{"id":231379,"date":"1999-02-26T00:00:00","date_gmt":"1999-02-25T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/lloyds-steel-industries-ltd-vs-indian-oil-corporation-ltd-anr-on-26-february-1999"},"modified":"2015-04-23T02:32:33","modified_gmt":"2015-04-22T21:02:33","slug":"lloyds-steel-industries-ltd-vs-indian-oil-corporation-ltd-anr-on-26-february-1999","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/lloyds-steel-industries-ltd-vs-indian-oil-corporation-ltd-anr-on-26-february-1999","title":{"rendered":"Lloyds Steel Industries Ltd. vs Indian Oil Corporation Ltd. & Anr. on 26 February, 1999"},"content":{"rendered":"
Delhi High Court<\/div>\n
Lloyds Steel Industries Ltd. vs Indian Oil Corporation Ltd. & Anr. on 26 February, 1999<\/div>\n
Equivalent citations: AIR 1999 Delhi 248, 1999 98 CompCas 73 Delhi, 78 (1999) DLT 301, 1999 (49) DRJ 349<\/div>\n
Author: M Shamim<\/div>\n
Bench: M Shamim<\/div>\n<\/p>\n
<\/pre>\n
ORDER<\/p>\n
Mohd. Shamim, J.<\/p>\n
1.  The plaintiff through the present application want this Court to issue  a restraint order restraining defendant No. 1 from encashing the Bank  Guarantee No. 16\/94 dated 29.10.1994 in the sum of Rs. 26,00,000\/- and Bank  Guarantee No. 17\/94 dated 29.10.1994 in the sum of Rs. 1,02,97,377\/- issued  by defendant No.2.\n<\/p>\n
 2. Brief facts which are relevant and material for the disposal of the  present application are as under: that the plaintiff are a public limited  company incorporated under the Indian Companies Act, 1956. Defendant No.1  are a government company within the meaning of Section 617 of the Indian  Companies Act, 1956. Defendant No.2 are a banking company formed and constituted under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970. The first defendant have set up a refinery at Mathura in  the State of Uttar Pradesh. They thus wanted to install horton spheres at  the above said refinery and with the said and in view floated a tender  inviting offers on turnkey basis from prospective contractors. On July 7,  1994, the plaintiff along with many other contractors responded to the  same. The quotation of M\/s. G.R. Engineering was the lowest at Rs.  10,34,42,400\/- while that of the plaintiff was the second lowest at Rs.  10,75,39,109.40. The plaintiff were persuaded to agree to the execution of  the contract at a lower value and below that of lowest on the assurance  that such an acceptance would be compensated by awarding works on other  projects of defendant No.1. The plaintiff thus agreed to work at a bare  minimum profit margin with a view to establishing long term relationship  with the first defendant. A formal acceptance of the plaintiff’s offer was  conveyed by the first defendant vide their telegram\/fax of acceptance dated  October 7, 1994 on some of the following terms and conditions.\n<\/p>\n
  (i) The work would involve the design, supply, fabrication,   erection, testing and associated civil, structural and electrical   works for five numbers of 12m diameter horton spheres, consisting   of three number propylene spheres and two number LPG spheres.\n<\/p>\n
  (ii) The contractual time for completion of work was stipulated   as sixteen months from the date of issue of the telegram\/fax.\n<\/p>\n
  (iii) The plaintiff was required to deposit Rs. 26,00,000\/- as   initial security or in lieu thereof furnish a bank guarantee.\n<\/p>\n
  (iv) The plaintiff were also required to furnish a composite bank   guarantee against release of 10% mobilisation advance of Rs.   1,02,07,377\/-. The mobilisation advance was to carry an interest   at the rate of 17.5% per annum.\n<\/p>\n
 3. A formal contract was executed on November 24, 1994. The plaintiff in  view of the above furnished two bank grantees referred to above issued by  defendant No.2. The plaintiff carried out the preparatory work at the site  fully detailed in para 6 of the plaint. Engineers India Ltd. were appointed  as the engineer in-charge of the project (hereinafter referred to as EIL  for the sake of convenience). The representatives of defendant No.1 along  with those of EIL in a joint meeting held on November, 30, 1995 for the  first time revealed their intentions of rescinding the contract by substituting and novating the original contract by a fresh contract which would  involve installation of only three propylene horton spheres in place of  five horton spheres. The plaintiff who had no previous notice of the same  expressed their reservation to defendant No.1 vide their letter dated  December 5, 1995 whereby it was conveyed in no uncertain terms that if the  first defendant had any such intention of novating the contract it would  like to receive clear and unambiguous instructions as the work of installation of LPG spheres was in an advanced stage. The Site Engineer of EIL on  December 17, 1995 for and on behalf of the first defendant orally instructed the representative of the plaintiff at the site to abandon the work of  two LPG spheres and to confine themselves to the installation of propylene  spheres in the locations which were designed and prepared for LPG spheres.  The plaintiffs put forward their difficulty in execution of three propylene  spheres only. According to them the consequences which were to follow from  the novation of the contract whereby the horton spheres were reduced from  five to three leading to the abandonment of two LPG spheres would lead to  serious financial and pecuniary implications besides the loss of time.  Conversion of the footings into foundations for propylene spheres was not  feasible as the size and reinforcement of LPG and propylene spheres were  totally different. The plaintiff brought all the above facts to the notice  of EIL through their letter dated December 9, 1995.\n<\/p>\n
