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1981 Supreme(Del) 59
High Court Of Delhi
PESTICIDES INDIA - Appellant
Versus
STATE CHEMICALS AND PHARMACEUTICAL CORPORATION OF INDIA LIMITED - Respondent
Interim Application 2369 of 1980
Decided On : 02/13/1981
B.P.AGRAWAL, R.K.Joshi
Performance guarantees are autonomous and independent contracts, irrevocable in character, and the obligations arising under the bank guarantees are independent of the obligations arising out of the contract between the parties.
Headnote:
PERFORMANCE GUARANTEE - BANK GUARANTEE - INTERPRETATION - EFFECT - INDEPENDENT CONTRACT - ABSOLUTE OBLIGATION TO PAY - DISPUTE BETWEEN PARTIES IRRELEVANT - INJUNCTION AGAINST BANK RESTRAINING PAYMENT DISCHARGED.
Fact of the Case:
Pesticides India applied to the State Chemicals and Pharmaceuticals Corporation of India Ltd. (Corporation) for the purchase of Carbaryl Technical. The Corporation agreed to supply 40 metric tonnes at a specified price. Pesticides made an earnest money payment through two bank guarantees issued by the State Bank of Bikaner and Jaipur (Bank). Due to certain circumstances, the Corporation could only supply 11 metric tonnes on a high seas basis, which Pesticides accepted and paid for. The Corporation offered to deliver the remaining 29 metric tonnes on an ex-godown basis, which Pesticides refused, claiming that the Corporation was liable to deliver the balance quantity also on a high seas basis. The Corporation invoked the bank guarantees, and Pesticides sought an injunction against the Bank from making payment to the Corporation.
Finding of the Court:
The court held that the bank guarantees were independent of the underlying contract between Pesticides and the Corporation. The bank's obligation to pay arose upon the happening of a specified event, which was the demand by the Corporation's Chief Marketing Manager. The court found that the Chief Marketing Manager had made such a demand, and therefore the bank was bound to honor its undertaking to pay. The court also held that the performance guarantee was an autonomous and independent contract, irrevocable in character, and the obligations arising under the bank guarantees were independent of the obligations arising out of the contract between the parties.
Issues: 1. Whether the bank guarantees were independent of the underlying contract between Pesticides and the Corporation? 2. Whether the bank's obligation to pay arose upon the happening of a specified event? 3. Whether the Chief Marketing Manager had made a demand for payment under the bank guarantees? 4. Whether the performance guarantee was an autonomous and independent contract, irrevocable in character?
Ratio Decidendi: 1. The court held that the bank guarantees were independent of the underlying contract between Pesticides and the Corporation, as evidenced by the terms of the guarantees, which provided that the bank's obligation to pay was unconditional and irrevocable and that the bank would pay without protest or demur and without reference to Pesticides. 2. The court held that the bank's obligation to pay arose upon the happening of a specified event, which was the demand by the Corporation's Chief Marketing Manager. The court found that the Chief Marketing Manager had made such a demand, and therefore the bank was bound to honor its undertaking to pay. 3. The court held that the performance guarantee was an autonomous and independent contract, irrevocable in character, and the obligations arising under the bank guarantees were independent of the obligations arising out of the contract between the parties.
Final Decision: The court discharged the injunction order restraining the bank from making payment to the Corporation and dismissed the petition filed by Pesticides. The court also appointed an arbitrator to resolve the dispute between Pesticides and the Corporation.
( 1 ) THE petitioner has made an application under sec. 20 of the Arbitration Act for reference of the disputes between the parties to arbitration. With this petition he has made another application under sec. 41 read with Schedule 2 of the Indian Arbitration Act and O. 39 rules I and 2 of the Code of Civil Procedure. This order will govern them both.
( 2 ) THE salient facts are simple. The petitioner. Pesticides India, wanted to purchase raw material known as Carbaryl Technical through the canalised agency of State Chemicals and Pharmaceuticals Corporation of India Ltd. , (Corporation), respondent No. 1. Pesticides made an application in the prescribed form. They entered into an agreement with the Corporation. They gave earnest money to them in the form of two bank guarantees Nos. 16 and 17 of 1979 issued on 14th April, 1979 by the State Bank of Bikaner and Jaipur (hereinafter called the, bank), each one being for an amount of Rs. 1,44,000.
( 3 ) IN their application dated 6th June, 1979 Pesticides stated that they require 40 metric tonnes of Carbaryl Technical which may be supplied to them. "the Corporation imports this raw material from foreign countries and supplies them to Indian parties after registering their requirements. As regards the mode of delivery the terms provide that the "mode of delivery of raw material namely, high seas/ex-tank/ex-Jetty/exgodown will be decided upon by Civil Procedure Code depending on the circumstances of each case and the applicant cannot insist on a particular mode of delivery".
( 4 ) ON 6th September, 1979, the Corporation offered to supply 40 metric tonnes Carbaryl Technical to Pesticides at the pries, of Rs. 34,468 per metric tonne,. This was to be. done from the vessel State of Punjab which was expected to arrive on 12th September, 1979. Pesticides were not able to make full payment of the allotted quantity. They asked the Corporation to give them the facility of Bill Marketing Scheme and allow them 90 days credit in the sum of Rs. 14 lakhs. The Corporation agreed to this. But before the formalities could be completed by Pesticides the vessel State of Punjab arrived in Bombay Port on 16th October, 1979. Pesticides completed the formalities on 21st October, 1979. The quantity of 40 metric tonnes which the vessel State of Punjab had brought and which was originally allotted to Pesticides had to be sold to some other party. This is the case of the Corporation.
( 5 ) IT is not in dispute that II metric tonnes were supplied by the Corporation to Pesticides from another vessel Export Commerce which arrived afterwards. This was supplied on high seas basis. It was accepted by Pesticides. They paid for 11 metric tonnes and took delivery.
( 6 ) THE dispute arose regarding the balance quantity of 29 metric tonnes. The Corporation offered the balance quantity on ex-godown basis. The price of ex-godown is quite high. It is over Rs. 63,000 per metric tonne. Pesticides refused to take the balance quantity at this high price. They said that the Corporation was liable to deliver the balance quantity also on the high seas basis as had been done in the case of 11 metric tonnes. The Corporation took the stand on the term of the agreement which provided that an applicant cannot insist on a particular mode of delivery. The mode of delivery was to be decided by the Corporation. The upshot is that Pesticides refused to take delivery of 29 metric tonnes on ex-godown basis which was offered to them by the Corporation.
( 7 ) ON 7th July, 1980, the Chief Marketing Manager of the Corporation addressed a letter to the bank in these terms : "sub: Bank Guarantee No. (i) 16179 and 0017179 dated 14th April 1979 for Rs. 1,44. 000 each A[c M/[s Pesticides India, udai Sagar Road, Udaipur-1 (RAJ.) Dear Sir, Please refer to your above mentioned Bank Guarantee issued on behalf of M[s. Pesticides India, Udai Sagar Road, Udaipur-I (Raj ). We are to inform you that the party failed to lift the quantity of 2
