1. The petitioner in this application, inter alia, has prayed for issuance of a writ of or in the nature of mandamus directing the respondents to forthwith revoke and/or rescind and/or cancel the letters dated 7th September, 1992 and 18th September, 1992 which are contained in Annexures R, R/1, S, S/1 to the writ application as also desisting from invoking bank guarantee No. AH7.BG/3/87, dated 7th November, 1987 for a sum of Rs. 10 lacs 57 thousand 1 hundred 60 and bank guarantee No. 5/88, dated 5th October, 1988 for a sum of Rs. 31 lacs 71 thousand 4 hundred 80 both issued by the Bunk of Maharashtra.
2. The fact of the matter lies in a very narrow compass.
3. The petitioner No. 1 owns a shipyard at Shibpur for carrying on business as Marine and Mechanical Engineers and structural fabricators. The respondent No. 5 intended to get a fishing trawler built by the petitioners. According to the petitioners the Central Government had evolved a scheme to promote shipping industries and grant loan to such persons intending to get a ship built wherefor even subsidy is paid. It is stated that a contract for building the aforesaid fishing trawler, the cost whereof was one crore five lacs was entertained into between the petitioners and respondent No. 5 on or about 23-3-1987. The Government's subsidy was to be to the tune of 1/3rd of the said amount, namely, Rs. 33,40,128/- and the buyers own contribution was only to the extent of Rs. 3,61,577/-. The respondent No. 2 Shipping Credit Investment Co. Ltd. granted a loan to the respondent No. 5 for a sum of Rs. 68,69,000/-. On or about 26th March, 1987, a tripartite agreement in writing was executed by and between the petitioner No. 1, respondent No. 2 and respondent No. 5. On the same day an agreement was entered into by the petitioner No. 1 and the respondent No. 2 for grant of subsidy to the extent of Rs. 33,40,128/-.
4. Pursuant to the said tripartite agreement dated 26th March, 1987, payment of loan for construction of the fishing trawler was to be made to the petitioners as per Clause 14 thereof. The petitioner received payments to the extent of Rs. 10,57,160/- and 31,71,480/- in terms of their Bills in respect whereof petitioner No. 1 furnished two bank guarantees being dated 7th November, 1987 and 5th October, 1988. According to the petitioners the respondent No. 5 backed out from the said agreement halfway through as the petitioner refused to accede to his wrongful demand that a Marine Cater Pillar Engine be installed in place and stead of indigenous Cummins Engine. It may be noted that the second payment to the petitioner No. 1 was made by the respondent No. 2 although in the meanwhile disputes and differences had arisen between the petitioner No. 1 and the respondent No. 5. The respondent No. 2 allegedly released the second payment observing that the payment at the third stage might be made only after a new buyer was found by the petitioner No. 1 or alternatively an amicable settlement be made with the existing buyer i.e respondent No. 5. No amicable settlement, however, took place between the petitioner No. 1 and respondent No. 5.
5. The petitioners have contended that the Central Government sought to intervene in the matter and indicated the possibilities of settling claim of the petitioner by it. However, in terms of letter dated 14-3-1991 the respondent No. 2 observed that in view of the conduct of the respondent No. 5 the contract be treated to have become frustrated. The respondent No. 2 by a letter dated 14-3-91 asked the petitioner No. 1 for reimbursement of the amount of loan but gave an alternative proposal to them with a view to finding out a new buyer and stipulated that in case no new buyer could be placed by the petitioner, the bank guarantees would be invoked by it. The petitioner No. 1 allegedly found out a new buyer i.e respondent No. 6. The Government of India, however, asked the respondent No. 6 to comply with certain directions in terms of its letter dated 14-5-1992. Respondent No. 6 applied for grant of loan before the Government of India and the respondent No. 2 in terms of its letter dated 10-8-1992 sought for certain clarification on the points specified therein. Deliberations were held by and between the respondent No. 6 and respondent No. 2.
6. The new buyer allegedly opposed the proposed enhanced rate of interest and gave a counter proposal with request to liquidation of loan and further proposed that the debt ratio may be 4:1 instead of 2:1 as proposed by the respondent No. 2.
7. The bank guarantees were invoked by the respondent No. 2 in terms of two letters dated 7-9-1992.
8. The petitioners filed a writ application on or about 22-9-1992 praying for the reliefs as referred to hereinbefore.
9. An affidavit-in-opposition has been filed only by the respondent No. 2 wherein, inter alia, it has been contended that this writ application is not maintainable.
10. It may, however, be mentioned that the petitioners invoked the arbitration agreement contained in the aforementioned tripartite agreement dated 26-3-1987 and filed an application under Section 20 of the Arbitration Act on or about 7th December, 1993. The said application was allowed by A.N Roy, J. by an order dated 5th August, 1994. The respondent No. 2, however, admittedly has filed an application for recalling the said order.
11. Mr. Anindya Mitra, learned Senior Counsel appearing on behalf of the petitioners raised a number of contentions in support of the writ application. The learned Counsel firstly submitted that the bank guarantees could be enforced by the respondent No. 2 only in the event of the petitioners' failure to comply with the terms and conditions thereof but as from the impugned notices it would appear that failure to comply with the terms and conditions of the contract has been attributed to the respondent No. 5, the said notice are invalid in law. It was submitted that the respondent No. 5 being the ship owner committed breach of the contract and the petitioners having not committed any breach of the terms and conditions of the tripartite agreement, the bank guarantees cannot be invoked as against them.