 4. Later on EIL formally informed the plaintiff by their letter dated  March 9, 1996 that defendant No.1 were reducing the engineering scope of  work to three horton spheres for storage purposes as against five horton  spheres as provided for in the original contract. The reason for reduction  in the scope of the work from five to three was given as the alleged delay  on the part of the plaintiff to complete the work by stipulated date of the  contract i.e. February 6, 1996. The reduction of the scope from five to  three horton spheres does not amount to alteration of the scope of work in  terms of clause 2.5.1.0 of the contract but is tantamount to the rescission  of the original contract by substituting it or novating it with a new  contract. The defendant have dispensed with and remitted the performance of  the original contract.\n<\/p>\n
 5. EIL issued a show cause notice vide their fax dated April 25, 1996  whereby defendant No.1 threatened termination of the contract and awarding  the same to another contractor at the plaintiff’s risk and cost. The plaintiff in reply to the above letter dated April 25, 1996 pointed out that  commencement of the work as per the new contract could not be done on  account of certain outstanding issues such as. non payment of outstanding  dues under the original contract, the absence of the assurance that the  liquidated damages clause would not be invoked and that the extension of  time till February, 1997 for completion of work would be granted. The  plaintiff have categorically accepted vide their letter dated January 6,  1997 the defendant’s offer of the novated contract in respect of three  propylene spheres at a value of Rs. 6,98,32,944\/-. However, despite the  above the defendant have sought to encash the two bank guarantees. The  plaintiff were informed of the same by the second defendant vide their  letter dated January 9, 1997. The demand of defendant No.1 for encashment  of the bank guarantees vide their letter dated January 8, 1997 is illegal,  fraudulent, unconscionable and unfair. The bank guarantee No. 17\/94 pertaining to the mobilisation advance stands fully adjusted while the other  bank guarantee No. 16\/94 furnished in lieu of initial security deposit is  in the nature of performance which stands discharged with the determination  of the contract. The encashment notice is bereft of any reason or any basis  for invocation. The plaintiff have suffered huge losses in the execution of  the contract in terms of money spent on raw material bought for the execution of the work. Defendant No.1 have failed and neglected to make payment  towards the outstanding bills to the tune of Rs. 2,12,19,093\/- apart from  the sum of Rs. 600 lacs towards compensation of work executed at the site.  Even though the original contract for installation of five horton spheres  stands rescinded the defendant are threatening to invoke and encash the  bank guarantees alluded to above. Hence arose the necessity for the presentation of the present application for ad interim injunction restraining the  defendant from encashing the aforesaid bank guarantees.\n<\/p>\n
 6. The application has been opposed inter alia on the following grounds:  that right from the beginning of the contract the plaintiff had shown a  complete lack of interest for the timely completion of the project as the  progress of the work carried out by the plaintiff was very slow and tardy.  The work was not commenced at the project till March 6, 1995 i.e. more than  five months after the award of the contract. Furthermore the only work done  by the contractor was the incomplete construction of a temporary  screen\/barricade between the project site and the rest of the refinery  tankages. After 13 months i.e. more than 80% of the contractual time,  progress achieved was barley 5.5%. It was in the above circumstances EIL  was constrained to issue letter dated December 8, 1995 to the plaintiff to  show cause as to why the work be not off-loaded or the contract be not  terminated. In view of the inordinate delay caused by the plaintiff in  fabricating the horton spheres and in view of the first defendant’s urgent  requirement of these spheres it had become imperative for the first defendant to arrange two ready-made bullets to be diverted to the project site to  be utilised for storage of propylene, until propylene spheres were erected  at the project site as a result of which two of the five horton spheres  became unnecessary. Defendant No.1 were therefore, in exercise of their  powers under clause 2.5.1.0 of the GCC constrained to reduce the scope of  the work under the said contract to three propylene spheres instead of  five. The plaintiff expressed their willingness to proceed with the revised  scope of the work at the meeting held on March 21, 1996 and by their letter  dated April 25, 1996. However, they failed to carry out the contract.\n<\/p>\n
