Jagdish Constructions Ltd. Vs. M.P. Rural Road Development Authority and ors. - Court Judgment

Excerpt:
banking - performance guarantee - petitioner awarded with contract for construction by respondent no. 1, which must be completed within specified period - petitioner also furnished unconditional guarantee and respondent no.2 (bank) was guarantor - respondent no.1 terminated contract and invoked performance guarantee - consequently, respondent no. 2 issued communication and advising petitioner to deposit amount of performance guarantee - aggrieved by same, petitioner filed present petition - held, unconditional guarantee is encashable on very demand of beneficiary and demand said to be conclusive when it should be raised by concern party according to terms and condition of contract - in present case, performance guarantee furnished in favour of respondent no. 1 beneficiary, is unconditional and without any strings - neither prior notice nor determination or quantification of loss would be necessary for invoking performance guarantee made by petitioner - in instant case, beneficiary has not issued letter or notice nor quantified loss amount, which provide sufficient ground to issue restraint order or interfere with invocation of performance guarantee - in result, petition fails and accordingly dismissed - motor vehicles act, 1988 [c.a. no. 59/1988]section 147; [a.k. patnaik, cj, s.s. jha & a.m. sapre, jj] liability of insurer - third party insurance held, the insured who is a party to the insurance is not a third party for the purpose of chapter xi of the act, particularly section 147 thereof. thus, any person other than the insurer and the insured who are parties to the insurance policy is a third party. the insurer, however, would not be liable for any bodily injury or death of a third party in an accident unless the liability is fastened on the insurer under the provisions of section 147 of the act or under the terms and conditions of the policy of insurance. hence, the mere fact that a passenger is a third party would not fasten liability on the insurer unless such liability arises under section 147 of the act or under the terms and conditions of the insurance policy. an employee is a third party inasmuch as he is not a party to the insurance policy. but merely because an employee is a third party, the insurance company would not be liable to compensate in case such employee suffers bodily injury or dies in an accident in which the motor vehicle is involved unless section 147 of the act fixes such liability on the insured or unless the terms and conditions of the contract of insurance fixes liability on the insurer. section 147 (1)(b) of the act provides that in order to comply with the requirements of chapter xi of the act, a policy of insurance must be a policy which insures the person or classes of persons specified in the policy to the extent specified in sub-section (2) against the liabilities mentioned in clauses (i) and (ii) thereunder. even if an employee is a passenger or a person travelling in a motor vehicle which is insured as per the requirements of sub-section (1) of section 147 of the act, the insurer will not be liable to cover any liability in respect of death or bodily injury of such employee unless such employee falls in one of the categories mentioned in sub-clauses (a), (b) and (c)of clause (i) of the proviso to sub-section (1)of section 147 of the act and further in cases where such employees fall under categories mentioned in sub-clauses (a), (b) and (c) of clause (i) of the proviso to sub-section (1`) of section 147 of the act, the insurer is liable only for the liability under the workmens compensation act, 1923. [national insurance co. ltd. v sarvanlal, 2004 (4) mpht 404 (d.b) overruled]. sections 147 & 96 & m.p. m.v. rules, 1994, rule 97; [a.k. patnaik, cj, s.s. jha & a.m. sapre, jj] control of transport vehicles m.p. rules relate to provisions of control of transport vehicles and it cannot be adopted for interpreting sections 147 and 145 of the m.v. act to hold the insurer liable for death or bodily injury suffered by passenger. [national insurance co. ltd. v sarvanlal, 2004 (4) mpht 404 (d.b) overruled]. - matsas (1966) 2 lilr 495 while refusing to grant and injunction 'a bank guarantee is every much like a letter of credit. no doubt, it is true that in exceptional cases, such as fraud of which the bank has the notice, court may issue injunction but otherwise it is open for the parties to settle their disputes as per the mode provided under the contract.orders.k. seth, j.1. though this petition is directed against the communication dated 1-3-2007 (annexure p-1) but in fact, it is to seek a restrain order against respondents not to effect recovery from the petitioner till adjudication of dispute by arbitrator.2. undisputed facts. petitioner was awarded contract for 