JUDGMENT
1. This is a suit for recovery of money on the basis of contract of guarantee. Defendant No. 2 has contended the suit by filing written Statement. The other Defendants have not filed any Written Statement and have not taken part during trial. Second Defendant has also taken a third party notice to all the Defendants, But the notice was served only on Defendants Nos. ] & 3. The other Defendants have not been served. Both the Plainiff and the second Defendant have not adduced any oral evidence. Both parties have filed some documents, which have been marked by consent. The Plaintiff’s documents are marked as Exhibit A to Exhibit Z and Exhibit A1 to Exhibit AA. Second Defendant’s documents are marked as Exhibits 1 to 21. In fact some of
the exhibits are common. I have heard the learned Counsel for the Plaintiff and the learned Counsel for the second Defendant.
2. The Plaintiff’s case is as follows:–
The Plaintiff is Union Bank of India, which is a nationalised bank. The Defendant No. 1 is a partnership firm of which Defendants Nos. 3 to 6 are partners. The First Defendant-firm had entered into an agreement with the Government of Maharashtra for construction of bridge. In connection with that contract, the first Defendant was required by the Government to give cash security deposit or a bank guarantee in a sum of Rs. 34,280/-, Hence, the first Defendant approached the Plaintiff/Bank for a bank guarantee. The Plaintiff agreed and issued a bank guarantee in favour of the Government of Maharashtra, dated 7th August, 1969. The guarantee has been renewed form time to time. On the request of first Defendant, Vulcan Insurance Co. Ltd. entered into guarantee policy with the first Defendant undertaking to pay whatever amount the Plaintiff/Bank incurs in honouring bank guarantee in favour of the Government of Maharashtra. The said policy is being extended from time to time. It is stated that the present second Defendant namely United India Fire & General Insurance Co. Ltd. is the successor in interest of Vulcan Co. Ltd. The Executive Engineer of Ratnagiri District, State of Maharashtra by a letter dated 5th Dec. 1975 invoked the bank guarantee and called upon the Plaintiff to make payment of Rs. 34,280/-. Then there was correspondence between the Plaintiff and Defendants Nos. 1 and 3 to 6. The first Defendant was called upon to make payment. The first Defendant took time to get the matter settled with the Government. After some correspondence, the Plaintiff was obliged to make payment to the Government of Maharashtra as per the conditions of Bank guarantee. The Plaintiff/Bank called upon the second Defendant to make payment of sum of Rs. 34,280/- which it had paid to the Government of Maharashtra. But the second Defendant did not comply with the Plaintiff/ Bank’s demand. Since, the defendants have filed to reimburse the money to the Plaintiff,
the Plaintiff/Bank has filed this suit for recovery of Rs. 34,280/- with costs.
3. The second Defendant who is the only contesting defendant in this suit has filed Written Statement. It is stated that the suit is bad for misjoinder of parties and causes of action. The contract between the first defendant and the Government of Maharashtra and the contract between the Plaintiff and first Defendant are admitted. The correspondence between the parties is admitted. However, it is stated that on getting Plaintiff/ Bank’s letter, the first Defendant wrote to the Plaintiffs asking him not to make any payment to the Government, since the Government itself is due (sic) money to the first defendant. In spite of protest by the first Defendant, the Plaintiff/Bank paid money to the Government of Maharashtra. This payment is unjustified. Hence, Plaintiff called upon the second Defendant to reimburse the said amount. In the letter of the Executive Engineer, invoking the bank guarantee, there is no allegation of any default on the part of the first Defendant regarding the contract work. Hence, there is no default on the part of the first Defendant, who was doing the contract work and therefore the Plaintiff was not obliged to honour the bank guarantee. It is stated that the suit is not maintainable. That the second Defendant is not liable to make any payment. Alternatively it is pleaded that if the second defendant is made liable for the suit claim, then the second Defendant is entitled to be indemnified by Defendants Nos. 1 and 3 to 6. The second Defendant has also taken third party notice to the defendants praying that it should be reimbursed by Defendants Nos. 1 and 3 to 6.
However, the third party notice has been served only on the Defendants Nos. 1 and 3.
4. Following issues have been framed in
this suit:–
ISSUES
1) Whether Plaintiff Bank was liable to honour its commitment under the Guarantee Dated 7th August, 1969 (Exh. ‘A’ to Plaint) issued in favour of State of Maharashtra.
