T.S. Doabia, J.
1. The invoking of the bankguarantee, issued by he State Bank of India,by the Punjab State Electricity Board (hereinafter referred as the Board) as-the subject-matter of this petition, under Article 226 of theConstitution of India. The broad argumentwhich has been advanced on behalf of thepetitioner concern, which furnished the Bankguarantee and which entered into an agreement for sale of material manufactured by it isthat the condition precedent for invoking thebank guarantee are not in existence. It hasbeen urged inter alia that the Board has notassessed the loss which it has sustained onaccount of the alleged non-performance ofthe agreement. Principles of natural justicehave thus been invoked. The argument raisedis that before assessing the compensation orthe loss sustained by the Board, an opportunity of hearing should have been afforded tothe petitioner. Before going into furtherdetails, some of the principles dealing withgrant of injunction with regard to bankguarantees be noticed:
(i) A contract of guarantee is a distinct andseparate contract envisaged by Section 126 of the Indian Contract Act, 1872.
(ii) Banks are not concerned with the SalesContract, if it were otherwise, Credit businesswould be impossible.
(iii) The banker is not called upon to know or interpret trade customs and terms where a mandate is unambiguous and a paying banker acts in a reasonable way in pursuance of it, he is protected.
(iv) The fulfilment of the term of the sales contract is a matter between the seller and the buyer alone. This principle can be spelt from the decision reported as Stein v. Hambro's of Northern Commerce, 1922 (10) LJL Rop 529 (CA).
(v) The banker must accept and pay for the document irrespective of any defence which there may be to a claim under the contract of sale and that such a defence is solely a matter to be sorted out between the buyer and theseller. This was so held in Urguhart, Lindsay and Co. Ltd. v. Eastern Bank Ltd. 1922 (1) KB 318.
(vi) It is also settled that the commercial trading must go on on solemn guarantee irrespective of any dispute between the contracting parties. Hamzeh Malas & Sons v. British Imex Industries Ltd. 1958 (2) QB 127 supports this conclusion.
(vii) Again it is an accepted principle that only in exceptional cases the Court is to interfere with the machinery of irrevocable obligations assumed by Banks.
(viii) Where a Bank has given a performance guarantee it is required to honour the guarantee according to the terms of and is not concerned whether either party to the contract which underlay the guarantee was in default. See, Edward Owe Engineering Ltd. v. Barglays Bank International Ltd. 1977 (3) WLR 764 : (1978) 2 All ER 976.
Thus, it well settled by judicial precedent and commercial conventions that an elaborate commercial system has been built up on the footing of a confirmed letter of credit and this constitutes a bargain between the banker and vendor of the goods. This bargain imposes upon the Banker an absolute obligation to pay irrespective of any dispute there might be between the parties whether or not the obligations under the contract were fulfilled or not. The system of confirmed letter of credit which has now been judicially equated with Bank guarantee is to be allowed to have full sway and there has to be minimum most interference by the Courts. This legal principle was held to be of a great importance by the Supreme Court of India in the case of Tarapore & Co. Madras v. Tractoro Export Moscow, (1969) 2 SCR 920 : (AIR 1970 SC 891). It was observed that this system is the life fand blood of international trade. It was further observed that if interference is permitted in the matter of enforcement of these banking transactions then this would have serious repercussions jeopardising the international trade. What was found to be of great significance and importance in the matter of International Trade wasTrade was found to be equally important in the matter of conducting internal trade in this country. The Courts have reiterated that the autonomy of an irrevocable letter of credit was entitled to full protection and except in very rare and exceptional circumstances, Courts should not interfere with this autonomy. What was said with regard to International Trade would 'fortiori' apply to a Bank guarantees because around bank guarantee revolves majority of the internal trade transactions in this country. In modern commercial transactions, various devices are used to ensure performance by the contracting parties. The traditional letter of credit has taken a new meaning. They are also known as stand by letters of credits, performance bond and gurantee bond are other devices increasingly adopted in commercial transactions. The Courts have treated such documents as analogous to letter of credit. The later decision of Supreme Court of India are reported as United Commercial Bank v. Bank of India, AIR 1981 SC 1426, Centax International Ltd. v. Vinner Impas Inc. (1986)4 SC? 136 : (AIR 1986 SC 1924), U. P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd. (1988) 1 SCC 174. The State Trading Corporation of India Ltd. v. Jainsons Clothing Corpn. AIR 1994 SC 2778, CEC Tech. Service Co. Inc. v. Punjab Sons (P) Ltd., AIR 1991 SC 1994.
