JUDGMENT
Anil Dev Singh, J.
1. This is the plaintiff’s application under Order 39, rules 1 and 2, read with section 151 of the Code of Civil Procedure, 1908, seeking a direction restraining the second defendant, i.e., Syndicate Bank, from paying to the first defendant any amount under bank guarantees No. 24/87 and No. 25/87, dated July 1, 1987.
2. It is an admitted case of both the parties that the plaintiff was awarded a contract for “construction of additional shed for L.P.G. botting plant at Tikrikalan” by defendant No. 1. The total value of the contract was Rs.49,10,043. Under clause 2.1.0.0. of the general conditions of the contract, the plaintiff was required to furnish a security deposit in an amount equivalent to 10 per cent. of the total value of the contract for the due performance of its obligations under the contract. Again, according to clause 18 of the tender documents, the plaintiff was also required to furnish a bank guarantee for securing mobilisation advance to the tune of Rs. 4,91,004. It seems that the plaintiff and defendant No.1 came to a further agreement whereby the latter agreed to accept a composite back guarantee both for the mobilisation advance as well as for the security deposit. Accordingly, the plaintiff furnished a bank guarantee, bearing NO. 24 of 1987, issued by defendant No. 2 to defendant No. 1 covering both mobilisation advance as well as security deposit. This bank guarantee was for a sum of Rs. 4,91,004. That apart, the plaintiff also furnished another bank guarantee, being guarantee NO. 25/87 on July 1, 1987, for an amount of Rs. 1,22,751 in lieu of unpaid balance of initial security deposit which was required to be paid under clause 2.12.0 of the the general conditions of the contract. It may be relevant to point out that the contract in question was terminated on November 20, 1988, when the bank guarantees in question were also invoked by defendant No. 1.
3. Learned counsel appearing for the plaintiff submits that defendant No. 11 was not justified in invoking the bank guarantee No. 24/1987 to the full extent when, admittedly, a sum of Rs. 2,46,304 had already been recovered by it from the running bills of his client and adjusted towards the mobilisation advance. Learned counsel for the plaintiff further urges that, by invoking the bank guarantee, defendant No. 1 has practiced fraud on the plaintiff which vitiates the underlying contract. According to learned counsel, defendant No. 1 could have invoked the bank guarantee only for the balance amount of the mobilisation advance which remained due after the adjustment of the said amount of Rs. 2,46,300.
4. Learned counsel appearing for defendant No. 1, in reply, contends that the bank guarantee No. 24/87 is a composite one and converse both advance and security deposit. Since the plaintiff did not furnish the security deposit, bank guarantee No. 24/87 was to take care of this amount as well. Learned counsel further submits that there is no question of the underlying contract being vitiated as the invocation of the bank guarantee was not fraudulent. The invocation, according to him, is in terms of the bank guarantee which was furnished at the instance of the plaintiff.
5. I have considered the respective contentions of learned counsel for the parties. As already pointed out, the plaintiff, under the principal contract, was to furnish a cash deposit of 10% of the value of the contract towards security for the due performance of the contract and was also liable to furnish a bank guarantee for a sum of Rs. 4,91,004 for securing the mobilisation advance. Pursuant thereto, the plaintiff furnished a composite bank guarantee, being bank guarantee No. 24/87 issued by the Syndicate Bank, defendant No. 2, against the mobilisation advance as well as in lieu of security deposit. This position is quite apparent from the third and the fourth paragraphs of the bank guarantee which read as under :
“And, whereas, the corporation agreed to advance to the contractor a sum of Rs. 4,91,004 (rupees four lakhs ninety-one thousand and four only) for utilisation in the performance of the work covered by the said contract. (hereinafter referred to as `the said advance’ which expression shall include any and all further advances made by the corporation to the contractor with reference to the said contract) on production of an undertaking from a bank in respect of the said advance, which shall, without prejudice to any other mode of recovery availabile to the corporation be recoverable by deduction from the gross accepted value of the running account bills and final bill of the contractor commencing with the first running account bill.
And, whereas, the contractor is also required to furnish an undertaking from a bank in lieu of cash depoist of 10 per cent. of the value of the contract towards security deposit (hereinafter referred to as the `security deposit’) valid till the end of the defect liability period as specified in the said contract.”
6. Thus, the bank guarantee covered both the advance and the security deposit. Clause 2, 3 and 4 of the bank guarantee are also relevant so far as inter se rights of the parties to the bank guarantee are concerned. The said clauses are as under :
“Now, therefore, in consideration of the promises a for going and at the request of the contractor, the bank hereby irrevocably and unconditionally undertake to pay to the corporation at New Delhi forthwith on first demand without protest or demur or proof or condition any and all amounts demanded by the corporation in writing from the bank with reference to this undertaking up to an aggregate limit of Rs. 4,91,004 (rupees four lakhs ninety-one thousand and four only).
