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High Court Of Delhi
HARPARSHAD - Appellant
Versus
SUDARSHAN STEEL MILLS,PUNJAB NATIONAL BANK - Respondent
First Appeal Order (OS) 36 of 1979
Decided On : 08/01/1979
BANK GUARANTEE - ABSOLUTE LIABILITY - SUBJECT TO TERMS AND CONDITIONS - PERFORMANCE GUARANTEE - INTERPRETATION OF BANK GUARANTEE - DUTY OF BANK AND BENEFICIARY - TEMPORARY INJUNCTION.
Fact of the Case:
The appellant, M/s. Harprashad and Co. Ltd., invoked a bank guarantee furnished by the Punjab National Bank in favor of M/s. Sudershan Steel Rolling Mills, the plaintiff-respondent. The bank guarantee was issued to secure the performance of a contract between the appellant and the plaintiff-respondent. The appellant claimed that the plaintiff-respondent had failed to fulfill its obligations under the contract, resulting in the appellant having to pay an amount to the foreign buyer under a performance guarantee. The appellant sought to recover the amount from the bank under the bank guarantee. The plaintiff-respondent obtained a temporary injunction restraining the appellant from recovering the amount.
Finding of the Court:
The court held that the liability under the bank guarantee was not absolute and was subject to the terms and conditions of the guarantee. The court found that the appellant had not complied with the terms of the bank guarantee by failing to specify in the demand notice the particular obligation under the contract that the plaintiff-respondent had failed to fulfill. The court also found that the alleged defect in the shipping documents submitted by the plaintiff-respondent was insignificant and had been accepted by the foreign buyer and its bank. The court concluded that no cause of action had arisen in favor of the appellant against the plaintiff-respondent under the bank guarantee.
Issues: 1. Whether the liability under the bank guarantee was absolute or subject to terms and conditions? 2. Whether the appellant had complied with the terms of the bank guarantee? 3. Whether the alleged defect in the shipping documents submitted by the plaintiff-respondent was material?
Ratio Decidendi: 1. The court held that the liability under the bank guarantee was not absolute and was subject to the terms and conditions of the guarantee. The court relied on the language of the bank guarantee, which stated that the bank's liability would arise only if the plaintiff-respondent failed to fulfill its obligations under the contract in the judgment of the appellant. The court held that this language imposed a duty on the appellant to specify in the demand notice the particular obligation under the contract that the plaintiff-respondent had failed to fulfill. 2. The court found that the appellant had not complied with the terms of the bank guarantee by failing to specify in the demand notice the particular obligation under the contract that the plaintiff-respondent had failed to fulfill. The court held that this failure rendered the demand notice invalid and prevented the appellant from recovering the amount under the bank guarantee. 3. The court found that the alleged defect in the shipping documents submitted by the plaintiff-respondent was insignificant and had been accepted by the foreign buyer and its bank. The court held that this defect did not constitute a failure by the plaintiff-respondent to fulfill its obligations under the contract and did not give rise to a cause of action in favor of the appellant under the bank guarantee.
Final Decision: The court dismissed the appeal and upheld the temporary injunction restraining the appellant from recovering the amount under the bank guarantee.
( 1 ) GENERAL proposition do not solve concrete cases. Justice Holmes has said. While the law generally stated is that liability arising out of the unilateral contracts of commercial credits, such as letters of credit, bank guarantees and performance bonds is absolute, the intention of the parties as gathered from a reasonable construction of the language of the particular contract must ultimately govern the decision of the court as to the arising of the liability thereunder. The terms of a particular document may even constitute an exception to the general rule.
( 2 ) THE bank guarantee furnished by the Punjab National Bank (defendants-respondents 2 and 3) in favour of M/s. Harprashad and Co. Ltd. (appellant-defendant No. 1) contains the following material words :
"in case M/s. Sudershan Steel Rolling Mills fails in the judgment of M/s. Harprashad and Company Ltd. to carry out fulfil any of the obligations assumed under the said contract, we undertake to promptly pay the Punjab National Bank, Parliament Street, New Delhi, in favour of M/s. Harprashad and Company Ltd. or to their order merely upon receipt of first written notice, any amount up to Rs. 2,l3,6l8. 00 that may be claimed by them for any reason or purpose at their own discretion without it being necessary for M/s. Harprashad and Company Ltd. to issue a declaration or take action through administration legal, or any other channels, or to prove the default of M/s. Sudershan Steel Rolling Mills and/or the veracity of the affirmations made by them". When the appellant defendant No. 1 invoked the bank guarantee Sudershan Steel Rolling Mills (plaintiff respondent No. 1) filed Suit No. 933 of 1978 and obtained an order of temporary injunction against defendants I to 3, restraining defendant No. 1 from recovering the amount guaranteed by the bank, defendants 2 and 3 by the bank guarantee. This appeal by the appellant defendant No. 1 is against the order of the learned single Judge granting the temporary injunction.
( 3 ) MR. Anil Diwan, learned counsel for the appellant urged the following contentions in support of the appeal. 1. The contract REFERRED TO in the bank guarantee was the agreement between the plaintiff and defendant No. 1. dated 22nd June, 1977 under which the plaintiff was responsible for the preparation of documents, such as bills of lading under which the goods were to be exported to the foreign buyer. These documents were negotiated by the Punjab National Bank through the State Bank of India with the foreign buyer. This was done under reserve , because the bills of lading described the appellant as m/s. Harprashad and Company without the addition of the word limited after it. The bank told the appellant that if payment of documents is refused on account of any discrepency. " The sale proceeds of the goods received by the foreign buyer and credited to the account of the appellant would be recalled. The appellant in his judgment regarded this as a failure on the part of respondent No. 1 to carry out and fulfil any of the obligations assumed under the said contract. The appellant was, therefore, entitled to invoke the bank guarantee and recover the amount of it from the bank. 2. This bank guarantee, dated 14th July, 1976 was to be effective on execution of the contract between the appellant and defendant No. 1, which was the agreement later arrived at on 22nd June, 1977. Clause 7 of the agreement referring to the bank guarantee was as follows:
"that the exporter has furnished a performance guarantee of the value of the 10% of the goods to be supplied to foreign Buyer under the purchase contract , of the Punjab National Bank, Parliament Street, New Delhi. The said performance guarantee has been furnished by the Punjab National Bank against a counter-guarantee of the contractor. It is clearly agreed and understood that in the event of any amount being paid or payable under the performance guarantee of the exporter to the foreign Buyer
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