'construction and of maintenance of rural roads' under pradhan mantri gram sadak yojna (pmgsy) in respect of package no. mp-3153 a.d.b. to be completed within the stipulated period of twelve months. pursuant to this, work order was issued. petitioner also furnished an unconditional performance guarantee in the sum of rs. 75 lacs payable on demand without demure to the respondent no. 1. the respondent no. 2, the oriental bank of commerce issued said performance guarantee in favour of respondent no. 1. it is also not disputed that respondent no. 1 terminated contract on 1-3-2007 and invoked the performance guarantee, consequently, the respondent no. 2 issued the communication dated 6-3-2007 (annexure p-4) advising petitioner to deposit amount of the per for mance guarantee. hence this petition.3. shri bagadia, learned senior counsel for the petitioner made two-fold submissions. one, that no letter or prior notice was given by the respondent no. 1 to show what were the compelling factors for invoking the performance guarantee. second, without ascertaining or quantifying the amount of loss, respondent no. 1 was unjustified in invoking the performance guarantee. after having heard learned counsel for the petitioner on the question of admission, and giving considerable thought, i find myself unable to agree with either of the submissions of learned counsel for the petitioner for the following reasons.4. a performance guarantee is akin to letter of credit. in other words, it is a commercial document so it can be invoked in a commercial manner. the invocation would be sufficient and proper, if the bank concerned understands that the guarantee is being invoked by the beneficiary in terms of the guarantee. the position has been summed by roskill, lj in howe richardson scale co. ltd. v. polimex-cekop and national westminster bank ltd. (1978) 1 lloyd's rep 161 in these words:whether the obligation arises under a letter of credit or under a guarantee, the obligation of the bank is to perform that which it is required to perform, that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contract; the bank here is simply concerned to see whether the event has happened upon which its obligation to pay has arisen.in united commercial bank v. bank of india, reported in : [1981]3scr300 , supreme court in para 41 of the judgment also quoted with approval the following observations of lord denning in elian v. matsas (1966) 2 lilr 495 while refusing to grant and injunction '...a bank guarantee is every much like a letter of credit. the courts will do their utmost to enforce it according to its terms. they will not in ordinary course of things, interfere by way of injunction to prevent its due implementation.... but that is not an absolute rule. circumstances may arise such as to warrant interference by injunction.'5. an unconditional bank guarantee is encashable on the very demand of the beneficiary and the demand according to the terms of guarantee is conclusive. in such type of guarantee, the beneficiary is the sole judge as to whether there is any breach of underlying or primary contract and the bank is not concerned with the underlying contract unless otherwise expressly provided for. in present case, performance guarantee furnished in favour of respondent no. 1 beneficiary, is unconditional one without any strings attached to it as is clear from perusal of performance guarantee furnished in favour of respondent no. 1. neither a prior notice nor determination or quantification of loss would be necessary for invoking the performance guarantee such as the one furnished by the petitioner. no doubt, it is true that in exceptional cases, such as fraud of which the bank has the notice, court may issue injunction but otherwise it is open for the parties to settle their disputes as per the mode provided under the contract. in the present petition, it is not the case of the petitioner that fraud of which the bank had notice. merely because the beneficiary has not issued a letter or notice nor quantified the loss amount, in my opinion, are not sufficient to issue a restraint order or to interfere with the invocation of the performance guarantee. thus, i do not find any merit in the submissions of the learned senior counsel. similarly, reliance placed on the decision in hindustan construction co. ltd. v. state of bihar reported in : air 1999 sc3710 is of no avail. as regard the relief no. (ii) of para 7, learned counsel for the petitioner was fair enough to state at the outset of the arguments, that a. dispute has already been raised by the petitioner for the decision of the competent authority in terms of the contract. no sooner, the authority gives a decision parties shall be free to resolve their dispute in terms of the contract.6. in the result, this petition fails and is accordingly dismissed summarily. order accordingly.

