COMMERCIAL BANK OF CEYLON PLC VS. ACE CONTAINERS (PVT) LTD

COMMERCIAL BANK OF CEYLON PLC
VS.
ACE CONTAINERS (PVT) LTD

SUPREME COURT
CHANDRA EKANAYAKE, J
SISIRA DE ABREW, J
UPALY ABEYRATHNE. J
SC APPEAL 142/2014
SCHCLA NO. 41/2014
HC (CIVIL) NO. 329/2013 MR
OCTOBER 23, 2014
DECEMBER 4, 2014
JANUARY 20, 2015

Civil Procedure Code Section 18 - Addition of a necessary party? Performance guarantee/ performance bond - Legal implications? Difference between a guarantee and a demand guarantee? Uniform Rules for Demand Guarantees by the ICC - Wider Construction.

The Plaintiff entered into a Contract with L company for the surfacing of Respondent's container yard, by the contract the Respondent agreed to pay

an advance payment equivalent to 30% of the estimated sum to be paid to L Company on submission of a Bank guarantee, L company furnished an advance payment guarantee from the Appellant Bank. The Responded preferred a claim for the full value of the Bank guarantee (Rs. 22,080,000.00) to the Appellant Bank on the basis that the L Company has failed to return the advance paid them in full Upon the claim the Appellant forwarded a pay order for a sum of Rs. 1,371,655.19 on the basis that the remaining balance of advance is Rs. 1,192,743,64 (with taxes). The Respondent whilst contending that the Appellant was not entitled to rely on the payment certificate set out a claim for a sum of Rs. 14,485,325.75 Upon (he receipt of summons, the Appellant made an application seeking an order to add L company as party Defendant on the basis that the Respondent has failed to join L Company as a Defendant. The Commercial High Court refused the application.

Held:

(1) A Party can be added as a necessary party to a pending action in order to enable the court effectually and completely to adjudicate upon and settle all the questions involved in that action.

(2) The clauses in the guarantee (A3) precisely specifies the parties in the transaction and their liabilities towards each other and the procedure how to discharge the liabilities cast upon them. The L Company has no rote to play in the recovery procedure in the circumstances the L Company need not to be added as a necessary party.

(3) A bank which issues a performance guarantee must honour that guarantee according to its terms. lt is not concerned in the least with the relations between the supplier and the customer nor with the question whether the supplier has performed his contracted obligation or not, nor with the question whether the supplier is in default or not The Bank must pay according to its guarantee, on demand if so stipulated, without proof of conditions. The only exception is when there is a clear fraud of which the Bank has notice.

(4) It is only in exceptional circumstances that courts will interfere with the machinery of obligations assumed by the Banks. They are the life blood of international commerce. Courts will leave the merchants to settle their disputes under the contracts by litigation. The Courts are not concerned with the difficulties to enforce such claims These are risks which merchants take.

(5) If Court interferes with a Bank's undertaking it will undermine its greatest asset - its reputation for financial and contractual probity.

(6) The essential difference between a guarantee in the strict sense and a demand guarantee is that liability of a surety is secondary, whereas the liability of the issuer of a demand guarantee is primary. A surety's liability is co-extensive with that of the principal debtor and, if default by the principal debtor is disputed by The surety, it must be proved by the creditor Neither proposition applies to a demand guarantee The principle which underlies demand guarantee is that each contract is autonomous. The autonomy principle is embodied in article 2b of the Uniform Rules for demand guarantees of the ICC.

Per Upaly Aberathne, J.

L Company cannot be a party t

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