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High Court Of Calcutta
A. K. SEN, SUDHIR RANJAN ROY
NATIONAL PROJECT CONSTRUCTION CORPN.LTD. - Appellant
Versus
G.RANJAN - Respondent
C. O. 1817 Of 1984
Decided On : 09/19/1984
BANK GUARANTEE - ENFORCEMENT - CONDITIONS - INDEPENDENT TRANSACTION - ARBITRATION - JURISDICTION OF COURT - INJUNCTION - LOCUS STANDI OF THIRD PARTY: 1. A Bank guarantee is an independent transaction and can be enforced on its own terms irrespective of any other consideration, provided the conditions laid down therein are fulfilled. 2. The liability under a Bank guarantee is absolute and unconditional once the terms and conditions are fulfilled, and is wholly independent of the disputes proposed to be raised. 3. A Court should normally refrain from granting injunction to restrain the performance of contractual obligations arising out of a letter of credit or a Bank guarantee between one Bank and another. 4. A third party to a Bank guarantee executed by a Bank in favour of a petitioner does not have locus standi to challenge the enforcement of the guarantee.
Fact of the Case:
The petitioner, a Government Company, entered into a contract with Coal India Ltd. for setting up a Housing Complex at Dankuni, Hooghly. The opposite party, a firm, was awarded the contract for construction of different buildings. A Bank guarantee was furnished by the Bank of Baroda in favour of the petitioner to secure the mobilisation advance paid to the opposite party. The petitioner rescinded the contract due to the opposite party's failure to adhere to the work schedule. The petitioner directed the opposite party to deposit the balance sum of the mobilisation advance, failing which the petitioner would ask the Bank to make payment against the Bank guarantee. The opposite party filed a suit for filing of the Arbitration agreement and for reference of the dispute to an Arbitrator. During the pendency of the suit, the opposite party obtained an order of injunction restraining the petitioner from enforcing the Bank guarantee.
Finding of the Court:
The Court held that: 1. The Bank guarantee was a conditional guarantee and could be enforced only on fulfilment of the conditions prescribed. 2. The conditions for enforcement of the Bank guarantee were independent of each other and fulfilment of any one of the conditions would entitle the petitioner to enforce the guarantee. 3. The petitioner was entitled to enforce the Bank guarantee as the opposite party had failed to utilise the mobilisation advance for the purpose of the contract and the entire amount of the mobilisation advance had not been recovered from the running bills of the opposite party. 4. The Bank guarantee stood independent of the other connected transactions and its enforcement could not be the subject-matter for arbitration. 5. The learned Subordinate Judge acted in improper exercise of jurisdiction in restraining the petitioner from enforcing the Bank guarantee by an order of injunction.
Issues: 1. Whether the Bank guarantee was an absolute or conditional guarantee? 2. Whether the conditions for enforcement of the Bank guarantee were fulfilled? 3. Whether the Bank guarantee could be enforced independently of the other connected transactions? 4. Whether the learned Subordinate Judge acted properly in granting an injunction restraining the petitioner from enforcing the Bank guarantee?
Ratio Decidendi: 1. The Court held that the Bank guarantee was a conditional guarantee and could be enforced only on fulfilment of the conditions prescribed. The conditions for enforcement of the Bank guarantee were independent of each other and fulfilment of any one of the conditions would entitle the petitioner to enforce the guarantee. 2. The Court held that the petitioner was entitled to enforce the Bank guarantee as the opposite party had failed to utilise the mobilisation advance for the purpose of the contract and the entire amount of the mobilisation advance had not been recovered from the running bills of the opposite party. 3. The Court held that the Bank guarantee stood independent of the other connected transactions and its enforcement could not be the subject-matter for arbitration. 4. The Court held that the learned Subordinate Judge acted in improper exercise of jurisdiction in restraining the petitioner from enforcing the Bank guarantee by an order of injunction.
Final Decision: The Court set aside the impugned order of injunction passed by the learned Subordinate Judge on May 11, 1984.
( 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 material 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 bi-lateral agreement was executed thereafter by and between the petitioner and the opposite party wherein it was provided inter alia 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, inter alia, 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 Sept. 1983. By another letter dated 18th/19th Oct. 1983 the petitioner directed the opposite party to deposit the balance sum 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 S. 20 of the Arbitration Act for filing of the Arbitration agreement and for reference of the dispute between the parties relating to and arising out of
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