GENERAL ELECTRIC TECHNICAL SERVICES COMPANY INC.versusPUNJ SONS (P) LTD. AND ANOTHER

A           GENERAL ELECTRIC TECHNICAL SERVICES
                       COMPANY INC.
                                       v.
                 PUNJSONS (P) LTD. AND ANOTHER

                               AUGUST 7, 1991
B
        [K. JAGANNATHA SHETTY, V. RAMASWAMY AND
                  YOGESHWAR DAYAL, JJ.]

          Cnntract-Termination due to failure to comply specifications-
    Bank guarantee-Claim for encashment-Liability of Bank-Order
    restraining Bank from making payment-Legality of.
c
          The appellant's contract with Indian Airlines included the
    construction and fabrication of air craft testing-~•ntre/epgine repair
    centre in Delhi. For getting that work done, the appellant eiilUed into a
    contract with the tespondent-I.
D
          As per the contract, respondent-I was require'd to provide
    performan.:e boml equal to 30 per cent of the total value of contract
    price, which was to be split up into two performance bonds partly to be
    released on completion of the F'roject, and the balance upon the expira-
    tion of the warranty, and to furnish a Bank guarantee to secure the
E   mobilisation advance of 25 per ''ent of contract value.

         Respondent-I, instead of furnishing the two performance bonds,
    wrote a letter for a revised proposal, which was accepted by the
    appellant.

F         As the respondent-I failed to complete the project within the
    stipulated time, as per contractual specifications, despite repeated
    opportunities, the appellant terminated respondent-l's right •O con-
    tinue the project and sought for encashment of the Bank guMantee for
    Rs.I,06,I2,500, which was issued to the appellant by the Bank.

G        The respondent-I filed a suit for injunction against the appellant
    and the Bank in the High Court and obtained an ex-parte injunction
    from the Single Judge, restraining the Bank and the appellant from
    encashing the Bank guarantee.

         When the ex-parte injunction was vacated, respondent-I prefer-
H   red an appeal to the Division Bench of the High Court. The Division

                                       412
                      ELECTRIC CO. v. PUNJ. SONS                       413

Bench allowed the appeal, staying the encash1uent of the 6ank
                                                                              A
guarantee till the disposal of the respondent's suit.

      On the question, whether the Court was justified in restraining
the Bank from paying the appellant under the Bank guarantee at the
instance of respondent-1, allowing the appeal of the appellant-
company, this Court,                                                          B

       HELD: 1. In the instant case, the High Court has misconstrued
the terms of the Bank guarantee and the nature of the inter-rights of the
parties under the contract. The mobilisation advance is required to be
recovered by the appellant from the running bills submitted by the
respondent. If the full mobilisation advance has not been recovered, it
would be to the advantage of the respondent. Secondly, the Bank is not        c
concerned with the outstanding amount payable by the appellant under
the running bills. The right to recover the amount nnder the running
bills has no relevance to the liability of the Bank under the guarantee.
The liability of the Bank remained intact irrespective of the recovery of
mobilisation advance or the non-payment under the running bills. The          D
failure on the part of the appellant to specify the remaining mobilisation_
advance in the letter for encashment of Bank guarantee is of little
consequence to the liability of the Bank under the guarantee. The
demand by the appellant is under the Bank guarantee and as per the
terms thereof. The Bank has to pay and the Bank was willing to pay as
per the undertaking. The Bank cannot be interdicted by the Court at the       E
instance of respondent-1 in the absence of fraud or special equities in
the form of preventing irretrievable injustice between the parties. The
High Court in the absence of prima facie case on such matters has
committed an error in restraining the Bank from honouring its commit-
ment under the bank guarantee. [421E-422A]
                                                                              F
     U.P. Cooperative Federation Ltd. v. Singh Consultants and
Engineers (P) Ltd., [1988] 1SCC174, Followed.

      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3087
of 1991.
                                                                              G
     From the Judgment and Order dated 23.11.1990 of the Delhi
High Court in F.A.0. (O.S.) 123 of 1989.

     Kapil Sibal, D.D. Thakur. Ms. Lira Gos_;,amy. A.K. Mahajan,
A.S. Chandhoik, Ms. Meera Chibber and Dinesh Agnani for the ap-
pearing parties.                                                              H
    414                     SUPREME COURT REPORTS           [ 1991) 3 S.C.R.