(ii) It shall not be necessary for the corporation to proceed against the contractor before proceeding against the bank and the undertaking herein contained shall be enforcement against the bank as principal debtor notwithstanding the existence of any security for any indebtedness of the contractor to the corporation (including relative to the said advance or for the security shall at the time when a claim is made against the bank or proceedings taken against the bank hereunder, be outstanding or unrealised.
(iii) As between the bank and the corporation for the purpose of this undertaking the amount claimed or demanded by the corporation from the bank with reference to this undertaking shall be final and binding upon the bank as to the amount payable by the bank to the corporation hereunder.
(iv) The liability of the bank to the corporation under this undertaking shall remain in full force and effect notwithstanding the existence of any difference or dispute between the contractor and the corporation, the contractor and the bank and/or the bank and the corporation or otherwise howsoever touching or affecting these presents or the liability of the contractor to the corporation, and notwithstanding the existence of any instrauctions or purported instructions by the contractor or any other person to the bank not to pay or for any cause with hold or defer payment to the corporation under the presents, with the intent that notwithstanding the existence of such difference, dispute or instruction, the bank shall be and remain liable to make payment to the corporation in terms hereof.”
7. A bare perusal of these clauses shows that the bank had irrevocable and unconditionally undertaken to pay on demand without protest or demur all amounts demanded by defendant No. 1 from the bank under said guarantee. It is also clear that the bank had undertaken to pay the amount irrespective of the existence of any difference or dispute between the parties to the underlying contract. Clause (iii) of the bank guarantee makes the invocation of the bank guarantee by defendant No. 1 final and binding up the bank as to the amount payable by the bank to the defendant. The mere fact that the defendant had recovered mobilisation advance of Rs. 2,46,304 will not make the invocation illegal or fraudulent as the plaintiff was also required to seucre defendant No. 1 to the extent of 10 per cent. of the value of the contract towards a cash security deposit. It is well- settled that unconditional and irrevocable letters of credit and bank guarantees must be honoured by the banks regardless of the existence of disputes between the parties to the underlying contract as, otherwise, the whole edifice of commercial activity will crumble.
8. This view finds support from a serious of judgment of various courts (See U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (p) Ltd. ; General Electric Technical Services Company Inc. v. Punj Sons (P) Ltd. ; Centax (India) Ltd. v. Vinmar Inpex Inc. ; Triveni Engineering Works Ltd. v. Belganga Sahakari Sakhar Karkhana Ltd. [1991] 4 Delhi Lawyer 189 ; [1992] 74 Comp Case 585 ; Kalpavriksha Engineers and Management Consultants (P) Ltd. v. National Projects Construction Corporation Ltd. (Suit No. 2154 of 1991 decided on February 20, 1992, see [1993] 76 Comp Case 446 (Delhi).
9. Learned counsel for the plaintiff has invited my attention to a decision of this court in Nangia Contraction (India) Ltd. v. International Airport Authority of India [1992] 1 Delhi Lawyer 246. This judgment does not help the plaintiff as it was not a case of a composite guarantee. In this case, different bank guarantees were furnished to secure mobilisation, advance and for due performance of the contract. Part of the mobilisation having been received, it was held that invocation of the bank guarantee to the full extent, not limited to the balance mobilisation advance, was fraudulent. With regard to the other bank guarantees furnished for securing due performance of the contract, in invocation was upheld on the basis of the principles laid down in U.P. Co-operative Federation Ltd’s case [1989] 65 Comp Case 283. Guarantee No. 24/87, which was furnished in the instant case was a composite one. Two purposes wre rolled into one. It is not denied by learned counsel for the plaintiff that the said bank guarantee was also in lieu of deposit of 10 per cent. of the total value of the contract. Therefore, the recovery of the mobilisation advance partially or even to the full extent will not, in any way, make the invocation of the bank guarantee illegal as it was also to serve as a performance guarantee.
10. Regarding invocation of bank guarantee NO. 25/87 which was furnished in lieu of unpaid balance of initial security deposit, nothing has been urged which makes the invocation illegal.
11. In view of the aforesaid discussion, the interim order dated December 30, 1988, is vacated.
12. IA stands disposed of.
13. IA NO. 2233 of 1992 :
Learned counsel for the defendants seeks time to file a reply. Let the same be filed within three weeks. List the matter on August 25, 1992.