 7. The plaintiff neither executed the letter of Trust nor fixed a date  for completion of the reduced work through they were required to do so. By  December, 1996 it became quite clear to defendant No.1 that the plaintiff  were not in a position to fabricate or erect even a single sphere for the  propylene unit at the Mathura Refinery site. Defendant No.1 therefore had  no option but to recall their advances and have the work performed at the  risk and cost of the plaintiff under the relevant provision of the contract. To this end and with a view to placing itself in funds, the first  defendant made a demand on the bank guarantees Nos. 16\/94 and 17\/94 dated  October 29, 1994 issued by defendant No. 2. It has been discovered that  shortly after making their offer dated February 12, 1997 and much before  the defendant agreeing to amend the contract in terms of the offer the  plaintiff had already sold or otherwise utilised all the steel plates which  were acquired for the work and the plaintiff was thus no longer in a position to undertake the work.\n<\/p>\n
 8. The bank guarantees are independent of the contract in between the  plaintiff and the first defendant. The letter to defendant No. 2 to pay to  defendant No.1 the amounts under the bank guarantees is not in any manner  contradicted by or related to the contract in between the plaintiff and  defendant No.1. Defendant No.1 by their letter dated March 9, 1996 had only  altered the scope of the contract under the provisions of clause 2.5.1.0 of  the General Conditions of Contract. It is wrong and false that the invocation of the bank guarantees vide letter dated February 8, 1997 is not in  terms of the contract. It is wrong and false that in terms of clause  2.5.1.0 of the GCC the bank guarantees can be invoked only in the event of  the failure on the part of the plaintiff to fulfill their obligations. The  application is false and frivolous. It is thus liable to be dismissed.\n<\/p>\n
 9. It has been urged for and on behalf of the plaintiff that hiving off  two horton spheres out of the five which were to be fabricated and installed at the site for storage of propylene and LPG as per the terms of  the contract dated October 7, 1994 led to novation\/rescission of the original contract. The defendant gave vent to their intention of novating or  rescinding the contract first of all on November 30, 1995 by asking the  plaintiff to fabricate and install three horton spheres only (vide letters  dated December 5, 1995, December 9, 1995, December 14, 1995, February 5,  1996 and March 7, 1996). It implies thereby that 40% of the work was taken  away out of the original contract. The original contract was thus truncated. It can to an end once the performance was discharged by rescission or  novation. The surety will also be deemed to have been discharged. Reduction  in the number of horton spheres from five to three made the contract economically unviable and illusory. Negotiations for fresh contract for fabrication of three horton spheres continued during the period from March 9,  1996 to February 14, 1997. Hence the defendant cannot be permitted to  encash the bank guarantees.\n<\/p>\n
 10. Learned counsel for the defendant Mr. Kaura, on the other hand, has  contended that there was absolutely no novation of the contract though  there is no gainsaying the fact that there was an alteration in the scope  of work inasmuch as the defendant asked the plaintiff to fabricate and  install three horton spheres only in place of five. However, the said  alteration is permissible vide clause 2.5.1.0 of General conditions of  contract and defendant No.1 by alteration in the scope of the work have  done nothing to the detriment of the plaintiff. They have simply exercised  their contractual right within the domain of the contract. The learned  counsel has in this connection led this Court through clause 2.5.1.0 of the  General Conditions of the Contract.\n<\/p>\n
 11. The above polemical issue can be resolved by casting a glance at the  relevant clause of the contract which deals with the scope of the work.  Admittedly both the Parties are bound by the terms of the contract. They  cannot wriggle out of the same. When there is a clause in the contract  which entitles the defendant to alter the scope of the work, in that eventuality the plaintiff should not have any grievance on the said score if  the defendant resorted to the same by reducing the scope of the work they  found to their dismay and horror that the plaintiff were not in a position  to perform the contract even much after the expiry of the time of 16 months  which was allotted to them. The present suit was filed on January 13, 1997.  Till then there is no dispute on the point that the plaintiff were not in a  position to fabricate and install even one horton sphere. The present  contract was entered into as has been observed above, on October 7, 1994.  As per the terms of the contract, the contract, was to be executed within a  period of 16 months from the date of the acceptance of the offer  vide\/fax\/telegram dated October 7, 1994. Thus the said period came to an  end on February 6,1996. Yet there was nothing in sight that the plaintiff  would be in a position to install and fabricate the requisite number of  horton spheres i.e., five. Consequently, there was no way to get out of  this impasse except to reduce the number of horton spheres from five to  three and this they were entitled to do so as per clause 2.5.1.0 of the  General Conditions of the contract which deal with the alteration in the  scope of the work. I am tempted over here to cite in extenso the said  clause which was taken recourse to by the defendant to reduce the number of  horton spheres from five to three. It is in the following words:-\n<\/p>\n