Judgment:
ORDER

S.K. Seth, J.

1. Though this petition is directed against the communication dated 1-3-2007 (Annexure P-1) but in fact, it is to seek a restrain order against respondents not to effect recovery from the petitioner till adjudication of dispute by arbitrator.

2. Undisputed facts. Petitioner was awarded contract for 'Construction and of Maintenance of Rural Roads' under Pradhan Mantri Gram Sadak Yojna (PMGSY) in respect of package No. MP-3153 A.D.B. to be completed within the stipulated period of twelve months. Pursuant to this, work order was issued. Petitioner also furnished an unconditional performance guarantee in the sum of Rs. 75 lacs payable on demand without demure to the respondent No. 1. The respondent No. 2, the Oriental Bank of Commerce issued said performance guarantee in favour of respondent No. 1. It is also not disputed that respondent No. 1 terminated contract on 1-3-2007 and invoked the performance guarantee, consequently, the respondent No. 2 issued the communication dated 6-3-2007 (Annexure P-4) advising petitioner to deposit amount of the per for mance guarantee. Hence this petition.

3. Shri Bagadia, learned senior counsel for the petitioner made two-fold submissions. One, that no letter or prior notice was given by the respondent No. 1 to show what were the compelling factors for invoking the performance guarantee. Second, without ascertaining or quantifying the amount of loss, respondent No. 1 was unjustified in invoking the performance guarantee. After having heard learned Counsel for the petitioner on the question of admission, and giving considerable thought, I find myself unable to agree with either of the submissions of learned Counsel for the petitioner for the following reasons.

4. A performance guarantee is akin to letter of credit. In other words, it is a commercial document so it can be invoked in a commercial manner. The invocation would be sufficient and proper, if the bank concerned understands that the guarantee is being invoked by the beneficiary in terms of the guarantee. The position has been summed by Roskill, LJ in Howe Richardson Scale Co. Ltd. v. Polimex-Cekop and National Westminster Bank Ltd. (1978) 1 Lloyd's Rep 161 in these words:

Whether the obligation arises under a letter of credit or under a guarantee, the obligation of the bank is to perform that which it is required to perform, that particular contract, and that obligation does not in the ordinary way depend on the correct resolution of a dispute as to sufficiency of performance by the seller to the buyer or by the buyer to the seller as the case may be under the sale and purchase contract; the bank here is simply concerned to see whether the event has happened upon which its obligation to pay has arisen.

In United Commercial Bank v. Bank of India, reported in : [1981]3SCR300 , Supreme Court in para 41 of the judgment also quoted with approval the following observations of Lord Denning in Elian v. Matsas (1966) 2 LILR 495 while refusing to grant and injunction '...a bank guarantee is every much like a letter of credit. The Courts will do their utmost to enforce it according to its terms. They will not in ordinary course of things, interfere by way of injunction to prevent its due implementation.... But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction.'

5. An unconditional bank guarantee is encashable on the very demand of the beneficiary and the demand according to the terms of guarantee is conclusive. In such type of guarantee, the beneficiary is the sole Judge as to whether there is any breach of underlying or primary contract and the bank is not concerned with the underlying contract unless otherwise expressly provided for. In present case, performance guarantee furnished in favour of respondent No. 1 beneficiary, is unconditional one without any strings attached to it as is clear from perusal of performance guarantee furnished in favour of respondent No. 1. Neither a prior notice nor determination or quantification of loss would be necessary for invoking the performance guarantee such as the one furnished by the petitioner. No doubt, it is true that in exceptional cases, such as fraud of which the bank has the notice, Court may issue injunction but otherwise it is open for the parties to settle their disputes as per the mode provided under the contract. In the present petition, it is not the case of the petitioner that fraud of which the bank had notice. Merely because the beneficiary has not issued a letter or notice nor quantified the loss amount, in my opinion, are not sufficient to issue a restraint order or to interfere with the invocation of the performance guarantee. Thus, I do not find any merit in the submissions of the learned senior counsel. Similarly, reliance placed on the decision in Hindustan Construction Co. Ltd. v. State of Bihar reported in : AIR 1999 SC3710 is of no avail. As regard the relief No. (ii) of para 7, learned Counsel for the petitioner was fair enough to state at the outset of the arguments, that a. dispute has already been raised by the petitioner for the decision of the competent authority in terms of the contract. No sooner, the authority gives a decision parties shall be free to resolve their dispute in terms of the contract.

6. In the result, this petition fails and is accordingly dismissed summarily. Order accordingly.