12. Mr. Mitra urges that a perusal of the bank guarantees would disclose that the same were performance guarantees and in view of the fact that there had been no failure on the part of the petitioners, the demand made by the respondent No. 2 upon the respondent No. 3 Bank must be held to be illegal.
13. In this connection my attention was drawn to the fact that the Central Government itself had treated the contract to have become frustrated. The learned Counsel submitted that in such an event, the bank guarantees cannot be invoked and in support of the aforementioned notice of invoking bank guarantees being not in terms thereof, the same is illegal and thus, cannot be enforced in a Court of Law.
14. Reliance in this connection has been placed upon Haraprasad & Co. Ltd. v. Sudarshan Steel Mills, reported in AIR 1980 Delhi 174 and Nongia Construction India (P) Ltd. v. National Buildings Construction Ltd., 1990 (2) Comp Law J. 265.
15. Mr. Mitra further submitted that the respondent No. 2 had been acting in terms of the provisions of the Merchant Snipping Act. The said Act was repealed by Act No. 66 of 1986 (The Ship Development Fund Committee) (Abolition) Act, 1986, hereinafter referred to for the sake of brevity as the said Act).
16. The learned Counsel contended that in terms of the provisions of the said Act the right, title and interest of the Ship Development Fund Committee vested in the Central Government and thus the respondent No. 2 does not have any right to invoke the bank guarantees. Mr. Mitra contended that Section 8 of the said Act empowers the Central Government to issue a notice upon the ship owner only, to whom the Committee had granted any financial assistance, to discharge forthwith in full his entire dues and also discharge other liabilities to the Central Government on the conditions laid down therein, the respondent No. 2 must be held to have acted illegally as it was acting as a designated person in terms of Section 16 of the said Act which applied only to the Part-III of the said Act. Submission of Mr. Mitra appears to be that as S. 8 of the said Act contemplates a notice by the Central Government upon Ship Owner only and then the notice by the respondent No. 2 to the Bank asking it to pay the amount covered by the two bank guarantees aforementioned must be held to be illegal, as the respondent No. 2 had been acting in exercise of its delegated power and under Section 16 of the said Act.
17. The learned Counsel, submitted, in this view of the matter a writ petition may be held to be maintainable and in support of the aforementioned contentions he has placed reliance on a decision of a learned single Judge of this Court in Peerless Guide Ltd. v. Union of India, reported in 1993 (2) Cal High Court Notes 362.
18. The learned Counsel submitted that Article 14 of the Constitution of India applies even on the field of contract and this keeping in view of the fact that action of the respondent No. 2 is arbitrary, it must be struck down.
19. Mr. S. Paul, the learned Counsel appearing on behalf of the respondent No. 2, on the other hand, submitted that the petitioner in this writ application seeks to enforce a pure commercial contract which does not raise any constitutional issue and thus, this writ application is not maintainable.
20. Strong reliance has been placed by Mr. Paul on Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370 : (1985 Supp 3 SCR 909) and a Division Bench decision of the Patna High Court in Amarendra Kumar v. The State of Bihar, reported in AIR 1993 Pat 112.
21. The learned Counsel submitted that, in any event, as the Supreme Court has deprecated passing of an order injuncting the principal to enforce the bank guarantee except in the case of fraud, this writ application is not maintainable.
22. Reliance in this connection has been placed upon Svenska Handelsbanken v. Indian Charge Chroms, reported in 1994 (1) SCC 502 : (AIR 1994 SC 626); United Commercial Bank v. Bank of India, reported in AIR 1981 SC 1426; and U.P Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., reported in 1988 (1) SCC 174.
23. Mr. Paul further drew my attention to the various terms of the tripartite agreement and submitted that keeping in view of the fact that the petitioners furnished the bank guarantees pursuant thereto, it has no legal right to resist the same by filing the writ application in this Court. Learned Counsel submitted that neither any concluded contract nor understanding has been arrived at by and between the petitioners, respondent No. 2 and respondent No. 6 and in that view of the matter, the respondent No. 2 must be held to have acted within its contractual right to invoke the bank guarantees so as to enable it to recover the advance made by it to the petitioner.
24. Mr. Paul further submitted that as in terms of the Shipping Development Fund Committee (Abolition) Act, 1986, the petitioner No. 1 comes within the purview of the definition of ‘ship owner’, the notice issued by the respondent No. 2 to respondent No. 3 cannot be said to be illegal.
25. The petitioners in terms of the aforementioned agreement dated 26th March, 1987 entered into by and between it and the respondent No. 5 admittedly applied for and was granted subsidy by the respondent No. 2 in terms of an agreement dated 26th March, 1987 for a sum of Rs. 33,40,128/-.
26. It is also admitted that on or about 26th March, 1987 a tripartite agreement was entered into by and between the respondent No. 5 (hereinafter referred to as ‘the said Company’), petitioner No. 2 (hereinafter referred to as ‘the Committee’) and petitioner No. 1 (hereinafter referred to as ‘builders’).
