Radiant Engineering Industries Pvt. Ltd. Vs Vulcan Engineers Ltd.

Nikhil Nath Bhattacharjee, J.@mdashIn this appeal preferred by the Plaintiff impugning an interlocutory order No. 26 May 29, 1992, passed by dated learned Assistant District Judge, Second Court, Alipore, in Title Suit No. 32 of 1991, the only question that arises for consideration is how far a Bank guarantee in the wake of alleged novation of the contract and the averred fraud and suppression of material fact is enforceable at the instance of the beneficiary.

2. On the, factual score, it appears that the Calcutta based Plaintiff company entered into an agreement with Defendant No. 1, a Bombay based engineering company for supply of conveyor components valued at Rs. 22,40,000 (Rupees twenty two lac forty thousand) to be effected between 1st week of December 1989 and 3rd week of May 1990 on an expressed stipulation that the Defendant company would pay 5 % of the total supply value as advance against Plaintiff company''s submission of a Bank guarantee for the same. Accordingly, the Plaintiff received Rs. 1,31,310 (Rupees one lac thirty one thousand three hundred ten) as advance after furnishing the Bank guarantee dated March 17, 1989, for the said amount through the Defendant No. 2, the State Bank of India, Ballygunge Branch, in favour of the Defendant No. 1. The Bank guarantee is set out below:

STATE BANK OF INDIA

BALLYGUNGE BRANCH

Off Veer Savarkar Marg

Guarantee No. 35/SIB/38

Amount of Guarantee: Rs. 1,31,310/-.

Guarantee cover from: 17.3,89 to 31.3.90

Last date for lodgment of claim: 30.6.90

This Guarantee is issued subject to the condition that the liability of the Bank under this Guarantee is limited to a maximum, of Rs. 1,31,310 (Rupees one lakh thirty-one thousand three hundred ten only) and the Guarantee shall remain in full force upto 3,1st March, 1990 and, cannot be invoked otherwise than by a written demand or claim under this Guarantee served on the Bank on or before 30.6.1990. In consideration of the purchaser having placed an order on the Contractor vide order No. VLK/8807-3/C/RBK dated 3.3.1989 (hereinafter referred to Contract'') and having agreed to pay as advance the sum of Rs. 1,31,310 (Rupees one lack thirty one thousand three hundred and ten only) being 5 % of the contracted value of the order on production of Bank Guarantee for an equal amount, the Bank do hereby undertake to pay to you an amount not exceeding Rs. 1,31,310 (Rupees one lac thirty one thousand three hundred ten only) claimed by you irrespective of whether any loss "or damage has been caused to or suffered by you by reason of any default or defaults on the part of. the Contractor in the due supply of any plant, machinery of equipment or carrying out any works under the said contract in respect of which such advance payments as aforesaid is td be made by you to the Contractor or otherwise in the observance and performance of any of the terms and conditions relating thereto in accordance with the true intent and meaning thereof and in the vent of any defaults on the part of the Contractor as aforesaid we shall forthwith on demand without protest or demur pay to you any sum or/ sums not exceeding in total the said sum of Rs. 1,31,310 (Rupees one lac thirty one thousand three hundred ten only) as may be claimed by you to be due from the Contractor by way of refund of such advance payment or any portion or portions thereof.

We, the State Bank of India, undertake not to revoke this Guarantee during its currency except with the previous consent of the purchaser in writing'' and agree that any change in the Constitution of the said Contractor or the said Bank shall not discharge our liability hereunder. Notwithstanding anything to the contrary we agree that your decision as to whether the Contractor has made any such default or defaults and the amount or amounts to which you are entitled by reason thereof shall be binding on us and we shall not be entitled to ask you to establish your claim or claims under this Guarantee but shall pay the same forthwith without objection or excuse. We undertake to pay to you any money as demanded notwithstanding any dispute or disputes raised by the Contractor in any suit or proceeding pending before any Court or Tribunal or Arbitrators relating thereto our liability under these presents being absolute and unequivocal.

The payment so made by us under this Guarantee shall be valid discharge of our liability for payment hereunder. We, State Bank of India, Ballygunge, further agree with the purchaser that the purchaser shall haye the fullest liberty without our consent and without affecting in any manner our obligations hereunder ''to vary any of the terms and conditions of the said Contract or to extend time of performance by the said Contractor from time to time or to postpone for any time or from time to time of the powers exercisable by the Purchaser against the said Contractor and to forebear or enforce any of the terms and conditions from our liability by reasons of any such variation or forbearance act or omission on the part of the Purchaser or any indulgency by the Purchaser to the said Contractor or by any such matter or things whatsoever which under the law relating to sureties would but for this provision have effect; of $o relieving us.