2) Whether Defendant No. 2 under
Guarantee Policy dated 21st August, 1969 (Exh.’B’ to the Plaint) and extended upto 30th June, 1976, liable to pay to the Plaintiff sum of Rs. 34,280/- along with interest thereon at the rate of 14% p.a. from the date of Suit till Judgment and thereafter at the rate of 6% p.a. till payment.
3) Whether Defendants Nos. 3 to 6 as partners of Defendant No. 1 firm and/or as the legal heirs of J.S. Khanna and/or under their indemnity dated 7th August, 1969 (Exh. ‘C’ to the Plaint) are jointly and severally liable to pay to the Plaintiffs Rs. 34,280/- along with interest thereon at the rate of 14% p.a. from the date of the suit till judgment and thereafter at the rate of 6% p.a. till Judgment.
4) What was the correct nature and what were the terms and conditions of the Guarantee Bond executed by the Plaintiffs in favour of the Government and was Plaintiffs legally bound to make good the Demand made by the Government?
5) If Defendant No. 2 is to make payment then can they claim indemnity and contribution from Defendant No. 1 and Defendants Nos. 3 to 6 pursuant to the Counter Guarantee dated 10th January, 1969, executed by them?
5. Issues Nos. 1 and 4: — The Plaintiff’s contention is that in terms of bank guarantee it was liable to make payment when there was a demand by the Executive Engineer. Its defence is that in the absence of default or breach of condition on the part of the first Defendant, the Government had no right to demand the money on the basis of bank guarantee and that the plaintiff was not liable to pay the money on the basis of the bank guarantee. Before considering the question of law on this point, let me refer to the available evidence on this point.
6. Exhibit ‘D’ dated 7-8-1969 is the bank guarantee executed by the Plaintiff. It is mentioned in the first para that for the performance of the contract between the Government of Maharashtra and the first Defendant in respect of constructing bridge across Moohemad Creek at Vengurla-Reddy
Road in Ratnagiri District, the Plaintiff/Bank had executed a bank guarantee. The relevant undertaking on part of the Plaintiff/ Bank is follows:–
“We, Union Bank of India, Ratnagiri (herein after called “the Bank”) do hereby agree to pay on demand to the employer a sum of Rs. 34,280/- (Rupees Thirty four Thousand and two hundred eighty only) under this bond.”
It is therefore seen that here is an unconditional contract by the bank to pay the agreed amount to the Government of Maharashtra on demand.
Exhibit ‘E’ is a letter of indemnity executed by the first Defendant and its partners in favour of the Plaintiff-Bank on the same day as a security for the bank guarantee given by the Plaintiff on that day namely 7-8-1969. The letter acknowledges the bank guarantee given by the Plaintiff/ Bank and the first Defendant agrees to indemnify the bank for any loss incurred by it for honouring the bank guarantee. Then comes an important clause as to under what terms and conditions the bank was liable to pay the money to the Government. The relevant clause reads as follows:–
“And I/We further agree that any request made upon you by the Executive Engineer B and C Division, Ratnagiri for payment of any sum or sums of money in pursuance of the said Guarantee shall be a sufficient authority to you for making any such payment and that notwithstanding anything contained in the said Guarantee executed by you it shall not be incumbent upon you to enquire whether any such amount or amounts is/are in fact due. I/We also agree that payment by you under this guarantee is to be conclusive that the claim has arisen and of the amount of such claim.”
It is therefore, seen that in this letter, the first defendant has categorically and unequivocally admitted that the plaintiff should make the payment of demand by the Executive Engineer and it is no part of the duty of the Plaintiff to enquire whether any amount is due to the Government or not. It further records that any payment under the
guarantee is conclusive that the claim has arisen and also about the amount of such claim. That means the bank is under no obligation to find out whether any amount is due to the Executive Engieer or not. If there is a demand by the Executive Engineer, without doing any inquiry about the correctness of the amount or correctness of the demand, the Plaintiff was obliged to make payment.
7. In order to give security to the Plaintiff, the first Defendant entered into an agreement with the Vulcan Insurance Co, Ltd., and executed an indemnity bond in favour of the Plaintiff, as per Exhibit F dated 21st August, 1969. It clearly shows that if the Plainitff/ Bank makes any payment on demand by the beneficiary, it is sufficient authority to the bank for making payment. Then, there is a specific clause in Exhibit ‘F’, which reads as follows:–
“….. it shall not be incumbent upon the
Bank to enquire whether any such amount or amounts is/are in fact due and that any payment by the Bank under said Bank Guarantee shall be a conclusive proof that a claim has arisen and of the amount of such claim.”
