G H Standard Chartered Bank v. Heavy Engineering Corporation Ltd. & Anr.

RASTOGI, J. 1. Leave granted. 2. The instant appeal is being preferred against the judgment and order dated 8 th May, 2019 passed by the Division Bench of the High STANDARD CHARTERED BANK v. HEAVY ENGINEERING CORPORATION LTD. Court of Calcutta setting aside the judgment dated 16 th October, 2015 of the Single Bench and accepting claim of the 1 st respondent-plaintiff holding that the bank guarantees were properly invoked in law a nd accordingly the decree came to be passed for Rs. 1,10,33,207.00 /- as claimed in paragraph 18 of the plaint with interest at the rate of 8 per cent per annum from the date of institution of the suit until payment. 3. Although both the Judges of the Division Bench has delivered their separate judgment but have expressed a concurring view on the subject. 4. The dispute primarily arose with regard to two b ank guarantees amounting to Rs. 71,35,100/- and Rs. 20,32,500/- in terms of the letters of intent, HEC-CS-1502-81 dated 19 th May, 1981 and HEC-CS-1502-81 dated 19 th May, 1981 furnished on behalf of the 2 nd defendant by the appellant Bank(1 st defendant) in favour of the 1 st respondent-plaintiff “as advance against supply of plant and equipment” by the 1 st respondent-plaintiff to the 2 nd respondent (defendant no. 2). The two bank guarantees are on identical terms and the only difference is the date and the amount which are reproduced as under:- Bank Guarantee No. 1001/03/100G dated 16 th February, 1983 “We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas Road, Calcutta 700001 undertake the Indemnity and keep th e CORPORATION indemnified to the extent of Rs. 71,35,100/- (Rupees SEVENTY ONE LAKHS THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY) against any loss or damage caused to or suffered by the CORPORATION by reason or any breach or failure by the said SUPPLIER, in due performance of the aforesaid contract, we shall forthwith on demand pay to the CORPORATION any sum or sums not exceeding Rs. 71,35,100/-(RUPEES SEVENTY ONE LAKHS THIRTY FIVE THOUSAND AND ONE HUNDRED ONLY) without making any prior reference to the said SUPPLIER with and exclusion of any action in Court by SUPPLIER.” Bank Guarantee No. G/1001/84/608 dated 29 th August, 1984 “We, GRINDLAYS BANK P.L.C., 19 Netaji Subhas Road, Calcutta 700001 do hereby undertake the Indemnity and keep the CORPORATION indemnified to the extent of Rs. 373 20,32,500(Rupees TWENTY LAKHS THIRTY TWO THOUSAND FIVE HUNDRED ONLY) against any loss or damage caused to or suffered by the CORPORATION by reason or any breach or failure by the said SUPPLIER, in d ue performance of the aforesaid contract , we shall forthwith on demand pay to the CORPORATION any sum or sums not exceeding Rs. 20,32,500/-(RUPEES TWENTY LAKHS THIRTY TWO THOUSAND FIVE HUNDRED ONLY) without making any prior reference to the said SUPPLIER with and exclusion of any action in Court by SUPPLIER.” (emphasis supplied) 5. The said two bank guarantees were furnished for an d on behalf of 2 nd respondent towards the sum insured “against any loss or damage caused to or suffered by the Corporation by reason or any breach or failure by the said supplier, in due perf ormance of the aforesaid contract.” Brief facts of the case : 6. By a letter of intent dated 19 th May, 1981, 1 st respondent placed an order on 2 nd respondent(Simon Carves India Ltd. ‘SCIL’) for the complete design, supply of both indigenous a nd imported equipments, erection and commissioning of requisite civil and construction works of the Dankuni Coal Complex at a total pri ce of Rs. 21.10 crores. The letter of intent dated 19 th May, 1981 after describing 4 sections of the LTC plant at Dankuni stated as under: - “The above price covers the complete design, supply of both indigenous and imported equipment , erection and commissioning with requisite civil and structural works complete in all respects except land filling upto 4.00 M level, railways siding, roads & outside drawing and perphorial lighting which will only be outside your scope or work. The break up of the total price of Rs. 21.10 crores for purpose of billing is enclosed. We have noted the terms of payment proposed by you in your letter dated 18.05.81. As we have indicated about the terms of payment agreed to by