NOTWITHSTANDING anything hereinbefore contained, our liability under this Guarantee is restricted to Rs. 1,31,310 (Rupees one lac thirty one thousand three hundred ten only) shall remain in force until 31.3.90 unless an action to enforce a claim under the Guarantee'' is filed against us within 30.6.90, all rights under the Guarantee shall be forfeited and we shall be relieved and discharged from all liabilities hereunder.

We lastly undertake not to revoke this Guarantee during it currency except with the previous consent of the Beneficiary in writing.

The Bank has the power to issue this Guarantee under the State Bank of India Act and the undersigned being the Manager (SJB) of the Bank has full power to sign this Guarantee on behalf of the Bank.

Seal & Signature of the Bank

For State Bank of India

Sd/-

Manager (SIB) Ballygunge

60-A Gariahat Road

Calcutta-700 016

Place : Calcutta

Dated: 17 Mar. 1989

3. It is both parties'' case that various amendments and modifications of the technical terms and specifications of the ordered goods were effected by the Defendant No. 1 with, the consent of and acceptance by the Plaintiff that resulted in both qualitative and quantitative changes in the original purchase order. The total value of the ordered goods were enhanced from Rs. 22,48,000 to Rs. 56,12,000 (Rupees Fifty six lac twelve thousand). Instead of supply of conveyor component the contract now envisages supply of entire conveyor components the contract now envisages supply of entire conveyor system. There is no denying that for the subsequent increase in the value of the purchase order, the Plaintiff furnished indemnity bonds for due performance of the new purchase order, and in course of time, the Plaintiff effected a part delivery which was also accepted by the Defendant No. 1. Again, admittedly, various differences of views and attempts to impose new terms and conditions arose between the parties resulting in conflict of interests between them and ultimately by a telex message dated March 7, 1991, to the Plaintiff, the Defendant No. 1 cancelled the contract allegedly as suggested by you (Plaintiff) earlier. It is the Plaintiff''s case that by changing the scope of the earlier contract, the designs, period of performance, terms of'' payment etc. and asking for indemnity bonds which were not part and parcel of the original contract, the Defendant No. 1 created an impression that the earlier contract and the purported Bank Guarantee, already furnished by the Plaintiff, had become extinguished and substituted by the new purchase order and the new indemnity bond and in such circumstances the Bank Guarantee which was of the nature of an indemnity bond became invalid and unenforceable in law. Plaintiff alleges that the Defendant No. 1 fraudulently and with motive did not intimate the Bank, Defendant No. 2, about the changes in the original contract and about entering into the new contract and by wrongfully and unilaterally terminating the contract without prior notice to the Plaintiff, the Defendant ho. 1 caused huge loss to the Plaintiff. The Plaintiff came to know that the Defendant No. 1 had communicated with the Bank, Defendant No. 2, intimating that they would enforce the Bank Guarantee. This, according to the Plaintiff, amounts to fraud. Plaintiff, therefore, had no other alternative but to file the Title-Suit wherein a petition under p. 39 rr. 1 & 2 read with Section 151 of the CPC was moved for an order of temporary injunction restraining the Defendant No. 1 from claiming any amount on the basis of the Bank Guarantee and/or from receiving any amount from the Bank in respect thereof. Also an order was prayed for restraining the Defendant No. 2 from dealing, encashing or remitting any amount in relation to or arising out of the said Guarantee. And an ad interim, order in terms of the aforesaid prayers was also sought for. The learned Assistant District Judge after hearing the parties passed an ad interim order directing that status quo be maintained. Against that order, Defendant No. 1 moved a Revisional Application before this Court and in CO. No. 4083/1991 the Division Bench after hearing both sides directed the Court below to hear out the application for temporary injunction and modified the injunction order to the extent that the cheque which had been drawn rjy the Bank should not be handed over to ". Defendant No. 1 till the injunction application is disposed of. Thereafter the learned Assistant, District Judge upon hearing the matter rejected Plaintiffs application for temporary injunction. And hence is this Miscellaneous Appeal preferred by the Plaintiff, having been aggrieved'' and dissatisfied with the said order.

