Judgment:
20 $~ * + IN THE HIGH COURT OF DELHI AT NEW DELHI CS(OS) 298/2017 SHREEHARI ASSOCIATES PRIVATE LIMITED ..... Plaintiff Through: Mr. Akhil Sibal, Senior Advocate with Mr. Sandeep S. Ladda, Mr. Yashvardhan and Mr. Devender Singh, Advocates. versus NATIONAL THERMAL POWER CORPORATION LIMITED & ANR. ..... Defendants Through: Ms. Kanika Agnihotri, Advocate for defendant No.1- NTPC. % CORAM: HON'BLE MR. JUSTICE MANMOHAN Date of Decision:
05. h July, 2017
JUDGMENTMANMOHAN, J: (Oral) Caveat 597/2017 Since the caveator has entered appearance, the present caveat is disposed of as infructuous. CS(OS) 298/2017 Page 1 of 21 I.A. 7318/2017 in CS(O) 298/2017 Keeping in view the averments in the application, plaintiff is exempted from filing the original/dim copies/clear copies of the documents at this stage. Needless to say, this order is without prejudice to the rights and contentions of the parties. Accordingly, present application stands disposed of. I.A. 7320/2017 in CS(OS) 298/2017 Present application has been filed seeking enlargement of time in filing the court fees. Learned counsel for the plaintiff prays for and is permitted to file the deficient court fees within one week. Accordingly, the application stands disposed of. CS(OS) 298/2017 & I.A. 7321/2017 Let the plaint be registered as suit. Issue summons in the suit and notice in the application to the defendants. Ms. Kanika Agnihotri, learned counsel, who appears on advance notice, accepts notice on behalf of defendant No.1-NTPC. Let a written statement to the plaint and reply to the application be filed within a period of four weeks. Issue summons/notice to defendant No.2-Bank only by all modes including dasti. The summons to the defendant shall indicate that a written statement to the plaint and reply to the application shall be positively filed within four weeks of the receipt of the summons. Liberty is given CS(OS) 298/2017 Page 2 of 21 to the plaintiff to file a replication within two weeks of the receipt of the advance copy of the written statement. The parties shall file all original documents in support of their respective claims along with their respective pleadings. In case parties are placing reliance on a document which is not in their power and possession, its detail and source shall be mentioned in the list of reliance which shall be also filed with the pleadings. Admission/denial of documents shall be filed on affidavit by the parties within two weeks of the completion of the pleadings. The affidavit shall include the list of the documents of the other party. The deponent shall indicate its position with regard to the documents against the particulars of each document. List the matter before Court on 22nd August, 2017. I.A. 7319/2017 in CS(OS) 298/2017 1. Issue notice to the defendants.
2. Ms. Kanika Agnihotri, learned counsel, who appears on advance notice, accepts notice on behalf of the defendant No.1-NTPC.
3. It is pertinent to mention that present suit has been filed for permanent injunction seeking stay of encashment of bank guarantee.
4. It is stated in the plaint that on 03rd June, 2016, the defendant No.1 issued a Notice Inviting Tender (NIT) for balance work of Ash Dyke Package for Solapur Super Thermal Power Project located at district Solapur, Maharashtra and as per Clause 5 of the NIT, a bidder along with filing requisite documents, was required to make an earnest money deposit of Rs.2,19,60,000/- (EMD) by way of a bank guarantee CS(OS) 298/2017 Page 3 of 21 in the proforma prescribed under Clause X of the General Condition of Contracts for civil works.
5. It is further stated in the plaint that pursuant to the bid document, the plaintiff submitted its online bid for the said project along with all relevant and necessary documents including the bid security documents dated 12th July, 2016 valid upto 11th July, 2017. However, the defendant No.1 vide letter dated 23rd November, 2016 rejected the plaintiff’s bid on the ground that the plaintiff did not meet the qualifications/requirements set forth in the NIT. Further, vide letter dated 22nd December, 2016 the defendant No.1 informed the plaintiff that upon verification of the certificate dated 28th February, 2014 issued by the Executive Engineer, some discrepancies had been found and plaintiff was blamed for having committed a fraud.
6. Mr. Akhil Sibal, learned senior counsel for plaintiff states that though the plaintiff’s technical bid was rejected, yet the defendant No.1 arbitrarily wrote a letter to defendant No.2 on 30th June, 2017 seeking encashment of the bank guarantee furnished by the plaintiff in contravention to the terms of the tender. He states that the plaintiff’s bid was furnished on 12th July, 2016 and as per the terms of the tender, the defendant No.1 had no right to encash the bank guarantee beyond the period of 180 days from the date of opening of the technical bid of the plaintiff.
