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High Court Of Calcutta
PRATIBHA BONNERJEA
M/S.BANERJEE AND BANERJEE - Appellant
Versus
HINDUSTHAN STEEL WORKS CONSTRUCTION LTD. - Respondent
Matter No. 1931 of 1985
Decided On : 05/08/1986
ARBITRATION - Bank guarantees - Enforcement - Conditions precedent - Quantification of damages - Special equity - Injunction.
Fact of the Case:
Petitioner, a contractor, entered into a contract with Respondent No. 1 for construction work. Seven bank guarantees were furnished by the petitioner in favor of Respondent No. 1, two for security deposit and five for securing mobilization advance made by Respondent No. 1 to the petitioner. Respondent No. 1 made written demands for enforcing all seven guarantees, alleging breach of contract by the petitioner and claiming unliquidated damages. The petitioner filed an application under Section 41 of the Arbitration Act for an order restraining Respondent No. 1 from enforcing the guarantees, arguing that Respondent No. 1 was bound to quantify the damages suffered or to be suffered on account of the breach of contract before enforcing the guarantees.
Finding of the Court:
The Court held that Respondent No. 1 was required to quantify the damages suffered or to be suffered on account of the breach of contract before enforcing the guarantees. The demand letters issued by Respondent No. 1 failed to specify the alleged damage or loss, and merely stated that the damage far exceeded the guaranteed amounts. This indicated that the alleged damage was unascertained and unliquidated, and Respondent No. 1 had not discharged its function as the sole judge to quantify the damages. The Court also found that Respondent No. 1 had suppressed the fact that it had already recovered a substantial amount from the petitioner's running bills, which gave rise to a special equity in favor of the petitioner to stop payment by the banks on the basis of the demand letters.
Issues: 1. Whether Respondent No. 1 was required to quantify the damages suffered or to be suffered on account of the breach of contract before enforcing the guarantees? 2. Whether the demand letters issued by Respondent No. 1 were in accordance with the terms of the guarantees? 3. Whether there was a special equity in favor of the petitioner to stop payment by the banks on the basis of the demand letters?
Ratio Decidendi: 1. The Court held that Respondent No. 1 was required to quantify the damages suffered or to be suffered on account of the breach of contract before enforcing the guarantees, as per the terms of the guarantees and the general principles of law. 2. The Court held that the demand letters issued by Respondent No. 1 were not in accordance with the terms of the guarantees, as they failed to specify the alleged damage or loss and merely stated that the damage far exceeded the guaranteed amounts. 3. The Court held that there was a special equity in favor of the petitioner to stop payment by the banks on the basis of the demand letters, due to the suppression of material facts by Respondent No. 1 and the attempt to recover the entire guaranteed amount without quantifying the damages.
Final Decision: The Court granted the petitioner's application and restrained Respondent No. 1 from enforcing the seven bank guarantees. The petitioner was directed to continue renewing the guarantees until the disposal of the arbitration proceedings.
( 1 ) ORDER:- This is an application under S. 41 of the Arbitration Act for an Order restraining the respondent No. 1 from enforcing seven Bank guarantees for a total sum of Rs. 11,50,000/- furnished by the Bank of Madura Limited and the Indian Overseas Bank the respondents Nos. 2 and 3 herein, on behalf of the petitioner in favour of the respondent No. 1. These bank guarantees were given pursuant to the express terms of the contract dated 12-5-84 entered into between the petitioner and the respondent No. 1 for construction works in the Farakka Super power Thermal Project at Farakka. Out of the seven Bank guarantees, two are in lieu of security deposit and five are for securing mobilisation advance made by the respondent No. 1 to the petitioner.
( 2 ) THE respondent No. 3 Indian Overseas Bank issued two guarantees particular whereof are set out below : 1) LG/013/8/84 dated 15-5-85 for rs. 1,50,000/ -. 2) LG/013/12/84 dated 26-9-84 for rs. 1,00,000/- and the rest of these five Bank guarantees were issued by the Bank of Madura Limited, the respondent No. 2 herein, which were as follows: 1) LG/g/s/2/84 dated 7-3-84 for rs. 4,00,000/- 2) LG/g/s/5/84 dated 15-3-84 for rs. 2,00,000/- 3) LG/g/s/5/84 dated 28-4-84 for rs. 1,00,000/- 4) LG/rr/us/5/84 dated 28-4-84 for rs. 1,00,000/- 3) LG/rr US/4/84 dated 28-4-84 for rs. 1,00,000/-
( 3 ) THE forms of two Guarantees for security deposit issued by the two Banks, were approved by the respondent No. 1. The essential terms necessary for enforcing these Bank guarantees are as follows : 1) The Bank undertakes to indemnify the respondent No. 1 to the extent of the amount specified in the guarantee against any loss or damage caused to or suffered by the respondent No. 1 by reason of any breach of the petitioner of any of the terms and conditions of the contract between the petitioner and the respondent No. 1. 2) The Banks further agree that the respondent No. 1 shall be the sole Judge as to whether the petitioner has committed any breach or breaches of the terms and conditions of the said contract and the extent of loss, damage, costs, charges and expenses caused to or suffered by or that may be caused to or suffered by the respondent No. 1 on account thereof and the decision of the respondent No. 1 on this point will be final and binding on the Banks.
( 4 ) THEREFORE, in the present case, for enforcement of the guarantees for security deposit, the respondent No. 1 will have to make a written demand stating that the petitioner has committed breach of any terms of the contract and the extent or the quantum of loss or damages suffered or to be suffered by the respondent No. 1 as a result thereof. The decision of the respondent No. 1 regarding the quantum of damage will not be questioned or challenged by the Banks. On fulfilment of these two conditions, the Bank will be bound to release the guaranteed amount.
( 5 ) SIMILARITY the five guarantees against mobilisation advance which were approved by the respondent No. 1, could be enforced only on following terms and conditions : 1) The Bank guarantees the due recovery of the money advanced by the respondent No. 1 to the petitioner by way of mobilisation advance. If the petitioner fails to utilise the said advance for the purposes of the contract or the respondent fails to fully recover the said sum with interest in accordance with the stipulation in the contract, the Bank undertakes to pay to the respondent No. 1 unconditionally, irrevocably and without demur to the extent of the amount guaranteed on demand by the respondent No. 1 for the loss or damage caused to it or suffered by the respondent No. 1 by being unable to recover in full the said sum with interest. The respondent No. 1 was the sole judge for deciding whether the petitioner had failed to utilise the advance or the extent or the quantum of loss suffered by it or its failure to recover the balance of advance and this decision would be final and binding on the ban
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