1999 Supreme(Del) 83

High Court Of Delhi
DLF INDUSTRIES LIMITED - Appellant
Versus
HONG KONG AND SHANGHAI BANKING CORPORATION LIMITED - Respondent
Interim Application 1022 of 1998
Decided On : 02/01/1999

A variance clause in a bank guarantee allows the purchaser to vary the terms and conditions of the contract without the consent of the bank, and such variation does not discharge the principal debtor or the banks giving bank guarantees.

Headnote:

BANK GUARANTEE - ENCASHMENT - INJUNCTION - JURISDICTION - NOVATION OF CONTRACTS - VARIATION CLAUSE - LIABILITY OF SURETY - TERMS OF CONTRACT - FRAUD AND IRRETRIEVABLE INJURY - ARBITRATION - EQUITABLE OBLIGATIONS - PERFORMANCE GUARANTEE - ADVANCE PAYMENT GUARANTEE - IRRETRIEVABLE INJURY - LIQUIDATED DAMAGES.

Fact of the Case:

Petitioner, DLF Industries Ltd. (DLF), entered into a contract with respondent No. 3, M/s Atul Limited (Atul), for the expansion of a power project. The contract was split into three separate agreements for the purpose of performance guarantee and other guarantees. The project was to be commissioned by 15/3/1996, but the time was extended till 15/5/1997. The contract was not completed. Bank guarantees were given by Hongkong and Shanghai Banking Corporation Limited, Central Bank of India, and ABN Amro Bank for advance payment and performance guarantee clauses. DLF claimed that Atul could not make the payments in time, and meetings were held for novation of contracts in favor of State Bank of India (SBI). Atul approached DLF to accept the novation of the three contracts in favor of SBI. DLF accepted the novation and agreed to give fresh bank guarantees in favor of SBI. However, Atul ceased to be the contracting party as the purchaser of the equipment TG set, its design, and engineering services, etc. After the novation, there was no privity of contract between DLF and Atul. DLF claimed that the original contract could not be enforced anymore, and the bank guarantees furnished by Atul had become non-operational. Atul contended that the bank guarantees were irrevocable and unconditional and were payable on demand without any demur. SBI claimed that it was entitled to invoke the bank guarantee as Atul had ceased to be the purchaser in view of the novation of the contract.

Finding of the Court:

1. The Delhi courts had jurisdiction to hear the case as the bank guarantees were executed in Delhi, and none of the banks were bound by the agreement between DLF and Atul to have exclusive jurisdiction in Valsad, Gujarat. 2. There was no novation of the contracts in favor of SBI as the novation was not fully implemented by both parties, and the bank guarantees were never executed by DLF in favor of SBI. 3. The variance clauses in the bank guarantees allowed the purchaser to vary the terms and conditions of the contracts without the consent of the banks, and such variation did not discharge the principal debtor or the banks giving bank guarantees. 4. Atul could invoke the bank guarantees as the term "purchaser" covered both Atul and SBI, and the Memo of Understanding between the parties allowed Atul to invoke the bank guarantees. 5. The bank guarantees were not invoked strictly in terms of the bank guarantee as they did not specify the amount claimed and the reason for the claim, but this technicality would not defeat the claim of Atul in the absence of any allegation of fraud or irretrievable injury to DLF. 6. The encashment of the bank guarantee for Rs. 115 lakhs could not be stopped as there was no fraud or irretrievable injury alleged by DLF, and the delay in the installation of the T.G. set caused loss to Atul. 7. The encashment of the bank guarantee for Rs. 1.88 lakhs could be allowed as the rest of the amount had been adjusted by deductions from the bills.

Issues: 1. Whether the Delhi courts had jurisdiction to hear the case? 2. Whether there was a novation of the contracts in favor of SBI? 3. Whether the variance clauses in the bank guarantees discharged the principal debtor or the banks giving bank guarantees? 4. Whether Atul could invoke the bank guarantees? 5. Whether the bank guarantees were invoked strictly in terms of the bank guarantee? 6. Whether the encashment of the bank guarantee for Rs. 115 lakhs could be stopped? 7. Whether the encashment of the bank guarantee for Rs. 1.88 lakhs could be allowed?

Ratio Decidendi: 1. The territorial jurisdiction of a court is determined by the place where the cause of action arose and the agreement of the parties to confer exclusive jurisdiction on a particular court. 2. Novation of a contract requires the consent of all parties involved, and the original contract is discharged only when the new contract is fully implemented. 3. A variance clause in a bank guarantee allows the purchaser to vary the terms and conditions of the contract without the consent of the bank, and such variation does not discharge the principal debtor or the banks giving bank guarantees. 4. The term "purchaser" in a bank guarantee covers both the original purchaser and any subsequent purchaser who acquires the rights and obligations of the original purchaser. 5. A bank guarantee must be invoked in accordance with the terms of the guarantee, but technical deviations from the prescribed form may be overlooked in the absence of fraud or irretrievable injury to the party against whom the guarantee is invoked. 6. The encashment of a bank guarantee can be stopped only on the grounds of fraud or irretrievable injury to the party against whom the guarantee is invoked. 7. The encashment of a bank guarantee for a specific amount can be allowed if the beneficiary of the guarantee has suffered a loss to that extent, and there is no evidence of fraud or irretrievable injury to the party against whom the guarantee is invoked.

Final Decision: OMP 20/98 and IA 1022/98 were allowed, and the respondents were restrained from encashing the bank guarantee. OMP 21/98 and IA 1023/98 were decided accordingly, allowing the respondents to encash the bank guarantee only to the extent of Rs. 1.88 lakhs. OMP 22/98 and IA 1024/98 were dismissed.