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2007(7) Supreme 614
Supreme Court of india
(From Delhi High Court)
Altamas Kabir & B.Sudershan Reddy, JJ.
Vinitec Electronics Private limited— Appellant
versus
HCL Infosystems Limited — Respondent
Appeal (civil) 5121 of 2007
[Arising out of SPL (C) No. 16098/2006]
Decided on : 02-11-2007
Bank guarantee – Invocation of – Law relataing to - Bank guarantees which provided that they are payable by guarantor on demand is considered to be an unconditional bank guarantee – When in course of commercial dealings, unconditional guarantees have been given or accepted beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes – It is equally well settled in law that bank guarantee is an independent contract between bank and beneficiary thereof - The bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one - The dispute between beneficiary and party at whose instance bank has given guarantee is immaterial and of no consequence - There are, however, two exceptions to this Rule - The first is when there is a clear fraud of which Bank has notice and a fraud of beneficiary from which it seeks to benefit - The fraud must be of an egregious nature as to vitiate entire underlying transaction - The second exception to general rule of non-intervention is when there are special equities in favour of injunction, such as when irretrievable injury or irretrievable injustice would occur if such an injunction were not granted.(Paras 11,12)
(1997) 1 SCC 568, relied upon.
Fact of the Case :
An Agreement was entered into between appellant M\s Vinitic electronics private limited and respondent HCL infosystem limited herein in the instant case under which Respondent agreed to buy UPS systems from appellant. There was default in stipulated payment inspite of supply of equipments by appellant to Respondent. Respondent agreed to pay sum provided performance bank guarantee of 10% value was furnished. Appellant’s case that even after furnishing bank guarantee, respondent made a payment of only Rs. 30 lakhs and sum of Rs. 8 lakhs still remained unpaid. Contention of appellant that Respondent under no circumstances was entitled to invoke bank guarantee without paying balance amount and that bank guarantee had become inoperative as condition precedent for its invocation was not complied with. Single Judge dismissed injunction application filed by appellant on ground that it had no merit. High Court on appeal affirmed order of Single Judge.
Present Appeal has been filed against said order of High Court.
Findings of the court :
The Court held that what was furnished was a conditional bank guarantee and bankers were liable to pay amounts only upon established fact that supplier was in default for performance of their warranty obligations under contract. But by subsequent letter, relevant clauses in bank guarantee was amended where under banks stood as guarantor and responsible on behalf of supplier upto a total of Rs. 16,81,238.50. Amended clauses made it abundantly clear that bank had undertaken to pay amount upto a total of Rs. 16,81,238.50. Bank guarantee as amended replaced Para 4 of original bank guarantee and made the bank guarantee furnished as unconditional one. Mere fact that bank guarantee referred to principal agreement in preamble of deed of guarantee not made guarantee furnished by bank to be a conditional one unless any particular clause of agreement had been made part of Deed of Guarantee. On careful analysis of terms of guarantee, guarantee found to be an unconditional one. Appellant hence could not be allowed to raise any dispute and prevent respondent from encashing bank guarantee. Appeal having no merit was dismissed.
Result : Appeal dismissed.
Key Points: - The judgment analyzes whether the bank guarantee furnished was unconditional after amendment and whether it could be invoked despite outstanding payments (!) (!) (!) . - It states the general rule: an unconditional bank guarantee is independent of underlying disputes and must be honored by the bank (!) (!) (!) . - It identifies two exceptions to the general rule: (i) clear fraud known to the bank, and (ii) special equities such as irretrievable injury or injustice, justifying injunction against encashment (!) (!) (!) . - It discusses precedent on invocation of bank guarantees and the standards for when injunctions may be granted or refused (U.P. State Sugar Corpn v. Sumac, etc.) (!) (!) (!) . - The Court held that the amended guarantee in this case made the bank guarantee unconditional, binding the bank to pay on demand (!) (!) (!) . - The appellant could not raise disputes to prevent encashment since the guarantee was unconditional (!) (!) . - The court found no fraud or irretrievable injustice established to invoke the exceptions, so the appeal was dismissed (!) (!) (!) . - It reiterates that the existence of disputes under the underlying contract does not prevent enforcement of an unconditional bank guarantee (!) (!) . - The decision references prior Supreme Court principles summarized in Himadri Chemicals and Mahatama Gandhi Sahakra Sakkare for injunction standards (!) (!) (!) .