It is admitted fact that second Defendant is the successor in interest of the Vulcan Insurance Co. Ltd., and hence, is bound by Exhibit ‘F’. Exh. ‘F’ also clearly shows that bank is under no obligation to find out whether any amount is at all due to the Government and if so, how much amount is due. Even according to this document, the plaintiff is under a legal obligation to make payment on demand by the beneficiary.
8. Exhibit ‘R’ is the letter dated 5-12-1975, under which Executive Engineer, invoked the bank guarantee and called upon the Plaintiff to make payment. The Executive Engineer has invited the attention of the Plaintiff-Bank to its bank guarantee dated 7-8-1969 and demands the payment of the amount of Rs. 34,280/-.
It is not as if the Plaintiff-Bank honoured this letter immediately. It is seen from the record that the Plaintiff wrote letter and reminding letters to the first defendant to
make payment and settle the claim. Then the first Defendant wrote letter to the bank saying that there is no breach on its part and that the breach is on part of the Government and that he is negotiating with the Government for settlement and that the first Defendant is itself entitled to large sums of money from the Government and therefore, the Plaintiff should not make payment under bank guarantee, (vide Exh. S, Y, W, A-3 and A-4). The Plaintiff has brought to the notice of the first Defendant about the demand made by the Executive Engineer. Whether really breach is committed by the Government or by the first Defendant is no concern of the plaintiff-bank. It is also no concern of the plaintiff-bank to find out whether the Government was due any amount to the first Defendant as alleged by the first Defendant. Since, the first Defendant did not make the payment and did not settle the matter with the Government and in view of reminding letters received from the Executive Engineer (Vide Exhibits (sic) the plaintiff was compelled to make the payment to the Government to honour it bank guarantee in June, 1976 as per its letter Exh. A-6 dated 7-6-1996.
9. The learned Counsel for the second Defendant contended that the bank guarantee was not enforceable since, it does not mention any default clause on the part of the first Defendant and further in the letter of Executive Engineer, there is no allegation of default by the first Defendant. He placed reliance on Section 126 of the Contract Act, which provides for a contract of guarantee only when there is default on the person at whose instance the contract of guarantee was given. The reliance was placed on two authorities.
In (1990) 2 Com LJ 265 (Delhi), Nangia Construction (India) (P) Ltd. v. National. Buildings Construction Corporation Ltd., the Court was concerned about interpretation of Section 126 of the Indian Contract Act and also about the bank guarantee produced in that case. The facts of that case are distinguishable. However, the learned Counsel for the second Defendant placed reliance that a
guarantee becomes enforceable only upon the default as observed at page 279 para 95 of the reported judgment. With great respect to the learned single Judge of the Delhi High Court, who decided that case, I am unable to subscribe to the said view. I will presently point out number of decisions of the apex courts, where the consistent view is taken that bank’s liability is to be determined on the basis of the contents of the bank guarantee and not on the basis of the liability of principal debtor. If the bank guarantee creates a liability on demand then bank is obliged to honour its commitment and pay the amount irrespective of the question whether there was a default on the part of the principal debtor or not.
Even assuming for a moment that the view of Delhi High Court in the above case is acceptable, I may point out that from the facts of this case such a contract can be spelt out from the conduct of the parties. As soon as the Plaintiff received the demand notice from the Executive Engineer, the Plaintiff did not pay the amount immediately, but wrote a letter to the first defendant and wrote two/three reminding letters. It is only about 6 months later the bank paid the amount, when the first Defendant did not settle the matter. It is already seen that the conditions in the letter of guarantee executed by the first Defendant and also in the guarantee policy executed by the second Defendant, there is a specific clause that Plaintiff need not go outside the bank guarantee and Plaintiff need not find out whether there was actually any default by the first Defendant (Vide Exhibits ‘E’ and ‘F’).
The learned Counsel for the Second Defendant also relied on M/s. Banerjce & Banerjce v. Hindusthan Steel Works Construction Ltd. In particular the learned Counsel for the second Defendant invited my attention to page 381, where it is observed that the letter invoking the bank guarantee must mention that the contractor has committed breach of contract etc. In my view in that case the bank guarantee itself provided a clause that the bank is standing guarantee against any loss or damages etc. committed by the principal debtor by violating the agreement with the creditor. When the
bank guarantee itself mentions such a condition, then the demand letter must mention that there was such a breach and the bank must pay the money.