27. From a perusal of the tripartite agreement the following fact emerges—
a) The Company applied to the Committee for grant of loan of Rs. 68,69,899/-.
b) The terms and conditions of the loan were conveyed to the Company by the Committee in terms of letter dated 6th January, 1986 which was accepted by the Company by its letter dated 25th January, 1986.
c) The Company represented to the Committee that as and when the Committee directly disburses to the builders so much of the amount as can be disbursed by the Committee to the Company on account of the loan, pursuant to the loan agreement; the builders would undertake and agree to furnish security to the full satisfaction of the Committee of the amount so paid.
d) To protect the interest of the Committee, the Company would assign its rights and benefits under the Contract to the Committee and not its liabilities thereunder.
e) The Company has deposited first instalment of loan to the Committee which would be released by it to the builders along with the amount of loan in the manner and the stages indicated thereafter.
f) Builders have agreed to build and construct ship trawler subject to the conditions contained therein and the builders have confirmed and consented to the assignments of the rights and benefits of the Company under the contract to the Committee but without any liabilities thereunder.
28. The said agreement contains covenants entered into by and between the Company and Builders as also the Committee and Builders.
29. There cannot be any doubt that Article 14 of the Constitution applies in case of contract entered into by and between the State and others. However, when the State enters into transactions pursuant to its commercial pursuits, its action cannot be said to be a State action unless public law character is attached to it.
30. The Supreme Court in Life Insurance Corporation of India v. Escorts Ltd., reported in AIR 1986 SC 1370 : (1985 Supp 3 SCR 909), held that LIC as a shareholder is required to act as any other shareholder and thus it cannot be restrained from doing so nor is it bound to disclose its reasons for moving the resolutions. The Supreme Court further held in AIR 1993 SC 1494 : (1993 AIR SCW 1425) (Food Corporation of India v. Jagannath Dutta). We are of the view that the High Court was not justified in quashing the impugned notice especially when the terms and conditions of the contract permitted the termination of the agreement by either of the parties. The High Court should not have gone into the question of contractual obligation in its writ jurisdiction under Article 226 of the Constitution. Even otherwise the High Court misread the documents on the record and grossly erred in reaching the conclusion that no policy-decision was taken by the FCI to terminate the storage agencies in the State of West Bengal. We may refer to some of the documents on the record.
31. In State of Punjab v. Ajudhia Nath, reported in AIR 1981 SC 1374, the Supreme Court was considering the case of auction-sale wherein it has also held that the principles of natural justice is not required to be complied with when the demand of the State is merely for payment of money.
32. In Amarendra Kumar v. State of Bihar, reported in AIR 1993 Pat 112, a Division Bench of Patna High Court of which I was a member held:—
“In the case of Burmah Construction Co. v. State of Orissa, reported in AIR 1962 SC 1320 (at p. 1323) delivering the judgment of the Constitution Bench, Shah, J. stated thus:
‘The High Court normally does not entertain a petition under Article 226 of the Constitution to enforce a civil liability arising out of a breach of contract or a tort to pay an amount of money due to the claimant and leaves it to the aggrieved party to agitate the question in a civil suit filed for that purpose. But an order for payment of money may sometime be made in a petition under Article 226 of the Constitution against the State or against an officer of the State to enforce a statutory obligation.’
33. The above decision was quoted with approval in a subsequent Constitution Bench decision, in the case of Suganmal v. State of Madhya Pradesh, AIR 1965 SC 1740, and the Court took the view that a petition praying merely for the issue of a writ of mandamus for refund of tax or any money due from the State cannot be normally maintained. It was held (at p. 1742 of AIR):
‘Normally petitions solely praying for the refund of money against the State by a writ of mandamus are not to be entertained. The aggrieved party has the right of going to the Civil Court for claiming the amount and it is open to the State to raise all possible defences to the claim, defences which cannot, in most cases, be appropriately raised and considered in the exercise of the writ jurisdiction.’
34. Later, a Bench of four Judges of the Supreme Court of India, in the case of D.R Mills v. Commissioner, Civil Supplies, AIR 1976 SC 2243 (at page 2249) : 1976 (3) SCR 387, quoted the above two decisions with approval.
35. In Northern India Seeds Corporation v. The State of Bihar, reported in 1994 (1) BLJR 559, it was noted:—
“45. In Radhakrishna Agarwal v. State of Bihar, AIR 1977 SC 1496 : (1977 (3) SCR 249), the Supreme Court categorised the cases arising out of breaches of alleged obligation by the State or its agents in three types of cases, namely:
(i) Where the petitioner makes a grievance of breach of promise on the part of the State in cases where promise has been made by State and the promises has acted to his prejudice.
(ii) Where the contract entered into between the Contracting Party of the State is in exercise of statutory power under Statutory Acts or Rules framed thereunder.
(iii) Where the contract entered into between the State and the persons aggrieved is non-statutory and purely contractual of the rights and obligation of the parties thereto are governed by the terms of the contract.
The Supreme Court held that whereas the case falling within the categories (i) and (ii) aforementioned, a writ petition under Article 226 of the Constitution would be maintainable but in the cases falling within the category (iii), no writ petition shall lie.
46. This aspect of the matter has been considered by a Full Bench of this Court in Pancham Singh v. State of Bihar, reported in 1991 (1) PLJR 352, when this Court upon taking into consideration various other decisions of Supreme Court carved out a fourth category and held that a writ petition shall also be maintainable where the contract has been terminated by the ‘State’ on a ground dehors any of the terms of the contract, and which is per se violative of Article 14 of the Constitution.
