VINITEC ELECTRONICS PRIVATE LTD. v. HCL INFOSYSTEMS LTD

Citation: [2007] 11 S.C.R. 897

Court: Supreme Court of India

Bench: ALTAMAS KABIR, B. SUDERSHAN REDDY

Case summary

VINITEC ELECTRONICS PRIVATE LTD. v. HCL INFOSYSTEMS LTD.pdf

Judgment text

VINITEC ELECTRONICS PRIVATE LTD. v. HCL INFOSYSTEMS LTD. NOVEMBER 2, 2007 [ALTAMAS KABIR AND B. SUDERSHAN REDDY, JJ. ] -f ,> Bank Guarantee-Invocation of-Contract between parties- One ofthe partiesf~rnishing Bank Guarantee in favour ofthe other Guarantor seeking injunction ofinvocation ofthe Guarantee as there existed a dispute between the contractingparties-Permissibility of- Held: In the facts ofthe case, the Guarantee was an unconditional one-Hence the same could be invoked by the beneficiary despite pendency ofthe dispute-Bank Guarantee is an independent contract between the Bank and the beneficiary-bank is obliged to honour its ).. guarantee so long as it is unconditional and irrevocable-The case also \ does not fall under exceptions-Allegations offraud and plea of 'special equities' are vague and not supported by any evidence. Appellant entered into agreement with the respondent whereby respondent agreed to buy UPS systems from the appellant.

Despite supply ofall the equipments, respondent defaulted in making the full payment. Respondent agreed to pay the balance sum provided the performance Bank Guarantee of10% value was furnished. The same was furnished. Itwas later amended makingthe same unconditional. Even after furnishing the Bank Guarantee, respondent did not make full payment. Appellantfiled injunction application on the ground that respondent was not entitled to invoke the Bank Guarantee without paying the balance amount as the same had become inoperative as the condition precedent for is invocation was not complied with. Trial Court in view of the fact that the Bank Guarantee was made unconditional by its amendment, dismissed the application. Division - contract value stood paid and all the obligations pursuant to clause 15(a) · to (c) of the contract have been fulfilled and it is only then the bank ' guarantee in question was furnished to the respondent upon payment of 30% ofthe contract value to the appellant.

It was asserted that the bank guarantee furnished as it stands is an unconditional one. 7. The learned Single Judge after elaborate consideration of the matter found no merit in the injunction application filed by the appellant and accordingly dismissed the same. The Division Bench ofthe Delhi High Court affirmed the order ofthe learned Single Judge. "' 8. The learned senior counsel Sh. Kailash Vasdev mainly submitted that the High Court committed an error in interpreting Paragraph 4 ofthe amended bank guarantee in isolation and divorced from the terms and conditions of the contract dated May 10, 2000 entered between the parties. It was submitted that the High Court instead ofrelying upon the operative portion ofthe bank guarantee ought to have taken all the clauses which are mate1ial to arrive at a real intention ofthe parties. The submission was that the respondent did not make full payment ofRs.

49,99,335/- to the appellant and therefore the pre-condition embodied in the perfmrnance bank guarantee dated 10th August, 2001 as amended on 20th August, ~ 2001 was never satisfied and as such the performance guarantee did not come into being at all, remained ineffective and unenforceable and therefore could not be invoked. 9. The learned counsel for the respondent submitted that after the amendment ofthe bank guarantee substituting clause 4 on 20th August, ---(! " 2001, the conditional bank guarantee furnished by the appellant became an unconditional one. 10. We have carefully considered the rival submissions made during j ~ ~ -~ the course ofhearing ofthe appeal. 11. The law relating to invocation ofbank guarantees is by now well settled by a catena ofdecisions ofthis court. The bank guarantl! es which provided that they are payable by the guarantor on demand is considered I ,' to be an un-conditional bank guarantee.

When in the course ofcommercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realize such a bank guarantee in terms thereof t irrespective ofany pending disputes. In UP. State Sugar Corporation 1 v. Sumac International Ltd, this court observed that : "The law relating to invocation ofsuch bank guarantees is by now well settled. When in the course of 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 ofany dispute raised by its customer. The very purpose ofgiving such a "'· 1 ·bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions.

A fraud in connection with such a bank guarantee would vitiate the very foundation ofsuch 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 r injustice to one of the parties concerned. Since in most cases { payment ofmoney 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 ofsuch an exceptional and irretrievable nature as would over ride the terms ofthe guarantee and the adverse effect ofsuch an injunction on commercial dealings in the country. The two grounds _... ,___ are not necessarily connected, though both may coexist in some cases. " I. p997J 1 sec 568. INFOSYSTEMSLTD. [B. SUDERSHANREDDY,J. ] . )'- 12.

