G.S Atwal And Co. Engineers (Pvt.) Ltd. v. Hindustan Steel Works Construction Ltd. .

1. This is an application under S. 41 of the Arbitration Act. The facts of the case are shortly as follows:—

The petitioner and the respondent admittedly entered into eleven contracts whereby the petitioner was to construct eleven schools in Nalut, Libya at the cost of LD. 2,437,525,000. All the contracts were written contracts and all dt. 21-8-79. The contracts contain inter alia two clauses with which this Court is concerned in disposing of the application.

Clause 25.1—Retention money

a) The Associate shall within the time specified in the Letter of Intent/Letter of acceptance deposit with the principal a further sum in addition to the earnest money paid with the offer to work up to a rate of 1% of the value as initial retention money in cash or Government securities, performance bond by a Bank acceptable to the principal.

b) To this sum shall be added the deductions from the Associates' interim bills for work done as specified under Cl. 2.12 hereof, so as to make a total retention of 5% of the contract value as aforesaid.

c) When the retention money reaches a limit of three thousand five hundred Libyan Denars, the Associate, if he so desires, may convert the amount into a Bank guarantee as approved by the principals.

d) The retention money shall remain at the entire disposal of the principals as a security for the satisfactory execution and completion of the works in accordance with the conditions of the contract. The principals shall be at liberty to adjust and appropriate from the retention money such penalties and dues as may be payable by the Associate under the contract and the amount by which retention money is reduced by such appropriation will be made good by further deduction from the Associate's subsequent bills in the manner as aforesaid until the retention money is restored to the full limit mentioned above.

e) On due satisfactory performance and completion of the contract in all respects the retention money will be refunded to the Associate without any interest after passing of the final bill on presentation of an absolute no demand certificate from the Engineer in the prescribed form and up to return in good condition of any specification, drawings, samples or other property belonging to principals which may have been issued to the Associate.

Clause 3.11 — Advance

The Associate shall be paid a mobilisation advance up to a maximum of 5% of the value of the contract after signing of the contract against a bank guarantee in favour of the principals from an approved nationalised bank in India. The advance will be paid in two stages as follows:—

a) A maximum of 20% of the mobilisation advance or 1% of the value of the contract shall be paid in Indian rupees before departure of the Associates and his labourers to Libya. This advance shall be in Indian rupee.

b) The balance 4% of the contract value will be paid in Libya in Libyan Denars after deducting the cost of air-ticket, if any, purchased by the principals for the journey from India to Libya in respect of the Associate, his employees and labour.

c) The recovery of the mobilisation advance paid shall be made in Libyan Denars on pro rata basis increased by 10% from running bills till full amount is recovered so that the recovery of mobilisation advance is recovered by the time 90% of the work is completed.

2. Pursuant to the above terms of the agreement, the respondent paid to the petitioner Rs. 32.50 lakhs by way of mobilisation advance and as against that the petitioner instructed the United Commercial Bank, No. 10, Brabourne Road Branch to issue a Bank guarantee securing repayment of Rs. 32.50 lakhs in favour of the respondent beneficiary. It is evident from Cl. 3.11 that the respondent and the petitioner clearly expressed their intention that the bank guarantee to be furnished, pursuant to this clause, would be for securing repayment of the advance made by the respondent and for nothing else. It is one of the functions of the Commercial Banks to issue bank guarantee as advance payment guarantee in favour of the beneficiary at the request and in accordance with the instructions of their customers. The bank must act according to the instructions of the customer in this respect and has no authority or right to act contrary to such instruction or to do anything exceeding the authority given to the Bank by its customer. No bank has any right or aothority to saddle its customer with any additional liability under a guarantee by issuing the same contrary to the instruction by its customer. If the bank exceeds its authority, the customer will not be bound by the provisions introduced in the guarantee by the bank contrary to the instruction of the customer. It is the bounden duty of the bank to strictly follow the instructions of the customer because the guarantee agreement is entered into only between the bank and the beneficiary. The customer, at whose instance the guarantee is issued, does not become a party to the said document.