A         The Judgment of the Court was delivered by

          K. JAGANNATHA SHETTY, J. We grant special leave and
    proceed to dispose of the appeal.

           The General Electric Technical Services Company ('GETSCO')
B
    had entered into a contract with Indian Airlines which included, inter
    alia, the construction and fabrication of air craft testing centre/engine
    repair centre in Delhi. The GETSCO in turn entered into a contract
    with Mis Punj Sons (P) Ltd. respondent-1 for getting that work done
    for Indian Airlines. As pe.r the contract respondent-1 was required to
    provide performance bond equal to 30 per cent of the total value of
c   contract price which was to be split up into two performance bonds
    partly to be released on completion of the project, and the balance
    upon the expiration of the warranty. The respondent-1 was also
    required to furnish a bank guarantee to secure the mobilisation
    advance of 25 per cent of the contract value. On 28 October, 1986
    respondent-! furnished the bank guarantee to secure the mobilisation
D
    advance of Rs.1,86,00,000. The guarantee was furnished by Hongkong
    & Shanghai Bank ('the Bank') respondent-2.

          Respondent-! instead of furnishing the two performance bonds,
    as agreed upon, wrote a letter dated 3 September, 1987, as follows:
E
                "

                      Sub: Jet Engine Test & Repair Centre at Pa/am

                      Finance September 3, 1987
F
                Dear Sir,

                      In terms of above contract we have to submit two
                separate Bonds for Mobilisation advance & performance
                guarantee & 25% and 30% of the Contract value. Bank
                Guarantee for mobilisation advance has already been sub-
G               mitted and we have not to submit the Performance Bonds
                for 30% of the Contract value. Since the amount of Perfor-
                mance Bond shall be progressively utilised ove1 the con-
                tract period, in order to reduce Bank c:iarges and marginal
                money, we would like to suggest alternative proposals to
                meet with your requirements:
H
                      ELECTRIC CO. v. PUNJ. SONS [SHETTY, J.]              415

                   AA. We propose to submit performance guarantees for
                                                                                 A
                   30% of the contract value duly signed by two directors in
                   theit personal capacity and countersigned by Punj Sons
                   (Pvt) Ltd. This Performance bond shall include identical
                   terms & conditions, as desired in your format. Similar
                 . Bond has already been accepted by M/s Hindustan Petro-
                   leum Corporation Ltd. Bombay for their Bombay-Pune            B
                   Pipeline Project valued at Rs.7.05 crores.

                  BB. Alternatively, we would suggest submission of a Compo-
                  site Bank Guaratee where amount vacated by Mobilisation
                  advance shall be utilised by Performance Bank Guarantee
                  amount. This Guarantee shall at any time be valid for eqHi-
                  valent to 30% of the co'1tract value, to cover unrecovered     c
                  mobilisation advance and Performance Guarantee amount
                  of the work certified.

                        We have submitted similar Bonds to a number of our
                  customers to their entire satisfaction. May we request you     D
                  to look into the above arrangement and allow us to submit
                  the above Bond or Composite Bank Guarantee under this
                  Contract.

                        Thanking you and assuring you of our best services at
                  all times .... "                                               E

             GETSCO has accepted the revised proposal contained in the
 ..,   aforesaid letter. Consequently, on 25 January 1988, the Bank
' "t   furnished a composite bank guarantee for Rs.. 2, 12,25,000. Out of this
       composite bank guarantee 15 per cent being Rs.1,06, 12,500 would
       remain in force until 30 June, 1988 and the balance 15 per cent would     F
       remain valid till final acceptance certificate i.e. till 30 June 1989.

             It seems iespondent-i failed to complete the project within the
       stipulated time as per contractual specifications despite repeated
       opportunities to rectify defects and deficiencies prior to August 1988
       and thereafter. GETSCO terminated respondent-l's right to continue        G
       the project and wrote a letter dated 17 April 1989 to the Bank seeking
       encashment of the bank guarantee dated 25 January 1988 for
       Rs.1,06, 12,500. On the same day the bank issue~ a cashier's order No.
       2605 for Rs.1,06, 12,500 in favour of GETSCO. On 18 April 1989 the
       respondent-1 filed a suit for injunction against GETSCO and the Bank
       in the High Court and obtained an ex-parte injunction at the residence    H
    416                   SUPREME COURT REPORTS            [1991] 3 S.C.R.

    of learned Single Judge restraining the Bank and GETSCO from
A
    encashing the bank guarantee. On 11July1989 the ex-parte injunction
    was vacated. On the same day respondent-! preferred an appeal to the
    Division Bench of the High Court and obtained stay of encashment of
    the bank guarantee. On 23 Novemher 1990, the Divi,inn Bench
    allowed the appeal, set aside the order ot 1earnect Single Judge and
B   stayed the encashment of the bank guarantee till the disposal of the
    respondent's suit.