4. On the other hand the case of the Respondent is that as the contract has failed altogether, they were entitled to invoke the. Bank Guarantee obtained against advancement of 5% of the total purchase price. It is their case that by a letter dated October 18, 199i, which was received by the Bank on November 7, 1991, the Defendant No. jL invoked the said Guarantee which have been expressly validated by the Plaintiff upto March 31, 1991. The Respondent herein also state that they are lawfully entitled to invoke the said Bank Guarantee particularly because they are only seeking to recover the initial advance made by them to the Plaintiff. and also because the Appellant has failed to perform its obligation under the contract.

5. Mr. Roychowdhury For the Appellant built up his argument from three different aspects. First, about novation of original contract. He meticulously look us through the averments of the pleadings in order to highlight how the scope, price, specification and. period of performance of the original contract were changed, completely changed by the new purchase order where there is no provision for any advance of the 5 % or otherwise of the total purchase price and which introduced an indemnity bond which was not part and parcel of the original purchase order dated June 13, 1989, so much so that the original contract was totally extinguished and in its place came out a new contract evidenced by the new purchase order dated April 20, 1990. In this connection he referred to Cheshire and Fifoot''s Law of Contract (p. 504, 10th ed.) which runs as follows:

III. Original contract extinguished but replaced by fresh agreement. Thirdly, the intention of the parties may be to extinguish the former written contract, but to substitute for it a new and self-contained agreement. The result of such a bargain is that the prior written contract is rescinded, but the substituted agreement, if made orally, is unenforceable for want of written evidence.

A difficult question of contruction that may arise in. this context is to discover what the parties intended to accomplish by their later oral agreement. Did they intend to extinguish the original written contract altogether and to substitute a new contract in its place, or did they intend merely to'' vary the contract effectively extinguishing the original contract but is itself unenforceable. If on the otherhand, the object of the parties was to modify their exiting rights and obligations, the latter contract is entirely destitute of its effect. In order to decide this question, the terms of the oral agreement must be examined ; and if it is found that they are so far inconsistent with the original contract as to destroy its substance, though perhaps the shadow remains, the inference is that the parties intended to abrogate their former contract by the substitution of a new and self-contained agreement.

6. He then referred to the decision in Union of India v. Kishori Lal Gupta A.l.R. 1953 Cal. 642 '' where it was decided that Section 62 of the Contract Act (Novation) does not apply when there has been a breach of the original contract and that it depends on the construction of the new contract as to whether the original contract has been rescinded for breach thereof. His contention was that by abrogation of the original contract the Bank Guarantee which was part and parcel thereof must be treated to have fallen through and therefore Plaintiff''s petition for temporary injunction for restraining the Defendant from enforcing the Bank Guarantee should have been allowed by the Court below injuncting the Defendant No. 1 from encashing the Bank Guarantee.

7. Mr. Roychowdhury''s next branch of argument was that when the original contract was abrogated giving rise to a new contract, the Defendant No. 1 by failing to intimate the Bank, Defendant No. 2, about the same committed fraud upon the Plaintiff. In this connection he relied on the definition of fraud as appears in Black''s Law Dictionary (p. 594) which runs as follows:

An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed which deceives and is intended to deceive another so that he shall act upon it to his legal injury. Any kind of artifice employed by one person to deceive another.

8. Mr. Roychowdhury pointed out that fraudulent motive or design is not capable of direct proof in most cases and that it can only be inferred as was laid down by the Supreme Court in the case Yeshwant Deorao v. Walchand Ramchand AIR (38)

9. Admitting that as a general rule Court should not interfere with an irrevocable Bank Guarantee, he laid emphasis on exceptional cases in which Court may have to intervene to prevent irretrievable injustice being committed, as also where special equities require the Court to do so. In this connection he referred to a Division Bench judgment of this Court in Asim Ganguly v. Indian Oxygen Ltd. AIR 1989 Cat. 150. wherein this Court observed that irrevocable commitment of obligation of Banks in the form of a Bank Guarantee must be honoured free from interference by the Court though it may not be treated as so sacrosanct or sacred as the holy book and may be touched and pricked where there is any serious disputes and good prima facie case and fraud and special equities in -the form of preventing irretrievable injustice between the parties.

