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High Court Of Calcutta
Prabir Kumar Majumdar
SCRAP MOULD WILL - Appellant
Versus
METAL SCRAP TRADE CORPORATION LTD - Respondent
Matter 1 Of 1988
Decided On : 03/11/1989
BANKING AND FINANCE - BANK GUARANTEE - ENFORCEMENT - CONDITIONS - INJUNCTION RESTRAINING ENFORCEMENT - PRINCIPLES - APPLICABILITY - IRREVOCABLE COMMITMENT - FRAUD - IRRETRIEVABLE INJUSTICE.
Fact of the Case:
The petitioner, Scrap Mould Will, entered into a contract with the respondent, Metal Scrap Trade Corporation Limited, for the supply of shredded scrap. As per the contract, the petitioner was required to furnish a performance bond from an approved bank for US dollars 1,82,280 being 5% of the value of the contract. The petitioner furnished a bank guarantee issued by the Standard Chartered Bank for the said amount. The respondent invoked the bank guarantee on the ground that the petitioner had failed to perform under the contract. The petitioner filed an application under Section 20 of the Arbitration Act, 1940, for filing of the arbitration agreement contained in the contract and also filed an application under Section 41 of the Arbitration Act for an injunction restraining the enforcement of the bank guarantee.
Finding of the Court:
The court held that the bank guarantee is a contract between the bank and the beneficiary, independent of any underlying contract between the parties. The only exceptions to such rule are cases of fraud or irretrievable injustice. The court found that there was no case of fraud or irretrievable injustice in the present case and that the invocation of the bank guarantee by the beneficiary was made in accordance with the terms of the bank guarantee. Therefore, the court dismissed the petitioner's application for injunction.
Issues: 1. Whether the bank guarantee can be enforced upon fulfilment of the conditions that the petitioner has committed breach of any of the terms of the contract or performance thereof as a result of which a loss or damage has been caused to, or suffered by, the respondent. 2. Whether the invocation of the bank guarantee by the respondent was illegal or wrongful. 3. Whether the bank guarantee is part of an international commercial transaction in the form of a performance guarantee wherein an irrevocable commitment in the form of a bank guarantee has been issued in favour of the beneficiary by the bank.
Ratio Decidendi: 1. The court held that the bank guarantee is a contract between the bank and the beneficiary, independent of any underlying contract between the parties. The only exceptions to such rule are cases of fraud or irretrievable injustice. 2. The court found that there was no case of fraud or irretrievable injustice in the present case and that the invocation of the bank guarantee by the beneficiary was made in accordance with the terms of the bank guarantee. 3. The court held that the bank guarantee is part of an international commercial transaction in the form of a performance guarantee wherein an irrevocable commitment in the form of a bank guarantee has been issued in favour of the beneficiary by the bank.
Final Decision: The court dismissed the petitioner's application for injunction.
( 1 ) THE petitioner, Scrap Mould Will, entered into a contract with the respondent, Metal Scrap Trade Corporation Limited, on or about June 10, 1987, for supply of 28,000 MT plus/ minus shredded scrap at the seller's option. The scrap was intended to be purchased by the respondent as the canalising agent for distribution to various ultimate consumers in the country.
( 2 ) ONE of the terms and conditions of the said contract between the parties required the petitioner to furnish a performance bond from an approved bank for US dollars 1,82,280 being 5% of the value of the contract.
( 3 ) IN compliance with the aforesaid requirement, the petitioner furnished a bank guarantee issued by the Standard Chartered Bank, 4, Netaji Subhas Road, Calcutta, for US dollars 1,82,280.
( 4 ) BY the said bank guarantee, the said Standard Chartered Bank guaranteed that they would indemnify the respondent and/or keep the respondent indemnified against any loss or damage that may be caused to, or suffered by, the respondent by reason of any breach of contract by the petitioner of any of the terms and conditions of the said contract or performance thereof.
( 5 ) THE relevant portion of the said bank guarantee is as follows :"against contract No. FT/11/ms/c-24/7-88, dated June 10, 1987, covering 28,000 MT 50/0 melting scrap of carbon steel-shredded scrap conforming to US ISIS code No. 210/211 (hereinafter called 'the said contract') entered into between Metal Scrap Trade Corporation Ltd. , Calcutta (hereinafter called 'the purchaser') and Scrap Mould Will (hereinafter called 'the seller'), this is to certify that, at the request of the seller, we, Standard Chartered Bank, 4, Netaji Subhas Road, Calcutta 1, are holding in trust in favour of the purchaser, Metal Scrap Trade Corporation Ltd. , Calcutta, the amount of USD 1,82,280 (U. S. dollars one hundred eighty-two thousand two hundred eighty only) to indemnify and keep indemnified the purchaser, Metal Scrap Trade Corporation Ltd. , Calcutta, against any loss or damage that may be caused to, or suffered by, the purchaser, Metal Scrap Trade Corporation Ltd. , Calcutta, by reason of any breach of contract by the seller of any of the terms and conditions of the said contract and/or the performance thereof, we agree that the decision of the purchaser, Metal Scrap Trade Corporation Ltd. , Calcutta, whether any breach of any of the terms and conditions of the said contract and/ or in the performance thereof has been committed by the seller and the amount of loss or damage that has been caused or suffered shall be final and binding on us and the amount of the said loss or damage shall be paid by us forthwith on demand to Metal Scrap Trade Corporation Ltd. , Calcutta. "
( 6 ) BY a letter dated December 19, 1987, the respondent invoked the said bank guarantee dated July 1, 1987. The said letter is in the following terms :"metal Scrap Trade Corporation Ltd. , 225f, Acharya J. C. Bose Road, Calcutta 20. Ref. No. ACT/ft/ms/c-24/87-88/p-4 Dated 19th December, 1987. The Manager, Corporate Banking, Standard Chartered Bank, 4, Netaji Subhas Road, Calcutta. Dear Sir, sub : Performance guarantee bond No. 852/301/87, dated July 1, 1987, for USD 1,82,280 executed by you in our favour on behalf of Scrap Mould Will, Bahrain, claim for encashment thereof due to non-performance by the seller. In reference to the above, we hereby invoke the above guarantee for encashment for value of USD 1,82,280 (United States dollars one lakh eighty-two thousand two hundred eighty) as the party has failed to perform under the contract. You are directed to issue a draft in our favour in equivalent Indian rupees immediately on receipt of this notice for encashment. Thanking you, yours faithfully, For Metal Scrap Trade Corporation Ltd. (Sd) S. Sinha Ray Dy. Manager (FTA) 19-12-1987. "
( 7 ) A further letter of demand by the respondent dated January 2, 1988, was also addressed to the said Standard Chartered Bank.
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