J.D. Kapoor, J.
1. This is the second bout of litigation with regard to the invocation of the Bank Guarantee was not invoked as per its terms. While allowing the petition vide order dated 29.5.2003 this Court directed that the petitioner shall keep the Bank Guarantee alive till final award was given by the Arbitrator. At the same time it also observed that this order would in no manner stand in the way of the respondent in issuing a fresh letter of invocation of the Bank Guarantee alive till final award was given by the Arbitrator. At the same time it also observed that this order would in no manner stand in the way of the respondent in issuing a fresh letter of invocation of the Bank Guarantee in accordance with its terms and shall provide cause for the same.
2. Both the parties are Public Sector Undertakings. Petitioner is manufacturer of cloth on looms and is also the supplier of such products to various agencies. Respondent No. 1 is the umbrella body of various State level apex co-operative societies, etc. That in June 1996 the State of Bihar through Directorate of Handlooms and Sericulture, Department of Industries invited tenders for supply of Cotton Dhoties and cotton/nylon/polyester Sarees to each family of the State of Bihar living below the poverty line. The respondent No. 1 bid for the said tender, and was ultimately awarded the same. A formal Agreement was entered into on 5.3.1997 for supply of 124.52 lakh Dhoties and an equal number of Sarees. The total value of the contract was Rs. 199.854 crores. At the time of signing of the contract, the State of Bihar paid an advance of Rs. 40 crores to the respondent No. 1, which furnished a Bank Guarantee for the said amount on the said day. The said amount of Rs. 40 crores was to be used for the production/development of infrastructure and purchasing of raw material.
3. That upon being awarded the tender, the respondent No. 1 in turn entered into Agreements with various State-level Handloom Corporations including the petitioner for supplying the said Dhoties and Sarees to the State of Bihar. Such an agreement was entered into between the respondent No. 1 and the petitioner on 14.3.1997.
4. Supplies were to be commended by it within 30 days or earlier after receipt of order from respondent along with advance of Rs. 3.50 crores. Clause 4 of the agreement stipulated that 4 month' period of delivery would be reckoned from the 30th day after the date on which the order to commence the work was received by the supplying agency namely the petitioner, together with advance amount of Rs. 3.50 crores. In the event of delay in supply, the petitioner agreed to pay penalty of 0.50% per month of delay on the value of balance due deliveries subject to maximum penalty of 20% as set out in the agreement.
5. Respondent was also given the option to make changes in the supply schedule to different districts within the total supply order depending upon the feed back received from different districts regarding their requirements after giving one month's notice to Supplying Agency.
6. Admittedly, the advance of Rs. 3.50 crores was received by the petitioner on 10.6.1997 and Bank Guarantee was furnished on 23.9.1997. In terms of Clause 3, the supplies were to be completed by 10.10.1997 i.e. within four months from the receipt of advance. From July 1997 to September 1997, the petitioner made supplies worth Rs. 3.99 crores. Vide order dated 4.9.1997, the respondent informed the petitioner that it has sent various communications to the Government of Bihar asking about the further supplies but these have remained unanswered and such unilateral action and decisions are indicative of the action of Government of Bihar that they are not desirous to abide by the contract and thereforee it should discontinue the further supplies for the time being and furnish the details of the supplies made up to date.
7. The State of Bihar had independent contract with the respondent against the Bank Guarantee whereas respondent's contract with the petitioner was an independent contract. The State of Bihar invoked the Bank Guarantee of the respondent on 23.9.1997. Feeling aggrieved the respondent approached this Court on 30.9.1997 but failed to obtain the ex parte injunction against the encashment of the said Bank Guarantee. As a counter blast, the respondent vide letter dated 20.10.1997 invoked the Bank Guarantee of Rs. 3.50 crores given by the petitioner. The petitioner challenged the validity of the invocation by way of petition under Section 9 of the Arbitration and Conciliation Act, 1966. As referred above vide order dated 25.10.1997, this Court allowed the petition by holding that the same was not in terms of the Bank Guarantee and at the same time allowed the respondent to issue a fresh letter of Invocation in accordance with the terms of the guarantee and at the same time shall provide cause thereforee.