3. In this case, the petitioner was throughout under the impression that the guarantee No. 399/79 dt. 10-10-79 issued by the United Commercial Bank under Cl. 3.11 of the contract is a mobilisation advance guarantee only as would be evident from the correspondence which passed between the petitioner and the respondent. By letter dt. 8-6-82 being Annexure ‘H-1’ to the petition, the petitioner clearly stated:

“…….it is not a performance guarantee but a mobilisation advance guarantee and if any amount is due and recoverable against this guarantee, the same may be kindly indicated to our bankers so that they can process your request of performing this guarantee above.”

4. By another letter dt. 4-10-82 addressed to the respondent, the petitioner again stated in respect of the bank guarantee No. 399/79 as follows:

“We do not agree with your contention that this bank guarantee is to be kept valid till the completion of the contract. The validity of this guarantee is necessary till the amount of mobilisation advance paid to us under the terms of this guarantee is outstanding. The guarantee becomes redundant as soon as this advance is fully recovered. We have time and again over the last 10 months requested you to confirm the recovery made against this item without any response from you. (Pages 55 and 57 of the petition).

5. By letter dt. 17-12-82, the petitioner again wrote to the respondent in connection with the guarantee No. 399/79 as follows:—

“…..you have deducted from our running bills, the agreed proportionate amount towards mobilisation advance given to us, covered and secured under this bank guarantee, as per the terms of agreement under the contract.” (Page 60 of the ptn.)

6. By its letter dt. 3-1-83, the petitioner asked the respondent to furnish the information regarding progress of the work done by the petitioner and agreed to extend the period of bank guarnatee No. 399/79 for minimum period necessary. In reply to the letter, the respondent by its letter dt. 4-1-83 admitted that the guarantee No. 399/79 was against mobilisation advance and requested the petitioner to extend the period of the guarantee and agreed to furnish the information regarding progress of works as requested by the petitioner. This letter is at page 63 of the petition. The provisions of Cl. 3.11 of the contract and aforesaid correspondence leave no doubt about the nature of the guarantee agreed to be furnished under Cl. 3.11 of the contract. Both the respondent and the petitioner were fully aware of the provisions of Cl. 3.11 and the respondent knew that the guarantee would be only for mobilisation advance and nothing more and nothing less. On this background, it is absolutely impossible and improbable that the petitioner would unilaterally volunteer to take upon itself the additional liability and would instruct the bank to furnish a mobilisation advance-cum-performance guarantee under Cl. 3.11 But from the bank guarantee No. 399/79 dt. 10-10-79 being Annexure ‘C’ at page 36 of the petition, it appears that the bank had issued a mobilisation advance-cum-performance guarantee in favour of the respondent under Cl. 3.11 of the contract. It is obvious that the bank had used a standard form of performance guarantee for the purpose of issuing this mobilisation advance guarantee without striking out the unnecessary and inapplicable clauses contained therein. As a result, the guarantee became a mobilisation advance-cum-performance guarantee contrary to the provisions of Cl. 3.11 of the contract. The petitioner was not a party to this document and as such could not detect the mistake on the part of the bank concerned. This bank guarantee was accepted by the respondent obviously with ulterior and mala fide motive to saddle the petitioner with additional liability for breach of contract which was absolutely beyond the scope of Cl. 3.11 and that is why the respondent did not point out to the bank about the same. It is an admitted fact that the respondent has made deductions from the petitioner's running bills being L.D 1,30,170,917 against mobilisation advance as would be evident from the statement of recoveries made up to 30-9-83 and issued by the respondent, being Annexure ‘G’ at page 50 of the petition. From Annexure ‘G’ it appears that L.D 19485.193 was recovered in excess and was transferred to the column “Advance on interest.” Therefore, prima facie the entire advance has been recovered. But the respondent, taking advantage of this guarantee No. 399/79, negligently issued by the bank, by its letter dt. 15/16th March, 1984, addressed to the bank, invoked the said bank guarantee for recovery of loss and damages alleged to have been suffered by the respondent due to the alleged breach of contract by the petitioner. The bank by its letters dt. 27-3-84 and 4-5-84 expressed its willingness to pay the entire amount of Rs. 30.50 lakhs under the said guarantee. On coming to know about the aforesaid conduct of the respondent and the bank, the petitioner by its letter dt. 28-4-84 through its Solicitor protested vehemently stating:

