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High Court Of Calcutta
A. K. SEN, SUDHIR RANJAN ROY
JECT CONSTRUCTION CO LTD - Appellant
Versus
G.RANJAN - Respondent
C. O. 1817 Of 1984
Decided On : 09/19/1984
BANK GUARANTEE - ENFORCEMENT - BANK GUARANTEE - INDEPENDENT TRANSACTION - ARBITRATION - JURISDICTION OF COURT - INJUNCTION - LOCUS STANDI OF THIRD PARTY: 1. A bank guarantee is a conditional guarantee and not an absolute one, and its enforcement is subject to fulfillment of the conditions prescribed. 2. The conditions for enforcement of a bank guarantee may be independent of each other, and fulfillment of any one of them will entitle the beneficiary to enforce the guarantee. 3. A bank guarantee is an independent transaction and can be enforced on its own terms, irrespective of any other claims and disputes between the parties. 4. The question of whether the beneficiary is lawfully entitled to enforce the bank guarantee is not a matter for arbitration, as the guarantee stands independently of any other transaction. 5. A court has jurisdiction to restrain the enforcement of a bank guarantee only if the beneficiary has not fulfilled the conditions for its enforcement or if the guarantor has a valid defense to the claim. 6. A third party who is not a party to the bank guarantee does not have locus standi to challenge its enforcement.
Fact of the Case:
The petitioner, a government company, entered into a contract with the opposite party for the construction of a housing complex. The petitioner issued a letter of intent and a provisional work order, which contained the terms and conditions of the contract. The opposite party failed to adhere to the work schedule, and the petitioner rescinded the contract. The petitioner demanded the balance of the mobilization advance from the opposite party, but the opposite party filed a suit for arbitration and obtained an injunction restraining the petitioner from enforcing the bank guarantee. The petitioner filed a revisional application challenging the injunction.
Finding of the Court:
The court held that the bank guarantee was a conditional guarantee and that the petitioner was entitled to enforce it because the opposite party had failed to utilize the mobilization advance for the purpose of the contract. The court also held that the question of whether the petitioner was lawfully entitled to enforce the bank guarantee was not a matter for arbitration and that the third party did not have locus standi to challenge its enforcement. The court set aside the injunction.
Issues: 1. Whether the bank guarantee was a conditional or absolute guarantee? 2. Whether the petitioner was entitled to enforce the bank guarantee? 3. Whether the question of whether the petitioner was lawfully entitled to enforce the bank guarantee was a matter for arbitration? 4. Whether the third party had locus standi to challenge the enforcement of the bank guarantee?
Ratio Decidendi: 1. The court held that the bank guarantee was a conditional guarantee because it was subject to the fulfillment of two conditions: (1) failure of the contractor to utilize the mobilization advance for the purpose of the contract, and (2) the mobilization advance not being fully recovered by the petitioner. 2. The court held that the petitioner was entitled to enforce the bank guarantee because the opposite party had failed to utilize the mobilization advance for the purpose of the contract. 3. The court held that the question of whether the petitioner was lawfully entitled to enforce the bank guarantee was not a matter for arbitration because the bank guarantee stood independently of any other transaction. 4. The court held that the third party did not have locus standi to challenge the enforcement of the bank guarantee because it was not a party to the bank guarantee.
Final Decision: The court set aside the injunction restraining the petitioner from enforcing the bank guarantee.
( 1 ) THE above revisional applications arise out of three different orders of injunction issued at the instance of the opposite parties, restraining the petitioner Corporation from enforcing the Bank guarantees executed in its favour. They involve identical questions of fact and law. This common judgment will, therefore, dispose of all the three cases. It will be sufficient if we refer to the materials facts of C. O. No. 1817 of 1984 only.
( 2 ) THE defendant-petitioner, the National Projects Construction Corporation Ltd. which is a Government Company within the meaning of Companies Act, 1956 entered into a contract with Coal India Ltd. for setting up a Housing Complex at Dankuni, Hooghly. On or about 23rd February, 1982, the petitioner-Corporation invited tender for construction of different buildings at Dankuni Coal Complex and after negotiations an offer was made by the plaintiff-opposite party, M/s. G. Ranjan, a firm, by their letter dated 22. 4. 82. A bilateral agreement was executed thereafter by and between the petitioner and the opposite party wherein it was provided interalia that a mobilisation advance to the extent of 5% of the value of the contract will be paid to the opposite party-contractor by the petitioner against production of Bank guarantee from a nationalised bank. It was agreed that an interest of 18. 5% shall be charged against the mobilisation advance and the advance including interest shall be recovered on pro-rata basis from the running bills of the opposite party and the recovery will be completed before 80% of the work is executed.
( 3 ) A letter of intent was issued by the petitioner on May 12, 1982 and on May 7, 1983 a provisional work order was issued, containing the terms and conditions including special terms and conditions of the contract.
( 4 ) THE construction work of the buildings under the work order had to be completed within a specified time and the opposite party agreed to complete the said construction work within the time schedule as mentioned in the work order.
( 5 ) IN terms of the agreement, a Bank guarantee was furnished in May 1982 by the Bank of Baroda, Tollygunge Branch, to the tune of Rs. 3,50,000/- in favour of the petitioner and the petitioner made an advance of the said sum to the opposite party by way of mobilisation advance. It was provided interalia in the Bank guarantee that if the opposite party-contractor failed to utilise the mobilisation advance for the purpose of the contract and/or the said advance of Rs. 3,50,000/- together with interest thereon was not fully recovered by the petitioner-Corporation the Bank would unconditionally undertake to pay to the petitioner-Corporation on demand and without demur the said sum of Rs. 3,50,000/- with interest at the rate of 10% per annum.
( 6 ) THE opposite party-contractor having failed to adhere to the work schedule as agreed, the petitioner had no other alternative but to rescind the contract as, otherwise, the petitioner stood the risk of being penalised by the Coal India Ltd for having failed to complete the construction work within the scheduled time. The contract between the petitioner and the opposite party was rescinded by a notice dated the 24th September, 1983. By another letter dated 18th/19th October, 1983 the petitioner directed the opposite party to deposit the balance of Rs. 2,65,400/- with interest @ 18. 5% per annum which was lying with the opposite party as mobilisation advance, within 7 days from the receipt of the letter, failing which the petitioner would ask the Bank of Baroda, Tollygunge Branch, Calcutta, for making payment of the said sum against the Bank guarantee.
( 7 ) ON receipt of the said letter, the opposite party filed a suit, being Title Suit No. 254 of 1983 before the learned Subordinate Judge, 3rd Court, Alipore under section 20 of the Arbitration Act for filing of the Arbitration agreement and for reference of the dispute between the parties relating
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