7. Mr. Sibal also states that in accordance with the Clause 6.5.6 of the Tender, the EMD/Bid Security of all the unsuccessful bidders was to be returned not later than one month from the date of expiration of the bid validity and the defendant No.1 in clear violation of its CS(OS) 298/2017 Page 4 of 21 contractual obligations had failed to return the bid security amount even though the bid validity period expired six months ago, i.e., on 14th January, 2017. In support of his submission, Mr. Sibal relies upon the judgment of this Court in D.S. Constructions Ltd. Vs. Rites Ltd., AIR2006Del 98 wherein it has been held as under:-
"“33. Now, in the factual background of the present case, I find that the offer of the plaintiff lapsed on 23-9-2003 and there was no underlying contract between the plaintiff and the defendant No.1. When the plaintiff's offer lapsed on 23-9-2003 it became entitled to the return of the earnest money amount and the defendant No.1 could not, in law, forfeit the same. Knowing that it is not entitled to forfeit the amount, if the defendant No.1 still goes ahead and invokes the bank guarantee it would be doing so despite the knowledge that it has no right to forfeit the amount. Such an invocation would be clearly fraudulent. Since the defendant No.1 is the beneficiary, such fraudulent action on its part would be liable to be injuncted in view of the well settled legal principles.” 8. Mr. Sibal contends that the documents furnished by the plaintiff pertaining to construction work of planning, designing and construction of Storage Dam at Ozarkheda under Varangaon Talvel Parisar Sichan Yojana with all Appurtenant works Tq. Bhuswal, District Jalgaon are genuine and true copies.
9. In support of his contention, Mr. Sibal referred to various communications exchanged between M/s. Mulay Brothers Pvt. Ltd. and defendant No.1 as well as with Ex. Superintending Engineer, Jalgaon Irrigation Project Circle, Jalgaon.
10. Mr. Sibal lastly submits that the defendant No.1 cannot forfeit the earnest money deposit submitted by the plaintiff in the form of CS(OS) 298/2017 Page 5 of 21 bank guarantee as it has not suffered any loss and the forfeiture would be void in accordance with Sections 23 and 74 of the Indian Contract Act. In support of his submission, he relies upon the following Division Bench judgments of this Court:-
"A. IVRCL Infrastructures & Projects Ltd. Vs. National Highways Authority of India, W.P.(C) 235/2011 wherein it has been held as under:-
"“35. We have already held that the bid is responsive and thus there is no question of forfeiture of the Bid Security Amount. We may, however, notice that submissions were advanced by parties as to why even if the bid of the petitioners is treated as non-responsive on account of the Power of Attorney the Bid Security Amount was not liable to be forfeited. This was, in fact, a common question involved in three writ petitions filed against respondent No.1 in which arguments took place on the same date. We have separately pronounced an order in WP (C) No.8418/2010 where we have dealt with this issue. We do not want to record a discussion on this aspect and consider it appropriate to extract our discussion and finding on this aspect as contained in WP (C) No.8418/2010 as under: “50. Learned counsel for respondent No.1 submitted that the bid security amount was a specific term of the RFP clause 2.1.7. Respondent No.1 was entitled to forfeit and appropriate damages inter alia in the event specified in Clause 2.20.7 in view of what is set out in clause 2.20.6. The said clause also provides that the bidder is deemed to have acknowledged and confirmed that the authority will suffer loss and damage on account of withdrawal of its bid or for any other default by the bidder during the period of bid validity as specified in the RFP. Clause 2.20.7 states that the amount is mutually agreed genuine pre-estimated compensation and damages payable to the authority for inter alia time cost and effort of the Authority. The CS(OS) 298/2017 Page 6 of 21 conditions under which it applies includes where a bid is a non-responsive bid. However, as per the latter part of sub- clause (a) of clause 2.20.7 if the bid is a nonresponsive bid, the damages are restricted to 5 per cent of the value of the bid security. The question, thus, arises whether in case of a non-responsive bid could it be said that 5 per cent of the value of the bid security was the genuine pre-estimate of damages?.