   “The owner may at any time(s) before or after the commencement of   the work by notice in writing issued to the Contractor alter the   scope of work by increasing or reducing the jobs required to be   done by the Contractor or by adding thereto or omitting therefrom   any specific job or operations or by substituting any existing   jobs or operations with other jobs and or operations, or by   requiring the Contractor to perform any extra works in or about   the job site, and upon receipt of such notice the Contractor   shall execute the job(s) as required within the altered scope of   work.”\n<\/p>\n
 12. It is manifest from above that the defendant did nothing to incur the  wrath\/displeasure of the plaintiff by altering the scope of the work. They  have simply resorted to clause 2.5.1.0 of the General Conditions of Contract to reduce the number of Horton spheres. The plaintiff should not and  cannot have any quarrel on the said score. They have to drink as they have  brewed. Thus I am of the view that the plaintiff cannot take any advantage  of the said variation in the number of the spheres, and would not affect  the liability of the banker under the guarantees to make payment to the  defendant.\n<\/p>\n
 13. Assuming arguendo, there has been a variation in the contract between  the plaintiff and defendant No.1, the impugned bank guarantees given at the  instance of the plaintiff by defendant No. 2 permit such type of variation  without affecting the liability of defendant No. 2 in any manner. To substantiate my above view the relevant provision of the bank guarantee can be  adverted to with profit. It provides as under:-\n<\/p>\n
   “(i) The Corporation shall have the fullest liberty without   reference to the Bank and without affecting in any way the liability of the Bank under this undertaking, at any time and\/or   from time to time to anywise vary and said contract and\/or any of   the terms and conditions thereof or of the said advance and\/or to   extend time for performance of the said contract and\/or payment   of the said advance in whole or part or to postpone for any time   and\/or from time to time any of the said obligations of the   Contractor and\/or the rights, remedies or power exercisable by   the Corporation against the the Contractor and either to enforce   or forbear from enforcing any of the terms and conditions of or   governing the said contract and\/or the said advance, or the   securities, if any, or any of them available to the Corporation   and the Bank shall not be released from its liability under these   presents and the liability of the Bank shall remain in full force   and effect notwithstanding any exercise by the Corporation of the   liberty with reference to any or all the matters aforesaid or by   reason of time being given to the Contractor or any other forbearance, or omission on the part of the Corporation or of any   indulgence by the Corporation to the Contractor or of any other   act matter of thing whatsoever which under any law could (but for   this provision) have the effect of releasing the Bank from its   liability hereunder or any part thereof.”\n<\/p>\n
 14. The above point further gets amply clear from a few lines in the said  bank guarantee which envisages as under:-\n<\/p>\n
   “WHEREAS LLOYDS STEEL INDUSTRIES LIMITED, having its   Registered\/Head Office at 501, Raheja Centre, Nariman Point,   Bombay 400 021 (hereinafter called the “Contractor” which expression shall include its\/his\/their successors and assigns\/executors, administrators, representatives and assigns) has been   awarded a Contract in terms, inter alia, of the Corporation’s   Letter of Acceptance (Fax of Intent No. PJ\/PRU\/03 dated   7.10.1994) of Tender No. 3192\/T-18\/94-95\/RSG\/07 dated 31.5.1994   for “DESIGN, SUPPLY, FABRICATION, ERECTION, TESTING AND ASSOCIATED CIVIL, STRUCTURAL AND ELECTRICAL WORKS FOR 5 NOS. OF 12 M DIA   HORTON SPHERES FOR MATHURA REFINERY” at a total value of Rs.   10,29,73,770.00 (Rupees Ten Crore Twenty Nine lacs Seventy three   thousand Seven hundred Seventy only) (hereinafter called the said   Contract which expression shall include any formal contract   entered into subsequent thereto or in supersession thereof and   all modifications to and amendments in the said contract”.\n<\/p>\n
 15. It is abundantly clear from above that the impugned bank guarantees in  the present case are couched in the widest possible terms to cover every  type of eventuality which the parties may face subsequent to their entering  into the present contract. The bank guarantees in question embrace within  their fold any formal contract entered into subsequent to the contract in  question. They also take care of the supersession of the present contract  and all modifications and amendments thereto. Thus any change, modification, supersession and novation of the impugned contract is taken care of  by the bank guarantees in question and they would continue to remain intact  despite the said variation, modification and change in the contract. Thus  the plaintiff cannot be heard to say that the alleged modification and  variation in the contract led to the discharge of defendant No. 2 and the  banker did not remain liable any more.\n<\/p>\n
