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Judgment
Ashok Menon, Chairperson
This is an appeal filed under the provisions of the Recovery of Debts Due to Banks & Financial Institutions Act, 1993(“RDDB & FI Act”, for short) by the MUFG Bank Ltd. (formerly, The Bank of Tokyo-Mitsubishi Ltd, and before that, The Bank of Tokyo Ltd.) impugning the judgement and order dated 14/05/2002 dismissing Original Application (O.A.) No. 3268 of 1999 on the files of the Debts Recovery Tribunal-I, Mumbai (D.R.T.) in which they were the Applicant.
The 1st respondent is a company named Klen and Marshall Manufacturers & Exporters Ltd., which is presently under liquidation and is represented by the official liquidator attached to the Hon’ble High Court of Madras (impleaded as the 3rd respondent). The 2nd respondent is the Canara Bank.
The 1st respondent approached the Appellant for issuance of a guarantee for a sum of $ 497,235/-plus ₹ 71,997/-in favour of the Power Grid Corporation of India Ltd. (PGCIL) during the course of the business transactions that the 1st Respondent had with them and guarantee bearing No. 8200 was issued on 22.02.1995 which was amended on 28.02.1995 and 03.08.1995 and the amount was increased to $5,71,789/– plus ₹82,752/-. During the performance of its contract with the PGCIL, the 1st respondent entered into a contract with a company named Galada Power & Telecommunication Ltd. (Galada). The 2nd respondent Canara Bank issued a backup guarantee of $4,88,675/-plus ₹59,931/-on behalf of the Galada in favour of the 1st respondent to the account of the Appellant. Following the terms of the guarantee (the amount of which was subsequently increased) issued by the Appellant in favour of PGCIL, on 13/11/1998, upon invocation of the guarantee by PGCIL, the Appellant paid a sum of ₹ 24,309,452/-(at the conversion rate of ₹ 42.37 per US Dollar). Thereupon, the Appellant called upon the Canara Bank to make good the payment as per the backup guarantee, and the 1st respondent was called upon to pay the balance amount, and in the event of failure by the 2nd respondent to pay, pay the entire amount of guarantee paid by the Appellant bank to PGCIL. Neither the first respondent nor the second respondent responded to the demand of the Appellant. The contract between the first respondent and PGCIL contemplates the issuance of a guarantee from a recognised bank as security for compliance with the contract by the first respondent. Given the guarantee, on the guarantee being invoked, the Appellant is under obligation to pay to PGCIL on behalf of the first respondent without even requiring PGCIL to prove or show the reasons for invoking the guarantee.
The guarantee issued by the Appellant was initially for a period up to 01.12.1997 which was extended from time to time till 30.11.1998. The backup guarantee was executed by the second respondent Canara Bank at the request of Galada on 04.04.1995 which was amended by the second respondent on 27.04.1995 and 03.08.1995. It was agreed upon by the second respondent that upon the first written demand declaring Galada to be in default under its construct with the first respondent, without caveat or argument, the Canara Bank will make payment in favour of the first respondent to the account of the Appellant. The guarantee of the second respondent was subject to the invocation of the original performance bank guarantee No. 8200 executed by the Appellant in favour of the PGCIL. The backup guarantee which was initially up to 01.12.1997 extended up to 30. 11.1998.
By letter dated 12.11.1997, PGCIL called upon the Appellant to extend the validity of the guarantee by six months and if it was not possible, to treat that letter as an invocation of the guarantee. Thereafter, the Appellant informed the first respondent to deposit a 100% cash margin for the amount of the guarantee or to have the backup guarantee of the second respondent renewed in favour of the Appellant. It was also requested to the first respondent to execute a Power of Attorney in favour of the Appellant to enable them to invoke the backup guarantee and recover the amount if it became necessary. The POA as required, was provided by the first respondent. The first respondent also instructed the Appellant vide letter dated 27.11.1997 to address the second respondent for extension of the backup guarantee failing which to treat the letter as a letter of demand. The second respondent initially refused to extend the validity but later, came around to extend the validity of the backup guarantee vide letter dated 01.01.1998.