Vide letter dated 26.8.2002, the respondent again invoked the Bank Guarantee by specifically mentioning that the Bank Guarantee was being invoked strictly in terms thereof. Relevant extracts of letter of invocation are as under:
'Further, I, thereforee, say that M/s Maharashtra State Handlooms Corporation Ltd. the society has caused breach of the terms and conditions contained in the agreement dated 14.3.1997. I hereby invoked the captioned Bank Guarantee and demand a sum of Rs. 3.50 crores from you as the same is due and payable to ACASH by way of loss or damage caused to or which would be caused to or suffered by ACASH by reasons of breach by M/s Maharashtra State Handlooms Corporation Ltd. of the terms and conditions contained in the said agreement dated 14.3.1997.'
This letter gave rise to the instant petition.
8. Relevant clauses of Bank Guarantee as well as of contract need to be reproduced to appreciate the controversy in the right prospective.
BANK GUARANTEE
Clause 1
'We, State Bank of India, do hereby undertake to pay the amount due and payable under this guarantee to the beneficiary without any demure, merely on demand from ACASH stating that the above claim is due by way of loss or damage caused to or would be caused to or suffered by ACASH by reason of breach by the said Society of the terms and conditions contained in the said agreement or by reason of Society's failure to perform its part of the contract or supply of order. Any such demand made in the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee. However, the liability of the bank under this guarantee shall be restricted to an amount not exceeding Rs. 3.50 crores.'
Clause 12
'The Bank Guarantee which has been furnished to the ACASH for a sum of Rs. 3.50 crores may be invoked by the ACASH unless the entire supplies are made by the supplying agency to the satisfaction of Government of Bihar. Performance Guarantee to the tune of 10% contractual value has to be furnished by the supplying agency.'
Contract
Clause 2
'The ACASH has agreed to advance a sum of Rs. 3.50 crores to supplying agency for commencing the execution of the contract. Supplying agency has agreed to give a Bank Guarantee for Rs. 3.50 crores against this advance.'
Clause 3
'Supplying agency will start supplies within 30 days or earlier after receipt of order from ACASH, along with advance of Rs. 3.50 crores and thereafter complete the supplies within four months as per the order placed with them.
ACASH will have the option to make changes in the supply schedule to different districts within the total supply order depending upon the feed back received from different districts regarding their requirements after giving one month's notice to Supplying Agency.'
Clause 4'The total time of four months allowed for carrying out the work shall be strictly observed by supplying agency. Four months period of delivery shall be reckoned from the 30th day after the date on which the order to commence the work is received by supplying agency together with the advance of Rs. 3.50 crores as stated hereinbefore. Supplying agency will pay penalty of 0.50% per month of delay on value of balance of due deliveries for which the maximum penalty will be 2% as set out in the Performance Guarantee also.'
9. The aforesaid conspectus of facts shows that the controversy revolves around Clause 3 of the agreement i.e. whether the petitioner had maintained the schedule of time in supplying the articles or not.
10. Mr. Neeraj Kaul, learned Senior Counsel for the petitioner has assailed the validity of second letter of invocation mainly on the following grounds:
(i) That the invocation is bad in law as it has not been invoked by duly authorised person as mentioned in the Bank Guarantee.
(ii) That in spite of the reasons provided by the respondent in the earlier letter of invocation having been found insufficient and in spite of the observations of his Court that subsequent letter of invocation shall provide the cause, the respondent has issued stereotype letter of invocation which was no better than the earlier one inasmuch as that neither was it in terms of the guarantee nor was any cause shown.
(iii) The schedule of time as stipulated by Clause 3 of the agreement was faithfully observed by the petitioner inasmuch as it had already supplied the articles of the value of Rs. 3.99 crores up to September 1997 i.e. within four months of the receipt of the advance of Rs. 3.50 crores. thereforee, the letter of invocation was unwarranted and uncalled for.
(iv) Though the petitioner had supplied articles for an amount more than what it received by way of advance still the fact remains that supplies were discontinued at the instance of the respondent vide letter dated 4.9.1997 as the respondent was having its own problem with State of Bihar with whom he had independent contract of supply of Dhoties, and had furnished Bank Guarantee which was duly invoked by the State of Bihar and since the respondent had failed to obtain the stay against invocation of the guarantee, it resorted to this action out of reaction.