10. He further referred to a Single Bench decision of the Madras High Court in Arul Murugan Traders Vs. Rashtriya Chemicals and Fertilisers Ltd., Bombay and Another, '' wherein the learned Judge observed that judicial pronouncements of different Courts including the Supreme Court of India make it quite clear that there is no absolute rule prohibiting grant of injunction against enforcement of a Bank Guarantee and that in exceptional cases C ourts will interfere with the machinery of irrevocable obligation assumed by Banks and that the Plaintiff must establish a prima facie case, meaning thereby that thate is a bona fide contention between the parties or serious question to be tried, and further the balance of convenience is also a relevant factor. If the element of fraud exists, the decision points out, the Courts must step in to prevent one of the parties to the contract from deriving unjust enrichment by invoking the Bank Guarantee. In this case officers of the Respondent company committed fraud upon the Appellant and to save their skin the compnay sought to enforce the Bank Guarantee and the Court perhaps rightly interfered in the matter.

11. Mr. Roychowdhury also placed reliance (in a Single Bench decision of the Bombay High Court the case in Dai-ichi Karkaria Private Ltd., Bombay Vs. Oil and Natural Gas Commission Bombay and another, where it was decided in the facts of the case that exception to the general rule of refusing to grant injunction was made out warranting injunction in favour of the Plaintiff as there had been fraud, economic duress and commercial pressure. In that case the Defendant had agreed to make ad hoc payment of certain amount to the Plaintiff provided the Plaintiff would undertake to repay the said amount on receipt of refund of customs duty. The undertaking was given in the form of a Bank Guarantee which provided that the Bank irrevocably and unconditionally agreed to pay the said amount without any demur merely on demand from the Defendant. The terms of the bargain were renegotiated and the Plaintiff was compelled to accept the new terms, i.e. the stipulation in the Bank Guarantee providing the liability of the Bank to pay the amount to the Defendant even if refund of customs duty was not received by the Plaintiff. Extensions of the Bank Guarantee were also given by the Plaintiff prima facie out of fear and apprehension that the Defendant might enforce the guarantee immediately and jeopardise the economic viability of the Plaintiff. The Defendant also induced the Plaintiff to the belief that the Defendant would be able to persuade the Government to grant refund of customs duty. In the action that followed the Plaintiff impugned that part of the Bank Guarantee as it required the Plaintiff to pay the amount irrespective of non-receipt of refund of customs duty, as also invocation of the Bank Guarantee on the ground of economic duress, fraud, coercion and special equities of the situation. The learned Judge held that the Plaintiff had made out a strong prima facie case establishing that the Defendant had procured the consent of the Plaintiff to the stipulation in the Bank Guarantee for its invocation irrespective of non-receipt of the amount of refund of customs duty by economic duress and fraud and that as such the special equities of the situation warranted grant of an injunction in favour of the Plaintiff as sought for.

12. Mr. Roychowdhury also placed reliance on another Single Bench decision of the Bombay High Court in Kirloskar Pneumatic Co. Ltd. v. N.T.P.C. AIR 1987 Horn. 308 where a Bank Guarantee was furnished in support of a bid as required by notice inviting tenders. The bid was withdrawn before acceptance. The respondent sought to enforce the Bank Guarantee. It was held that it was a fit case for issuing temporary injunction restraining the Bank from making payment as a clear prima facie case was made out that the bid could be revoked before acceptance, that the Respondent did not act to their detriment relying on the bid and that the bid could only be invoked if the contract was to be awarded and further that balance of convenience was clearly in favour of granting injunction to prevent a wrong being committed.

13. On the other hand, Mr. Tarun Roy, Advocate for the Respondent, submitted that though he is in complete agreement with Mr. Roychowdhury in the propositions of law sought to be made out by him, he has, however, reservation about whether the cited decisions have any manner of application upon the facts of the present case. He submitted that there was no novation and that only amendments ad modifications of the original contract were made from time to time a''t the level of mutual agreement as would be evident from the communications between the parties, particularly Defendant No. l''s intimation No. YLK 8807-03/C/124 RBK dated April 20, 1990, which records as follows:

With reference to the discussion with your Mr. Mehta on 10.2.90, we are pleased to amend our purchase order as follows.

14. Mr. Mehta presumably means Mr. Benod Kumar Mehta, the Finance Manager of the Appellant company, vide supplementary affidavit dated February 26, 1993, affirmed by him.

15. He further referred to Annex. F to the stay petition which is the telex message dated March 7, 1991 that runs as follows:

Reference our orders No.... dated 13.6.89, No.... dated 14.6.90 and No.... dated 8.3.90. Thank you for your Telex dated 6.3.1991, We regret that there have been too many discussions and time consuming arguments and other problems in execution of our orders on you. Even a small matter such as the make of break required for shuttle conveyor (please sec your telex dated 23.2.91 and our reply dated 23.2.91) is not being resolved.