It is equally well settled in law that bank guarantee is an independent contract between bank and the beneficiary thereof. The bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and of no consequence. In BSES Limited (Now Reliance Energy Ltd. ) v. :B ' • 2 Fenner India Ltd. and Anr. , this court held: > "10. There are, however, two exceptions to this Rule. The first is when there is a clear fraud of which the Bank has notice and fraud ofthe beneficiary from which it seeks to benefit. The fraud must be ofan egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of nonintervention is when there are "special equities" in favour of injunction, such as when "irretrievable injury" or "irretrievable injustice" would occur ifsuch an injunction were not granted. The D' )t...

general rule and its exceptions has been reiterated in so many \ judgments ofthis court, that in UP. State Sugar Corpn. v. Sumac International Ltd. , (1997) 1 SCC 568 (hereinafter "U. P. State Sugar Corpn") this Court, correctly declare that the law was "settled". 13. In Himadri Chemicals Industries Ltd. v. Coal Tar Refining 3 Company, this court summarized the principles for grant of refusal to grant of injunction to restrain the enforcement ofa bank guarantee or letter ofcredit in the following manner : " 14...... (i) 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 realize such a Bank Guarantee or Letter of Credit in tem1s thereof irrespective ofany pending disputes relating to the tem1s ofthe contract. 2. [2006] 2 sec ns. 3. (2007) 9 Scale 631.

~ ->( ~- (ii) The Bank giving such guarantee is bound to honour it as per its tenns irrespective ofany dispute raised by its customer. (iii) The courts should be slow in granting an order ofinjunction to restrain the realization ofa bank guarantee or a Letter of Credit. ) (iv) Since a Bank Guarantee or a Letter of Credit is an ~ independent and a separate contract and is absolute in nature, the existence ofany dispute between the parties to the contract is not a ground for issuing an order ofinjunction to restrain enforcement of Bank Guarantees or Letters ofCredit. (v) Fraud ofan egregious nature which would vitiate the very foundation ofsuch a Bank Guarantee or Letter ofCredit and the beneficiary seeks to take advantage ofthe situation. (vi) Allowing encashment ofan unconditional Bank Gwrantee or a Letter ofCredit would result in irretrievable hann or injustice ~ to one ofthe parties concerned. " { 14. In Mahatama Gandhi Sahakra Sakkare Karkhane v. 4 National Heavy Engg. Coop.

Ltd and Anr. , this court observed : " Para 22. Ifthe bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection ,_ ' whatsoever to pay the amounts under the guarantee. The person in whose favour the guarantee is furnished by the bank cannot be prevented by way ofan injunction from enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee ~) in tenns ofthe agreement entered between the parties has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute ofwhatsoever nature and prevent the purchaser from enforcing the bank guarantee by way ofinjunction except on the ground offraud and irretrievable injury. Para 28. What is relevant are the terms incorporated in the ·~ ·, guarantee executed by the bank. On careful analysis ofthe terms 4. [2007]6SCC417. . ":> - VINITECELECTRONICS PRIVATELTD. v. HCL 905 INFOSYSTEMS LTD. [B. SUDERSHAN REDDY, J.

] )'-_· and conditions ofthe guarantee in the present case, it is found that the guarantee is an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent the appellant from encashing the bank guarantee. The merefact that the bank guarantee refers to the principle agreement without referring to any specific clause in the preamble ofthe deed ofguarantee .. does not make the guarantee furnished by the bank to be ) conditional one. " [Emphasis supplied] 15. Keeping these principles in mind we shall now proceed to apply the same to the facts of this case. 16. Shorn ofall the embellishments the question that really arises for our consideration is as to whether bank guarantee furnished is an unconditional and in-evocable one or a conditional one?

It may not be ~ necessary to refer in detail the terms and conditions ofthe contract except \ to analyse the original clause ofthe bank guarantee dated August 10, 2001 and as well as the subsequent amendment ofthe relevant clause in the said bank guarantee on 20th August, 2001. 17. The relevant clause in the bank guarantee dated 10th August, 2001 furnished by the appellant is to the follov.. ~ng effect: "Whereas Mis Vinitec Electronics Pvt. Ltd. H-33, Bali Nagar, New Delhi (hereinafter called the 'Supplier') supplied their Vinitec on-line UPS systems of various capacities pursuant to their Agreement dated 10th May, 2000 & P. 0. No. 45000i 1730 dated ,C 30. 05. 00 (hereinafter called the 'Company') for the final Purchaser President oflndia through the Director, National Crime Records Bureau, Ministry of Home Affairs, Government of India, New Delhi(hereinafter called the 'Purchaser'). Whereas in tem1s ofClause No. 15 ofthe Agreement for receiving ~· the entire balance payments ofRs.