On 22.05.1998, PGCIL again addressed the Appellant reminding them that the guarantee was expiring on 31.05.1998 and reiterated the request made by them earlier vide letter dated 12.11.1997. The Appellant bank once again intimated respondents Nos. 1 and 2 regarding the need for an extension of the validity of the backup guarantee vide letter dated 01.06.1998. The Appellant bank thereafter called upon the first respondent to remit the guarantee extension charges (guarantee commission). Despite being put to notice; the first respondent did not pay the guarantee charges.
On 14.11.1998, the PGCIL once again called upon the Appellant to extend the validity of the guarantee for another six months before the expiry on 30.11.1998 or to treat a letter as an invocation of the guarantee. Despite the Appellant calling upon the first respondent to deposit ₹7,19,505.97 towards commission charges for extension of guarantee from 01.06.1998 to 30.11.1998 and also to pay the future commission charges for renewal/extension of bank guarantee for a further period, the first respondent did not pay the commission charges although a request was made to extend the guarantee. The first respondent also requested the Appellant to address the second respondent for an extension of the backup guarantee. The first respondent did not at any time contend that the demand put forth by the PGCIL for the invocation of a guarantee was not justified. To enable the Appellant to invoke the backup guarantee, the Appellant needed to honour its guarantee towards PGCIL. In the circumstances, the Appellant addressed a letter to PGCIL recording payment of ₹2,43,09,452/- (at the conversion rate of ₹43.37 per US Dollar plus ₹82,752/-) as referred to in the guarantee No. 8200 issued by the Appellant. The duly cancelled bank guarantee was also received by the Appellant from PGCIL.
Thereafter, the Appellant requested the second respondent to invoke the backup guarantee issued by the second respondent to the extent of the amount mentioned in the backup guarantee. The letter of invocation was, however, refused to be accepted by the second respondent. Demand through an advocate and notary public practising in Hyderabad was also not responded to. A letter sent by the second respondent addressed to the Appellant regarding the backup guarantee being extended was received only on 05.12.1998. It was contended by the first respondent that the invocation of bank guarantee by PGCIL was not justified and requested the Appellant to assist the first respondent in recovery of the amount from PGCIL. Repeated correspondence with the second respondent to make payment under the backup guarantee also fell on deaf ears. Being aggrieved, the Appellant was compelled to file the O.A. before the D.R.T. The D.R.T. dismissed the O.A. under the premise that the Appellant acted in haste to pay the amount to PGCIL, ignoring the first Respondent’s request for an extension of the guarantee. The Appellant is aggrieved and hence, in appeal.
Heard Mr G. Kinkhabwala, the Ld. Counsel appearing for the Appellant and Mr Bidan Chandran, the Ld. Counsel appearing for the Respondents. Records perused.
It is pointed out by the Ld. Counsel that the bank guarantee is an independent contract and not dependent on the underlying contract between the first respondent and PGCIL. It is an independent contract between the bank and the beneficiary and therefore, the parties are bound by it. It is also pointed out that in the letter dated 14.11.1998 addressed by the PGCIL to the Appellant, there is an invocation in unequivocal terms and hence, the Appellant is bound to abide by it without demur or objection irrespective of whether there was any dispute between the first Respondent and PGCIL. It is further submitted that the past conduct and events after the invocation of the guarantee are irrelevant and immaterial. The Ld. Counsel points out that the D.R.T. erred in misconstruing the terms contained in the bank guarantee dated 22.02.1995 and the amends thereto on 28.02.1995, 03.08.1995 and the backup guarantee dated 04.04.1995 issued by the second respondent and the amendment thereto on 27.04.1995. It is pointed out that the Ld. Presiding Officer failed to appreciate the terms of the guarantee issued by the Appellant in favour of PGCIL which were absolute, unconditional and binding. The Appellant, therefore, had no discretion whatsoever to disburse the amount. It was an error on the part of the D.R.T. to hold that the demand made by the PGCIL was conditional. The mutual rights and obligations of the parties under the bank guarantee and the backup guarantee have been misinterpreted. The amendments made to the bank guarantee were not considered. The letter dated 08.12.1997 issued by the second respondent informing that the original condition No. 2 of the backup guarantee was deleted by the amendment dated 27.04.1995 has been outrightly ignored by the D.R.T.