us, it will not be possible to consider your proposal for relaxation of the same. However, attempts will be STANDARD CHARTERED BANK v. HEAVY ENGINEERING CORPORATION LTD. [RASTOGI, J.] made to consider some softening of payment terms la ter depending our own cash flows on this project. Kindly let us have your detailed technical specifications et c to enable us to draw up a detailed contract for the work. Kindly communicate your acceptance of this letter of intent and furnish us a bank guarantee on approved proforma to relea se the initial advance of Rs. 15.64 lakhs to you. In pursuance of the letter of intent two bank guarantees hav e been furnished by the defendant no. 1 on behalf of the defendant no. 2 “as advance against the supply of plant and equipment. ” (emphasis supplied) 7. Pursuant to the letter of intent, a formal Memorandum of Agreement dated 8 th August, 1985 was executed by and between SCIL. Thereafter, the 1 st respondent (plaintiff) from time to time advanced for the said work against several bank guarantees furnished b y SCIL. It may be noticed that the instant dispute pertains to two bank guarantees dated 16 th February, 1983 and 29 th August, 1984, which were advanced to SCIL, the details of which have been indicated above. The said guarantees furnished by the appellant bank were extended f rom time to time and revalidated. 8. In due course of time, in breach of contract wit h the 1 st respondent-plaintiff, SCIL failed to duly complete the supply of equipment and the other conditions of the letter of intent and fur ther defective equipments. It is alleged that the work had to be aba ndoned due to which 1 st respondent suffered huge losses and damages. Ultimately, a sum of Rs. 139.90 lakhs, was deducted by the 1 st respondent from final bill which pertained to the apportione d work handed over to SCIL. 9. In view of the letter dated 6 th November, 1998, 1 st respondent- plaintiff demanded encashment of both the said guarantees which were refused by the bank to honour and diverse correspon dence was exchanged by and between the 1 st respondent -plaintiff and the appellant-defendant bank. 1 st respondent in continuation made subsequent demands for encashment of the guarantees by le tter dated 19 th December, 1998 which is reproduced hereunder:- 375 “No.HDC/Proj/Fin/98-343 Dated the 19 th December, 1998 To The Chief Manager Corporate Banking ANZ Grindlays Bank 19, Netaji Subhas Road Post Box No.2645 Calcutta – 700001 Dear Sir, With reference to your St. Relationship Manager’s letter d td. 7.12.98 regarding encashment of B.Gs issued by you on behalf of M/s. SCIL for a total value of Rs.91.68 lakhs you are ver y much aware that M/s. SCIL owes to H.E.C. Rs.139.90 la khs due to defective supply of Plant & Equipment as well as no n- supply of Plant & Equipment and also other contract ual deficiencies which has caused loss as reflected in the handi ng over/taking over report of the DCC Project by CIL. You are also aware that HEC has gone out of the way in supporting SCIL and getting the Plant completed with minimum damage. It is within HEC’s full rights to invoke the BG as per Clause No.2 of the BG’s which is reproduced below; (BG No.G1001/83/1084 dt. 16.8.83 for Rs. 71,35,100.00 and BG No.G1001/84/608 dt. 29.8.84 for Rs. 20,32,500.00). WE GRINDLAYS BANK PLC 19, Netaji Subhas Road, Calcutta – 700001 do hereby undertake the Indemnity of Rs. (Rupees _______________________) against any loss or damage caused to or suffered by the CORPORATION by reason or any breach or failure by the said SUPPLIER, in d ue performance of the aforesaid contract, we shall forthwi th on demand pay to the CORPORATION any sum or sums not exceeding Rs. (RUPEES without making any prior reference to the said SUPPLIER with an exclusion of any action in c ourt by SUPPLIER. The failure of M/s. SCIL in fulfilling the contractual obli gation which includes performance Guarantees of Plant & Equipmen t STANDARD CHARTERED BANK v. HEAVY ENGINEERING CORPORATION LTD. [RASTOGI, J.] are very well documented by HEC & CIL. In fact, the unadjusted advance of SCIL on account of Plant & Equipment is far in excess of the loss suffered by HEC. The same has been brought down to Rs.139.90 lakhs after allowing credit for contractu al settlement. Although as per terms of BG we are not bound to explain you