 16. Learned counsel for the plaintiff has then contended that the clause  with regard to the alteration in the scope of the work i.e., clause 2.5.1.0  of the General Conditions of the Contract does not permit the variation of  the main terms of the contract which go to the root of the matter. Thus  according to the learned counsel there could not have been any reduction in  the number of horton spheres from five to three inasmuch as the said reduction made the contract economically unviable. I am sorry I am unable to  agree with the contention of the learned counsel. To my mind, the words  used in the said clause “……….alter scope of work by increasing or  reducing the jobs required to be done by the Contractor…..” are wide  enough to include within their domain the reduction in the number of horton  spheres and the plaintiff cannot question the same.\n<\/p>\n
 17. The next contention put forward by the learned counsel for the plaintiff is that if the parties to a contract agree to substitute a new contract for it or to rescind or alter it, the original contract need not be  performed. According to the learned counsel, the promisein the instant  case i.e., defendant No.1 remitted the performance of the contract. Hence  the plaintiff would no more be liable to perform the said contract. The  liability of the guarantor is co-extensive with that of the principal  debtor. If for some reason the liability of the principal debtor stands  discharged the principal debt stands extinguished and with it the liability  of the guarantor also. Learned counsel for the plaintiff in order to substantiate the said argument has placed reliance on the provisions of Section 62, 63 and 133 of the Contract Act.\n<\/p>\n
  “62. If the parties to a contract agree to substitute a new   contract for it, or to rescind or alter it, the original contract   need not be performed.”\n<\/p>\n
  “63. Every promiseany dispense with or remit, wholly or in   part, the performance of the promise made to him, or may extend   the time for such performance, or may accept instead of it any   satisfaction which he thinks fit.”\n<\/p>\n
  “133. Any variance, made without the surety’s consent, in the   terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the   variance.”\n<\/p>\n
 18. The learned counsel on the basis of the above provisions of law has  contended that the plaintiff herein are the principal debtor whereas defendant No. 2 are a guarantor. Admittedly there was a variation in the  terms of the original contract in the instant case as a corollary whereof  the contract of guarantee came to an end and could not be enforced. The  learned counsel to illustrate the above point cited certain authorities in  support of his contention. It was observed by a Division Bench of the  Madras High Court in The Indian Bank, Madras Vs. Krishnaswamy and Others,  . “………. It is well settled under Section 62 of the  Contract Act, if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be  performed. Similarly, under Section 133 of the Act any variance, made  without the surety’s consent in terms of the contract between the Principal  debtor and the creditor discharges the surety as to the transactions subsequent to the variance.”\n<\/p>\n
 19. A Single Judge of the Nagpur High Court was of the view as reported in  Babu Rao Ramchandra Rao and Others Vs. Babu Manaklal Nehramal, AIR 1938  Nagpur 413, “………If the liability of the surety is so co-extensive  with that of the principal debtor, his right is not less co-extensive with  that of the creditor after he satisfied his debt. To enable the surety to  enforce his right against the principal debtor, there are two essential  conditions: (i) that the debt itself must subsist, (ii) that his remedy  against the principal must remain un-impaired. Consequently the creditor  will be entitled to compel the surety to perform his promise only if the  debt subsists and the surety’s remedy is un-impaired.”\n<\/p>\n
 20. To the same effect are the observations in Gundia Venkamma Vs. Rao  Sahib Kotla Sanyasayya, . It was opined by their Lordships of the Privy Counsel as far back as the year 1893 in Commercial Bank  of Tasmania and Jones and another, 1893 Law Reports Appeal Cases 313,  “Novation of debt operates as a complete release of the original debtor,  and cannot be construed as a mere covenant not to sue him”.\n<\/p>\n
 21. The above view was again reiterated by their Lordships of the Privy  Counsel in Seth Pratapsingh Moholalbhai and Another Vs. Keshavlal Harilal  Setalwad and Another,  “……….Surety is  discharged as soon as the original contract is altered without his  consent.”\n<\/p>\n
 22. A close scrutiny of the said authorities reveals beyond any shadow of  doubt that any variance in the terms of the contract without the consent of  the surety would lead to his discharge as to the transaction subsequent to  the variance. Thus the said authorities and the provisions of Section 133  of the Contract Act would come into operation only where there is a variance in the terms of the contract without the consent of the surety. The  case in hand is altogether different from the above. Defendant No. 2 i.e.,  the guarantor in the present case, bound themselves to pay to the beneficiary on demand without any demur and protest the amounts which they undertook to pay irrespective of any change in the terms of the contract as in  manifest from relevant terms of the bank guarantee reproduced above. There  is a further mention (vide cl. iv) in the bank guarantee that the liability  of the bank to the Corporation under this undertaking shall remain in full  force notwithstanding the existence of any difference or dispute in between  the Contractor and the Corporation. The said bank guarantees were furnished  at the instance of the plaintiff. Thus they are very much bound by the said  terms. Thus the above authorities are of no avail to the plaintiff.\n<\/p>\n
