IMPORTANT POINT
In summary suit for enforcement of Bank Guarantee in absence of pleading as to fraud and finding thereto unconditional leave to defend cannot be granted.

Headnote:Code of Civil Procedure, 1908-Order XXXVII-Summary suit-Leave to defend-Suit to enforce Bank Guarantee-Grant of unconditional leave-Legality of-Leave to defend sought for on ground guarantee in question given on basis of counter guarantee given by a foreign Bank and contractor obtained injunction against Bank, arbitration between parties pending and foreign and Indian Courts are seized of matter-Court granting unconditional leave-Unjustified-Encashment of unconditional Bank guarantee does not depend upon adjudication of dispute - No plea of fraud much less a finding there to-Injunction obtained or granted in favour of Bank in proceedings arising out of counter guarantee in foreign Court is no defence-High Court plainly erred in granting unconditional leave to defend suit.
Held : The High Court by order dated April 27, 1998 granted unconditional leave to defend the suit on the following terms (i) while invoking the bank guarantee, vide letter dated September 27, 1993 the amount of liquidated damage was not stated; (ii) according to bank guarantee, a clear notice of demand towards liquidated damage was to be given; (iii) the notice dated September 27, 1993 was not a legal notice to communicate the liquidated damages, and (iv) arbitration proceedings is pending and the Italian Court is also seized of the matter. In the absence of a plea relating to fraud, much less of a finding thereto, we find that the court could not have stated that the defence raised by the respondent Bank on the grounds set forth earlier is sufficient to hold that unconditional leave should be granted to defend the suit. In the arbitration proceedings that were pending it was certainly open to the parties concerned to adduce proper evidence and establish as to what are the liquidated damages that are payable and if any excess amount had been paid, the same would be recovered. So far as the order made by the Italian Court for not enforcing the bank guarantee is concerned, it must be stated that the said order arose out of the counter guarantee with which the appellant had nothing to do. When, in fact, there is no defence for suit filed merely to rely upon an injunction granted or obtained in their favour does not carry the case of the respondent Bank any further. The only basis upon which the respondent Bank sought for and obtained the injunction is that in event the counter guarantee cannot be honoured by reason of the injunction granted by the Italian court the respondent Bank should be extended the similar benefit. But a perusal of the Foreign Exchange Manual makes it clear that none of the claims would be an impediment to make payment under the Bank Guarantee in question. Therefore, in our view, the High Court plainly erred in having granted leave to defend unconditionally. We vacate that order and dismiss the application filed by respondent Bank for leave to defend (Paras 6, 9, 10 & 11)

JUDGMENT

Rajendra Babu. J.-Leave granted.

2. This appeal arises out of a suit filed to enforce a Bank Guarantee against the respondent under Order XXXVII CPC. The respondent filed an application seeking leave to defend the suit unconditionally. That application having been allowed this appeal is filed by special leave. Facts leading to this appeal are as follows:

3. The appellant entered into a contract with a consortium of M/s. Saipem SPA/Snamprogetti of Italy for construction of a system of undersea pipelines known as the Gas Lift Pipelines. The work comprised of pre-engineering survey, design and engineering procurement, wrap and coat, fabrication, transportation, laying, installation, testing and pre-commissioning of forty sub-marine pipeline segments of approximately total length of 181.8 kms. The contract price was to the tune of US $ 63,875,000 plus Indian Rs. 8,06,00,000/-. The scheduled completion date of the entire works subject to any requirements in the contract specifications as to the time of completion of any part of the work before completion of the whole, the whole of the work was to be completed by April 30, 1991. The contract also provided for levy of liquidated damages if the contractor failed to complete the entire works or any part thereof comprising the total turn key project before the prospective scheduled completion date fixed for the entire works or part thereof at a rate equal to 3% of the total contract price for each month s delay subject to a maximum of 10% of the contract price. The contractor was obliged to furnish a bank guarantee to cover liquidated damages for an amount equivalent to 10% of the contract price not later than 4 months prior to the scheduled completion date. However, if the project s completion date slips beyond the scheduled completion date, the contractor shall get validity of said guarantee suitably extended. In case, the contractor fails to provide the guarantee for liquidated damages within the time stipulated therein, the appellants shall be entitled to encash the performance guarantee. All disputes arising out or in connection with the contract shall be settled in accordance with the laws of India and the exclusive jurisdiction of the courts in India. In compliance with this requirement, the contractor had furnished a bank guarantee from the State Bank of India, Overseas Branch, Bombay, to cover liquidated damages, claim. That guarantee was for a sum of US $ 6,387,500 plus Indian Rs. 8,060,000/-. Through the said guarantee, the respondent Bank had unconditionally undertaken as under :

"Now therefore, in consideration of the premises aforesaid and at the request of the contractor, we, State Bank of India, Overseas Branch, Bombay, Bank organised under the laws of India and having its registered/head office at Calcutta (hereinafter called "the Bank") so as to bind ourselves and our successors and assignees, do hereby irrevocably and unconditionally undertake to pay to you, the Company, on demand in writing without demur or protest and irrespective of any contest or dispute between your goodselves and the contractor and without reference to the contractor, any sum of money at any time or from time to time demanded by the Company upto an aggregate limit of US $ 6,387,500/- (US Dollars six million three hundred eighty seven thousand and five hundred only) plus INR 8,060,000/- (Indian Rupees eight million sixty thousand only) on account of any liquidated damages due from the contractor to the company.

We further agree that as between us and the company for the purpose of this guarantee/undertaking, any notice of demand by the company towards liquidated damages and any amount claimed on account thereof, shall be final and binding as to the factum of the L.D. and the amount payable by us to the company hereunder relative thereto.

We further agree that this guarantee shall be governed by and construed in accordance with Indian laws.

We further agreed that if the project completion date s

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2000 Supreme(SC) 1141

IMPORTANT POINTIn summary suit for enforcement of Bank Guarantee in absence of pleading as to fraud and finding thereto unconditional leave to defend cannot be granted.

Cases Referred (6)

IMPORTANT POINT
In summary suit for enforcement of Bank Guarantee in absence of pleading as to fraud and finding thereto unconditional leave to defend cannot be granted.