all these things but the above details are furnished so tha t good sense will prevail and we expect you to live up to your reputation and honour the beneficiaries claim for encashment. Thanking you, Yours faithfully, T.L.N. SOURI GENERAL MANAGER (PROJECTS & MNTG) (emphasis supplied)” 10. This was followed by the letter dated 28 th December, 1998 which is also reproduced hereunder:- “No.GGM(CM)/ /98 28 th December, 1998 To The Chief Manager ANZ Grindlays Bank CALCUTTA. (Atten: Shri Vasudeo Kundu) Fax No.033-2211196 Sub: Encashment of two Bank Guarantees Nos. 1) G/1001/83/108G for Rs.71,35,100/- 2) G/1001/88/608 for Rs.20,32,500/- Ref: Our letter dated 19.11.1998. Dear Sir, We have intimated vide our above letter to encash the above two Bank Guarantees issued by you on behalf of SCIL India Ltd., to HEC. 377 You are requested to encash the above Bank Guarantees and send the proceeds amounting to Rs.91,67,600/- within 3 days time. Kindly treat this as most urgent and failing on th e part of the Bank to honour the beneficiaries demand will be viewed seriously. Thanking you, Yours faithfully, (L.M. Prasad)” 11. A further complaint was made by way of a letter date d 22 nd February, 1999 to the Banking Ombudsman, Calcutta. Ultimately , 1 st respondent-plaintiff was constrained to institute a suit before the High Court of Calcutta for decree of Rs. 1,10,33,207.07/- along with interest being the aggregate sum of both the said guarantees. 12. The appellant Bank filed its written statement and primarily took objection that the invocation of the bank guarantees wa s not in accordance with either of the said guarantees and contrary to the terms thereof and accordingly the appellant Bank was not liable to make payment to the 1 st respondent-plaintiff under either of the said guarantees. In support of its defence, the appellant Ba nk referred to the diverse correspondence exchanged between the appellant and 1 st respondent. In brief, the defence of the appellant Bank was t hat the invocation of the said bank guarantees was contrary to the t erms or not in terms thereof. 13. On the pleadings of the parties, the suit in the first instance came to the dismissed vide judgment & decree dated 16 th October, 2015 which came to be challenged by the 1 st respondent in appeal before the Division Bench of the High Court of Calcutta. In a concurring judgment while setting aside the judgment of the Single J udge of the High Court, it was finally held that the bank guarantees were properly invoked in law by the 1 st respondent-plaintiff and accordingly passed a decree of Rs. 1,10,33,207.00/- together with interest at the rat e of 8% per annum on and from the date of institution of the suit until payment. 14. Learned senior counsel for the appellant Bank, Shri Amit Sibal submits that the said bank guarantees only covered losses arising out of supply of plant & equipment and according to the p leadings on record, the plant stood installed in October, 1990 and this i s the case STANDARD CHARTERED BANK v. HEAVY ENGINEERING CORPORATION LTD. [RASTOGI, J.] where the appellant Bank in its independent capacity, refused the claim for it being clearly false to its knowledge and also not in ac cordance with the terms of the guarantee, i.e. beyond the purview of the bank guarantees and failing to apportion those losses suffered on account of claims which would be within the terms of the bank guarantee s. 15. Learned counsel further submits that the bank guarantees are in reference to two category of losses (i) non-supply/defect ive supply of plant & equipment (ii) “other contractual deficiencies” a nd by the invocation vide letter dated 19 th December, 1998 claims caused by “non- supply/defective supply of plant & equipment and other contractual deficiencies ” is outside the purview of the bank guarantee. Further, assuming the correctness of the claim, the 1 st respondent if suffered loss for both (i) non-supply/defective supply of plant and equipment (ii) “other contractual deficiencies”, it is difficult t o determine the apportionment between the two categories, because the invocation does not state how they are apportioned. The invocation is thus i nchoate and incomplete and this according to the appellant does not constit ute a valid invocation at all and it has not been properly appreciated by the Division Bench of the High Court in the impugned judgment and has to be interfered by this Court. 