We, therefore, have no alternative but to suggest cancellation of the balance portion of our above-mentioned orders as suggested by you earlier and please adjust our pending advance with you against the price of chutes ad balance amount of Rs. 35,693-12 P. due to you.

16. Mr. Roy''s contention is that there was no subrogation of the original contract but amendments and modifications were made in the contract in consultation with the Plaintiff and that ultimately the contract was cancelled only on suggestion of the Plaintiff and that being so, question of retaining the advance would not arise and that as the advance was nol paid back, the Bank Guarantee had to be invoked.

17. Mr. Roy submitted that the Bank Guarantee was expressly extended by the Plaintiff-Appellant of their own accord from March 7, 1989 to June 30,1990, from June 30, 1990 to September 30, 1990, from September 30. 1990 to December 31, 1990 and from December 31, 1991 to March 31, 1992 as would be evident from the communications received, by Defendant No. 1 from lime to time from Defendant No. 2. And that being the position. Mr. Roy urged, where is the fraud committed by the Defendant-Respondent upon the Plaintiff-Appellant?

18. Mr. Roy drew our attention to the terms of the Bank Guarantee which we have quoted almost at the outset, to highlight that the Bank Guarantee is irrevocable during its currency, that it is payable" only on demand and without demur, that in no case the Bank is entitled to ask the beneficiary to establish their claim under the guarantee and that the Defendant No. 1 enjoyed fullest liberty to vary any of the terms and conditions of the contract with the supplier by way of changing the designs, scope, price and extending time of performance of the contract without reference to the banker and without affecting in any manner the obligation of the banker to pay the guaranteed money on call. Mr. Roy also pointed out that by extending the Bank Guarantee even after filing of the suit on March 7, 1991 the Plaintiff-Appellant practically injuncted themselves from raising any question of fraud or coercion or economic duress having been perpetrated upon them.

19. In this connection, Mr. Roy placed reliance on several decisions of this Court, as also of the Supreme Court in Allied Resins and Chemicals Ltd. v. M.M.T.C. AIR 1986 Gal. 346 , Centax (India) Ltd. Vs. Vinmar Impex Inc. and Others, '', Centax (India) Ltd. Vs. Vinmar Impex Inc. and Others, '' which affirmed the decision of this Court as cited above and N.T.P.C. v. Hind Galvanizing and Engineering Co. Ltd. AIR 1990 Ori. 421 '' in support of his proposition that enforceability of commitments of a Bank depends on the terms and conditions of the deed of guarantee and that a law Court is not entitled to interfere with its enforcement except where there is fraud or special equity requiring such interference. Ke submitted that in the facts of the present case there being no scope for invoking any of the exceptions, the general rule shall prevail and this Court is not entitled to interfere with the order of the Court below refusing to grant injunction. He also pointed out that balance of convenience and inconvenience lay in the refusal as the Plaintiff who have already filed the suit for recovery of damages will not in that event suffer any irreparable injury.

20. It may be pointed out in this connection that at this stage of the suit, the question before us is whether we should interfere with an interlocutory order passed by the Court below in exercise of its discretionary power. We are not sitting on appeal against the final decision of the suit. We are not expected to express our final opinion about mutual right and liabilities between the parties. What we are required to say is whether the Court below was justified or not in refusing to grant temporary injunction against invocation of the Bank Guarantee in question. In this respect we are in complete agreement with Mr. Roy that little prima facie case the Plaintiff was able to make out and that in the facts of the case balance of conveniences lay heavily against the Plaintiff in obtaining the order. From the pronouncements cited by both sides as mentioned above, it is clear that it is now a settled principle of law that enforceability of a Bank Guarantee depends on it terms and that the Bank and the beneficiary are the only two parties concerned in the matter. Whether the original contract has been abrogated and along with it the Bank Guarantee has failed, are questions of little consequence between the Bank and the beneficiary at least at this stage of the matter. This being the position in facts and law, in our considered opinion the learned Assistant District Judge was quite justified in refusing to exercise his discretionary power in the matter of granting temporary injunction in Plaintiff''s favour. In this view of the matter we also hold that the Appellant herein has also failed to make out a case for interference with the impugned order of the learned Assistant District Judge.

21. The appeal stands dismissed out in the circumstances without cost. Interim order of status quo passed earlier stands vacated and withdrawn. The prayer for stay is considered and refused.

Mukul Gopal Mukherji, J.

22. I agree.