The Ld. Counsel for the Appellant relies on the decision of the Hon’ble Supreme Court observing that an irrevocable commitment either in the form of a confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except if a case of fraud or a case of a question of apprehension of irretrievable injustice has been made out, in U.P. Co-operative Federation Ltd. vs. Singh Consultants and Engineers Pvt. Ltd. (1988) 1 SCC 174 held thus:
“24. I may notice that in India, the trend of law is on the same line In the case of Texmaco Ltd. v. State Bank of India and others, A.I.R. 1979 Calcutta 44, one of us (Sabyasachi Mukharji) held that in the absence of special equities arising from a particular situation which might entitle the party on whose behalf guarantee is given to an injunction restraining the bank in performance of bank guarantee and in the absence of any clear fraud, the Bank must pay to the party in whose favour guarantee is given on demand, if so stipulated, and whether the terms are such have to be found out from the performance guarantee as such. There the Court held that where though the guarantee was given for the performance by the party on whose behalf guarantee was given, in an orderly manner its contractual obligation, the obligation was undertaken by the bank to repay the amount on "first demand" and without contestation, demur or protest and without reference to such party and without questioning the legal relationship subsisting between the party in whose favour guarantee was given and the party on whose behalf guarantee was given," and the guarantee also stipulated that the bank should forthwith pay the amount due notwithstanding any dispute between the parties," it must be deemed that the moment a demand was made without protest and contestation, the bank had obliged itself to pay irrespective of any dispute as to whether there had been performance in an orderly manner of the contractual obligation by the party. Consequently, in such a case, the party on whose behalf guarantee was given was not entitled to an injunction restraining the bank in performance of its guarantee It appears that special equities mentioned therein may be a situation where the injunction was sought for to prevent injustice which was irretrievable in the words of Lord Justice Danckwerts in Elian and Rabbath (Trading as Elian & Rabbath) v. Matsas and Matsas & Ors. (supra).”
In the decision of Mahatma Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engineering Corp. Ltd. & Ano. (2007) 6 SCC 470 the Hon’ble Supreme Court relying upon the decision in U.P. Co-operative Federation Ltd. (supra), observed that if the bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee.
The Ld. Counsel also relies on the decision of the Hon’ble Supreme Court in Oil and Natural Gas Corporation Ltd. v. SBI, Overseas Branch, Bombay AIR 2000 SC 2548 wherein observing that encashment of an unconditional bank guarantee does not depend upon the adjudication of disputes, held thus:
“ ….The learned Single Judge also held that the first respondent by separate letter dated 14-9-1994 and 10-5-1994 addressed to the Bank while requesting to extend the bank guarantee specifically stated that if it was not so done, the communication should be treated as notice for encashment of the bank guarantee and these communications addressed to the respective Banks prior to the guarantee would serve the purpose of notice to the Banks and so it cannot be held that the invocation was after the date of expiry of the said guarantees.
The same is the principle stated by this Court in Hindustan Steelworks Construction Ltd. v. Tarapore & Co. (1996 (5) SCC 34) It is held therein that encashment of an unconditional bank guarantee does not depend upon the adjudication of disputes. No distinction can also be made between a bank guarantee for due performance of a work contract and a guarantee given towards security deposit for a contract or any other kind of guarantee. Where the beneficiary shall be the sole judge on the question of breach of primary contract the bank shall pay the amount covered by the guarantee on demand without a demur. In the absence of a plea of fraud, guarantee had to be given effect to.”
The Ld. Counsel appearing for the Appellant submits that the observation in the above-cited precedent it has to be held that the bank guarantee was absolute and unconditional and the Appellant was bound to comply with it.
It is further pointed out by the Ld. Counsel for the Appellant that the first Respondent had failed and defaulted in complying with its obligations to keep the bank guarantee subsisting and valid for a further period. Despite being aware of its obligation, the first Respondent ignored the same. There was no need for the Appellant to consider the request for an extension of the guarantee. In the event of the first Respondent’s failure to fulfil its obligation to enable the Appellant to extend the bank guarantee, the Appellant was bound to make the payment to PGCIL in terms with their letter dated 14.11.1998.