2. The general principle thus is that a banker is bound to honour a letter of credit, stand by letters of credit performance bond and bank guarantees on their face value. The exceptions to the above rule are few and be noticed. These exceptions arise when there is a fraud or when there is failure to comply with the letter of credit or when the documents are defective. The Banker may not be bound or obliged to honour a bank guarantee if there is fraud. The nature of the fraud that the Courts talk about is the fraud of an 'egregious nature' as to vitiate the entire underlying transaction. It is the fraud, of the beneficiary and not fraud of somebody else. The Bank cannot be compelled to honour the credit in such cases. An irrevocable commitment either in the form of confirmed Bank Guarantee or irrevocable letter of credit cannot be interfered with except in a case of fraud or a case ofirretrievable injustice has been made out. This is the well-settled principle of law, and in order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or a bank guarantee, there should be a serious dispute. A fraud like any other charge of a criminal proceeding must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspension and conjectures. See ALM Narainjan Chittiar v. Official Assignee High Court Rangoon, AIR 1941 PC93,GEC Tech Services Co. Inc's case (AIR 1994 SC 2778) (supra) and Taxmaco Ltd. v. State Bank of India, AIR 1979 Cal 44.
3. Thus, an exception to the general rule is that the Bank should not pay under the letter of credit or similar documents where it knows that the request for payment is made fraudulently or in circumstances when there is no right to payment. Injunction may be granted in the case of obvious fraud. The above concept is based on the elementary principles of seem of (sic) that justice is done Again special equities represent situation where the non-grant of injunction would lead to a situation which could not be retrieved. See Hiam and Rambawth v. Matsas & Masas, 1966 (2) Lyoyds List Law reports 495. The another exception to the rule is where fraud by one of the parties to the underlying contract has been established and the Bank has noticed of the fraud. See Edward Owen Eng. Ltd.'s case (1977 (3) WLR 764) and UCPFS's case. In the absence of special equities arising out of a particular situation which might entitle the parties on whose behalf guarantee is given to an injunction restraining the Bank, in abide by Bank guarantee but in the absence of clear fraud and special equities the Bank is obliged to pay to the party in whose favour the guarantee is given. In the light of the above principles, the facts of this case be noticed. These are as under:
4. The Punjab State Electricity Board through its Chief Engineer placed a purchase order with M/s. Krishna Electrical Industries Pvt. Ltd. (hereinafter referred to as the petitioner). The terms and conditions have beenspecified in the purchase order. This is dated 3rd of August 1993. Copy of this has been placed on the record as Annexure P/1. With a view to seek proper compliance of this agreement, the Board insisted that the petitioner should furnish a bank guarantee and this was duly furnished by the State Bank of India. This Bank figures as respondent No. 1 in this petition. Some of the conditions of this agreement on which a reliance has been placed by the petitioner be now noticed. These are as under:
TERMS OF PAYMENT:
100% of the contract value on pro rata for each consignment of operationally complete equipment despatched after approval of Inspecting Authority/Test Certificates etc. along with 100% Sales Tax Excise duty and other Statutory levies as per contract shall be paid against Railway Receipt and despatch documents through bank (Bank charges to be borne by the supplier) and receipted challan 5% value of the amount valid for a period of three months after receipt of the material/ equipment against that consignment. ALTERNATIVELY
95% of the contract value pro rata for each consignment of operationally complete equipment despatched after approval of Inspecting Authorities Test Certificates etc. along with 100% Sales Taxed, Excise Duty and any other statutory levie as per contract shall be paid against R.R. and despatch documents through Bank (Bank charges to be borne by the Supplier/and receipted challan if transported by road. Balance 5% of the contract of each consignment shall be payable within 30 days on receipt of material/ equipment acceptance by the consignee in good condition. ,All the payments are to be made by Dy.Chief Accounts Officer/M (CentralisedPayment Cell), PSEB, Patiala. The billsshould therefore, be sent to him direct asindicated in clause 22.
By, Chief Accounts Office/M (CPC) Section, PSEB, Patiala shall release the payments against RR/ Receipted Challans only if the Bank Guarantee for claiming 100% payment and the security as per Clause 6 of purchase, order is furnished by you. Demurrage and wharfage charges, if any, as a result of delay in furnishing the Bank Guarantee and Security will be to your account.
PENALTY DAMAGES FOR DELAY IN DELIVERY:
If the supplier fails to deliver the material within the stipulated delivery period of the Purchase Order, the same is liable to be rejected and if accepted, the supplier shall be liable to pay as penalty charges, a sum of Rs. 0.5 (half of one percent) of the cost undelivered material so delayed.
NEGLIGENCE, DEFAULT AND RISK PURCHASE
In case of negligence on the part of the supplier to execute the order/contract with due diligence and expedition to comply with any reasonable orders given in writing by the Purchaser in connection with the Purchase Order/Contract contravention in the provisions of the Purchase Order/Contract the purchaser may give 21 days notice in writing to the supplier to make good the failure or neglect or contravention and if the supplier fails to comply with the notice within time considered to be reasonable by the purchaser, he will have the right to make a risk purchase for full or part of the quantities at the risk and cost of the supplier and cancel the contract and claim due compensation/damage from the supplier.