JUDGMENT
B.Sudershan Reddy, J. —
1.Leave granted.
2.The dispute between the parties relates to invocation of the bank guarantee furnished by the appellant to the respondent.
3.The appellant M/s. Vinitec Electronics Private Limited entered into agreement dated 10th May, 2000 with the respondent HCL Infosystem Limited under which the respondent agreed to buy UPS systems from the appellant for a consideration value of Rs.1,68,12,400/-. The method of payment and terms thereof are provided for in clause 15(a) and (d) in the said agreement.
“Clause 15 :
The payment terms will be :
(a)30% Advance against a Bank guarantee from a Scheduled Bank of equivalent value. The BG shall be valid till the date of final delivery at the Company location(s).
(b). . . . .
(c). . . . .
(d)10% after one year from the date of receipt of material at the customer site(s).”
4.The case of the appellant was that it had supplied all the equipments to the respondent by 2nd August, 2000 but the respondent committed default in making the stipulated payment amounting to Rs.49,99,338/-. The said sum according to the appellant remained unpaid. The respondent agreed to pay the sum provided the performance bank guarantee of 10% value was furnished. That is how bank guarantee as required by the respondent was furnished which was amended on 20th August, 2001. The case of the appellant was that even after furnishing the bank guarantee the respondent made a payment of only Rs. 30 lakhs on 22nd August, 2001 and false assertion of payment of Rs.11,99,335/- was made. It was also alleged that a sum of Rs. 8 lakhs still remained unpaid.
5.The appellants case before the trial court was that the respondent under no circumstances is entitled to invoke the bank guarantee without paying the balance amount of Rs.11,99,335/- or at least 8 lakhs which is admittedly liable to be paid. The bank guarantee had become inoperative as the condition precedent for its invocation was not complied with.
6.The case of the respondent was that the original contract value was Rs. 1,68,12,400/- out of which Rs. 1,60,12,400/-, i.e., 95% of the contract value stood paid and all the obligations pursuant to clause 15(a) to (c) of the contract have been fulfilled and it is only then the bank guarantee in question was furnished to the respondent upon payment of 30% of the contract value to the appellant. It was asserted that the bank guarantee furnished as it stands is an unconditional one.
7.The learned Single Judge after elaborate consideration of the matter found no merit in the injunction application filed by the appellant and accordingly dismissed the same. The Division Bench of the Delhi High Court affirmed the order of the learned Single Judge.
8.The learned senior counsel Sh.Kailash Vasdev mainly submitted that the High Court committed an error in interpreting Paragraph 4 of the amended bank guarantee in isolation and divorced from the terms and conditions of the contract dated May 10, 2000 entered between the parties. It was submitted that the High Court instead of relying upon the operative portion of the bank guarantee ought to have taken all the clauses which are material to arrive at a real intention of the parties. The submission was that the respondent did not make full payment of Rs. 49,99,335/- to the appellant and therefore the pre-condition embodied in the performance bank guarantee dated 10th August, 2001 as amended on 20th August, 2001 was never satisfied and as such the performance guarantee did not come into being at all, remained ineffective and unenforceable and therefore could not be invoked.
9.The learned counsel for the respondent submitted that after the amendment of the bank guarantee substituting clause 4 on 20th August, 2001, the conditional bank guarantee furnished by the appellant became an unconditional one.
10.We have carefully considered the rival submissions made during the course of hearing of the appeal.
11.The law relating to invocation of bank guarantees is by now well settled
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