amount specified in the bank guarantee. It does not depend upon the result of the decision in the dispute between the parties, in case of the breach.
The underlying object is that an irrevocable commitment either in the form of bank guarantee or letters of credit solemnly given by the bank must be honoured. The Court exercising its power cannot interfere with enforcement of bank guarantee/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as triable issue by strong evidence so as to prevent irretrievable injustice to the parties. The trading operation would not be jettisoned and faith of the people in the efficacy of banking transactions would not be eroded or brought to disbelief. The question, therefore, is: whether the petitioner had made out any case of irreparable injury by proof of special equity or fraud so as to invoke the jurisdiction of the Court by way of injunction to restrain the first respondent from encashing the bank guarantee. The High Court held that the petitioner has not made out either. We have carefully scanned the reasons given by the High Court as well as the contentions raised by the parties. On the facts, we do not find that any case of fraud has been made out.
In Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd., and another, the action of the bank in litigating and trying to protect the contractors in such cases and also grant of injunction was depreciated. Relevant portion of the judgment reads as under:--
It is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be followed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decisions will not be of much importance was clearly a method adopted by it in avoiding to follow and apply the law as laid down by this Court. Yet another serious error which was committed by the High Court, in the present case, was not to examine the terms of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had taken the trouble of examining the documents on record, which had been referred to by the trial court, in its order refusing to grant injunction, the court would not have granted the interim injunction. We also do not find any justification for the High Court in invoking the alleged principle of unjust enrichment to the facts of the present case and then deny the appellant the right to encash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guarantee the applicability of the principle of undue enrichment has no application.
30 We are constrained to make these observation with regard to the manner in which the High Court had default with this case because this is not an isolated case where the courts, while disobeying or not complying with the law laid down by this Court, have at time been liberal in granting injunction restraining encashment of bank guarantees.
It is unfortunate, that notwithstanding the authoritative pronouncements of this Court, the High Courts and the courts subordinate thereto, still seem intent on affording to this Court innumerable opportunities for dealing with this area of law, thought by this Court to be well settled.
When a position, in law, is well settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety to say the least, for the subordinate courts including the High Courts to ignore the settled decisions and then to pass a judicial order which is clearly contrary to the settled legal position. Such judicial adventurism cannot be permitted and we strongly deprecate the tendency of the subordinate courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wrongful and unwarranted relief to one of the parties. It is time that this tendency stops.
Before concluding we think it appropriate to mention about the conduct of the respondent - bank which has chosen not to be in this case.
From the facts stated hereinabove it appears to us that the respondent bank has not shown professional efficiency, to say the least, and has acted in a partisan manner with a view to help and assist respondent No. 1. At the time when there was no restraint order from any Court, the bank was under a legal and moral obligation to honour its commitments. It, however, failed to do so. It appears that the bank deliberately dragged its feet so as to enable respondent No. 1 to secure favourable order of injunction from the Court. Such conduct of a bank is difficult to appreciate. We do not wish to say anything more but it may feel that it will be prejudicial in the event of the appellant taking action against it.
In Bank of India Vs. Nangia Constructions (I) Pvt. Ltd. and Others, the Apex Court held that the national and international commercial transactions largely depend on bank guarantees and the banks could not be permitted to dishonour their commitments on the principle settled that if the bank guarantee was being invoked during its validity, the bank was bound to honour it. Relevant observations reads as under:--
We are afraid that even this case is of no help to the appellant because the facts of the instant case are quite different. Admittedly, the bank guarantee has been invoked during the validity period of the bank guarantee. The bank guarantee was unconditional on demand bank guarantee.
The bank was bound to honour its commitment and pay the amount of guarantee.
It is unfortunate that a nationalized bank is finding excuses for refusing to make the payment on totally untenable and frivolous grounds. The Division Bench was fully justified in making observations regarding the conduct of the nationalized bank. The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalized bank. In the present day world, the national and international commercial transactions largely depend on bank guarantees. In case the banks are permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions will come to a grinding halt. This principle has been reiterated in large number of cases by this court.
We do not deem it appropriate to burden this judgment by reiterating all those judgments.
In Vinitec Electronics Private Limited Vs. HCL Infosystems Limited, also the Apex Court examined the guarantee and found it to be an unconditional one and held that no dispute could be allowed to be raised and the respondents could not be prevented from encashing the bank guarantee.
Accordingly, keeping in view the fact that the Board had an absolute right to encash the bank guarantees during its tenure and during the period of work being carried out by the contractor, the bank was not justified in denying the encashment of the same on frivolous ground once it had extended the old bank guarantees on the same terms and conditions.
Accordingly, keeping in view the settled position of law which has been discussed in detail above, no fault can be found with the order of the Lower Appellate Court judgment and both the Courts below in RSA No. 750 of 2005. No question of law much less substantial question of law arises for consideration. Accordingly, all the appeals are dismissed and the judgment and decree of the Lower Appellate Court and both judgments and decrees of the Courts below in RSA No. 750 of 2005 are upheld. A photocopy of this judgment be placed on the record of each connected file.