50. Reference in this connection may be made to BASF India Ltd. v. The State of Bihar, 1992 BBCJ 670. The Division Bench in that case held:
“We are of the definite opinion that in all cases where breach of contract is alleged, the matter shall have to be decided keeping in view the law laid down by the Supreme Court (i.e the decision of the Supreme Court in Radhakrishna Agarwal's case).”
53. In Bisra Lime Stone Company Ltd. v. Orissa State Electricity Board, reported in AIR 1976 SC 127, the Supreme Court upon taking into consideration its earlier decision in Indian Aluminium Company v. Kerala State Electricity Board, AIR 1975 SC 1967, held that a writ petition is not maintainable where the parties can get their disputes resolved by invoking the adjudicating machinery of the arbitration clause.”
36. In Steel Authority of India Ltd. v. Steel Cracker, reported in 1994 (2) CLJ 174, a Division Bench of this Court held that although the Writ Court can interfere in contractual matters, the Court will not scrutinise in details the facts of disputed nature and will not enter into question of interpretation of contracts involving close scrutiny.
37. In Industrial Fuel Company Private Ltd. v. Heavy Engineering Corporation Ltd., reported in 1993 (2) BLJR 1308, it has been held:—
“13. In Binod Kumar Srivastava… v. The State Of Bihar & Ors.…, reported in 1992 (2) PLJR 229, a Division Bench of which one of us (N. Roy, J.) was a member of this Court relying upon various decisions held that writ of mandamus cannot be issued in favour of the Contractor for payment of his so-called outstanding bills.”
This aspect of the matter has again been considered by a Bench of which one of us (S.B Sinha, J.) was a member in Amarendra Kumar v. State of Bihar, reported in 1993 (1) BLJ 409 : (AIR 1993 Pat 112).
This aspect of the matter has also been considered by a Division Bench of this Court in Usha Brecco Ltd. v. State of Bihar, reported in 1993 (1) PLJR 183.
14. The decisions relied upon by Mr. Gadodia have been considered by the Supreme Court of India in Sterling Computers Ltd. v. M. & N. Publications Ltd., reported in 1993 (1) SCC 445 : (1993 (2) PLJR 12 (SC)). In Sterling Computers Ltd. the Supreme Court was considering a matter relating to grant of contract. N.P Singh, J. speaking for Supreme Court, inter alia, held that a contract awarded for the publication of directories had not only a commercial object but had public element at the same time that is to supply the directories to lacs of subscribers of telephone in Delhi and Bombay within the stipulated time free of cost. In that situation, it was held that MTNL could not exercise a unfettered discretion after the repeated breaches committed by UPI/UOI, by entering into a supplemental agreement with the Sterling for a fresh period of more than five years on terms which were only beneficial to UIP/UOI/Sterling with corresponding no benefit to MTNL, which they have realised only after the High Court went into the matter in detail in its judgment under appeal. It was held that as the supplemental agreement was a new agreement, the respondents should have invited tenders.
15. In that case the contract was given without issuing any public order. The Supreme Court, therefore held:—
“The cases aforesaid on which reliance was placed on behalf of the appellants, have also reiterated that once the State decides to grant any right or privilege to others, then there is no escape from the rigour of Article 14; the executive does not have an absolute discretion, certain percepts and principles have to be followed, the public interest being the paramount consideration. It has also been pointed out that for securing the public interest one of the methods recognised is to invite tenders affording opportunity to submit offers for consideration in an objective manner. However, there may be cases where in the Special facts and circumstances and due to compelling reasons which must stand the test on Art. 14 of the Constitution, departure of the aforesaid rule can be made. This Court while upholding the contracts by negotiation in the cases referred to above has impressed as to how in the facts and circumstances of those cases the decisions taken by the State and the authorities concerned were reasonable, rational and in the public interest. The decisions taken in those cases by the authorities concerned on judicial scrutiny were held to be free from bias, discrimination and under the exigencies of the situation then existing to be just and proper. On the basis of those judgments it cannot be urged that this Court has left to the option of the authorities concerned whether to invite tenders or not according to their own discretion and to award contracts ignoring the procedure which are basic in nature, taking into account factors which are not only irrelevant but detrimental to the public interest.”
21. Recently, the Supreme Court in Food Corporation of India Ltd. v. Jagannath Dutta, reported in AIR 1993 SC 1494 : 1993 AIR SCW 1426 held thus:
“We are of the view that the High Court was not justified in quashing the impugned notice especially when the terms and conditions of the contract permitted the termination of the agreement by either of the parties. The High Court should not have gone into the question of contractual obligation in its writ jurisdiction under Art. 226 of the Constitution.”
38. In State of Gujarat v. Meghji Pethraj Shah Charitable Trust, reported in 1994 (3) SCC 552, the Apex Court held:
“It is not also an executive or administrative act to attract the duty to act fairly. It was — as has been repeatedly urged by Shri Ramaswamy — a matter governed by a contract/agreement between the parties. If the matter is governed by a contract, the writ petition is not maintainable since it is a public law remedy and is not available in private law field, e.g, where the matter is governed by a non-statutory contract.”