11. In nutshell, petitioner's case is that respondent is not entitled to invoke the Bank Guarantee until it establishes that the petitioner had failed to maintain the schedule of time in supplying the articles as on this ground alone the Bank Guarantee was invocable. According to the petitioner he not only supplied the articles more than the value of the advance received by it from the respondent but also adhered to the schedule of time and discontinued the supplies at the instance of the respondent and there was no fault on the part of the petitioner for which it can be penalised.
12. On the contrary Mr. Rajiv Nayar, learned Senior Counsel for the respondent has at the outset referred to the import of Performance Bank Guarantee that such a guarantee' does not require the party to assess the loss and damage due to non- performance before invoking it, placed reliance upon the View of the Supreme Court in Hindustan Steel Workers Construction Ltd. v. S.S. Atwal and Co. (Engineers) Pvt. Ltd., : AIR1996SC131 --
'that the parties are not required to assess the quantum of loss and damages before invoking the performance guarantee or the Bank Guarantee and there is no ground for restraining the invocation of the unconditional guarantee.'
13. Apart from this, Mr. Nayar has attempted to show that the petitioner has been in breach of contract and thereforee is not entitled for any injunction. According to Mr. Nayar Clause 2 of the contract required the petitioner to furnish the Bank Guarantee for Rs. 3.50 crores against the mobilization advance. The agreement was executed on 14.3.1997. The respondent gave the advance of Rs. 3.50 crores against the Bank Guarantee on 10.6.1997. Since, time was essence of contract, the supplies were to be made within four months of receipt of advance. The petitioner cannot claim to have adhered to the schedule of time of contract as the petitioner took four months to furnish the Bank Guarantee as it failed to furnish the Bank Guarantee immediately after entering into the contract and took further one more month to supply the articles after receiving the advance whereas Clause 3 specifically provided that the petitioner shall start supplying within 30 days or earlier after receipt of the order from the respondent along with advance of Rs. 3.50 crores and, thereafter, complete the supplies within four months.
14. In the opinion of Mr. Nayar the respondent was entitled to invoke the Bank Guarantee in July itself but it did not do so in view of the assurance given by the petitioner to adhere to the schedule of supplies regularly. But this did not prevent the respondent from invoking the Bank Guarantee subsequently as the Bank Guarantee was unequivocal and unconditional. He further contended that the earlier petition was allowed only on the ground that the letter of invocation was not in terms of the Bank Guarantee. The instant letter of invocation specifically mentions that the Bank Guarantee was being invoked and a demand of Rs. 3.50 crores was being made as the same was payable to respondent by way of loss or damage caused to it or which would be caused or suffered by respondent by reasons of breach of the terms and conditions contained in the agreement dated 14.3.1997. To expect a party to spell out as to what loss or damage would be caused or had been suffered by it, is not the requirement of the Bank Guarantee being an unconditional, separate and independent contract. Thus according to Mr. Nayar subsequent invocation is strictly in terms of the Bank Guarantee and in no way can be faulted with.
15. In support of his contention Mr. Nayar placed reliance upon National Telecom of India Ltd. v. Union of India, : AIR2001Delhi236 wherein it was held that even if one of the requirements for invoking the Bank Guarantee is not specified, the demand made on the Bank has to be conclusive as regards the amount due and payable by it under the Bank Guarantee. It was further held that once the Bank Guarantee is in unequivocal and unconditional terms and undertakes to pay the amount without any demur or objection and irrespective of any dispute, there is no scope for injunction against the Bank Guarantee.
16. Mr. Nayar contended with vehemence that unless the Bank Guarantee is afflicted with the vice of fraud and its invocation is likely to cause irretrievable harm, it cannot be subjected to injunction. In support of this principle, Mr. Nayar has placed reliance upon Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Anr., : AIR1997SC2477 , wherein following guidelines were rendered by the Supreme Court.
'If there is fraud in connection with the Bank Guarantee which would vitiate the very foundation of such guarantee and the beneficiary seeks to take advantage of it, then he can be restrained from doing so. But for that, the fraud has to be an established unconstitutional bank guarantee would result in irretrievable harm of injustice to one of the parties concerned. 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 derisively 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.'