51. It must be borne in mind that the stage for submission of the RFP is the second stage in the tendering process. There is an earlier scrutiny in pursuance of the RFQ submitted by the parties in terms whereof certain parties are enlisted for submitting the RFP. At the stage of the RFP a sum of `3.00 lakh is paid to procure the documents. This amount cannot be the cost of the form but is really a pre-estimated cost of processing the RFP. A nonresponsive bid is one where at the threshold on the opening of the bid it is found to be defective on one account or the other and is, thus, shut out from the process of scrutiny. This can have no corelation with the value of the bid which would be the eventuality even if 5 per cent of the bid amount is encashed.
52. Learned counsel for respondent No.1 sought to canvass that the objective is to prevent non-serious persons from submitting the bids. This, in our considered view, is taken care of by charging an amount for purchase of RFP documents and in other eventualities of say a party backing out, the bid security amount being forfeited. The occasion for non-responsive bid would only be a defect in submission of the RFP.
53. Learned counsel for respondent No.1 could not seriously dispute that the amount really is in the nature of a penalty. If it is so it cannot be said to be a reasonable pre-estimate of damages and the parties suffering losses must prove that it is suffering damages to that extent. We are of the view that there is hardly any quibble over the settled legal position in CS(OS) 298/2017 Page 7 of 21 this behalf. Suffice it to say that in Maula Bux Vs. Union of India AIR1970SC1955the scope and ambit of Section 74 of the Contract Act, 1872 (hereinafter referred to as the „Contract Act‟) was discussed. It was observed that if the forfeiture of earnest money is in the nature of penalty Section 74 of the Contract Act would apply. In such a case proof of actual loss or damage would be essential. However, if the forfeiture amount is reasonable pre-estimate, it would not fall within Section 74 of the Contract Act. The legal position in this behalf has not changed. Section 74 of the Contract Act reads as under: “74- Compensation for breach of contract where penalty stipulated for- [When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.” 54. The 5 per cent of the bid security amount would be Rs. 73.95 lakh approx. This cannot be said to be the charges for processing the bids. That charge, in fact, already stands recovered which had been pre-estimated at `3.00 lakh for purchase of the RFP document.
55. We have no hesitation to hold that the aforementioned clause permitting 5 per cent bid security amount to be forfeited in case of a non-responsive bid is clearly penal in nature and thus provisions of Section 74 of the Contract Act would apply. It cannot be categorized as a reasonable pre- estimate of damages for a non-responsive bid and thus the bank guarantee for 5 per cent of the bid amount cannot be encashed in such an eventuality. CS(OS) 298/2017 Page 8 of 21 56. Thus, even on the second issue we are of the view that even if the bid was non-responsive, the 5 per cent of the bid security amount could not have been forfeited.” xxx xxx xxx 37. We are, thus, of the view that the RFP submitted by the petitioner being responsive, the forfeiture is illegal and invalid and the petitioner is entitled to refund of the said amount from the respondent. This is apart from the reason, set out hereinabove, that the provision permitting forfeiture of 5 per cent of the Bid Security Amount, even for a non- responsive bid, being penal illegal. Accordingly, we direct refund of the Bid Security Amount within a period of 15 days from today, failing which, it will carry simple interest at the rate of 15% p.a.” in nature, was B. M/s. Gayatri-DLF Consortium & Ors. Vs. National highways Authority of India & Anr., W.P.(C) 6833/2010 wherein it has been held as under:-
"“32. We are, thus, of the view that the RFP submitted by the petitioners being responsive as also by reason of our finding that there could not have been forfeiture of the Bid Security Amount to the extent of 5 per cent, the action of respondent No.1 in seeking to demand the said amount and threatening to forfeit the bank guarantee in default of the same is illegal and all communications addressed in this behalf by respondent No.1 are accordingly quashed.” 11. Per contra, Ms. Kanika Agnihotri, learned counsel for defendant No.1-NTPC has handed over a certified copy issued by the Executive Engineer of the details of work done by M/s. Mulay Brothers Pvt. Ltd. duly signed and stamped as a token of acceptance. The relevant portions of the certificate allegedly issued by the Executive Engineer and produced by the plaintiff along with its tender and the copy of the CS(OS) 298/2017 Page 9 of 21 certificate handed over today by the learned counsel for defendant No.1 is reproduced hereinbelow:-
"A. Certified copy filed by Plaintiff along with its Tender: “DETAILS OF WORKS DONE Name of Department Water Resources Department Name of Circle Jalgaon Irrigation Project Circle, Jalgaon Name of Division Design Divisional Unit, Jalgaon
1) Name of Work Designing, Planning and Construction of Dam at Ozarkheda for Varangaon Talvel Gat Parisar Sinchan Yojana with all approtent works Tal. Bhusaval-Muktainagar, Dist. Jalgaon.
