Allowed

Superintending Engineer P.T.W. v. M/S Crust Cables and Another

Allahabad HC20 Jul 2018SAPL/971/1999

Case brief

AI extract

What is this about?

In a second appeal regarding a bank guarantee dispute, the court examined the maintainability of a suit seeking permanent injunction against encashment. The appellant bank successfully established that the guarantee is independent of the underlying contract. The court held that the suit for an indefinite injunction was not maintainable as no fraud or irretrievable harm was shown, and the underlyin

What did the court decide?

The judgment and decree of the courts below were set aside; the second appeal was allowed; parties to bear their own costs.

Superintending Engineer P.T.W. Vs M/S… — Contract and Commercial Disputes | Allahabad HC (2018)

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RESERVED ON:- 28.05.2018 DELIVERED ON:- 20.07. 2018

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Case:- SECOND APPEAL No. - 971 of 1999

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Appellant :- Superintending Engineer,P.T.W. Respondent :- M/S Crust Cables & Another Counsel for Appellant :- S.C.,Vijendra Singh Counsel for Respondent :- Swapnil Kumar,Tarun Verma

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Hon'ble Siddharth,J.

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Heard Sri P. P. Chaudhary, learned Standing Counsel appearing for the appellant and Sri Swapnil Kumar and Sri Arvind Srivastava, Advocates, learned counsel for the respondents.

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This is defendant's second appeal against the judgment and decree dated 26.04.1999 passed by Sri Harpal Singh, XV^th Additional District Judge, Meerut in Civil Appeal No. 125 of 1997 dismissing the appeal and confirming the judgment of the trial court dated 30.04.1997 passed by Sri Shafeeq Uddin, VII^th Additional Civil Judge (Senior Division), Meerut in Original Suit No. 238 of 1992.

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Plaintiff instituted a suit praying for a decree of permanent injunction against the defendant no. 1, Branch Manager, Canara Bank, restraining him from honouring the bank guarantee of Rs. 1,68,848/- in favour of defendant no. 2, Superintending Engineer, Public Tube Well, till the final settlement of dispute between the plaintiff and defendant no. 2. Plaintiff's case is that the Executive Engineer, Tube Well, Circle 42, Lucknow invited bids for supply of 642 kg P.V.C. welding wires in August, 1992; that plaintiff made his tender for the said purpose and the defendant no. 2, Superintending Engineer, accepted the same; that the total sale consideration was Rs. 16,85,472/-; that a contract was executed between the plaintiff and defendant no. 2 on 06.12.1990 and plaintiff was required to execute a bank guarantee as per the agreement in favour of defendant no. 2 by fulfilling a condition in the contract that if the plaintiff fails to work as per the contract, the defendant no. 2 would be entitled to encash the bank guarantee of Rs. 1,68,848/- executed in his favour by the defendant no. 1 Canara Bank; that the plaintiff supplied goods of about Rs. 10 lakh to the defendant no. 2 and remaining supply was not made because the cost of copper increased from Rs. 82 Kg to 125 Kg; that there was condition in the contract that if due to any force majeure, it becomes impossible to comply the contract, the plaintiff would do so; that the increase in the cost of copper was beyond the control of the plaintiff and it was the result of the decision of the Central Government, therefore plaintiff prayed before the defendant no. 2 that either he should revise the contract and increase the amount of supply of goods agreed or he would be compelled to stop the supply; that instead of replying to the request of the plaintiff, defendant no. 2 informed the defendant no. 1, Canara Bank, to honour bank guarantee and make payment of Rs. 1,68,848/- and informed the plaintiff that he should deposit the amount in the bank for the above purpose; that the suit was instituted for restraining the bank from honouring the guarantee because in case the

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defendant no. 2 succeeds in encashing the bank guarantee, plaintiff would suffer irreparable loss.

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Defendant no. 1 filed written statement and admitted execution of bank guarantee and admitted its liability to pay the amount of bank guarantee to the defendant nos. 2 and 3.