           It seems to us that the Division Bench of the High Court has
    misconstrued the terms of the bank guarantee and the rights and
    liabilities of the parties thereunder. The first bank guarantee dated 28
    October. 1986 is in these terms:
c
               "!. In consideration of General Electric Technical Ser-
               vices co. Inc. Cincinnati, Ohio, U.S.A. C/o M/s P.L. Jaitly
               & co. lE/12, Jhandewalan Extension, New Delhi (herein-
               after called the owner) having agreed to grant mobilisation
D              advance of Rs.18,600,000 [Rs. Eighteen million six
               hundred thousand only] to M/s Punj Sons Pvt. Ltd., Indust-
               rial Area, Kalkaji, New Delhi 110019 (hereinafter called
               Contractor) under the terms and conditions of Tender No.
               HB-040-1 made by and betwee11 owner and Contractor for
               Indian Airlines Jet Engine Repair and Test Facilities Phase
E              II Construction being undertaken at the Indira Gandhi
               International Airport, New Delhi (hereincalled the Agree-
               ment) on the production of Bank Guarantee for
               Rs.18,600,000 [Rupees eighteen million six hundred
               thousan only! we, Ho11gkong & Shanghai Banking Corporn-
               t10n, 28 Kasturba Gandhi Marg, New Delhi-110001
F              (hereinafter called Bank) do hereby undertake to pay to
               the Owner an amount not exceeding Rs.18,600,000 [Rs.
               eighteen miliion six hundred thousand only], against any
               loss or damage caused to or suffere.d or would be caused to
               or suffered by the owner by reason of any breach by the
               Contractor of the terms and conditions .contained in the
G              Agreement.

                2. We, the Bank do hereby undertake to pay the amount
                due and payable under this Guarantee with demur, merely
                on demand from the owner stating that the amount claimed
                is due by way of loss or damage caused to or would be
H               caused to or suffered by the owner by reason of any breach
   ELECTRIC CO. v. PUNJ. SONS [SHETTY, J.]                  417

by the Contractor of any of the terms or conditions con-           A
tained in the Agreement or by reason of the Contractor's
failure to perform the Agreement. Any such demand made
on the Bank shall be conclusive, as regards the amount due
and payable by the Bank under this Guarantee. However,
our liability under this Guarantee shall be restricted to an
                                                                   B
amount not exceeding Rs.18,600,000 [Rupees eighteen
million six hundred thousand only].

3. We, the Bank further agree that the Guarantee herein
contained shall remaiJl in force and effect during the period
that would be t;iken for the performance of the Agreement
and that it shall continue to be enforceable till all the due of   c
the owner under or by virtue of the Agreement have been
fully paid and its claims satisfied or discharged or till the
owner certifies that the terms and conditions of the Agree-
ment have been lully and properly carried out by the Con-
tractor and accordingly discharges the Guarantee. Unless a
demand or claim under this Guarantee is made on us in              D
writing on or before the date (named in the Agreement
as the eno of the warrant/maintenance period) we shall
be discharged from all liability under this Guarantee
thereafter.

4. We, the Bank further agree with the Owner that the              E
owner shall have the fullest liberty without our consent and
without affecting in any manner our obligations hereunder
to vary any of the terms and conditions of the Agreement
or to extend time of performance by the Contractor from
time to time or to postpone for any time or from time to
time any of the powers exercisable by the owner against the        F
Contractor and to forbear or enforce any of the terms and
conditions relating to the Agreement and we shall not be
relieved from our liability bY reason of any such variation,
or extension being-granted by the owner or any indulgence
by the owner to the Contractor or by any such matter or
thing whatsoever which under the law relating to sureties          G
would but for this provision have effect of so relieving us.

5. We, the Bank lastly undertake not to revoke this
Guarantee during its currency except with the previous
consent 0 f the ow11er in writing.
                                                                   H
    418                 SUPREME COURT REPORTS           [1991] 3 S.C.R.

              Notwtthstanding anything stated above, our liability under
A
              this Guarantee is restricted to a sum of Rs.18,600,000 [Rs.
              eighteen million six hundred thousand only]. Our Guaran-
              tee shall remain in force untill the (date named in the
              Agreement as the "nd of the warrant/maintenance period).
              Unless a demand is lodged with us on or before that date 13
B             day of February 1988, all your rights under the said
              guarantee shall be forfeited and we shall be relieved and
              discharged from all liabilities thereafter."