In the present case, we find that the hank guarantee Exh. D is unconditional and does not provide any such contingency about payment on breach by the first defendant. The only condition for payment is there must be a demand by the Government of Maharashtra. When once there is a demand, there is an unconditional undertaking in the bank guarantee that bank should pay the amount. Hence, mentioning of any breach committed by the first defendant in the letter of demand does not arise in view of the special contract between the parties as mentioned in Exhibit ‘D’. I will presently point out that in number of decisions where consistent view taken is that the bank is bound by the terms of bank guarantee and it is not concerned with the contract between the debtor and the creditor.
10. The latest decision on the point which I have come across is one , State of Maharashtra v. M/s. National Construction Company, Bombay. The facts of that case are not relevant for our present purpose. But the legal position about bank guarantee is stated in para 13 of the reported judgment in the following words:–
“The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order, the bank giving the guarantee must honour the same and make payment.”
Therefore, the position is clear that the bank is not concerned with the performance or otherwise of the contract between the debtor and the creditor. The bank is bound by only the terms of bank guarantee and must pay the amount as agreed in the bank guarantee.
In Pollock and Mulla’s commentary on Indian Contract Act, (Vol. II) Eleventh Edition, at page 942 it is stated as follows:–
“In face of an unequivocal understanding by the Bank to pay the amount of guarantee as and when called upon to do so, the Bank is not entitled to raise a contention that no breach of contract was committed by the principal debtor.”
In my view this statement of law is squarely applicable to the facts of the case. As per the bank guarantee there is an unconditional offer by the Plaintiff to pay the money on demand by the Government of Maharashtra and when such a demand is made by the Executive Engineer, the Plaintiff cannot raise any contention that there is no breach of contract etc. It has to pay money. This position is further explained at page 946 as follows:–
“The duties of a bank in such guarantee are created by the document itself which in other words is “independent” and autonomous and is not concerned with the underlying contract unless the guarantee itself says that it will be enforceable on the proof of breach of the primary underlying contract.”
It may be there is exception to this rule if there is allegation of fraud. But in the present case, there is no allegation of fraud or special equities in favour of the first defendant.
11. We may make useful reference to another decision of the apex Court National Thermal Power Corporation Ltd. v. Flowmore Pvt. Ltd. Though the facts are different, the principle of law has laid down regarding enforcement of a bank guarantee. The apex court has observed at para 10, page 519 (or SCC) : (at p 4308 of AIR SCW) as follows:–
“….. Nevertheless, this express term
merely reiterates the nature of a bank guarantee which is payable on demand being made by the beneficiary of the bank guarantee. A bank guarantee which is payable on demand implies that the bank is liable to pay as_and when a demand is made upon the bank by the beneficiary. The bank is not concerned with any inter se disputes between the beneficiary and the person at whose instance the
bank had issued the bank guarantee.” (Underlining is mine)
Hence also the apex Court has made it clear that the bank need not go beyond the bank guarantee and if there is an unconditional contract for payment on demand, the bank is bound to make the payment and has no option.
12. In Centax (India) Ltd. v. Vinmar Impex Inc, the question arose about enforcement of bank guarantee. We are not concerned with the facts of that case, however, the position of law is explained in para 4 of the reported judgment in the following words: —
“The learned Judges ….. held that the
obligation of the Allahabad Bank under the letters of indemnity countersigned by the appellant was absolute and upon a demand being made by the Shipping Company i.e. the beneficiary, the Bank was liable to honour the same regardless of any controversy between the parties …..
as to whether the contract of sale had been performed. We agree with the reasoning and conclusion of the learned Judges.”
We therefore see that the apex Court approved the reasoning of the Division Bench of the Aliahabad High Court, which had held that in a case of unconditional and absolute bank guarantee the bank is bound to honour the same irrespective of any dispute between the contracting parties. It is further observed in the said judgment that the bank must bo allowed to honour their guarantees free from interference by Courts. Otherwise, it is pointed out, trust in international commerce would be irreparably damaged.
13. In Syndicate Bank v. Vijay Kumar, a question arose about enforcement of bank guarantee. In para 10 of the reported judgment, it is stated as follows:–
“….. It is well settled that the Bank
guarantee is an autonomous contract and imposes an absolute obligation on the Bank to fulfil the terms and the payment in the Bank guarantee becomes due on the happen
ing of a contingency on the occurrence of which the guarantee becomes enforceable.”