The outstanding commission charges payable by the first Respondent to the Appellant was ₹7,19,505.97. Exercising its right of general lien and set off, a sum of ₹1,51,560.05 lying in credit of CD Account No. 6530 was appropriated by the Appellant leaving a balance of ₹5,12,593.92. Further, a sum of ₹19,85,353 lying in miscellaneous deposit to the account of the first respondent was also appropriated towards the commission. In any case, on the date of invoking the bank guarantee on 30.11.1998, the guarantee commission charges were outstanding and were appropriated only subsequently. The Appellant had sought relief in the O.A. only after adjusting the amounts. The Appellant was under no obligation to seek a clarification from PGCIL to prove or establish their grounds for the demand of invoking the bank guarantee and therefore, the D.R.T. went wrong in holding that the first Respondent was never declared as a defaulter by PGCIL and therefore, the Appellant was under no obligation to pay the amount to the PGCIL. The event of the first Respondent fulfilling the obligations under the contract with PGCIL was of no consequence or relevance to the Appellant.
The first Respondent had raised an objection stating that no debt or liability had arisen in favour of the Appellant and therefore, the maintainability of the O.A. itself is challenged. It is pointed out that the O.A. is filed by the Appellant hastily and negligently. The payment now sought to be recovered is in contravention of the bank guarantee. It is submitted that the Appellant was fully aware that the supplies as per the terms of the contract have been completed and PGCIL has not made any claim based on any alleged default of supplies. Attention is invited to the legal notice dated 02.06.1999 issued on behalf of the Appellant to PGCIL which states thus:
“Our client is informed by M/s Klen & Marshals Manufacturers and Exporters Ltd., that they have completed all their obligations under their contracts with you and they have no liability under the contract to you. In the circumstances, invocation of the guarantee from our client by you is illegal. Since our client is not a party to the agreement between you and M/s Klen & Marshals Manufacturers and Exporters Ltd., our client is not in a position to make any comment on that statement.
In the circumstances aforesaid, you are hereby called upon to confirm and deny the statement of M/s Klen & Marshals Manufacturers and Exporters Ltd. referred herein above. If the statement is correct then you are hereby called upon to return the amount received by you wrongly from our client pursuant to the invocation of the guarantee of our client by you. Since you have been enjoying the amount received from our client, you are liable to pay the interest on the amount so received by you from 30.11.1998 at the rate of the bank’s prime lending rate of 16% per annum plus 4% spread i.e. aggregate 20% and since the payment has been unjustly with you, you are liable to pay the penal interest at the rate of 2% per annum over the above 20%”
Under the circumstances, it is pointed out that the only remedy available in law for the Appellant bank is to recover the mistaken payment given to PGCIL by resorting to a civil suit. Without proceedings against the PGCIL, the Appellant could not have proceeded against Respondents Nos. 1 and 2.
The second Respondent contents that at the request of Galalda a backup guarantee No. 2/1995 was issued on 04.04.1995 for an amount of $488675/- and Rs.59,931/-. The first Respondent was the beneficiary under the said counter-guarantee. The said guarantee was amended inter alia in terms of the fact that the guarantee Respondent of the second could invoke only in the event of invocation of the original performance bank guarantee given by the Appellant. The terms of the said backup guarantee No. 2/95 reads thus:
“This bank guarantee can be invoked by you only in the event of invoking of the original performance bank guarantee No. LG/612/8200 dated 22.02.1995 given by the supplier’s banker namely the Bank of Tokyo Ltd. Bombay Branch to PGCIL against the contract and not earlier and proof shall be given for invoking of original bank guarantee supplier’s bank to PGCIL No. LG/612/8200 dated 22.02.1995 given by aforesaid original performance the Bank of Tokyo Ltd. Bombay by PGCIL.”
It is pointed out by the second Respondent that the bank guarantee as well as backup guarantee were initially up to 01.12.1997 and extended once from 01.12.1997 to 31.05.1998 and the second time extended up to 30.11.1998 and on failure thereof make the remittance under the guarantee. The contention of the Appellant appears to be that due to non-payment of the Appellant’s commission charges for the extension of the guarantee up to 30.11.1998, the payment as per the guarantee was made to PGCIL. At the request of Galalda, the first Respondent had extended the guarantee No. 2/95 by six months up to 30.05.1999. Despite that, the Appellant made the payment as per the guarantee to PGCIL and put up the claim against Respondents Nos. 1 and 2.