As one of the contentions raised by the petitioner is that on account of circumstances beyond his control, it was not able to make the supplies and as reliance is being placed on a clause known as 'force majeure' this he also noticed. This reads as under:
FORCE MAJEURE
During the pendency of the contract/ purchase order if the performance in whole/ part by either party or any obligation thereunder is prevented/delayed by causes arising out of any war, hostility, Civil Commotion, act of the public enemy, sabotage, fire floods,explosions epidemics or non-availability of Govt. Controlled raw material under orders/ instructions of Central/State Government regulations, strikes, lockout embargo, acts of Civil/Military Authorities of any other causes beyond their reasonable control, neither of the two parties shall be made liable of losses or damages due to delay or failure to perform the contract during the currency of Force Majeure conditions, provided that the happening is notified in writing with documentary proof within 30 days from the date of the occurrence.
The supplies shall be resumed under the contract as soon as practicable after the happenings (events), cease to exist.
The contents of the Bank guarantee dated 28th of March, 1994 be also noticed. Paras 1, 2, and 3 are relevant, These read as under:
1. The State Bank of India, Industrial Estate 'Branch, Gwalior hereby agrees unequivocally and unconditionally to pay, within 48 hours, on demand in writing from the Chief Engineer MM, Central Purchase Organisation, Punjab State Electricity Board, Patiala, or any officer authorised by him in this behalf, of any amount up to and not exceeding Rupees 1,96,300/-(One Lac Ninety six thousand three hundred) only to the Punjab State Electricity Board who have entered into a contract or who have unconditionally accepted the purchaser order Number H-10382/Q-3405/PO-1/8 dated 2-8-1993 for the supply of material Multi core LT PVC cable for order value of Rupees 39,25,058/ - (Rupees Thirty Nine Lacs Twenty five thousand fifty eight only).
2. This Guarantee shall be valid and binding on this Bank up to and including 25-3-1995 and shall not be terminable by notice or on account of any change in the constitution of the Bank or the firm of contractors/ Suppliers or by any other reasons what-so-ever and our liability here-under shall not be impaired or discharged by any extension of time or variation or alterations made, given conceded or agreed with or without our knowledge or consent by or between the parties to the said contract/ purchase order.
3. Our liability under this Guarantees is restricted to Rs. 1,96,300/- (Rupees One Lac Ninety six thousand three hundred only). Our Guarantee shall remain in force up to 25-3-1995 unless a claim in writing is presented to us within six months from that date i.e. up to 25-9-1995 and if unpaid a suit or action to enforce a claim under the guarantee is filed against us within said six months, all your rights under the said Guarantee shall be forfeited and well shall be released and discharged from all liabilities thereunder.
5. It is not in dispute that the bank guarantee Annexure P-2, was furnished. It is also a fact that the petitioner concern failed to execute the purchase order. Accordingly, the Board addressed a communication Annexure P/3 to the petitioner. According to this communication, the petitioner concern was supposed to supply three-and-half Km of core cables of various sizes. This supply was to commence within two months from the receipt of the order by the petitioner firm. As only 4.00 Km of cables was supplied, the petitioner firm was reminded of its obligation, a letter in this regard was sent to it on 6th of July, 1994. As there was failure to make supplies another communication Annexure p-3 was sent. This was 21 days notice as per the terms and conditions of the agreement. Clause 15 of the agreement was thus invoked. It was made clear that in case supplies are not made, the Board would be at liberty to invoke compensation clause. The Board waited for sometime. There was no response. The Board accordingly invoked the bank guarantee. A communication copy was addressed to the State Bank of India Copy of this is Annexure P-4. This is dated 15th of May, 1995. It is this letter which led to the filing of this petition under Article 226 of the Constitution of India. On 26th of May, 1995, the respondent No. 1, was restrained from giving effect to the bank guarantee.
6. The case of the petitioner concern is that some orders were placed by the Board with its sister concern namely, Banmore Cables and conductors. It is stated that there was delay in making the payment of the bills raised by that firm. This is the suggestedreason for non-performance of the contract. A plea has also been taken that there was labour problem in the unit. This aspect be also noticed. This problem was there from October 1993, to December, 199.3. It is pointed out that from the month of January, 1994 to March, 1994 there was breakdown of machinery. A plea was also taken that the primary purchasers were not supplying the raw-material, particularly aluminum is said to have gone up. On the basis of the above pleas, it was indicated that the petitioner is within its rights to seek shelter of the clause known in commercial parlance as 'force majure.' The above pleas can be spelled out from the letter said to have been written on 22nd of July, 1994. Much stress was also laid down a clause dealing with terms of payment. It is indicated that the bank guarantee was furnished only for safeguarding of hards 5% of the value of the amount regarding which supplies were made and regarding which payment was to be made. It is indicated that payment of 100% of the contract value was to be made as soon as a consignment became operational. 95% of the amount was to be paid against a railway receipt on despatch of documents to bank and 50% of the amount was to be paid against bank guarantee. Much stress has been laid on the line, 16, 'if transported by road subject to furnishing a bank guarantee.' Stress has also been laid on the fact that this bank guarantee was only to represent 5% of the amount of value and for this again, as indicated above, reliance is being placed on the following lines dealing with terms of payment:
5% of value of the amount valid for a period of three months.'
