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1998 Supreme(Guj) 592
Gujarat High Court
Judgename :Y.B.BHATT
PREM CONDUCTORS PRIVATE LIMITED - Appellant
Versus
STATE BANK OF INDIA - Respondent
C.A. 10123 of 1998
Decided On : 11/06/1998
Headnote:Bank Guarantee - Realisation of - Principle of non-interference by Court is subject to justifiable exception - One such just exception is on ground of fraud which include act of invoking or realising the bank guarantee as in the case - Act of second respondent in the instant case amounts to fraud not only upon Bank but also upon plaintiff - Another just exception against realisation of bank guarantees is expressed in phrase `special equities which donot exist in favour of second respondent - To permit the invocation & realisation of bank guarantees on the part of the second defendant would tantamount to permitting him to take advantage of its own wrong - Court confirmed its ad interim relief dated 5.11.1998 subject to conditions specified.
Another aspect which is required to be considered is that the Supreme Court itself, in the aforesaid decisions as also in various other decisions, laid down a justifiable exception to the principle of non interference by the Courts in realisation of Bank guarantees. One such just exception is on the ground of fraud. However, the concept of fraud has many connotations and obviously there cannot be any omnibus definition of the said word. Furthermore, the concept of fraud is not limited to fraud committed by the beneficiary upon the bank in obtaining a Bank Guarantee in its favour, but would include the act of invoking or realising the Bank guarantee. In a given case, fraud could also provide justifiable exception to the principles laid down by the Supreme Court whereby the Bank guarantee itself had been obtained by fraud or on a gross misrepresentation of the facts. This is not to say that, on the facts of the case, it is so. In the instant case, I am merely considering the implications of the word fraud. What is more relevant on the facts and circumstances of the case is that since admittedly it was the second defendant who had failed to obtain the necessary Special Imprest Licence, it failed to procure the necessary raw material, it failed to supply such imported and/or any other raw material to the plaintiff, it would appear at least on a prima facie basis, that it was the second defendant who was responsible for non compliance of the terms of the contract between the parties.The conduct of the second defendant made it impossible for the plaintiff to comply with its obligation under the contract. Under such circumstances, the act of invocation of the Bank guarantee on the part of the second defendant, would in my opinion, amount to fraud not only upon the Bank, but also upon the plaintiff.
[Para 7]
This justification is expressed in the phrase special equities used by the Supreme Court in the decision of U.P. Co-oparative Federation Ltd., 1998 (1) SCC 174. As discussed hereinabove, I am of the opinion that this is a case, on the particular facts whereof, special equities constitute a relevant consideration. Since the second defendant as aforesaid has failed to import and/or supply the necessary raw material to the plaintiff, the plaintiff was in no position to manufacture the necessary goods for the performance of the contract in question. Under the circumstances, it apears to me that even if the plaintiff were found not to have performed its part of the contract (in failing to manufacture the goods in question), this failure was a direct consequence of the failure on the part of the second defendant to supply the raw material. On these facts and under these circumstances, I am of the opinion, that special equities cannot be ignored. To permit the invocation and realisation of the Bank guarantees on the part of the second defendant would tantamount to permitting the second defendant to take advantage of its own wrong, even if such wrong or lapse was inadvertent or beyond the control of the second defendant (as alleged).
[Para 8]
( 1 ) ). Heard the learned Counsel for the applicant (original plaintiff) and learned Counsel for the second opponent (original defendant No. 2 ). Hearing defendant No. 1 at this stage is not necessary since it has not taken any stand, either way, during the hearing of the injunction application.
( 2 ) ). As a result of the hearing and discussion, I am of the opinion that the ad interim relief granted by me by order dated 5/11/1998 requires to be confirmed. It is accordingly confirmed, subject to the further conditions that the appellant-plaintiff shall file an undertaking in the trial Court within two weeks from today to the effect that (i) in case the appellant-plaintiff loses in the suit, it shall immediately deposit in the trial Court a sum equivalent to 17% interest on Rs. 15. 00 lacs from the date of invocation of the bank guarantees by the second defendant upto the date of the decree, (ii) that it shall not oppose any application made by the second defendant for withdrawal of the same, and that (iii) such deposit shall be made before the exercise of the right of appeal from the decree in question. There shall be no extension of the said period.
( 3 ) ). The trial Court is also directed to expedite the hearing of the suit, and dispose of the same as expeditiously as possible and in any case not later than 28/02/1999. In case the trial Court is unable to dispose of the suit by the said date, the second defendant shall be at liberty to apply to the Court for vacating th6 present ad interim relief, and in case the trial Court comes to a conclusion (after hearing the parties) and records a finding that the non-disposal of the suit is on account of the plaintiff, the trial Court may permit the realisation of (he bank guarantees which are the subject-matter of the suit. In such case, the plaintiff shall stand absolved from the undertaking.
( 4 ) ). Although it is not necessary, I may state that before passing the present order i have heard the learned Counsel for hours, both on facts and on law. Learned counsel for respondent No. 2 original defendant No. 2 has in particular referred to the following decisions of the Supreme Court :- (i) U. P. State Sugar Corporation v. M/s. Sumac International Lt (k, reported in air 1997 SC 1644. (ii) Dwarikesh Sugar Industries Ltd. v. Prem Heay Engineering Works {p) Ltd. , reported in AIR 1997 SC 2477. (iii) U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. , reported in 1988 (1) SCC 174. I have perused the said decisions carefully and in that context. I am of the opinion that there cannot be any controversy as to the principles laid down by the Supreme court in the aforesaid decisions.
( 5 ) ). However, the said decisions have to be noted and applied looking to the facts and circumstances of the instant case.
( 6 ) ). First of all, it must be noted that the bank guarantees in question are not performance guarantees.
( 7 ) ). Another aspect to be noted is that the bank guarantees in question, although styled as unconditional guarantees, are in fact and in substance not really unconditional. As noted in the internal page 2 of the said guarantees, the bank has guaranteed payment of the designated amount in favour of" the beneficiary, namely, the second defendant, if the said supplier (meaning thereby the plaintiff") fails to comply with any of the three stipulated conditions. A. s part of the very same para. these conditions are set out. The first condition stipulates that the bank will make payment in case the supplier (the plaintiff) fails to make proper utilisation of raw material provided/ imported under the contract. In this context, it must be noted that it is an admitted position that the second defendant, who seeks to invoke the bank guarantees, was under an obligation under "the contract between the parties to import the necessary raw material under a Special Imp rest Licence, and to supply such imported material to the plaintiff". Admittedly