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Defendant nos. 2 and 3 filed their joint written statement admitting the contract between the parties; that the plaintiff was required to make supply of the entire goods as per the contract up to 28.02.1990 which was not supplied in time; that had supply been made in time increase in the cost of copper would not have affected their contract; that there was no such term in the contract justifying non-supply of goods in case of increase in the cost of copper; defendant no. 1 is bound to pay the amount to the defendant nos. 2 and 3 as per the bank guarantee; that the suit of the plaintiff is barred by Section 80 CPC and he has no cause of action; that suit is under valued and court fees paid is insufficient; that the defendant is entitled to get special costs under Section 35-A CPC from the plaintiff.

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Additional written statement was filed on behalf of the defendant nos. 2 and 3 stating that the plaintiff has failed to honour the contract and therefore his security amount which was mentioned in the bank guarantee is required to be forfeited; that the plaintiff has alternative remedy and therefore the suit is not maintainable and is barred by order 7, Rule 11 C.P.C. and deserves to be dismissed with cost.

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On the basis of the pleadings of the parties the trial court framed the following issues-:

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(1)Whether the invocation of bank guarantee no. 17/19 of Canara Bank by defendant no. 2 was illegal, invalid and arbitrary?

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(2)Whether the agreement could not be further performed on account of force majeure as alleged in Para 5 and 6 of the plaint? If yes, its effect?

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(3)Whether defendant no.1 is an unnecessary party in the suit? If so, its effect?

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(4)Whether the plaintiff failed to perform his part of contract and has become liable to compensate defendant nos. 2 and 3?

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(5)Whether the security in the form of bank guarantee was liable to be forfeited by defendant no. 2 as alleged in para 19 of written statement of defendant no. 2 and 3?

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(6)Whether the suit is not maintainable as alleged in para 21 of the written statement of defendant nos. 2 and 3?

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(7)Whether the plaint is liable to be rejected under Order 7, Rule 11 C.P.C. for wants of notice under Section 80 CPC?

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(8)Whether the plaintiff was not entitled to exemption under Section 80(2) CPC?

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(9) Whether the suit is not maintainable as alleged in para 23 of the written statement of defendant nos. 2 and 3?

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(10) Whether this court has got no jurisdiction to try the suit as alleged in para 25 of the written statement of defendant nos. 2 and 3?

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(11) Whether the plaintiff is wrong doer and the relief of injunction cannot be granted to him as alleged in para 26 of the written statement of defendant nos. 2 and 3?

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(12) Whether the suit is barred under Section 38 and 42 of Special Reliefs Act?

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(13) To what relief is the plaintiff entitled?

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Learned trial court decided issue no. 3 holding that defendant no. 1, Branch Manager, Canara Bank, is a necessary party since injunction has been sought against him. Issue nos. 7 and 8 were decided holding that the suit was instituted with the permission of dispensing notice under Section 80(2) CPC and therefore it is not liable to be rejected under Order 7, Rule 11 C.P.C. The plaint is not liable to be rejected. Issue nos. 2, 4 and 5 were decided by the learned trial court holding that the plaintiff failed to honour the contract because of increase in the cost of copper by the Central Government and beyond the control of plaintiff and therefore principle of force majeure would apply to this case. Issue nos. 1, 6, 9, 10, 11 and 12 were decided holding that the defendant no. 2 was not entitled to invoke the bank guarantee given by the defendant no. 1 in his favour since the plaintiff was prevented from honouring the contract on account of the force majeure and therefore the defendant no. 2 was not entitled to invoke the bank guarantee and forfeit the amount of security mentioned therein. Issue no. 13 was decided holding that the plaintiff has established his case and therefore a suit was decreed by the trial court.

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Defendants preferred the Civil Appeal against the judgment and decree of the trial court and lower appellate court framed the point of determination relying upon issue nos. 4 and 5 in the suit i.e., whether plaintiff has failed to honour his part of commitment in the contract and whether the defendant no. 2 is entitled to invoke the bank guarantee. The lower appellate court found that there was default on the part of defendant no. 2, since the inspection of the goods supplied by the plaintiff was not done in time nor the payment of the goods supplied by the plaintiff was made in time, therefore, the delay was caused by the plaintiff in supply of the goods. In view of the fault committed by the defendants themselves they cannot take benefit of their own wrong and invoke the bank guarantee against the interest of the plaintiff and the judgment and decree of the trial court was found to be correct and Civil Appeal of the defendant was dismissed.