2) Estimated Cost Rs.5308.40 Lakhs
3) Agreement No.CE.TIDC/03/038/20
for 2003-2004
4) Name of Contractor M/s Mulay Brothers Ltd., Sublet to M/s. Shreehari Associates Pvt. Ltd., Aurangabad- 431001 (Maharashtra)…………..” (emphasis supplied) B. Certified copy of the Details of Works Done handed over today by Defendant No.1: “DETAILS OF WORKS DONE CS(OS) 298/2017 Page 10 of 21 Name of Department Water Resources Department Name of Circle Name of Division Jalgaon Irrigation Project Circle, Jalgaon Design Divisional Unit, Jalgaon
1) Name of Work Designing, Planning and Construction of Dam at Ozarkheda for Varangaon Talvel Gat Parisar Sinchan Yojana with all approtent works Tal. Bhusaval-Muktainagar, Dist. Jalgaon.
2) Estimated Cost Rs.5308.40 Lakhs
3) Agreement No.CE.TIDC/03/038/20
for 2003-2004
4) Name of Contractor M/s Mulay Brothers Ltd., Tapadiya Terraces, IInd Floor, Adalat Road, Aurangabad-431001 (Maharashtra)…………..” (emphasis supplied) 12. In view of the aforesaid documents, she states that the words “sublet to M/s. Shreehari Associates Pvt. Ltd., Aurangabad 431001 Maharashtra” are an interpolation. She submits that as per Clause 6.5.8(e) of the Contract, the defendant No.1 is entitled to forfeit the EMD/bid security deposit. Clause 6.5.8(e) of the Tender Document is reproduced hereinbelow:-
"CS(OS) 298/2017 Page 11 of 21 “6.5.8 The EMD/Bid security shall be forfeited in any of the following circumstances by the Owner without any notice or proof of damage to the Owner etc. xxx xxx xxx (e) If the Bidder/his representative commits any frauds while competing for this Contract pursuant to the Fraud Prevention Policy of NTPC.” 13. Since the present proceedings pertain to stay of encashment of bank guarantee, this Court is of the opinion that it is important to reproduce the bank guarantee. The bank guarantee in question reads as under:-
"“In consideration of NTPC Limited having its Registered office at NTPC Bhawan Scope Complex, 7 Institutional Area, Lodi Road, New Delhi-110003 (hereinafter called the “Owner” which expression shall unless repugnant to the subject or context include its successors and assigns) having issued Notice Inviting Tender under Bidding Document No.Specification No.CS-9571-331 (R)-9 M/S SHREEHARI ASSOCIATES PVT. LTD., Register under the Companies Act 1956 having Certificate of incorporation No.U-45202 PN2001PTC16249as a Private Limited Company and having its Registered Office at “Sai Sharan”Plot No.4, Gut No.41, Golwadi, Paithan Road, Aurangabad-431005 (Maharashtra) & its Present Head Office at „Plot No.36, Gut No.41, Golwadi, Paithan-Waluj Link Road Aurangabad-431005 (Maharashtra) (hereinafter called the “Tenderer”) who wishes to participate in the said tender for Balance Work of Ash Dyke Packing for Solapur super Thermal Power Project (2 x 600 MW) an irrevocable and unconditoinal Bank Guarantee against Bid security for an amount of Rs.2,19,60,000/- (Indian Rupees Two Crores Nineteen Lakh and Sixty Thousand Only) valid upto 11.07.2017 is required to be submitted by the Tenderer in lieu of cash deposit as condition precedent for participation in the said tender. CS(OS) 298/2017 Page 12 of 21 SFS JALNA We, the INDIAN OVERSEAS BANK (Name of Bank) of LUCKY RAJ MANSION, OPPOSITE ROAD, AURANGABAD-431003 OF AURANGABAD BRANCH STATE- MAHARASHTRA (INDIA) bank incorporated under Companies Act 1956 and having one of our branch at Jalna Road, Aurangabad and having our Registered Office/Head Office at Chennai do hereby unconditionally and irrevocable (address) guarantee and undertake to pay to the “Owner” immediately on demand without any demur, reservation protest and recourse to the extent of said sum of Rs.2,19,60,000/- (Indian Rupees Two Crores Nineteen Lakh and sixty Thousand Only). Any such claim/demand made by the said “owner” on us shall be conclusive and binding on us irrespective of any dispute or difference raised by the tenderer. This guarantee shall be irrevocable and shall remain valid up to 11.07.2017 if any further extension of this guarantee is required, the same shall be extended to such required period(s) on receiving instruction from M/S SHREEHARI ASSOCIATES PVT. LTD. Aurangabad on whose behalf the guarantee issued in witness whereof the Bank through its authorised officer, has set its hand and stamp on this 12th day of July 2016 at Aurangabad (Maharashtra). Notwithstanding anything contained herein:
1. Our this Guarantee shall not excess Rs.2,19,60,000/- (Indian Rupees Two Crores Nineteen Lakh and sixty Thousand Only). liability under 2. This Bank Guarantee is valid up to 11.07.2017.
