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1983 Supreme(Del) 270
High Court Of Delhi
KERALA STATE CONSTRUCTION CORPORATION LIMITED - Appellant
Versus
NATIONAL BUILDINGS CONSTRUCTION CORPORATION LIMITED - Respondent
Decided On : 09/21/1983
Bank guarantees are unconditional and can be enforced by the beneficiary without the need for determination of any amount by any person other than the beneficiary, while government guarantees are conditional and cannot be enforced by the beneficiary without determination of the amount due to the beneficiary from the principal debtor.
Headnote:
ARBITRATION - GUARANTEE - ENFORCEMENT - BANK GUARANTEE - UNCONDITIONAL - RIGHT TO ENFORCE - GOVERNMENT GUARANTEE - CONDITIONAL - DETERMINATION OF AMOUNT DUE - NECESSARY - INJUNCTION - BALANCE OF CONVENIENCE.
Fact of the Case:
Plaintiff, a construction company, entered into sub-contracts with the defendant for the construction of various projects in Libya. The sub-contracts contained arbitration clauses. Disputes arose between the parties, and the plaintiff filed suits under Section 20 of the Arbitration Act, seeking the appointment of an arbitrator and reference of the disputes. The defendant had obtained various guarantees from the Government of Kerala and the State Bank of Travancore on behalf of the plaintiff. The plaintiff filed applications under Section 41 of the Arbitration Act read with Order 39 Rule 1 and Section 151 of the Code of Civil Procedure, seeking to restrain the defendant from enforcing the guarantees.
Finding of the Court:
The court held that the bank guarantees were unconditional and could be enforced by the defendant without the need for determination of any amount by any person other than the defendant. The court further held that the government guarantees were conditional and could not be enforced by the defendant without determination of the amount due to the defendant from the plaintiff.
Issues: 1. Whether the defendant could enforce the bank guarantees without the need for determination of any amount by any person other than the defendant. 2. Whether the defendant could enforce the government guarantees without determination of the amount due to the defendant from the plaintiff.
Ratio Decidendi: 1. The bank guarantees were unconditional and contained a clause stating that the bank's liability was restricted to an amount not exceeding the specified amount. The court held that this clause made the bank's liability clear and unambiguous, and that the defendant had a right to claim payment from the bank according to the procedure prescribed in the guarantee. 2. The government guarantees were conditional and contained clauses stating that the government's liability was limited to the amount due to the defendant from the plaintiff. The court held that these clauses made the government's liability dependent on the determination of the amount due to the defendant from the plaintiff, and that the defendant could not enforce the guarantees without such determination.
Final Decision: The court modified the ex-parte orders dated 1st April, 1982, vacating the injunction order relating to the four bank guarantees and confirming the injunction order relating to the three government guarantees.
( 1 ) THIS judgment will dispose of four applications under Section 41 of the Arbitration Act read with Order 39 Rule I and Section 151 of the Code of Civil Procedure for restraining the defendant from enforcing the guarantees furnished by the plaintiff. The plaintiff in the four Suits No. 211-A, 212-A, 213-A and 214-A of 1982 under Section Bread with Section 20 of the Arbitration Act prays for filing of the arbitration agreement in Court and for appointment of an arbitrator.
( 2 ) BRIEFLY the relevant facts are that National Building construction Corporation Limited, New Delhi (defendant) had entered into three contracts with the Public Housing Corporation on 2nd May, 1977, 3rd February, 1979 and 7th April, 1979 for the construction of (i) 1000 houses, (ii) school buildings, and (iii) public utility services in Beniwalid, Libya. On 17th October, 1977 the defendant entered into a sub-contract with plaintiff Vs. Kerala State Construction Corporation Limited, Trivandrum, a Government of Kerala Undertaking, by which the plaintiff agreed to construct 235 houses out of said 1000 houses (Suit No. 212-A/82 ). On 27th July, 1979 three sub-contracts were also executed between the defendant and the plaintiff by which the plaintiff agreed to construct (i) additional 100 houses, (Suit No. 211-A/82), (ii) three school buildings (Suit No. 213-A/82), and (iii) public utility services (Suit No. 214-A/82) in Beniwalid. The terms and conditions of all the four sub-contracts are almost similar. There is an arbitration clause in all the four sub-contracts. It provides that if any dispute or difference arises between the parlies in regard to the construction work or the contract, the same shall be referred to arbitration. The disputes arose between the partics. The plaintiff therefore, filed the said four suits and these applications.
( 3 ) UNDER the said four agreements the defendant had agreed to pay to the plaintiff a sum equal to the 20% of the contract value as mobilisation advance against furnishing of Government guarantee for the equivalent amount. Such advance was to be deducted at the rate of 20% from each running bill of the plaintiff. Further the plaintiff had agreed to furnish bank guarantee to the tune of 5% of the contract value for the satisfactory performance of the contracts. The defendant had also agreed to make special advance to the plaintiff on its furnishing 100% guarantee.
( 4 ) THE following guarantees were issued on behalf of the plaintiff in favour of the defendant relating to the four agreements between the parties :
(1) Letter of guarantee for Rs. 1. 65 crores on account of mobilisation advance relating to construction of 235 houses issued by the Government of Kerala on 15th November, 1977 (Suit No. 212-A/82 ). (2) Letter of guarantee dated 18th October, 1979 for Rs. 1. 52 crores on account of mobilisation advance pertaining to three agreements dated 27th July, 1979 regarding construction of 100 houses, 350 three school buildings and public utility services (Suits No. 211-A, 213-Aand 214-A of 1982 ). (3) Guarantee for Rs. 82. 50 lakhs on account of special advance relating to 235 houses issued by the Governor of Kerala on 17th October, 1978 (suit No. 212-A/82 ). (4) Guarantee dated 19th October, 1979 issued by the State Bank of Travancore undertaking to pay Rs. 14,84,000. 00 against any loss or damage relating to the agreement for construction of 100 houses (Suit No. 211-A of 1982 ). (5) Guarantee dated 19th October, 1979 issued by the State Bank of Travancore undertaking to pay Rs. 10,53,000. 00 against any loss or damage relating to agreement for the construction of three school buildings (Suit No. 213-A/82 ). (6) Guarantee dated 19th October, 1979 issued by the State Bank of Travancore undertaking to pay Rs. 12,63,000. 00 against any loss or damage relating to agreement for the construction, of public utility services (Suit No. 214-A/82 ). (7) Guarantee dated 14th July, 1980 issued by the State Bank o