39. Yet again the Supreme Court recently in Assistant Excise Commissioner v. Issac Peter, reported in 1994 (4) SCC 104 held:—
“We are, therefore, of the opinion that in case of contracts freely entered into with the State, like the present ones, there is no room for invoking the doctrine of fairness and reasonableness against one party to the contract (State), for the purpose of altering or adding to the terms and conditions of the contract, merely because it happens to be the State. In such cases, the mutual rights and liabilities of the parties are governed by the terms of the contracts (which may be statutory in some cases) and the laws relating to contracts. It must be remembered that these contracts are entered into purusant to public auction, floating offenders or by negotiation. There is no compulsion on anyone to enter into these contracts. It is voluntary on both sides. There can be no question of the State power being involved in such contracts. It bears repetition to say that the State does not guarantee profit to the licensees in such contracts. There is no warranty against incurring losses. It is a business for the licensees. Whether they make profit or incur loss is no concern of the State. In law, it is entitled to its money under the contract. It is not as if the licensees are going to pay more to the State in case they make substantial profits. We reiterate that what we have said hereinabove is in the context of contracts entered into between the State and its citizens pursuant to public auction, floating of tenders or by negotiation.”
40. The doctrine of legitimate expectation as was submitted by Mr. Mitra on the basis of the decision of the Supreme Court in Kamdhenu Cattle Food Industries, reported in JT 1992 (6) SC 259, also has no application. The Supreme Court in a large number of decisions has since considered the parameters of the doctrine of legitimate expectation and, inter alia, held that no action can be based only on legitimate expectation. I have considered this matter in Industrial Fuel Co. Pvt. Ltd. v. Heavy Engineering Corporation Ltd., reported in 1993 (2) BLJR 1308 in the following terms:—
“23. So far as the submission of Mr. Cododia on the doctrine of legitimate expection is concerned, the same has no application in relation to a dispute arising out of a contract qua-contract. The said doctrine is applicable in the cases of “State action.”
41. However, the Supreme Court recently in Union of India v. Hindustan Development Corporation, reported in Judgments Today 1993 (3) SC 15 has clearly held that no enforceable right is created in terms of the doctrine of legitimate expectation, but the same only checks arbitrariness on the part of the State.”
42. This aspect of the matter has recently been considered by the Supreme Court upon reviewing its earlier decisions including Kamdhenu Cattle's case (supra) in Madras City Wine Merchants' Association v. State of T.N 1994 (5) SCC 509, wherein it has been held:—
“From the above it is clear that legitimate expectation may arise—
(a) if there is an express promise given by a public authority; or
(b) because of the existence of a regular practice which the claimant can reasonably expect to continue;
(c) Such an expectation must be reasonable. However, if there is a change in policy or in public interest the position is altered by a rule or legislation, no question of legitimate expectation would arise.”
43. In Gaziabad Development Authority v. Delhi Auto and General Finance Pvt. Ltd., reported in AIR 1994 SC 2263, the Supreme Court held:—
“9. It is difficult to appreciate how the change of land use of the area in the Master Plan from ‘recreational’ to ‘residential’ could give rise to a legitimate expectation in a private coloniser owning land in that area that he could construct a housing colony therein simply because he had submitted some plan for approval, when grant of the permission under Section 15 of the U.P Act is not automatic and the statute permitted amendment of the Master Plan by change of the land use even thereafter. The mere fact that the area was shown originally as meant for recreational use, shows that reversion to the original land use is equally permitted by the statute. No legitimate expectation of the kind claimed by these private colonisers could arise on these facts and in a situation like this clearly contemplated by the Statute itself.”
The Supreme Court also held:—
“The aforementioned decision, therefore, clearly lay down the law that the High Court in exercise of its jurisdiction under Art. 226 of the Constitution of India cannot interfere in a matter of contract or demand of money under a contract unless there exists a public law element.”
The High Court, however, is entitled to interfere in a contractual matter, if the action of the State is arbitrary and thus, is violative of Art. 14 of the Constitution of India.
In this case, the respondents seek to enforce the bank guarantees furnished by the petitioner in terms of a tripartite agreement.
The Central Government had advanced loan to the Company for getting the ship built. It may be as has been submitted by Mr. Mitra that the petitioner has not committed any breach of contract and the breach of contract has been committed by the respondent No. 5. But that, by itself, prima facie, cannot deter the Central Government from realising its dues from the petitioner.
The instant case, therefore, does not involve any constitutional issue so as to enable this Court to exercise its writ jurisdiction.”
44. It is difficult to comprehend as to how the doctrine of legitimate expectation can be invoked in contractual fields. Moreover, an action on the part of an authority which is a State within the meaning of Art. 12 of the Constitution of India in the matter of contract cannot be said to be in pursuit of its administrative action particularly when the contract was concluded.