Again in para 14 of the reported judgment the Apex Court made it clear that the bank must honour the terms of the bank guarantee and the court will not interfere except in exceptional cases.
14. In U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., the same principle has been reiterated namely that the Bank must be allowed to perform their duties as per the terms of bank guarantee and the Court should not interfere with the same.
15. In view of the above discussion, what follows is that the bank guarantee is a special contract and it has to be enforced according to its terms. If the bank guarantee is unconditional and payment should be made on demand, then the bank is under no obligation to find out whether any default is committed or whether any amount is due by the person at whose instance, the guarantee was issued and once the beneficiary invokes the bank guarantee and makes a demand, the bank is obliged to make the payment. We must bear in mind that the bank guarantee is an accepted mode of indemnity in trade and commerce. We must also bear in mind that the bank must also keep its reputation by complying with the bank guarantee, where it has made an unconditional offer to make payment on demand. Hence in my view the defence contention that the bank guarantee was not enforceable of the Plaintiff-bank was not obliged to make payment till there was a default by the first defendant etc., has no merit and has to be rejected. Hence, issues Nos. 1 and 4 are answered accordingly.
16. Issue No. 2:– There is no dispute about this issue at all. When once it is held that the Plaintiff has acted as per the terms of the bank guarantee, then by virtue of letter of guarantee, the second defendant has to make good the loss to the Plaintiff, in view of the terms of Exh. F. Hence, issue No. 2 is answered in the affirmative.
17. Issue No. 3:– Even on this issue there is no dispute. When once it is held that the
Plaintiff has acted as per the terms of the bank guarantee, these the first defendant and its partners are liable to reimburse the Plaintiff-bank as per their letter of guarantee or letter of indemnity, which is Exh. E. Hence, issue No. 3 is answered in the affirmative.
18. Issue No. 5:– Second defendant has alternatively pleaded that on making payment to the Plaintiff, it is entitled to be reimbursed by first defendant and its partners. That is why the second defendant has taken third party notice to the Defendant No. 1 and Defendants Nos. 3 to 6. In fact the first defendant firm has executed a guarantee deed as per Exh. ‘A’ in favour of Vuleon Insurance Co. Ltd. undertaking to reimburse the Insurance Co. for whatever loss they incurred by making payment to the Plaintiff. We have already seen that the second defendant is a successor in interest of Vuleon Insurance Co. Hence, by virtue of Exh. A, the second defendant is entitled to get reimbursed from first defendant and its partners. But it is seen that the third party notice has not been served on all the defendants. It has been served only on defendants Nos. 1 and 3. In fact the learned Counsel for the second defendant has made a statement before the Court that he will proceed only against Defendants Nos. 1 and 3. (Vide Minutes of Order dated 19-2-1996). In fact the learned Judge, who was dealing with the suit on 19-2-1996 has mentioned in the said order that the third party notice is discharged against defendants. Nos. 4 to 6.
19. As per amendment of Order 8 of C.P.C. in State of Maharashtra, Rules XI to XIII have been added to Order 8 of C.P.C. Order 8, Rule XXIII provides for third party notice. Then Order 8, Rule XXV provides for making a decree on the basis of third party notice. The Court can pass a decree against the third party as per the notice.
In the present case, defendants Nos. 1 and 3 have not chosen to file any reply to the party notice. Further, by virtue of Exh. A, the first defendant has undertaken to reimburse the Insurance Co. for any payment made to the plaintiff. Hence, we can safely held that the second defendant is entitled to be reimbursed
by defendants Nos. 1 & 3. Hence, issue No. 5 is answered accordingly.
20. In the result, the suit is decreed as follows: —
(a) The defendants, jointly and severally are directed to pay Rs. 34,280 to the Plaintiff together with interest at 6% p.a. from the date of suit till the date of judgment and again 6% p.a. from the date of judgment till the dale of payment;
(b) On making payment of the suit amount to the plaintiff, the second defendant is granted a decree against defendants Nos. 1 and 3 for recovery of Rs. 34,280/-, current interest and costs;
(c) The plaintiff is entilled to get Court costs from the defendants jointly and severally;
(d) Decree in favour of second defendant against defendants Nos. 1 and 3 can be executed only after the second defendant makes full payment of the decree amount, interest and costs to the plaintiff.
21. Order accordingly.