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Karnataka High Court
Kudremukh Iron Ore Co.Ltd. - Appellant
Versus
Korula Rubber Co.Pvt.Ltd. - Respondent
Decided On : 07-11-86
BANK GUARANTEE - INTERPRETATION - CONTRACT OF INDEMNITY - UNCONDITIONAL OR IRREVOCABLE PROMISE TO PAY - DEMAND - SPECIFICITY - ARBITRATION PENDING - ENFORCEABILITY OF GUARANTEE - CONDITIONS PRECEDENT - JURISDICTION OF COURT TO DIRECT BANK TO DEPOSIT MONEY IN COURT.
Fact of the Case:
The petitioner, Korula Rubber Company Private Ltd., entered into a contract with the respondent No. 1, Kudremukh Iron Ore Company Ltd., for rubber-lining of steel pipes and fittings. The petitioner was required to submit a security deposit and give a guarantee for workmanship, defective materials, and life guarantee. The respondent No. 1 complained about some of the rubber peeling off at the ends of the pipes and fittings. The petitioner sent its representative to Kudremukh site for final assessment of the damaged pipes and for planning regular repairs. The repair work was going on when the respondent No. 1 threatened to carry out the risk purchase action. The petitioner informed the respondent No. 1 that it is doing everything possible to carry out the work of repairs; but respondent No. 1 was really preventing the petitioner from carrying out repairs and therefore it called upon the respondent No. 1 to desist from so doing failing which the petitioner would take legal action. The petitioner referred the dispute to the arbitrators. Thereafter, the petitioner filed an application restraining the respondent No. 1 from encashing the bank guarantees and restraining the bank from paying cash to the respondent No. 1.
Finding of the Court:
1. The court distinguished between letters of credit, contracts of guarantee, and contracts of indemnity, emphasizing their different characteristics and legal implications. 2. The court analyzed the specific terms and conditions of the bank guarantees in question, finding that they did not contain an irrevocable or unconditional promise to pay on demand. 3. The court held that the guarantees amounted to contracts of indemnity, requiring the beneficiary to show loss or damage caused to it before enforcing the guarantee. 4. The court found that no specific demand had been made by the revision petitioner calling upon the Bank to pay, and that the alleged demands were vague and did not comply with the requirements of the guarantee. 5. The court held that the revision petitioner had not complied with the condition requiring a suit or action to enforce the claim to be filed within six months from the expiry of the guarantee. 6. The court dismissed the revision petition, upholding the temporary injunction granted by the lower court, but clarified that the reasons for the dismissal were different from those given by the lower court.
Issues: 1. Whether the bank guarantees in question constituted irrevocable or unconditional promises to pay on demand. 2. Whether the guarantees amounted to contracts of indemnity, requiring the beneficiary to show loss or damage caused to it before enforcing the guarantee. 3. Whether a specific demand had been made by the revision petitioner calling upon the Bank to pay. 4. Whether the revision petitioner had complied with the condition requiring a suit or action to enforce the claim to be filed within six months from the expiry of the guarantee.
Ratio Decidendi: 1. The enforceability of a bank guarantee depends on the specific terms and conditions of the guarantee itself, and courts should interpret each document with reference to its own terms. 2. In the absence of an irrevocable or unconditional promise to pay on demand, the beneficiary of a bank guarantee must show loss or damage caused to it before enforcing the guarantee. 3. A demand for payment under a bank guarantee must be specific, showing the breach and the approximate loss or damage caused to the beneficiary. 4. Compliance with any conditions or time limits specified in the bank guarantee is essential for its enforceability.
Final Decision: The revision petition was dismissed, upholding the temporary injunction granted by the lower court. The court clarified that the reasons for the dismissal were different from those given by the lower court.
( 1 ) THIS is a revision by the respondent No. 1 against the order dated 25th March, 1981, passed by the IV Additional City Civil Judge, Metropolitan Area, Bangalore City, in Arbitration Petition No. 12/1981, allowing I. A. I. and thereby restraining the first respondent from realising the bank guarantees until the disposal of the main arbitration petition.
( 2 ) THE parties are referred to with reference to their position in the trial Court.
( 3 ) THE petitioner Korula Rubber Company Private Ltd. , a private limited company, having its registered office at Bombay, is carrying on business of manufacturing and selling rubber goods and rubber-lining of steel pipes and fittings. The respondent No. 1 Kudremukh Iron Ore Company Ltd. , is a Government of India undertaking and is engaged in the business of iron ore mining at Kudremukh. The respondent No. 2 United Commercial Bank is a nationalised bank. The Engineers India Ltd. , is the authorised inspection agent nominated by the respondent No. 1 and Metchem in respect of the work of rubber-lining of pipes and fittings entrusted to the petitioner under a contract. The respondent No. 2 bank has executed five bank guarantees in favour of the respondent No. 1.
( 4 ) IN May, 1978, the respondent No. 1 floated a tender for rubber-lining of steel pipes and fittings. The said tender also invited offers for the supply of steel fabricated items. The petitioner offered to do the work of rubber-lining of pipes and fittings and supply the other materials and to do the work of grooving and machining etc. , at the rates and on the terms and conditions mentioned in the letter dated 22-6-1978. Several negotiations went on between the petitioner and the respondent No. 1. The petitioner submitted its final offer in August, 1978, and it was accepted by the first respondent by its Purchase Order dated 28th September, 1978. As per the said order, the petitioner was to attend to the work of rubber-lining of pipes and fittings of approximately 8100 sq. metres and for a total value of Rs. 27,78,431/ -. The said contract was subject to some conditions and specifications mentioned therein. The terms of payment were : i) 20% of the order value to be paid as advance against a Bank Guarantee as per the pro forma of the respondent No. 1; ii) 70% against despatch of documents and Inspection Certificates; and iii) 10% within 60 days of receipt of materials and joint verification at site.
( 5 ) THE petitioner was required to submit security deposit to the extent of 10% and give guarantee for workmanship, for defective materials and life guarantee against total erosion of rubber-lining taking place to an extent which exposed the materials during the life guarantee. The said order provided for inspection of materials before despatch in accordance with the technical specifications mentioned in the contract. The relevant clauses are :"8. Security Deposit : You are requested to submit security deposit by way of Bank Guarantee to the extent of 10% value of order as per clause 3 of the General Conditions of Contract within 15 days. The Bank guarantee should be as per our pro forma from any of the banks approved by us and should be valid up to the expiry of the guarantee period. " "9. Inspection : (a) The inspection shall be carried out prior to despatch by M/s. Canadian Metchem Consultants Ltd. , 25, Mahatma Gandhi Road, Bangalore or their representative. (b) The inspection procedure/programme should be settled with the Inspection authority immediately on receipt of order and guarantee/test certificate and other data necessary as asked by M/s. Canadian Metchem Consultants Ltd. , should be furnished. ""10 (A) : Workmanship Guarantee : The rubber-lining shall be guaranteed against defective material and workmanship for a period of 12 months from the date of commissioning or June 1981, whichever is earlier. This workmanship guarantee shall mean the rubber compound totally coming off from the metal because of
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