45. Right to enforce Bank guarantee arises out of a contract qua-contract.
46. There is no public law element involved in it.
47. Thus a writ will not issue in the matter of enforcement of bank guarantee unless there exists a public law element.
48. Even otherwise, normally a Court will not issue an injunction restraining enforcement of a bank-guarantee.
49. It is to be noted in Svenska (supra) reported in 1994 (1) SCC 502 : AIR 1994 SC 626, the Supreme Court held clearly that except in the case of fraud, no injunction can be issued restraining principal from enforcing a bank guarantee in the following terms:
“The High Court was also in error in considering the question of balance of convenience. In law relating to bank gurantees, a party seeking injunction from encashing of bank guarantee by the suppliers has to show prima facie case of established fraud and an irretrievable injury. Irretrievable injury is of the nature as noticed in the case of Itek Corpn. Here is no such problem. Once the plaintiff is able to establish fraud against the suppliers or suppliers-cum-lenders and obtains any decree for damages or diminution in price, there is no problem for effecting recoveries in a friendly country where the bankers and the suppliers are located. Nothing has been pointed out to show that the decree passed by the Indian Courts could not be executable in Sweden.”
50. This aspect of the matter has also been considered by a Division Bench of this Court in Indian Bank… v. Metallurgical Engineering Consultants (India) Limited…., reported in 1994 (2) CLJ 295.
51. In Texmaco Ltd. v. State Bank of India, reported in AIR 1979 Cal 44, Sabyasachi Mukharji, J. (as His Lordship then was) held that in the absence of special equities arising from a particular situation which might entitle party on whose behalf guarantee is given to an injunction restraining the bank in performance of bank guarantee and in the absence of any clear fraud, the Bank must pay to the party in whose favour guarantee is given on demand, if so stipulated.
52. In U.P Co-operative Federation Ltd. v. Singh Consultants and Engineering (P) Ltd., reported in (1988) 1 SCC 174, a Division Bench of the Supreme Court comprising Sabyasachi Mukharji (as the learned Chief Justice then was) and K. Jagannatha Shetty, J. upon following a large number of Indian as also English decisions including Texmaco (supra) held:
“On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the Courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the Court should interfere.”
53. In United Commercial Bank v. Bank of India reported in AIR 1981 SC 1426 it has been held:
“It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the Courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The Courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the Courts. Otherwise trust in international commerce could be irreparably damaged.”
54. Recently again the Supreme Court in The State Trading Corporation of India v. Jarisas Clothing Corporation, reported in AIR 1994 SC 2778, clearly held that in a case of unequivocal and unconditional contract of bank guarantee by supplier or his failure for shipment of goods; no injunction should be granted against the corporation from invoking the bank guarantee except in a clear case of fraud.
55. The decision of the Delhi High Court relied upon by Mr. Mitra in AIR 1980 Del 174, and 1990 (2) Comp LJ 265, are cases when fraud had been pleaded and prima facie case was found to be existing in favour of the petitioner thereof. Such is not the position here.
56. In Union of India v. Bimal Consultants (P) Ltd. reported in 1995 (1) Cal L Times 66, a Division Bench of this Court stated the law—
“Under the agreement it is clear that the rate of pay phones had been granted under a contract. True this contract has been entered into by and between the Department of the Central Government and the writ petitioner/opposite party in respect of a telephone which is established, maintained by the Telephone Authorities. It is in the field of contractual obligation between the parties, it is not the law that a Writ Court can intervene in each and every case. A Public Body may have a power to take decision which will in some way affect or vary existing private law right of an individual. An individual may challenge decision for judicial review. If the source of power is statutory indicating that the matter has a sufficiently public element to render it suspectible judicial review. It is a case of a private law right the individual had to proceed by an ordinary action. The Court has drawn a distinction derived from contract which is a clause as ‘private law rights’ and rights derived from public law. By ‘public law right’ the Court generally means the ability to invoke the supervisory jurisdiction of the Court to ensure the public authorities to perform their statutory duties and properly exercise their statutory powers. The statute may expressly or impliedly impose restriction on the exercise of contractual power by a Public Body. Judicial review will be available to determine whether contract violates such statutory restriction or there has been breach of contract in violation of the statutory restriction. The Court would be performing the public law supervisory role of ensuring compliance with statutory limitation on the powers of public authorities and would not be dealing with private law issue of what the terms of the contract were or whether they had been broken.”
57. Reference in this connection may also be made to a recent decision of the House of Lords in R. v. Secretary of State for Transport, Ex Parte Richmond upon Thames London Borough Council, reported in 1994 (1) All ER 577.
58. Clauses 1, 5, 12 and 14 of the Bank Guarantees furnished by the petitioner demonstrate that he unequivocally agreed to pay to Central Govt. merely on a demand.
59. The Bank Guarantees, could be invoked by the Central Government for non-payment of the amount advanced by it to the petitioner.
60. Let me now consider another submission of Mr. Mitra. Mr. Mitra submitted that in terms of the provisions of the Shipping Development Fund Committee (Abolition) Act, 1986 (hereinafter referred to as 1986 Act) the respondents could not have been delegated with the power to enforce the Bank Guarantee which was furnished by the petitioner in favour of the Central Government.
61. The said Act was enacted for abolition of the Shipping Development Funds Committee and vesting of assets and liabilities of the Government in the Central Government. In terms of S. 3 the Shipping Development Funds Committee constituted under S. 15 of the Merchant Shipping Act, 1958 stands abolished, the consequence whereof have been provided in S. 4 thereof, whereby, inter alia, all the rights and privileges of the Committee were to become the rights and privileges of the Central Government and all properties, movable and immovable, shall vest in the Central Government.