49,99,335/- from the company, the supplier have agreed to provide a Performance Bank Guarantee equivalent to Rs. 16,81,238. 50 as 10% ofthe value of the contract to be kept valid till the wan-anty period during which --~ times the Supplier is required to perfonn their warranty obligations to the Purchaser; and Whereas pursuant to the application made by the supplier, we Oriental Bank ofCommerce, Kirti Nagar, New Delhi (hereinafter called the "Bank") have accordingly agreed to give the supplier a bank guarantee for the aforesaid purpose. Therefore, we, the bank, hereby affirm that we are guarantors and responsible on behalf of the supplier upto a total of Rs. 16,81,238. 50 (Rupees sixteen lacs eighty one thousand two hundred thirty eight and paise fifty only) and we undertake to pay any sum or sums within the limit of Rs. 16,81,238.

50(Rupees sixteen lacs eighty one thousand two hundred thirty eight and paise fifty only) as aforesaid upon receipt ofwritten demandfrom the purchaser and Company within the validity of this Bank Guarantee establishing the supplier to be in default for the performance oftheir warranty obligations under the contract. We, the bank, affirm that our liability under this guarantee is limited to the total amount ofRs. 16,81,238. 50(Rupees sixteen lacs eighty one thousand two hundred thirty eight and paise fifty only) and it shall remain in full force upto and including 31st August, 2003 and shall be extended from time to time for such further period(s) as desired by the purchaser, Company and supplier on whose behalf this Guarantee has been given. " 18. Thereafter by a letter dated 20th August, 2001, the bank guarantee was amended and Paragraph 4 ofthe bank guarantee dated I0th August, 2001 was substituted and the same reads as under : ''.

Therefore, we, the Bank, hereby affirm that we are Guarantors and responsible on behalf of the supplier upto a total of Rs. 16,81,238. 50 (Rupees sixteen lacs eighty one thousand two hundred thirty eight and paise fifty only) and we undertake to pay any sum or sums within the limit ofRs. 16,81,238. 50 (Rupees ·~) sixteen lacs eighty one thousand two hundred thirty eight and paise fifty only) as aforesaid upon receipt ofwritten demand. from the ~ VINITECELECTRONICSPRIVATELTD. v. HCL 907 r-- INFOSYSTEMSLTD. [B. SUDERSHANREDDY,J. ] Company within the validity ofthis Bank Guarantee. " 19. In the unamended bank guarantee the bank affinned that they are guarantors and responsible on behalfofthe supplier upto a total of Rs. 16,81,238. 50 (Rupees sixteen lakhs eighty one thousand two hundred ), thirty eight and fifty paise only) and had undertaken to pay any sum or ,.

sums within that limit upon receipt ofwritten demand from the purchaser within the validity ofbank guarantee provided itjs established the supplier to be indefault for the performance of their warranty obligations under the contract. This makes it abundantly clear that what was furnished was a conditional bank guarantee and the bankers were liable c. to pay the amounts only upon establishing the fact that the supplier was in default for the perfonnance oftheir warranty obligations under the contract. But by the subsequent letter dated 20th August, 2001, the relevant clause in bank guarantee was amended whereunder the banks stood as guarantor and responsible on behalfofthe supplier upto a total k of Rs. 16,81,238. 50 (Rupees sixteen lakhs eighty one thousand two ~ hundred thirty eight and fifty paise only) and had undertaken to pay any sum or sums within that limit "upon receipt ofwritten demand from the Company within the validity ofthis bank guarantee".

This amended clause makes it abundantly clear that the bank had undertaken to pay amounts upto a total ofRs. 16,81,238. 50. The condition that the amounts shall be paid only upon establishing the supplier to be indefault for the performance oftheir warranty obligation under the contract has been specifically deleted. In our considered opinion, the bank guarantee as amended replacing Paragraph 4 of the original bank guarantee makes the bank guarantee ,. )furnished as unconditional one. The bankers are bound to honour and pay the amounts at once upon receipt ofwritten demand from the respondent. 20. The learned senior counsel however relying upon the decision of this court in Hindustan Construction Co. Ltd. and Ors. v. State of 5 Bihar and Ors. contended that the bank guarantee could not said to be unconditional or unequivocal in terms so that the respondent could claim ---~any wlfettered right to invoke the bank guarantee and demand immediate payment tJ1ereoffrom the bank.