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Aggrieved by the concurrent finding of facts recorded by both the courts below this second appeal has been preferred and it was admitted on 16.08.1999 on the following substantial question of law:-

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(1)Whether the suit for injunction was maintainable at the instance plaintiff-respondent?

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(2)Whether plaintiff -respondent-1 could vary the terms of contract unilaterally?

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By the order dated 04.05.2018 the third substantial questions of law was framed as follows,

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(3)Whether the validity of agreement between the parties for supplying of certain goods, is relevant consideration for grant or refusal of injunction regarding invoking of bank guarantee?

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Learned counsel for the appellant has argued that as regard answer to the first substantial question of law, injunction sought by plaintiffs is in temporary form as he has claimed injunction till the final settlement of dispute between the plaintiff and defendant no. 2. Such type of injunction cannot be granted for indefinite period particularly when there is no other dispute pending between plaintiff and defendant-appellant before any other court or arbitrator.

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Moreover, in view of Section 38 of Specific Relief Act perpetual injunction may be granted to plaintiff to prevent breach of an obligation existing in his favour. Obligation means duty enforceable by law. Herein the present case, there is no such obligation existing in favour of plaintiff which could be said to have been breached due to the invocation of Bank Guarantee by the appellant. Due to failure of plaintiff to perform the contract within specified time invocation of Bank Guarantee cannot be stopped. Hence, the suit for injunction was not maintainable.

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As regard the other questions of law the submission made is that in view of the law laid down by the Hon'ble Apex Court in Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Company (AIR 2007 S.C. 2798) since a Bank Guarantee or letter of credit is an independent and separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantee or letters of credit.

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The Hon'ble Apex Court has observed that there are two exceptions when the Court can grant an order of injunction in favour of aggrieved party against the invocation of Bank Guarantee.

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(I) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee.

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(II) If invocation of Bank Guarantee likely is to result in irretrievable harm or injustice to one of the parties concerned.

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Dispute regarding performance of contract or failure in payment is not to be taken into account but the Courts below have decreed the suit without considering the aforesaid aspect of the matter, hence the impugned judgment passed by the Courts below are not sustainable and liable to be set aside.

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As regards existence of fraud is concerned, there is no such pleading of fraud as required under the provisions of Order 6, Rule 4 of C.P.C., Hence the above mentioned Second Appeal deserves to be allowed and judgment and decree passed by the Court below are liable to be set aside. Learned counsel for the plaintiff respondent has submitted that the submission of the plaintiff-respondent is that the substantial question of law no. 1. does not arise in as much as the issue about the maintainability of the suit was not

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pressed by the defendants-appellants before the Lower Appellate Court and therefore now that issue has become final. However, suit for injunction to restrain the defendants to invoke bank guarantee in the present circumstances is maintainable in view of specific clause 25 in the contract regarding force majeure , as the rupee was devalued it became impossible to honour the contract, the period of which was extended vide letter dated 25.06.1991 (paper no. 28C/9) up to 31.07.1991 as also pleaded in para 4 of the replica. The f orce majeure in the present contract includes acts of the Government and since the devaluation in rupee is made by the Government, the case of the plaintiff-respondent is covered under f orce majeure . The restrictions by Reserves Bank of India creating a situation where a person had difficulty has been held to be force majeure in 2001 (7) SCC 728 (para 14 and 15) . Similarly the purpose of force majeure clause has been interpreted to be the intention to save the performing party from the consequence of anything over which he has no control as held by Supreme Court in AIR 1961 SC 1285 (para 16 and 17) ; that due to devaluation of rupee, the cost of copper had gone very high and in view of this it was not possible to fulfill the contract and it got frustrated due to devaluation of rupee raising the price of copper. The plaintiff-respondent relied on AIR 1991 Madras 158 (para 7, 8, 9 and 12) ; that the defendants-appellants illegally wanted to invoke the bank guarantee fraudulently so as to cause irretrievable harm or injustice to the plaintiff-respondent. These have been held to be grounds to pass injunction restraining the invocation of bank guarantee in following judgments:-

