Back
2012 Supreme(Cal) 894
CALCUTTA HIGH COURT
Indra Prasanna Mukerji, J.
Unit Construction Co. Pvt. Ltd. - Plaintiff
Versus
Municipal Corporation of Delhi & Ors. - Defendants
G.A. No. 2520 of 2012 with C.S. No. 301 of 2012
Decided on : October 3, 2012
Mr. A. Mitra, J. Chowdhury, Ms. R. Kajaria and S. Ghosh
Mr. J. K. Mitra and S. Sen
Mr. A. K. Routh and S. Pal Chowdhury.
A bank guarantee is akin to a letter of credit and on invocation, the terms have to be scrupulously observed.
Headnote:
BANK GUARANTEE - INVOCATION - SECTION 30 OF THE STAMP ACT, 1899 - The court held that a bank guarantee is akin to a letter of credit and on invocation, the terms have to be scrupulously observed. The court further held that the bank guarantee in question was not invoked according to its terms and therefore, the plaintiff was entitled to a modification of the interim order.
Fact of the Case:
The plaintiff, a construction company, had furnished a bank guarantee to the defendant, a municipal corporation, as security for a contract. The bank guarantee was invoked by the defendant on the ground that the plaintiff had failed to perform its obligations under the contract. The plaintiff challenged the invocation of the bank guarantee on the ground that it was not made in accordance with the terms of the guarantee.
Finding of the Court:
The court held that the bank guarantee was not invoked according to its terms and therefore, the plaintiff was entitled to a modification of the interim order.
Issues: Whether the bank guarantee was invoked according to its terms.
Ratio Decidendi: The court held that a bank guarantee is akin to a letter of credit and on invocation, the terms have to be scrupulously observed. The court further held that the bank guarantee in question was not invoked according to its terms and therefore, the plaintiff was entitled to a modification of the interim order.
Final Decision: The court modified the interim order by directing the plaintiff to renew the existing bank guarantee or furnish a fresh bank guarantee for a like amount, by 10th October 2012. The court further directed that the defendant would not take any further steps with regard to invocation of the above bank guarantee on the basis of the letter of invocation dated 30th August 2012.
The Court: The question now before the Court is whether the order of status quo regarding transfer of funds passed by me on 7th September, 2012 and continued from time to time should be further continued.
2. There is no dispute whatsoever that the bank guarantee in question furnished by State Bank of India to the defendant for Rs. 4,30,00,000/- at the instance of the plaintif was otherwise an unconditional bank guarantee payable without demur by the bank. But, nevertheless, it had two conditions, which had to be fulfilled on its invocation. A written demand had to be made by Municipal Corporation of Delhi. That written demand had to make a claim for the guaranteed amount stating that the above amount was due to the Municipal Corporation of Delhi under the concerned agreement.
3. Learned Counsel for the plaintiff, Mr. Abhrajit Mitra, attacks the invocation of the bank guarantee made by a letter dated 30th August, 2012, which is Annexure-EE at page 188 of the petition. That letter was written by the Executive Engineer [Project-III). Rohini Zone under the letter head of North Delhi Municipal Corporation. He says that North Delhi Municipal Corporation is not the same as Municipal Corporation of Delhi and, hence, the invocation is bad not being according to its terms.
4. Mr. Jayanta Kumar Mitra, learned senior advocate for the defendant Corporation submits that North Delhi Municipal Corporation is a division of Municipal Corporation of Delhi and there is nothing wrong in the invocation of the bank guarantee. Furthermore, it is submitted by him that the concerned agreement dated 16th December, 2009 being Annexure-E at page 48 of the agreement would show that the agreement was executed on behalf of Municipal Corporation of Delhi by the self-same Executive Engineer. The guarantee document would also show that it was addressed to him.
5. The next point raised by Mr. Abhrajit Mitra is that the letter of invocation did not mention that the amount claimed was due to this Corporation under the said agreem~nt. For this reason also, the invocation is bad.
6. Now I will discuss some authorities on the subject.
7. Hindustan Construction Co. Ltd. v. State of Bihar & Others, reported in (1999) 8 SCC 4361 was about a bank guarantee which was required to be invoked by the Chief Engineer but was invoked by the Executive Engineer. The Supreme Court held that the invocation was not according to the terms and that a bank guarantee should be invoked strictly according to its terms. This decision was followed by a decision of our Court in Omega Shelters Pvt. Ltd. v. Unit Construction Co. Pvt. Ltd. & Ors., reported in 2009 (4) CHN 22 (paragraphs 13,14 and 15). Both these decisions were cited by Mr. Abhrajit Mitra. He also cited United Commercial Bank v. Bank of India & Others reported in AIR 1981 SC 1426. The Supreme Court in paragraph 41 of the report approved a passage from the judgment of Lord Denning M. R. in Elian v. Matsas, (1966) 2 LI LR 495, which said that a bank guarantee was equivalent to a letter of credit. In that case, the Supreme Court was concerned with a letter of credit. It opined that the terms of the letter of credit should be strictly followed.
8. Mr. Jayanta Kumar Mitra, learned Senior Advocate cited Hindustan Copper Ltd. v. Rana Builders Ltd. reported in AIR 1999 Calcutta 229. It is a division Bench judgment of this Court. This judgment held that a distinction has to be drawn between compliance with the terms of a bank guarantee and those of a letter of credit. In the matter of invocation of a bank guarantee the Court was to see whether the bank and the beneficiary understood that the guarantee was being invoked according to the terms. Substantial compliance would do.
9. I find that this decision referred to almost all the leading decisions of the Supreme Court on the subject including United Commercial Bank v. Bank of India & Others, AIR 1981 SC 1426 (supra). I also note that the above passage, namely paragraph 41 of that jud