“The guarantee for the sum of Rs. 32,50,000/- was given to secure the mobilisation advance of LD. 110687.724 ………..The question of the guarantee being linked with performance of alleged breach does not and cannot arise.

7. This letter is Annexure ‘M’ at pages 80-82 of the petition.

8. In support of the contention that almost entire mobilisation advance has been recovered, the petitioner's counsel invited my attention to Annexure ‘F’ at pages 48/49 of the petition in which the respondent had certified the value of the work executed by the petitioner up to 30-9-83. This document as well as Annexure ‘G’ are prima facie strong evidence in support of the petitioner's contention.

9. The disputes between the parties have already been referred to arbitration and the reference is pending. It is for the arbitrator to decide how much has been recovered by the respondent towards the mobilisation advance. If any amount still remains outstanding on the date of the award, the respondent will be entitled to recover only the outstanding amount of the advance by enforcing the guarantee No. 399/79 dt. 10-10-79. The respondent is not entitled to invoke this guarantee for recovery of loss and damage. The respondent also cannot say that the petitioner is estopped from denying that the guarantee No. 399/79 is not a mobilisation advance-cum-performance guarantee as the petitioner allowed the respondent to act on that basis. The question of estoppel does not arise in view of the fact that the petitioner is not a party to this document and the respondent itself admitted that the guarantee No. 399/79 was a mobilisation advance guarantee. Moreover, the parties are bound by the express written terms of the agreement being Cl. 3.11 of the contract. The respondent has throughout full knowledge of the correct legal position regarding this guarantee under Cl. 3.11 of the contract Hence the respondent now cannot go back upon its admission and treat the guarantee No. 399/79 as the performance guarantee. As this guarantee was issued by the banker contrary to the instruction of its customer in violation of its duties as a banker, it was the duty of the beneficiary to point out the same and not to accept this guarantee. The respondent was aware of the terms of Cl. 3.11 but kept silent and accepted the same with the ulterior motive to take advantage of the mistake, negligence and laches on the part of the banker when occasion would arise. On account of this conduct of the respondent, a special equity has arisen in favour of the petitioner and it is entitled to prevent the respondent from enforcing the said guarantee and to seek the Court's protection for the same. This guarantee was issued at the instance of the petitioner and although it is not a party thereto it has nexus therein. In my opinion, the principle laid down in AIR 1986 Cal 374 (Banerjee and Banerjee v. Hindustan Steel Works Construction Ltd.) will apply in full force. This is another instance of special equity for which the Court will protect the petitioner.

10. In that case (AIR 1986 Cal 374) I have dealt with all the authorities on this point thoroughly before arriving at my finding that if there is any special equity in favour of the petitioner, the petitioner can prevent the beneficiary from enforcing the bank guarantee. The general principle of non-interference by Court in cases of bank guarantee and L/C was for smooth functioning of international trade and commerce but this principle cannot stand in the way if the banker acts negligently in issuing bank guarantee contrary to its customer's instruction.