62. Section 2(d) of the said Act defines “designated person” meaning the person appointed as such under S. 16 of the Act. Section 2(g) defines “Shipowner” meaning a person of the description mentioned in S. 21 of the Act or who had obtained loans or financial assistance in any other form from the Committee. The word “shipping concern” has been defined in S. 2(h) of the said Act to mean any concern engaged in the business of shipping, owned, controlled or managed by a shipowner. Chapter III of the said Act provides for special powers of the Central Government in terms whereof a non obstante clause has been enacted so as to empower the Central Government to recover any amount by giving notice in writing to a ship owner to whom the Committee has granted financial assistance. Section 16 of the said Act reads thus:
“Delegation of powers to the designated person—
(1) The Central Government may, by notification in the Official Gazette, and subject to such conditions, restrictions and limitations as may be specified therein or otherwise, delegate all or any of its powers and functions under this Chapter to a designated person.
(2) Where any notification has been issued under sub-section (1), the provisions of this Act shall apply in relation to the designated person as they apply in relation to the Central Government in respect of any matter in relation to which the powers and functions of the Central Government have been delegated to the designated person.”
The submission of Mr. Mitra, therefore, is that keeping in view the aforementioned provisions the respondents could not have enforced the bank guarantee from a person who is not a shipowner inasmuch as the power to enforce the bank guarantee lies only with the Central Government in terms of Chapter III thereof.
63. However, a supplementary affidavit has been filed on behalf of the respondent No. 2 wherewith various notifications have been annexed. It appears that by a notification bearing No. S. 0305(E) dated 3rd April, 1987 the Central Government delegated all its powers and functions under Chapter III of the said Act to the said respondent.
64. On 2nd December, 1987 Parliament enacted Shipping Development Fund Committee (Abolition) Amendment Act, 1987, S. 2 whereof reads thus:
“2. In S. 16 of the Shipping Development Fund Committee (Abolition) Act, 1986 in sub-sec. (i), for the words, “this chapter”, the words “this Act” shall be substituted.”
A copy of the said Amendment Act is contained in Annexure “B” to the Supplementary Affidavit. By reason of the aforementioned Act, S. 16(1) of the said Act was also amended which reads thus—
“16(1). The Central Government may, by notification in the Official Gazette, and subject to such conditions, restrictions and limitations as may be specified therein or otherwise, delegate all or any of its powers and functions under this Act to a designated person.”
The Central Government again by a Notification bearing No. S.O 882(E) dated 22nd September, 1988 in continuation of the Notification bearing No. S.O 305(E) dated 3rd April, 1987 appointed the respondent No. 2 and delegated to it the powers and functions exercisable by it in terms of Ss. 4 and 5 of the said Act, a copy whereof is contained in Annexure “C” thereto.
65. Yet, again the Central Government in terms of its letter dated 5th October, 1988 while enclosing a copy of the aforementioned notification dated 22nd September, 1988 intimated to the said respondent that it was required to discharge the functions enumerated therein including—
“(2) to hold custody of Bank Guarantee furnished or to be furnished by ship builders and shipping concern and to keep watch and to ensure that these are kept renewed in accordance with the requirements of Securities for the loans advanced under contract entered into by the Shipping Development Fund Committees prior to its abolition.
(3) to issue notices to shipping concern for discharging forthwith in full the entire dues and other liabilities to the Central Government and for taking follow up measures in pursuance thereto for recovery of such dues.”
My attention has further been drawn to the fact that for removal of doubts the Central Government yet again issued a letter dated 23rd February, 1993 confirming the factum of delegation of power to the respondent No. 2 in relation to the Bank Guarantee as outlined in the letter dated 5th October, 1988. The said letter dated 23rd February, 1993 reads thus:
“With reference to para 2 of this office letter No. 5(3)/88(SDFC) dated 5-10-1988, the undersigned has been directed to inform that, for the removal of doubts, in addition to the specific mention in the stage payment/shortfall guarantees issued by various banks (either at the behest of the shipping/fishing companies or at the behest of shipyards) that the said guarantees could be invoked by SCICI, SCICI has, in fact, been specifically conferred the power to invoke the bank guarantees by the Central Government.”
The Central Government again issued a notification bearing No. S.O 235(E) dated 12th April, 1993 specifying the authority of the respondent No. 2 to invoke the Bank Guarantees furnished by shipyards, shipping and fishing companies, a copy whereof is contained in Annexure “F” to the Supplementary Affidavit.
66. The aforementioned Amendment Act and the notification thereunder, however, have no application in the instant case inasmuch as neither the said amendment nor the notification issued thereunder had been given a retrospective effect and a retroactive operation.
67. The tripartite agreement between the Shipping Development Funds Committee, the company and the petitioners were entered into on 26-3-87. A subsidy agreement between the said Shipping Development Funds Committee and the petitioner was also entered on the said date. The said Act came into force on 3-4-87 as a result whereof all the right and privileges of the committee contained in the aforementioned agreement dated 26-3-67 vested in the Central Government. Pursuant to the aforementioned agreement dated 26-3-87 the petitioners furnished two bank guarantees, one on 7-11-87 and another on 5-10-88 with regard to that two stages payments were received by it. Both the aforementioned bank guarantees were furnished in favour of the Central Government. Chapter III of the said Act provides for special powers of the Central Government to realise the amount from the shipowner to whom the Committee had granted a financial assistance, which in terms of explanation appended to S. 8 shall include any loan, advance or monetary assistance including any guarantee or counter-guarantee given to the shipowner by the Committee at any time before the appointed I day. Evidently, therefore, bank guarantees having been furnished in favour of the Central Government, S. 8 has no application to the 1 instant case. This finding, is fortified from the fact that in terms of S. 15 of the said Act, the Central Government had authorised to realise any loan, which has been recalled by a notice upon a shipowner in terms of S. 8 of the Act as an arrear of the land revenue.