17. Mr. Nayar urged that the petitioner succeeded in earlier petition for the reasons that the letter has not been invoked in terms of Bank Guarantee and now to say that the second letter is not in terms thereof when it specifically refers that the amount is due and payable by way of loss or damage or which would be caused or suffered by the respondent by reasons of breach by the petitioner of the terms and conditions of the contract would be highly far-fetched proposition particularly in view of the settled law governing the Bank Guarantees which are in unequivocal terms and unconditional and state that the amount would be paid without any demur or objection as the Bank Guarantee represents an independent contract between the Bank and beneficiary and both the parties are bound by the terms thereof.
18. Objection that the Bank Guarantee has not been invoked by a duly authorised person appears to be innocuous one and needs to be dealt with at the threshold. Admittedly, the Bank Guarantee does not stipulate a particular person either by name or designation who was authorised to invoke it. It simply states that the State Bank of India do hereby undertake to pay the amount due and payable under this guarantee to the beneficiary without any demure, merely on demand from ACASH stating that the above claim is due by way of loss or damage caused to or would be caused to or suffered by ACASH by reason of breach by the petitioner of the terms and conditions in the said agreement or by reason of Society's failure to perform its part of the contract or supply of order. The earlier Bank Guarantee was also invoked by Development Commissioner of the respondent company and instant letter of invocation was also issued by the Development Commissioner.
19. Mr. Kaul challenged the authority of the Development Commissioner by contending that he was not authorised by the respondent to send the letter of invocation. Though no such plea was taken by the learned Counsel in earlier petition but he thinks that the judgment in Hindustan Construction Co. Ltd. v. State of Bihar and Ors., : AIR1999SC3710 arms him with such a defense.
20. In Hindustan Construction case the Bank Guarantee was invoked by the Executive Engineer whereas it was the Chief Engineer through whom the Bank Guarantee was to be invoked. It was in view of the named person by way of designation mentioned in the Guarantee that this Court held the invocation bad in law being not in terms of the guarantee. In the instant case the Company was empowered to invoke the Bank Guarantee. Development Commissioner happens to be the Chairman of the respondent company and, thereforee, to say that he is not authorised person would be too much. He was in such a position that he was entitled to delegate his authority to lower functionary for invoking the Bank Guarantee. The very fact that the Bank Guarantee mentioned that 'the State Bank on the demand made by the respondent company would pay' shows that any responsible officer knowing the facts of the case or dealing with the matter was entitled to invoke the Bank Guarantee being representative of the respondent company. It is underlying intention which is more relevant for dealing with such contentious issue and not hyper technicalities or hair splitting interpretation. The fact remains that the petitioner knew it well and was aware of the fact that the Bank Guarantee has been invoked by the Development Commissioner on behalf of the respondent earlier also but it did not challenge or respond that the Officer who had sent the letter of invocation was not duly authorised officer. Even if such an objection had been taken by the petitioner it would not have held water nor would it have rendered the invocation bad as Development Commissioner is the highest functionary of the respondent Company and, thereforee, a person having full authority to invoke it.
21. Now comes the crucial question whether Bank Guarantee has been invoked strictly in its terms or not. There is unvarying unanimous opinion that the Bank Guarantee constitutes a separate, distinct and independent contract. In the instant case, the contract between the respondent and State of Bihar with regard to the Bank Guarantee was itself an independent contract and thereforee has no relevance or bearing upon the Bank Guarantee executed by the petitioner. While dealing with the nature of contract of Bank Guarantee and the principles governing the invocation thereof, the Supreme Court has laid down the criteria in Dwarikesh Sugar industries Ltd. v. Prem Heavy Engineering Workds (P) Ltd. and Anr. (supra).
22. After considering the contentions of the learned Counsel for both the parties carefully as well as scanning the terms of contract as well as the terms of Bank Guarantee and the letter of invocation, I arrive at the following conclusions :
(i) That in terms of the contract, the respondent had agreed to advance a sum of Rs. 3.50 crores to the petitioner for completion of the contract and in turn the petitioner gave a Bank Guarantee for the same amount.