We find no substance in the submission 5. [1999] s sec 436. ___. ; so made by the learned senior counsel on behalf of the appellant. In Hindustan Construction (supra), the appellant Company was awarded a contract by the State of Bihar for construction ofa dam. Clause 9 of the contract between the parties provided that the State would make an advance loan to the Company for the costs ofmobilisation in respect of the works on furnishing ofa bank guarantee by the appellant for an amount equal to the advance loan. The advance loan was required to be used exclusively for mobilisation expenditure. In case ofmisappropriation of the advance loan the loan at once shall become due and payable immediately.

In terms ofthis clause bank guarantee was furnished by the bank agreeing unconditionally and irrevocably to guarantee payment on demand without any objection but with the qualification that such payment shall be only in the event the obligations expressed in Clause 9 of the original contract have not been fulfilled by the contractor giving the right ofclaim to the employer for recovery ofthe whole or part ofthe advance mobilisation loan. Clause 9 ofthe main contract was thus incorporated and made part ofthe bank guarantee furnished by the banker. It is under those circumstances this court took the view that the bank guarantee furnished was not an unconditional one. Clause 9 in the bank guarantee refers to the terms and conditions of the contract between the parties. The bank guarantee thus could be invoked only in the circumstances referred to in Clause 9 wherein the amount would become payable only ifthe obligations are not fulfilled or there is misappropriation. 21.

In the present case the amended clause does not refer to any of the clauses specifically as such but on the other hand the bank had undertaken responsibility to pay any sum or sums within the guaranteed limit upon receipt ofwritten demand from the Company. The operative portion of the bank guarantee furnished by the bank does not refer to any ofthe conditions for payment under the bank guarantee. It is true that the bank guarantee furnished makes a reference to the principal agreement between the parties in its preamble. Mere fact that the bank guarantee refers to the principal agreement in the preamble ofthe deed ofguarantee does not make the guarantee furnished by the bank to be a conditional one unless any particular clause ofthe agreement has been made part of the Deed of Guarantee. ~- / VINITEC ELECTRONICS PRIVATELTD. v. HCL 909 INFOSYSTEMS LTD. [B. SUDERSHANREDDY,J. ] 22. The recitals in the preamble in the deed of guarantee do not control the operative part ofthe deed.

After careful analysis ofthe terms ofthe guarantee we find the guarantee to be an unconditional one. The appellant, therefore, cannot be allowed to raise any dispute and prevent the respondent from encashing the bank guarantee. 23. The next question that falls for our consideration is as to whether the present case falls under any ofor both the exceptions namely whether there is a clear fraud of which the bank has notice and a fraud of th~ beneficiary from which it seeks to benefit and another exception whether there are any "special equities" in favour ofgranting injunction. 24. This Court in more than one dt:cisions took the view that fraud,, if any, must be of an egregious nature as to vitiate the underlying transaction. We have meticulously examined the pleadings in the present case in which no factual foundation is laid in support ofthe allegation of fraud.

There is not even a proper allegation ofany fraud as such and in \ fact the whole case of the appellant centers around the allegation with regard to the alleged breach of contract by the respondent. The plea of fraud in appellant's own words is to the following effect: 'That despite the respondent, HCL being in default ofnot making payment as stipulated in the Bank Guarantee, in perpetration of abject dishonesty and fraud, the respondent, HCL fraudulently invoked the Bank Guarantee furnished by the applicant and sought remittance ofthe sums under the conditional Bank Guarantee from the Oriental Bank of Commerce vide letter of invocation dated 16. 12. 2003. " 25. In our considered opinion such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less the fraud ofan egregious nature as to vitiate the entire transaction. The case, therefore does not fall within the first exception. _,____ 26.

Whether encashment of the bank guarantee would cause any "iITetrievable injury" or "irretrievable injustice". There is no plea ofany "special equities" by the appellant in its favour. So far as the plea of "iITetrievable injustice" is concerned the appellant in its petition merely ~d: } -;: -~ "That should the respondent be successful in implementing its evil design, the same would not only amount to fraud, cause irretrievable injustice to the applicant, and render the arbitration nugatory and infructuous but would permit the respondent to take an unfair advantage of their own wrong at the cost and extreme prejudice ofthe applicant. " 27. The plea taken as regards "irretrievable injustice" is again vague and not supported by any evidence. 28. There is no dispute that arbitral proceedings are pending. The appellant can always get the reliefprovided he makes his case before the Arbitral Tribunal.

There is no allegation that it would be difficult to realize the amounts from the respondent in case the appellant succeeds before the Arbitral Tribunal. 29. In this view ofthe matter, we see no merit in this appeal. 30. We make it clear that this order and as well as the order passed 1 by the Delhi High Court shall have no bearing on the merits ofthe case pending before the Arbitral Tribunal. 31. The appeal is accordingly dismissed. We make no order as to costs. t- K. K. T. Appeal dismissed.