68. Thus, in relation to the bank guarantees furnished by the petitioner in favour of the Central Government provisions of the said Act have no application at all.
69. If the provisions of the said Act had no application, it was open to the Central Government to invoke the bank guarantees dehors the provisions thereof and for the said purposes it was also open to the Central Government to appoint an Agent therefor. As in view of my finding aforementioned the bank guarantees furnished by the petitioner would not attract the provisions of the said Act, it was not necessary for the Central Government to appoint a ‘designated person’. It is true, as was submitted by Mr. Mitra, that the respondent No. 2 purported to act as — ‘designatured person’ authority in terms of the said Act, but on his own showing, the said Act had no application and in that view of the matter it was not necessary for the Central Government to delegate its power under the said Act in favour of the respondent No. 2 by issuing an appropriate notification in this regard.
70. The parties, however, proceeded on the basis that the respondent No. 2 had the requisite authority of the Central Government to invoke the said bank guarantees as an agent aliunde. This jural relationship of the Central Government and the respondent No. 2 had neither been disputed by the petitioner or by the Central Government.
71. In paragraph 41(g) of the writ petition, the petitioner has stated—
“The respondent No. 2 by its letters dated 5th August, 1992 and 28th August, 1992 duly called upon your petitioner to extend bank guarantee in question which are to expire on and from 4th October, 1992 and 29th October, 1992”.
Similarly, in paragraph 24 at p. 16 of the Affidavit-in-Reply, it was stated—
“The respondent No. 2 for reasons best known to itself proceeded to invoke the bank guarantee with undue haste. The respondent No. 2 was duly informed of the interest subsidy, orally as well as by letter. Assuming that the respondent No. 2 had no doubts with regard to interest subsidy to be granted by the Ministry of Food Processing, the respondent No. 2 could have sought clarification from the Ministry instead of proceeding to invoke the bank guarantee with undue haste.”
Other correspondences to the same effect appear at pp. 20, 21, 22 and 23 of the Supplementary Affidavit.
72. The respondent No. 2 played a pivotal role in relation to the new agreement, which was sought to be entered into by and between the petitioner, the respondent No. 6 and the Central Government. The correspondences passed between the parties even after the writ petition was filed and in terms whereof a proposal had been given by the Central Government that the petitioner should withdraw the said application. The petitioner also in terms of his letter dated 13-5-93 addressed to the respondents contended—
“In any case, we have time and again reiterated our commitment to you and the Ministry of Finance, Govt. of India about our firm intention of completing the partly built vessel. We are only waiting for our clearance and necessary documentation to be completed by you in this regard as settled in your office on 12-13th November, 1992”.
In another letter dated 26-2-93 addressed to the respondent No. 2 the petitioner again stated that any attempt on the part of the respondent No. 2 to enforce the bank guarantees will amount to an act of contempt. Even in that letter the petitioner did not deny or dispute the authority of the respondent No. 2 to enforce the bank guarantee. In the brochure of the respondent No. 2, which is contained in Annexure ‘I’ to the writ application, it has been stated—
“Agents to Government:
As a consequence of the abolition of SDFC, the Government of India has taken over the assets and liabilities as well as past commitments of SDFC. The Government has designated SCICI and its authorised representative to manage the assets and liabilities of erstwhile SDFC. It has advanced Rs. 1350 million to SCICI for this purpose.”
73. For the reasons aforementioned, in my opinion, it would not be proper to exercise the discretion of this Court to interfere with the enforcement of bank guarantees by the respondent No. 2 as an injunction, as noticed hereinbefore, for restraining enforcement of a bank guarantee, should not normally be granted. Even if this writ application is allowed, the Central Government can invoke the bank guarantees.
74. As indicated hereinbefore, the Central Government has made its position clear in various documents that the respondent No. 2 has been acting as its agent.
75. It is also evident that the petitioner has also expressly and/or in substantio accepted the said respondent as the agent of the Central Government for all intents and purposes.
76. Moreover, the petitioner has already invoked the arbitration clause. An application under S. 20 of the Arbitration Act has already been filed and the same has been allowed although the matter is pending consideration at the instance of the respondent No. 2. It is now well known that when there exists an arbitration clause, the writ petition normally does not lie. Reference, in this connection may be made to Industrial Fuel Company Pvt. Ltd. v. Heavy Engineering Corporation Ltd., 1993 (2) BLJR 1308, to which reference has been made earlier.
77. It is now well settled that this Court does not exercise its jurisdiction under Article 226 of the Constitution of India only because it is lawful to do so. Reference in this connection may be made to 1994 BBCJ 74, and 1994 (2) BLJR 1, Ananda Shankar Prasad v. The State of Bihar.
78. For the reasons aforementioned, this writ application is dismissed. However, in the facts and circumstances of the case, there will be no order as to costs.
Application dismissed.
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