16. In support of his submission, learned counsel has pl aced reliance on the judgment of this Court in Hindustan Construction Co. Ltd. Vs. State of Bihar & Others 1 and Gangotri Enterprises Ltd. Vs. Union of India and Others 2. 17. Per contra, Ms. Madhavi Diwan, learned ASG appearing on behalf of the 1 st respondent, while supporting the finding recorded by the High Court in the impugned judgment submits that as per precedents laid down by this Court, the question of law is no more res integra and is well settled that the bank guarantee is an indepe ndent contract between the bank and the beneficiary and the bank is alway s obliged to honour its guarantee as long as it is an unconditional and irrevocable one. At the same time, the dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence and two exceptions to the rule have been carved out. The first is when there is a fraud of which th e Bank has notice and a fraud of the beneficiary from which it seeks to benefit. 1 1999(8) SCC 436 2 2016(11) SCC 720 379 The second exception to the general rule of non-intervention is s uch when there is a ‘irretrievable injury’ or ‘irretrievable injustice’ that would occur to the Bank. 18. We have heard learned counsel for the parties and with their assistance perused the material available on record. 19. The law relating to invocation of bank guarantees with the consistent line of precedents of this Court is well settled and a three- Judge Bench of this Court in Ansal Engineering Projects Ltd. Vs. Tehri Hydro Development Corporation Ltd. and Another 3 held thus:- “4. 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 pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be re strained 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 commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor. 5.…..The court exercising its power cannot interfere with enforcement of bank guarantee/letters of credit except onl y 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.” (emphasis supplied) 20. A bank guarantee constitutes an independent contract. I n Hindustan Construction Co. Ltd. Vs. State of Bihar and Others (supra), a two Judge Bench of this Court formulated the condition 3 1996(5) SCC 450 STANDARD CHARTERED BANK v. HEAVY ENGINEERING CORPORATION LTD. [RASTOGI, J.] upon which the invocation of the bank guarantee dep ends in the following terms:- “9. What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of t he bank guarantee are, therefore, extremely material. Since the bank guarantee represents an independent contract between th e bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.” 21. The same principle was followed in State Bank of India and Another Vs. Mula Sahakari Sakhar Karkhana Ltd. 4 wherein a two-Judge Bench held thus:- “33. It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separ ate transaction. 34. If a construction, as was suggested by Mr Naphade, is to be accepted, it would also be open to a banker to put forward a case that absolute and unequivocal bank guarantee should be read as a conditional one having regard to circumstances attending thereto. It is, to our mind, impermissible in law.” 22. Taking note of the exposition of law on the subject in Himadri Chemicals Industries Limited Vs. Coal Tar Refining Co. 5, a two- Judge Bench of this Court in Gujarat Maritime Board Vs. Larsen & Toubro Infrastructure Development Projects Limited an d Another 6 has laid down the principles for grant or refusal for invocation of bank guarantee or a letter of credit. The relevant paragraph i s as under:- “ From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement 4 2006(6) SCC 293 5 2007(8) SCC 110 6 2016(10) SCC 46 381 of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a lett er of credit: (i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract. (ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. (iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit. (iv ) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order o f injunction to restrain enforcement of bank guarantees or letters of credit. (v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation. (vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.” 