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1981 Supreme(Del) 107
High Court Of Delhi
DAMODAR PAINTS PRIVATE LIMITED - Appellant
Versus
INDIAN OIL CORPORATION - Respondent
Interim Application 3744 of 1980Q
Decided On : 03/16/1981
A.K.GANGULY, V.N.KALRA
An irrevocable bank guarantee is independent of the underlying contract between the parties. The bank is absolutely bound to make payment on demand without recourse to court.
Headnote:
BANK GUARANTEE - IRREVOCABLE - ENCASHMENT - STAY - DISPUTE REFERRED TO ARBITRATION - NO STAY - BANK LIABLE TO PAY ON DEMAND - NO RECOURSE TO COURT.
Fact of the Case:
Petitioner, Damodar Paints Pvt. Ltd., entered into an agreement to supply specialized coal tar to Indian Oil Corporation Ltd. (Corporation). Petitioner furnished an irrevocable performance bank guarantee from State Bank of Hyderabad (Bank) as per the contract's General Purchase Conditions. Disputes arose between the parties and were referred to arbitration. Petitioner sought a permanent injunction restraining the Corporation from encashing the bank guarantee till the award was made.
Finding of the Court:
The court held that the bank guarantee was irrevocable and the Bank was liable to pay on demand without recourse to court. The contract between the Corporation and the Bank was independent and distinct. The court dismissed the petition and vacated the temporary injunction granted earlier.
Issues: Whether the demand made by the Corporation on the Bank for encashing the bank guarantee is liable to be stayed till an award is made in the arbitration proceedings.
Ratio Decidendi: The court relied on the legal proposition settled in the Division Bench judgment in Premier Tyres Limited v. The State Trading Corporation, which held that a performance guarantee stands on a similar footing to an irrevocable letter of credit. The bank must honor the guarantee according to its terms without proof or conditions, except in cases of clear fraud.
Final Decision: The petition was dismissed, and the temporary injunction granted earlier was vacated. The parties were left to bear their own costs.
( 1 ) THE petitioner, Damodar Paints Pvt. Ltd. , entered into an agreement to supply specialised coal tar to M/s. Indian Oil Corporation Ltd. , (hereinafter the Corporation), respondent No. I herein.
( 2 ) THE petitioner in compliance with the requirements of Clause 15 of the General Purchase Conditions of the said coatract fulrnished to the Corporation a performance bank guarantee issued by the State Bank of Hyderabad, respondent No. 2 herein.
( 3 ) IT is the admitted case of the parties that the bank guarantee furnished is irrevocable. The Bank on demand had undertaken to pay to the Corporation any amount specified in the notice of demand upto an agrregate limit of Rs. 1,80,000. The bank guarantee provides that it will not be determined or affected by any dispute or disputes between the petitioner and the Corporation and further under that guarantee the bank has waived all rights to deny its liability towards the Corporation even if the petitioner had, at any time, required the bank to stop payment
( 4 ) IT is the petitioner s case that certain disputes have arisen between the parties and the same having been referred to an Arbitrator under the terms of the arbitration clause contained in the General Purchase Conditions of the Contract, the demand made by the Corporation upon the Bank for encashing the bank guarantee is liable to be stayed till an award is mde.
( 5 ) BY the present petition the petitioner is seeking permanent injunction restraining the Corporation from making any demand for payment or from encashing or enforcing the bank guarantee furnished by the bank, respondent No. 2.
( 6 ) WHILE admitting the petition to a regular hearing Luthra issued a temporary injunction in terms of the prayer made in I. A. No. 3744 of 1980, restraining the Corporation from encashing or enforcing the said bank guarantee
( 7 ) IDENTICAL relief is sought by the petitioner in the main petition, O. M. P. No. 153 of 1980, as well as in I. A. No. 3744 of 1980. Therefore, this order disposes of both.
( 8 ) IN support of the contention that disputes having been referred to an Arbitrator, the demand made by the Corporation on the Bank is liable to be stayed till the award is made, learned counsel for the petitioner relied upon an unreported Division Bench judgment of this Court in F. A. O. (08)45 of 1978 (MI s. Scooter India Ltd. v. M/s. R. D. Verma and Co.) decided on 15th November, 1978 (1 ). That was a first appeal directed against the order granting temporary injunction in the suit filed by the plaintiff-respondent, restraining the defendant-appellant, Scooter India Ltd. , from encashing the bank guarantee furnished by Andhra Bank Limited. The plaintiff in that suit was to supply some cranes to M/s. Scooter India Limited. Under the contract a performance guarantee with regard to those cranes was furnished by the Andhra Bank Limited on behalf of the plaintiff. The cranes were supplied but the defendant complained that they were not as per specifications. In the suit filed by M/s. R. D. Verma three reliefs were claimed (i) that the contract has been duly performed, (ii) therefore, the remainder of the price is payable by the Scooters India Limited to R. D. verma and Company and (iii) meanwhile the bank guarantee should not be realized by Scooter India Limited. One of the issues framed in that suit by the Single Judge was, "whether the cranes supplied by the plaintiff are in accordance with the specifications ?"
( 9 ) BECAUSE of the above issue, the Division Bench comprising V. S. Deshpande, C. J. and N. N. Goswamy J. , upheld the order of temporary injunction restraining the defendant from encashing the bank guarantee. It was observed :
"while we agree with the general principle that the Bank guarantee should be able to be realised without recourse to court of law and without any condition, we cannot ignore the special circumstances of this case cited above. It is only because all the three parties are before the learne