 23. It was next contended by learned counsel for the plaintiff that the  consent of the surety, if any, must be subsequent to the variation in the  terms of the contract. Any consent prior to the variation would be of no  avail to the creditor. I am sorry, I am unable to agree with the contention  of the learned counsel for the plaintiff. To my mind, it would not make any  difference if the consent is prior to the impugned variation or subsequent  thereto; nevertheless it would be treated as a consent within the meaning  of Section 133 of the Contract Act. The above view is fortified by the  following authorities.\n<\/p>\n
  (1) Citibank N.A., New Delhi Vs. Juggilal Kamlapat Jute Mills Co.   Ltd., Kanpur, : A Single Judge of this Court   opined (vide para 57) “…….. With utmost respect, therefore, I   would follow the Privy Council and the Madras Judgments and hold   that the rights conferred on the surety under Sections 133, 135   or 141 could be waived by specific agreement in the deed of   guarantee. As a matter of fact, such an agreement would amount to   consent within the meaning of those sections.”\n<\/p>\n
  (2) British Motor Trust Company, Limited Vs. Hyams, (1934) 50   Times Law Reports 230. “Normally speaking any alteration in the   contract between the creditor and the debtor was sufficient to   release the Surety, but the effect was expressly excluded in this   case. To give a meaning to the word “variation” one must look at   the context in which it occurred, and here the provision was so   wide that it was almost impossible to put any limit to the power   to vary. He held that the agreement of February 17, 1932 must be   regarded as only a variation of the old agreements and not as   such a new agreement as would release the guarantor. It might be   that the position of the debtor was so altered that he would be   less able to repay the guarantor, but even such a change was not   beyond the very wide power to variation contained in the guarantee. There must, therefore, be a judgment for the plaintiffs.”\n<\/p>\n
 24. There is another side of the picture. It is a well recognised principle of Civil Jurisprudence that a contract of guarantee by a bank in favour  of the beneficiary is an independent contract in between the bank and said  beneficiary and the said contract can always be enforced by the beneficiary  by invoking the said bank guarantee at any time during the subsistence of  the contract of guarantee, whenever the beneficiary thinks it proper to do  so. While observing so this Court is not oblivious of the fact that the  contract is to be enforced of course as per the terms of the contract. In  case the guarantee in question is a conditional one then the said conditions and stipulations must be fulfillled before the contract of guarantee  is given effect to. On the other hand, if the bank guarantee is unconditional and the banker has promised to pay a stipulated amount without any  demur and protest to bank would be failing in its duty in not paying the  said amount when the beneficiary makes a demand for the same. Such a contract is in no way influenced by the primary contract i.e., by dealings in  between the principal debtor and the contractor. The bank can avoid the  said contract only when it is shown that the said contract of guarantee was  secured by practicing fraud on the bank. The other condition when the said  contract cannot be implemented and given effect to would be only when it is  shown that it would be a case of irretrievable injustice or a case of  special equities. It would not be out of place over here to refer to certain authorities in support of the above view. It was reported in Hindustan  Steel Works Construction Ltd. Vs. Tarapore & Co. & Anr., 1996 (5) SCALE  186, “(A) A bank guarantee is an independent and distinct contract between  the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the  bank guarantee is given and the beneficiary;\n<\/p>\n
  (B) In case of an unconditional bank guarantee the nature of   obligation of the bank is absolute and not dependent upon any   dispute or proceeding between the party at whose instance the   bank guarantee is given and the beneficiary.\n<\/p>\n
  (C) ………….\n<\/p>\n
  (D) Commitment of banks must be honoured, free from interference   by the courts and it is only in exceptional cases, that is to   say, in case of fraud or in a case where irretrievable injustice   would be done if bank guarantee is allowed to be encashed, the   Court should interfere.”\n<\/p>\n
 25. It was observed by the Hon’ble Supreme Court in U.P. State Sugar  Corporation Vs. Sumac International Ltd., ,  “……When in the course of the commercial dealings an unconditional bank  guarantee is given or accepted, the beneficiary is entitled to realize such  a bank guarantee in terms thereof irrespective of any pending disputes. The  bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving  such a bank guarantee would otherwise be defeated………..”\n<\/p>\n
   “The existence of any dispute between the parties to the contract   is not a ground for issuing an injunction to restrain the enforcement of bank guarantee. The Courts have carved out only two   exceptions. A fraud in connection with such a bank guarantee   would vitiate the very foundation of such a bank guarantee. Hence   if there is such a fraud of which the beneficiary seeks to take   advantage he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or   injustice to one of the parties concerned. Since in most cases   payment of money under such a bank guarantee would adversely   affect the bank and its customer at whose instance the guarantee   is given, the harm or injustice contemplated under this head must   be of such an exceptional and irretrievable nature as would   override the terms of the guarantee and the adverse effect of   such an injunction on commercial dealings in the country…….”\n<\/p>\n