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i. AIR 1996 SC 2268 (para 15, 18, 22 and 23) ii. AIR 1997 SC 2477 (para 20 and 24) iii. AIR 1998 SC 3710 (para 14 and 21)

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There is no such case of defendants-appellants that they have suffered any loss due to non supply of PVC wire to them by the plaintiff-respondent and thus they are not entitled for any compensation from plaintiff guarantee. Thus the courts below were justified in passing the impugned judgment and decree; that so far as the judgments relied on by the standing counsel are concerned, it is submitted that Supreme Court in 2016 (10) SCC 46 after quoting para 14 of 2007 (8) SCC 110 has held that the court should be slow in granting an order of injunction to restrain realization of bank guarantee and also carved out the two exception of fraud and if resulting in irretrievable harm or injustice. Thus these judgments are in fact in favour of the plaintiff-respondent; that so far as substantial question of law no. 2 is concerned no such issue is pressed by the defendants-appellants before the courts below and thus cannot be raised for the first time before this Hon'ble Court. However, there is nothing on record to suggest that plaintiff-respondent has varied the terms of contract and there is no such pleading; that similarly the substantial question of law framed by this Hon'ble Court on 04.05.2018, it is submitted that this question also does not arise in present facts of the case in as much as the defendants-appellants cannot be permitted to invoke the bank guarantee.

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Thus in view of the aforesaid facts, the appeal deserves to be dismissed.

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Sri Arvind Srivastava learned counsel appearing on behalf of the defendant no. 1, Branch Manager Canara Bank has placed reliance on the judgment in the case of Gujarat Maritime Board Vs . Larsen And Toubro Infrastructure Development Projects Ltd. and Another, (2016) 10 SCC 46 Indian Express Para 11 and 12 are as follows:-

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“It is contented on behalf of the first respondent that the invocation of bank guarantee depends on the cancellation of the contract and once the cancellation of the contract is not justified, the invocation of bank guarantee also is not justified. We are afraid that the contention cannot be appreciated. The bank guarantee is a separate contract and is not qualified by the contract on performance of the obligations. No doubt, in terms of the bank guarantee also, the invocation is only against a breach of the conditions in the LoI. But between the appellant and the Bank, it has been stipulated that the decision of the appellant as to the breach shall be absolute and binding on the Bank.

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An injunction against the invocation of an absolute and an unconditional bank guarantee cannot be granted except in situations of egregious fraud or irretrievable injury to one of the parties concerned. This position also is no more res integra. In Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Co ., at para 14: (SCC pp. 117-18)

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“ 14. From the discussion made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:

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(1) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective fo any pending disputes relating to the terms of the contract.

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(2) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

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(3) The Courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a letter of credit.

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(4) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.

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(5) Fraud of an egregious nature which would vitiate the very

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foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation. (6) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.”

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After hearing the counsel for the parties the maintainability of the suit preferred by the plaintiff is required to be decided as per the first substantial question of law framed in this appeal. The relief clause in the plaint is as follows:-

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“That by a decree of permanent injunction the defendant no. 1 may kindly be restrained to revoke the Bank guarantee of the plaintiff to the tune of Rs. 1,68,340/- and send this amount to defendant no. 2 till the final settlement between the plaintiff and defendant no. 2.”

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A perusal of the above relief clause in the plaint shows that the permanent injunction was sought by the plaintiff against the defendant for an indefinite period till the final settlement between the plaintiff and the defendant no. 2 of their dispute. The learned counsel for the defendant appellant has argued that such an injunction cannot be granted by the court which is for indefinite period. Secondly, there was no dispute pending before the parties before any court, forum or Arbitrator and therefore the relief sought in the plaint itself was barred by Section 41 of the Specific Relief Act and Section 38 of the Specific Relief Act does not contemplates grant of perpetual injunction of the nature prayed by the plaintiff-respondent. Learned counsel for the plaintiff-respondent has only submitted that no such substantial question of law arise in this appeal since this issue was not pressed by the plaintiff-respondent before the lower appellate court and therefore it has attained finality. His only argument is that his suit for injunction restraining the defendants to invoke by bank guarantee is maintainable in view of specific clause 25 in the contract regarding force majeure .