As regards the backup guarantee No. 2/95, the first Respondent is the beneficiary. Given the POA executed in favour of the Appellant by the first Respondent, the Appellant would have the right to invoke the guarantee only if the first Respondent had the right to do so.
PGCIL had only made a conditional demand with an option given to the Appellant to extend the guarantee by six months. The Appellant had also requested the first Respondent to extend their guarantee by six months and also to extend the counter-guarantee No. 2/95 by six months till 30.11.1998. Respondent No. 1 had also written a letter dated 27.11.1998 to the second Respondent to extend the backup guarantee. Galada had also written a letter on 28.11.1998 to extend a guarantee and had also informed that the contract had been performed to the satisfaction of PGCIL. It was to the utmost surprise of the second Respondent that the Appellant sent the communication on 30.11.1998 to the second Respondent at Secundrabad stating that the bank guarantee has been invoked by PGCIL and that they have remitted the amount to PGCIL resultantly, the backup guarantee executed by the second Respondent was being invoked. The said letter was sent to the regional office to the second Respondent and thereafter received by the branch office. On 30.11.1998, itself a reply was sent to the Appellant by the second Respondent stating that the validity of guarantee No. 2/95 has been extended for six months up to 30.05.1999 and the extended guarantee was also furnished to the Appellant. By a letter dated 13.02.1999 Galada had informed the second Respondent that the dispute had been settled regarding guarantee No. 2/95 in a meeting with PGCIL. Given the above, there was no merit in the claim put up by the Appellant. In the letter dated 14.11.1998 addressed to the Appellant by PGCIL there is no indication of any default by the supplier all that was requested was that PGCIL wanted to take services of the first Respondent for completion of the contract by getting the guarantee extended. The fact that the Appellant had also requested the first Respondent to extend the guarantee indicates that there was no breach. The guarantee could be invoked only in the event of the first Respondent declaring Galada in default and stating that PGCIL had invoked the guarantee. The letter addressed by the Appellant to the first Respondent would indicate that the invocation of the guarantee was not due to informed by Galada but non-payment of the commission charges.
The main contention which was raised against the appellant bank is that it acted in haste by making payments on 30.11.1998 to PGCIL given the invocation letter dated 14.11.1998. The appellant would submit that it could not have ignored or overlooked the terms of the backup guarantee and therefore, it was constrained to invoke the guarantee. It is pertinent to note that the cause of action of the appellant is not based on the non-performance of the contract. The bank guarantee was invoked not because there was a default but because there were some extraneous reasons. PGCIL had only asked for an extension to the bank guarantee. Amounts were due to the appellant from the 1st respondent which had agreed to the extension of the bank guarantee. The Canara Bank had also extended the backup guarantee. Under the circumstances, there was no need for the appellant to have invoked the bank guarantee in such haste. It is also the contention of the appellant that the charges due to the appellant were not paid by the 1st respondent. In case the charges were not paid, they could have been levied by the appellant after the extension of the guarantee. Non-payment of charges by itself could not have been the reason for the appellant to invoke the bank guarantee in haste. Even PGCIL have not stated in their invocation letter that the 1st respondent was in default. They had only requested an extension of the guarantee with the condition that if it is not extended, the guarantee may be taken as invoked. After extending the guarantee, nothing would have prevented the Appellant from claiming the charges from the 1st respondent. The statements would indicate that amounts were realised towards the charges from the 1st respondent. If that is so, the appellant should have extended the guarantee instead of making payment to PGCIL. The letter dated 02.06.1999 addressed by the appellant to PGCIL would also indicate that the guarantee was invoked and payment received by them in haste without there being any obligation on the part of the first respondent.
On an anxious consideration of all these facts and circumstances, I find no reason to interfere with the findings in the impugned order. The Appeal has no merits and therefore, I find no reason to upset the findings to the DRT. The Appeal is dismissed.