Thus, the argument raised is:
(i) that, the petitioner firm was unable to supply the goods on account of conditions beyond its control;
(ii) the bank guarantee was furnished only for 5% of the amount, of the bill regarding which payment was to be released as soon as the consignment became operational;
(iii) The Board has not assessed the compensation.
(iv) That, before assessing the compensation, there is a requirement to afford opportunity of hearing.
7. The stand taken by the Board be noticed;
8. Preliminary objections have been taken that Article 226 of the Constitution is not to be invoked for enforcing contractual obligations. It has also been indicated that the petitioner failed to supply the material and therefore, the guarantee has been rightly invoked. It is further argued that the bank guarantee was furnished for due compliance of all the terms of the agreement and as the petitioner failed to make the supply within the contractual period, the bank guarantee has been rightly invoked. With regard to argument that circumstances beyond the control of the petitioner, came into existence, it is stated that this factor was taken note of. The petitioner concern on 12th of July, 1994, wrote a letter copy whereof is Annexure 1/4 / 5. This was given due consideration by the Board. The time for making the supplies was extended. It is argued that on its own showing the alleged unrest in the petitioner concern was only up to December, 1993. So far as breakdown of the machinery was concerned, it is pointed out that this was only up to March, 1994. The non-payment to the sister concern of the petitioner concern is denied. It is pleaded that this plea is of no consequence. Increase in the price of the raw-material has been said to be a factor with which the Board is not concerned. With the argument that the compensation has not been assessed, it has been indicated that moment there is failure to comply with the terms of the agreement and there is non-supply of the material it would furnish a cause for invoking the bank guarantee. The fact that a specific amount has been specified in the Bank guarantee, it is argued that this amount should be taken as represents the minimum compensation to which the Board is entitled to. The total amount of contract was for a sum of Rs. 39,25,058/-. On this basis, it is argued that the amount of Rs. 1,96,300/- is the minimum which the Board must have.
For rest of the claim, it would take such steps as may bepermissible under the law. (9) I am of the view that:
(i) Guarantee is a performance guarantee and if there is failure to perform the contractor terms of agreement it could invoke;
(ii) The argument that guarantee covers only 5% of the amount regarding which payment could be withheld but was not to be withheld and the guarantee was for this purpose, only is not correct. This is not so spelled out from the deed of guarantee. The gurantee is wholesome and covers all eventualities.
(iii) The reliance on 'Force Majure' clause is misplaced. All the events are of the year 1994;
(iv) Non-payment to a sister concern is of no consequence.
(v) There is no requirement of affording opportunity of hearing as amount payable is quantified.
(vi) No equities arise in favour of the petitioner as it has on its own showing failed to make the supplies.
(vii) The increase in raw material is of no solace of the petitioner. This eventuality is always taken care of when price is settled between the parties.
10. Coming to the legal position again as indicated above the only exception which has been carved out by the various judgments referred to above is that there should be plea of fraud. In the present case, such a plea has not been taken. The other plea of irreperable loss is also not available. The exception carved out does not stand established in this case. The bank guarantee on the face of it can be enforced if there is non-compliance with any of the conditions of the purchase order. The petitioner concern has failed to supply the material and as such in terms of condition No. 1 of the bank guarantee, this has been rightly invoked.
11. The argument that the bank guarantee covers only 5% amount represented by the sale price of the material regarding which.,delivery is made, is not the correct appreciation of the agreement Annexure P/1 and the bank guarantee. No doubt, 5% of the amount is to be paid against bank guarantee but it is wrong to suggest that the Bank guarantee was furnished only for this purpose.
As indicated above, the bank guarantee was furnished for the due performance of the contract. The contract has not been complied with. The petitioner supplied part of the material indicated in Annexure P/4. The rest of the material has not been supplied. Notice of 21 days was given. Clause known as force majure is not attracted as all those events on which reliance has been placed are of the year 1994. It is only after that the bank guarantee has been invoked. In case, the petitioner undertakes to supply the material, even now as per the purchase (order) the Board may consider the desirability of not invoking the guarantee. In this eventuality the Bank guarantee would have to be kept alive by renewal. There is otherwise no merit in this petition and the same is dismissed.