 26. The Hon’ble Supreme Court cited with approval the observations of Sir  John. Donaldson, M.R. in Bolivinter Oil SA Vs. Chase Manhattan Bank, “The wholly exceptional case where an  injunction may be granted is where it is proved that the bank knows that  any demand for payment already made or which may thereafter be made will  clearly be fraudulent. But the evidence must be clear both as to the fact  of fraud and as to the bank’s knowledge. It would certainly not normally be  sufficient that this rests on the uncorroborated statement of the customer,  for irreparable damage can be done to a bank’s credit in the relatively  brief time which must elapse between the granting of such an injunction and  an application by the bank to have it charged.”\n<\/p>\n
 27. The Supreme Court while dealing with the question of irretrievable  injury opined (vide para 14)” On the question of irretrievable injury which  is the second exception to the rule against granting of injunctions when  unconditional bank guarantees are sought to be realised the Court said in  the above case that the irretrievable injury must be of the kind which was  the subject matter of the decision in the Itek Corporation case…….”.\n<\/p>\n
   “……..To avail of the exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other   party will not be able to pay, is not enough……..”. To the   same effect are the observations as reported in U.P. Cooperative   Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd.,   , Hindustan Steel Workers Construction Ltd. Vs. G.S. Atwal & Co. (Engineers) Pvt. Ltd., JT   1995 (7) S.C. 2 and Larsen & Toubro Limited Vs. Maharashtra State   Electricity Board and Others, .\n<\/p>\n
 28. With the above background let us now see as to whether the plaintiff  in the instant case have made out a case for the grant of an injunction? It  has been already observed above that the Court can grant an injunction in a  case of unconditional bank guarantee in those discerning few cases where a  party is in a position to prima facie make out a case of fraud. The other  ground on which the Court would be justified in granting an injunction  would be a case of an irretrievable injustice or because of special equities in favour of the plaintiff.\n<\/p>\n
 29. Admittedly in the present case the plaintiff have nowhere pleaded the  particulars of any fraud, nay, it is not a case of fraud at all. There is  no mention anywhere in the plaint that the bank guarantees were obtained by  practicing fraud on the bank and the said factum of fraud is within the  knowledge of the bank.\n<\/p>\n
 30. The plaintiff have also failed to prima facie show a case of an irretrievable injury. It is a well established principle of law that an irretrievable injury means the injury which cannot be remedied by any legal  action, whatsoever. This has been so hold in a catena of authorities that  irretrievable injustice for the grant of an injunction must be of such a  nature that in case the beneficiary recovers the guaranteed amount from the  bank then the bank would have no legal means to recover it back. The plaintiff herein want this Court to issue an injunction on the ground that there  is a variation in the terms of the contract. Hence the bank herein stood  discharged by the said variation\/novation of the contract. Since the performance of the impugned contract was remitted at the instance of the  defendant No. 1 the contract of guarantee can also not be given effect to.  It has already been observed above that such a variation was within the  terms of the General Conditions of the Contract. Furthermore, the contract  of guarantee as has been observed above, is an independent contract and it  is to be enforced un-influenced by any dispute in between the principal  debtor i.e. the contractor, and the beneficiary. Hence the variation of the  contract would have absolutely no effect on the liability of the banker to  pay the beneficiary under the contract of the guarantee.\n<\/p>\n
 31. The next contention raised by the learned counsel for the plaintiff is  that the bank guarantee No. 17\/94 dated October 29,1994 in the sum of Rs.  1,02,97,377\/- was given against the mobilisation advance equivalent to 10%  of the contract against the running bills. The plaintiff have already done  23.29% of the work at the site. The bank guarantee undertakes that the  advance was to be adjusted against the running bills which were to be  submitted by the plaintiff. Hence the said bank guarantee cannot be enforced. The second bank guarantee No. 16\/94 dated October 29, 1994 in the  sum of Rs. 26,00,000\/- also stands adjusted against the work executed by  the plaintiff as the security deposit was being adjusted against the running bills. The learned counsel while raising the said argument is oblivious of the fact that the impugned bank guarantees are un-conditional. The  bank undertook to pay to the beneficiary without any demur or protest the  sums secured by the said bank guarantees. The bank guarantees were not  qualified by the primary contract in between the plaintiff and defendant  No.1. Thus any dispute with regard to the work done or not done cannot be  put forward as an excuse not to pay under the said bank guarantees. Consequently the liability of the bank to pay to the beneficiary on demand is to  be enforced un-influenced by any dispute in between the plaintiff and  defendant No.1. If the plaintiff have got any grievance against defendant  No.1 they can seek appropriate remedy against the defendant for the same.\n<\/p>\n