3. We are liable to pay Guarantees amount of Rs.2,19,60,000/- Indian Rupees Two Crores Nineteen Lakh and sixty Thousand Only) any part thereof under this Guarantee only and only if you serve upon us a written claim or demand on or before 11.07.2017.” (emphasis supplied) CS(OS) 298/2017 Page 13 of 21 14. Consequently, the bank guarantee in question is an irrevocable and unconditional guarantee. The claim made by the defendant No.1, in accordance with the aforesaid bank guarantee is conclusive, final and binding on the defendant No.2-bank irrespective of any dispute raised by the plaintiff.
15. As far as the Division Bench judgments in IVRCL Infrastructures & Projects Ltd. (supra) and M/s. Gayatri-DLF Consortium & Ors. (Supra) are concerned, this Court finds that when the said matters were taken up in appeal to the Supreme Court, the Apex Court in one of the judgments, in the batch of matters has held as under:-
"it should abjure the parties, duly signed by “We are confronted with a situation when there is a contract between the Respondent which restricts forfeiture of 5% of the value of the Bid Security ostensibly not by way of a penalty. Of course, as is to be expected, the Respondent disagrees and on the contrary submits that the deduction/forfeiture is in terrorem and is punitive in nature. A Writ Court may at least as a temporary or preliminary view decide whether the damages imposed by an Authority amenable to writ jurisdiction such as NHAI indubitably are punitive or not, but the minute calculation. That controversy should be left to the Civil Court to decide, i.e. whether the deduction/forfeiture, in the present instance of 5% of the value of the Bid Security is punitive or otherwise. We think that the course that commends itself to us is to relegate the parties to the Civil Courts to determine whether any damages had been suffered by the National Highways Authority of India and if so whether the deduction of 5% was a fair pre-estimate or was punitive in nature. Since the parties have been bona fide prosecuting writ proceedings in the event of the plaintiff seeks enlargement/extension of time for filing of a from going into CS(OS) 298/2017 Page 14 of 21 Suit, the Courts in seisin will keep all the circumstances in view before passing an order. If the Suit is brought by the Respondent as plaintiff within one month from today, the Trial Court shall decide within six months whether or not to release the Bank Guarantee which has been furnished by the Respondent before this Court. Thereafter, the Appellant shall be free to encash the Bank Guarantee.” (emphasis supplied) 16. Consequently, the Division Bench’s direction for return of the bank guarantees was varied.
17. This Court is further of the view that it is settled law that encashment of bank guarantee can only be stayed on two grounds namely, fraud and irretrievable injustice/injury.