(ii) In terms of Clause 3, the petitioner was required to start supplies within 30 days after the receipt of the order along with advance which means that the supplies were to commence within 30 days from the receipt of the advance. The advance was received by the petitioner on 10.6.1997 and the petitioner commenced the supplies from 10.7.1997 i.e. within 30 days of the receipt of the demand.
(iii) The supplies were to be completed within four months which means that four months subsequent to the commencement of the supplies if the commencement was within 30 days of the receipt of the order accompanied with advance.
(iv) The supplies for the amount of Rs. 3.99 crores made by the petitioner from July 1997 to September 1997 which shows that the supplies were made within stipulated period.
(v) If at all there was any delay in not making the complete supplies within four months it was on account of the communication sent by the respondent dated 4.10.1997 asking the petitioner to discontinue the supplies as the respondent was having some problem with the Government of Bihar.
(vi) The instant action of invocation of the Bank Guarantee was a reaction of the invocation of the Bank Guarantee by State of Bihar against the respondent.
(vii) State of Bihar twisted the arm of the respondent and respondent in turn twisted the arm of the petitioner. Had there been any lapse on the part of the petitioner either in adhering to the schedule of time or in supplies, nothing prevented the respondent to intimate the petitioner but respondent did not do so as it was satisfied with the supplies and schedule of time.
(viii) The respondent was well aware of the fact that the earlier letter of invocation was found not only to be not in terms of the Bank Guarantee but also contained a flaw of non-disclosure of the cause. It was for these reasons that the earlier order passed by this Court did not foreclose the right of the respondent to re-invoke the Bank Guarantee but cautioned the respondent to provide a cause also.
(ix) The letter of invocation is reproduction of the words written in the Bank Guarantee but without disclosing the cause. Mechanical repetition of the words contained in the Bank Guarantee will not in such a situation be sufficient to sustain the letter of invocation particularly in the light of earlier judgment of this Court which called upon the respondent to disclose the cause of action for invoking the Bank Guarantee. Having been once bitten respondent was expected to be doubly cautious but it still failed to provide the cause of action while invoking the Bank Guarantee particularly when it is now harping upon the lapse committed by the petitioner in maintaining the schedule.
23. However, as a last resort, Mr. Nayar contended that the petitioner even otherwise is not entitled for injunction as the intention of the petitioner to get the dispute decided by way of arbitration is non-existent as the dispute arose in 1997 but till date application for appointment of the Arbitrator has not been made nor has any request been made by the respondent in this regard. While canvassing the proposition that unless there is manifest intention on the part of the party to seek adjudication of the dispute through Arbitration, it is not entitled for injunction under Section 9 of the Act, Mr. Nayar placed reliance upon Sundaram Finance Ltd. v. NEPC India Ltd., : [1999]1SCR89 , wherein following observations were made:
'When a party applies under Section 9 of the 1996 Act, it is implicit that there is final and binding agreement in existence and it is also implicit that a dispute must have arisen which is referable to the Arbitral Tribunal as Section 9 contemplates arbitration proceedings taking place between the parties and thereforee unless there is manifest intention on the part of the applicant to take recourse to the Arbitral proceedings and at the time when the application was filed, the proceedings have not commenced, the injunction should not be granted.'
24. It appears that the petitioner was more worried and concerned about the action of the respondent in invoking the Bank Guarantee as respondent was bent upon to invoke the same. Respondent cannot take advantage of its own wrong and the ratio of Sundram's inasmuch as that on the one hand it accused the petitioner for non-adherence of the schedule of time in spite of the fact that the petitioner had already made supplies for more than the advance amount received by it while on the other hand did not invoke the arbitration clause in view of the stand of the petitioner. In such a situation to say that there was no manifest intention on the part of the petitioner to take recourse to the Arbitral proceedings is neither correct nor acceptable.
25. In view of the foregoing reasons, the petition is allowed as the letter of invocation suffers from the vice of non-disclosure of cause of action apart from being not in terms of Bank Guarantee. By way of interim injunction the respondents are restrained from invoking the Bank Guarantee till the conclusion of arbitral proceedings in case these are initiated by any of the parties.
Petition is disposed of.