11. So far as the guarantee for retention money is concerned, the guarantee was to be issued by the bank in favour of the respondent for Rs. 6.50 lakhs in terms of Cl. 2.5.1 of the contract. This clause provides that the retention money would be 5% of the total value of the work and out of which 1% has to be secured by a guarantee and 4% thereof would be deducted by the respondent from the petitioner's running bills. Pursuant to this agreement and on the instruction by the petitioner, the bank issued the guarantee No. 350/79 dt. 16-8-79 for Rs. 6.50 lakhs in favour of the respondent beneficiary. This is a performance guarantee. This guarantee contains the express terms that for invoking this guarantee the beneficiary will have to allege that the petitioner has committed breach of the terms and conditions of the contract and also will have to state the amount of loss or damage suffered or (likely) to be suffered by the beneficiary. The guarantee No. 350/79 being Annexure ‘D’ at page 42 of the petition contains the provisions as follows:—

“…..the decision of the principal that the said Associate has committed breach or breaches and as to the amount or amounts of loss and damages, costs and charges and expenses caused to or suffered by or that may be caused to or suffered by the principal from time to time shall be final and binding on us.”

12. Therefore, for invoking this performance guarantee, the respondent has to assess the quantum of loss and damage and to mention that ascertained figure in the letter of invocation. The respondent is the sole judge for ascertaining the loss so far as the bank is concerned. The bank would not be entitled to challenge the correctness of the assessment. The letter of invocation is at page 78 of the petition, being Annexure ‘L’ thereto which clearly shows that the respondent did not mention the quantum of alleged loss or damage suffered or (likely) to be suffered by it. The counsel for the respondent, relying on AIR 1983 Cal 91 (Road Machines (India) Pvt. Ltd. v. Project and Equipment Corporation of India Ltd.) submits that it is not necessary that the letter of invocation should be in terms of the bank guarantee. He invites my attention to para 15 of the judgment:

“In my opinion, a bank guarantee may be invoked in a commercial manner. The invocation would be sufficient and proper if the bank concerned understands that the guarantee is being invoked by the beneficiary in terms of the guarantee.”

13. By laying down this principle, in my opinion, the Court proceeded on the basis that it was not necessary that the letter of invocation should strictly reproduce the terms of the bank guarantee but it must substantially comply with the terms of the bank guarantee. A careful reading of the aforesaid observation will clearly show that the bank will not be liable to pay if the invocation is not in the terms of the bank guarantee. Therefore, whether the invocation is in terms of the bank guarantee or not would depend on the terms of the guarantee and the letter of invocation. A bank would not be entitled to hold that the invocation is in accordance with the terms of the guarantee when clearly it is not so. There is no scope for assumption or speculation on the part of the bank in this matter. The phrase “commercial manner” does not empower the bank to act arbitrarily or whimsically. In Banerjee & Banerjee, AIR 1986 Cal 374, I have held that the bank guarantee and the letter of invocation must be read together to find out whether invocation has been made in accordance with the terms of the bank guarantee or not. If not, the bank is not liable to pay. Unless the loss or damage is quantified as required by the bank guarantee No. 350/79 there would be no debt payable by the bank as held in AIR 1974 SC 1265 (Union Of India v. Raman Iron Foundry .). If the damage is not assessed, it remains a claim for unliquidated damage. This bank guarantee cannot be enforced as this bank guarantee has not been given for securing the claim for unliquidated damage. In the present case, invocation has not been made in accordance with the terms of this bank guarantee. I have already pointed out how this bank has been discharging its banking operations perfunctorily. My observation on the conduct of this bank is fully corroborated by the fact that the bank has expressed its willingness to pay under the guarantee No. 350/79 on the basis of this letter which does not even substantially comply with the terms of this guarantee. Moreover, the petitioner is alleging that the respondent has deducted the full 5% retention money from its running bills and, as such, the bank guarantee No. 350/79 should not be enforced. Loss or damage, if any, as alleged, must be recovered from the 5% retention money lying in deposit in the hands of the respondent. This fact is disputed by the respondent. How much has been deducted by the respondent towards retention money from the running bills has to be decided by the arbitrator and cannot be decided by this Court. This bank guarantee can only be enforced if 5% has not been recovered. The correct position is within the special knowledge of the respondent. It will suffice to say that the invocation not being in accordance with the terms of the guarantee cannot be enforced. For all these reasons, the interim order made in this application is to continue until disposal of the pending arbitration proceeding. The cost of this application will be the cost in the arbitration proceeding.

Order accordingly.