18. As far as the concept of irretrievable injustice and injury is concerned, the Supreme court in Dwarikesh Sugar Industries ltd. vs. Prem heavy Engineering Works (P) Ltd. & Anr., (1997) 6 SCC450has held as under:-
"“22. The second exception to the rule of granting injunction, i.e. the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.” (emphasis supplied) 19. The nature of fraud on the basis of which an encashment of bank guarantee can be stayed is fraud of an egregious nature so as to vitiate the entire underlying transaction. It should be a fraud which CS(OS) 298/2017 Page 15 of 21 the bank can detect with a minimal investigation. The Supreme Court in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC174has held as under:-
"“52. A case involving the obligations under a performance guarantee was considered by the Court of Appeal in Edward Owen Engineering Ltd. v. Barclay Bank International Ltd. [(1978) 1 All ER976 The facts in that case are these: English sellers entered into a contract to supply and erect glass-houses in Libya. The Libyan buyers were to open an irrevocable letter of credit in favour of the sellers. The sellers told their English bank to give a performance guarantee. The English bank instructed a Libyan bank to issue a performance bond in favour of the buyers for a certain sum and gave their guarantee payable on demand without proof or conditions to cover that sum. The Libyan bank issued a bond accordingly. The sellers received no confirmed letter of credit and refused to proceed with the contract. The sellers obtained an interim injunction to prevent the English bank from paying on the guarantee. On appeal Lord Denning, M.R. said: “So, as one takes instance after instance, these performance guarantees are virtually promissory notes payable on demand. So long as the Libyan customers make an honest demand, the banks are bound to pay and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.” And said: this leads to the conclusion “All the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the that CS(OS) 298/2017 Page 16 of 21 20. the question whether least with the relations between the supplier and the customer; nor with the supplier has performed his contractual obligation or not; nor with the question whether supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice.” to protect 53. Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank's obligations of course should not be extended the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an “egregious nature as to vitiate the entire underlying transaction”. It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction. (emphasis supplied) It is also settled law that a bank guarantee is an independent contract and the bank at the behest of the tenderer cannot look to the terms of the underlying terms of contract entered into between the contractor and the beneficiary. The judgment in D.S. Constructions CS(OS) 298/2017 Page 17 of 21 Ltd. (supra) is inapplicable to the facts of the present case as in the said judgment no letter of invocation had been issued. In fact, the Supreme Court on the said concept has held in U.P. Cooperative Federation Ltd.(supra) as under:-
"“19. .............The plaintiffs appealed to the Court of Appeal in England. It was held by a Bench consisting of Lord Denning, M.R., Browne and Geoffrey Lane, L.J.
that a performance guarantee was similar to a confirmed letter of credit. Where, therefore, a bank had given a performance guarantee it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default. The only exception to that rule was where fraud by one of the parties to the underlying contract had been established and the bank had notice of the fraud. Accordingly, as the defendants' guarantee provided for payment on demand without proof or conditions, and was in the nature of a promissory note payable on demand, and the plaintiffs had not established fraud on the part of the buyers, the defendants were required to honour their guarantee on the demand made by the Libyan bank. It followed that the judge had been right to discharge the injunction and that the appeal would be dismissed. xxx xxx xxx 28. I am, however, of the opinion that these observations must be strictly considered in the light of the principle enunciated. It is not the decision that there should be a prima facie case. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose CS(OS) 298/2017 Page 18 of 21 of bank guarantees would be negatived and the fabric of trading operation will get jeopardised. xxx xxx xxx 34. On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the court should interfere. xxx xxx xxx 44. The modern documentary credit had its origin from letters of credit. We may, therefore, begin the discussion with the traditional letter of credit. Paul R. Verkuil in an article explains the salient features of a letter of credit in these terms: if to pay “The letter of credit is a contract. The issuing party — usually a bank — promises the „beneficiary‟ — traditionally a seller of goods — on demand the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of credit thus evidences — irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit.” 45. ..........The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute CS(OS) 298/2017 Page 19 of 21 between the buyer and the seller must be settled between themselves. The courts, however, carved out an exception to this rule of absolute independence. The courts held that if there has been “fraud in the transaction” the bank could dishonour beneficiary's demand for payment. The courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else. xxx xxx xxx 49. This was also the view taken by this Court in United Commercial Bank case. There A.P. Sen. J.
speaking for the Court, said (pages 323 and 324): (SCC pp. 783-84, paras 40-42) “. . .the rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit......
21. Further, as the bank guarantee in question has been encashed (emphasis supplied) admittedly during its validity, the plaintiff’s arguments that the defendant No.1 had no right to encash the bank guarantee beyond the period of 180 days from the date of opening of technical bid and/or breach of Clause 6.5.6 cannot be examined in the present suit.
22. For the same reason, neither the bank nor this Court while dealing with an application for stay of encashment of bank guarantee can hold a mini trial to determine whether the documents produced by the plaintiff along with its tender are genuine and true copies. CS(OS) 298/2017 Page 20 of 21 23. Consequently, the interim relief for stay of the encashment of the bank guarantee in question is declined. In the event the plaintiff is of the view that its bank guarantee has illegally and contrary to contractual terms been encashed, then the plaintiff has to file a suit for recovery or invoke the dispute resolution mechanism provided for in the contract.
24. Accordingly, the present application is dismissed with liberty to file appropriate legal proceedings in the event the bank guarantee in question is encashed. Needless to say, the observations made by this Court are prima facie in nature and have been made only to decide the present application. JULY05 2017 js MANMOHAN, J CS(OS) 298/2017 Page 21 of 21