23. The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary and the bank is always obl iged to honour its guarantee as long as it is an unconditional and irr evocable one. The dispute between the beneficiary and the par ty at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this Rule when there is a clear case of fraud, irretrievable injustice or spe cial equities. The STANDARD CHARTERED BANK v. HEAVY ENGINEERING CORPORATION LTD. [RASTOGI, J.] Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee. 24. The guarantees in the instant case were uncondit ional, specific in nature and limited in amount. The terms of the guarant ee categorically covered money which the 1 st respondent had advanced against supply of the plant and equipment by SCIL. The said guarantees covered any loss and damage caused to or suffered b y the 1 st respondent-plaintiff in due performance of the contract for s upply of plant and equipment. The guarantee documents dated 16 th February, 1983 and 29 th August, 1984, as a whole and clause 2 of the guarantee document in particular cover the advance which had been p aid by the 1st respondent-plaintiff by reason of any breach or failure by SCIL in due performance of the aforesaid contracts i.e. against t he contract for supply of plant and equipment. 25. From the correspondence that has been exchanged by and between them pertaining to invocation of the said guarantees, it clearly manifests that the initial letter of invocation written by the 1 st respondent- plaintiff dated 6 th November, 1998 indeed was per se inadequate and did not enumerate any condition for invocation of said guarantees save and except a reference to “a substantial amount to be rec overed from SCIL”. However, in the later correspondence exchanged between the parties dated 19 th December, 1998 followed by a letter dated 28 th December, 1998, 1 st respondent informed the appellant Bank that due to defective supply of plant and equipment as well as non-s upply of plant and equipment and also other contractual deficiencies of S CIL, losses had been suffered by the 1 st respondent and it was duly informed to the appellant Bank that the losses had been incurred both on account of supply of plant and equipment and on account of performance of the supply of plant and equipment. On reading of letters exchanged by and between 1 st respondent and the appellant Bank pertaining to invocation of the guarantees, the condition of the guarantees had been duly complied with. 26. In our considered view, once the demand was made in due compliance of bank guarantees, it was not open for the appellant Bank to determine as to whether the invocation of the bank guarantee was justified so long as the invocation was in terms of the bank guar antee. The demand once made would oblige the bank to pay under the t erms 383 of the bank guarantee and it is not the case of the appell ant Bank that its defence falls in any of the exception to the rule of case of fraud, irretrievable injustice and special equities. In absence thereof, it is not even open for the Court to interfere with the invocation and encashment of the bank guarantee so long as the invocation was in term s of the bank guarantee and this what has been observed by the Division Bench of the High Court in the impugned judgment and that reflec ted the correct legal position. 27. It is informed by the learned counsel for the appellant that the Standard Chartered Bank’s predecessor in interest, ANZ Grindlay’s Bank had opened a fixed deposit of Rs. 91,67,600/- on 18 th May, 2001, which was lien marked to HEC(Heavy Engineering Corporation Lt d.) and is being held under the control of the Registry of the H igh Court of Calcutta and the current fixed deposit is valued at Rs. 2,32,69,129.71/ - and the total liability under the impugned order as on date will be Rs. 2,78,03,681.64/-. The Registry of the High Court of Cal cutta may release the money lying in the account in favour of the 1 st respondent and it is for the appellant Bank(judgment debtor) to settle and satisfy the decree which is impugned in the instant proceedings. 28. We do not find any merit in the appeal which is he reby dismissed. No costs. 29. Pending application(s), if any, stands disposed of. Divya Pandey Appeal dismissed. STANDARD CHARTERED BANK v. HEAVY ENGINEERING CORPORATION LTD. [RASTOGI, J.]