 32. A matter very much akin to the matter in hand came up before the  Hon’ble Supreme Court as reported in Hindustan Steel Works Construction  Ltd., (supra) (vide para 14) “……..Whether the bank guarantee is towards  security deposit or mobilisation advance or working funds or for due performance of the contract if the same is un-conditional and if there is a  stipulation in the bank guarantee that the bank should pay on demand without a demur and that the beneficiary shall be the sole Judge not only on  the question of breach of contract but also with respect to the amount of  loss or damages, the obligation of the bank would remain the same and that  obligation has to be discharged in the manner provided in the bank guarantee. In General Electric Technical Services Company Inc. Vs. Punj Sons(P)  Ltd., , while dealing with a case of bank guarantee given  for securing mobilisation advance it has been held that the right of a  contractor to recover certain amounts under running bills would have no  relevance to the liability of the bank under the guarantee given by it.”\n<\/p>\n
 33. Learned counsel has then contended that in the second bank guarantee  No. 16\/94 dated October 29, 1994 in the sum of Rs. 26,00,000\/- there is no  term with regard to ‘vary’ the terms of the contract. Thus, defendant No.1  could not have varied and\/or altered the terms of the contract. The contention of the learned counsel for the plaintiff to say the least is puerile.  The terms of the two bank guarantees are identical and word by word the  same. It is only a typographical mistake that the word `vary’ does not find  a mention in bank guarantee No. 16\/94. In any case, words and sentences  cannot be read in isolation. They are to be read in conjunction with other  words and sentences in order to gather the meaning the sense which they  want to convey. If para (ii) of the said bank guarantee is read in this way  it would leave us in no manner of doubt that it is simply a typographical  mistake that the word `vary’ is not there. However, the intention of the  parties is quite clear on this point. Ergo the plaintiff cannot be allowed  to have any benefit on the said score.\n<\/p>\n
 34. The next contention put forward by the learned counsel for the plaintiff is that the letter for encashment of the bank guarantee dated January  8, 1997 does not give out any reasons, whatsoever, therefor. As per the  terms of the bank guarantee No. 16\/94 (vide cl. iv) it was mandatory for  defendant No.1 to have stated the unpaid balance of the said security  deposit for the encashment of the bank guarantee. To my mind, the learned  counsel has construed amiss clause (iv) of the said bank guarantee. What it  provides is simply this much that the amount stated by the Corporation in  any demand as the unpaid balance of the said security deposit shall be  conclusive of the said balance. Thus the said bank guarantee does not make  it mandatory on the part of the Corporation to have mentioned the amount  due from the plaintiff. However, in case the amount was so mentioned that  would be deemed to be correct and conclusive. Hence the bank guarantee  cannot be challenged on this score.\n<\/p>\n
 35. The other point raised by the learned counsel for the plaintiff while  challenging the bank guarantees is that the same were valid only till  validity of the defect liability period. The contention of the learned  counsel is devoid of any force. The period of the defect liability comes  into existence only after the completion of the work and the issuance of  the completion certificate. Admittedly the plaintiff have failed to perform  the contract. Even a single horton sphere was not installed by them. Hence  there is no question of beginning of the defect liability period. This is  fully evident from clauses 5.4.1.0 and 5.3.3.0 of the General Conditions of  the Contract.\n<\/p>\n
 36. In the above circumstances I do not see any force in the application  for injunction i.e., I.A, No. 359\/97. It is liable to be dismissed. The  application is accordingly dismissed. Consequently, I.A. No. 10283\/98 for  encashment of the bank guarantees is hereby allowed.<\/p>\n","protected":false},"excerpt":{"rendered":"
Delhi High Court Lloyds Steel Industries Ltd. vs Indian Oil Corporation Ltd. & Anr. on 26 February, 1999 Equivalent citations: AIR 1999 Delhi 248, 1999 98 CompCas 73 Delhi, 78 (1999) DLT 301, 1999 (49) DRJ 349 Author: M Shamim Bench: M Shamim ORDER Mohd. Shamim, J. 1. The plaintiff through the present application want […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[14,8],"tags":[],"class_list":["post-231379","post","type-post","status-publish","format-standard","hentry","category-delhi-high-court","category-high-court"],"yoast_head":"\nLloyds Steel Industries Ltd. vs Indian Oil Corporation Ltd. & Anr. on 26 February, 1999 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/lloyds-steel-industries-ltd-vs-indian-oil-corporation-ltd-anr-on-26-february-1999\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Lloyds Steel Industries Ltd. vs Indian Oil Corporation Ltd. & Anr. on 26 February, 1999 - 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