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It is observed from the relief clause that the plaintiff did not prayed for absolving him from the entire liability on account of the force majeure rather he prayed that till the dispute between the plaintiff and defendant no. 2 is decided, the defendant no. 2 should be restrained from encashing the bank guarantee given by the plaintiff through defendant no. 1, Canara Bank. Therefore, in the absence of any plea and relief sought in the plaint to the effect that the plaintiff is not entitled to make any payment to the defendant no. 2 and the contract between the parties have been illegally terminated, the relief prayed in the plaint could not have been granted to the plaintiff.

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Regarding the second substantial question of law no arguments have been advanced by the parties.

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Counsel for the appellant has submitted, regarding third substantial question of law, that validity or otherwise of the agreement between the plaintiff and the defendant no. 2 for supply of P.V.C. Wire was not at all relevant consideration for grant of injunction against the invocation of bank

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guarantee he has relied upon the judgment in the case of Himadri Chemical Industries (supra) wherein the Apex Court observed that bank guarantee is a definite contract unaffected by any dispute between the parties to the contract and therefore the courts cannot restrain enforcement of bank guarantee in case of any dispute between the parties to the contract regarding enforcement of its terms or violation thereof. Only two exceptions carved by the Apex Court is regarding fraud of an egregious nature and where invocation of bank guarantee is likes to result in irretrievable harm or injustice to one of the party. Learned counsel for the plaintiff-respondent has referred to various case laws where injunction was granted on account of inclusion of the clause of force majeure . There is no quarrel with the propositions argued and upheld by the courts but in the present case there is a marked difference, here the plaintiff's case is not that the termination of his contract was illegal and on account of force majeure he could not fulfil his part of his obligation and therefore he is entitled to an injunction from the court against the defendant no. 2. Rather his case is that till the dispute between the plaintiff and the defendant no. 2 regarding violation of contract on account of force majeure is decided the defendant no. 2 may be restrained from encashing bank guarantee. The defence of force majeure has only been taken to justify the violation of contract and no relief has been sought on its basis that because of the force majeure and on account of fault on the part of the defendants of not performing their part of contract a declaration be made that there is no violation of the terms and contract on the part of the plaintiff. Such a relief was not sought in any of the case laws relied upon by the plaintiff-respondent in his argument viz., Smita Conductor Ltd. Vs. Euro Alloys Ltd., (2001) 7 SCC 728, M/s. D. Gobin Pran Vs. M/s. Shyam Ji Kalidas and Company, AIR 1961 Supreme Court SC 1285, etc. Therefore the argument of the counsel for the plaintiffrespondent regarding this substantial question of law has no substance and cannot be accepted. Both the courts below have failed to consider that the relief sought by the plaintiff was such which could not have been granted by the courts below.

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In view of the above consideration the first substantial question of law is decided holding that the suit of the plaintiff, as it was framed and as per the relief claimed therein, was not maintainable and has wrongly been decreed by both the courts below. Second substantial question of law has not been pressed nor any argument has been advanced by the parties and therefore it is not being decided. Last substantial question of law is decided holding that the exercise of invocation of bank guarantee was independent of any dispute between the plaintiff and the defendant no. 2 and the defendant no. 1 was bound to honour the bank guarantee since there was neither any fraud nor injustice would have been caused to be plaintiff had it taken care to agitate the issue of violation of the contract in the suit or before any other competent forum proving his fulfilment of obligation as per the contract and violation of the terms of contract by defendant no. 2. In the present case it cannot be said that there was any obligation existing in favour of plaintiff which could be said to have been violated due to invocation of bank guarantee by the defendant no. 2. Therefore the suit of the plaintiff praying for permanent injunction against the defendant no. 1, Branch Manager, Canara Bank, restraining him from honouring the bank guarantee in favour

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of defendant no. 2, Superintending Engineer, public tubewell, was not maintainable.

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The judgment and decree passed by both the courts below are set aside second appeal is allowed. However, the parties are directed to bear their own costs.

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Order Date :- 20.07.2018 Rohit

Superintending Engineer P.T.W. v. M/S Crust Cables and Another

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Superintending Engineer P.T.W. v. M/S Crust Cables and Another

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