         The relevant terms of the second composite bank guarantee
    dated 25 January 1988 are as follows:
c
              "Bank Guarantee No. 86 NOH 918 dt. 28. JO. 1986 for
              Rs.1,86,00,000 favouring M/s General Electric & Techni-
              cal Services Co. Inc.

D
             Under the instructions from our clients M/s Pun j Sons
             (Pvt) Ltd. M-13, Connaught Place, New Delhi 110001, we
             hereby enhance the value of the above Bank Guarantee
             upto Rs.21,225,000 [Rupees twenty one million two hun-
             dred twenty five thousand only) being 30% of the revised
             Lumpsum Contract value of Rs. 70, 750,000 [Rupees
E
             seventy million seven hundred fifty thousand only).

             This Bank Guarantee shall act 'Composite Bank Guaran-
             tee' for Mobilisation Advance and Performance Bond
             where in Bank Guarantee, to the extent of amounts of
F            Mobilisation Advance so recovered, shall be utilised
             towards Two Performance Bonds of 15% of the Contract
             value each valid upto 30th June, 1988 and 30th June, 1989,
             respectively.

              All the other terms and conditions of the original Guaran-
G
              tee will remain unchanged.

              We, the Hongkong & Shanghai Banking Corporation, 28,
              Kastruba Gandhi Marg, New Delhi-110001, hereby under-
              takes not to revoke the Guarantee during the currency
H             except with the previous consent of the General Electric
              ELECTRIC CO. v. PUNJ. SONS [SHETTY, J.]                419

           and Technical Services Company Inc.                              A
           Notwithstanding, anything contained herein before our
           liability under this Guarantee is restricted to Rs.21,225,000
           (Rupees Twenty One Million Two Hundred Twenty five
           thousand only I and the recovery of Mobilisation advance
           from Running Bills Account will be in accordance with the B
           contract, the Guarantee against such amounts of Mobilisa-
           tion Advance as so recovered shall be treated towards
           performance Guarantee with the intent that after recovery
           of Mobilisation Advance in full, the Guarantee shall
           operate against the full value of Performance Bond. Out of
           the said guarantee amount, the Bank Guarantee amount of C
           Rs.10,612,500 (Rupees ten million six hundred twelve
           thousand & five hundred only) being the 15% of lumpsum
           value of the contract shall remain in force till the comple-
           tion of the Project i.e. upto 30th June 1988 and the Bank
           Guarantee for the balance amount i.e. Rs.10,612,500
           (Rupees ten million six hundred twelve thousand five D
           hundred only) being 15% amount shall remain in force till
           final acceptance certificate till 30th June, 1989.

           NOTWITHSTANDING anything contained hereinbefore
           our liability under this Guarantee will be restricted to
                                                                            E
           Rs.21,225,000 (Rupees twenty one million two hundred
           twenty five thousands only) until 30th June 1988 and will
           automaticallv stand reduced from Rs.21,225,000 to
           Rs.10,612,500 (Rupees ten million six hundred twelve
           thousand and five hundred only) on 30th June, 1988 with-
           out further reference to you. Our 1;"bilitv will continue only
                                                                            F
           to the extent of the balance amount of Rs.10,612,500
           (Rupees ten million six hundred twelve thousand and five
           hundred only) after 30th June, 1988 and will be conditional
           upon a claim being filed with us in writing on or before 30th
           June 1989. Thereafter our liability under this guarantee
           shall stand extinguished and we shall be relieved and dis-
                                                                            G
           charged from all liabilities thereunder."

     The second bank guarantee with which we are concerned makes
a reference to the first guarantee. It states that the guarantee is a
composite bank guarantee for mobilisation of advance and perfor-
mance bond. It .further states that all the other terms and conditions of   H
    420                   SUPREME COURT REPORTS            [1991] 3 S.C.R.

    the original Guarantee will remain unchanged. The liability of t~e
A
    Bank shall automatically reduce from Rs.2, 12,25 ,000 to
    Rs.1,06, 12,500 on 30 June 1988, which wll continue even after 30 June,
    1988 and will be conditional upon a claim being filed with the Bank in
    writing on or before 30 June 1989. In the first guarantee, the Bank has
    undertaken to pay to GETSCO the amount guaranteed without any
B   demur merely on demand stating that the amount is due by way of loss
    or damage caused to or would be caused to or suffered by GETSCO by
    reason of any breach committed by the respondent on any of the terms
    or conditions contained in the agreement or by reason of respondent's
    failure to perform the agreement. It is also provided that any such
    demand by GETSCO made on the Bank shall be conclusive as regards
    the amount due and payable by the Bank under the guarantee. The
c   GETSCO has only sought to enforce the bank guarantee for the
    balance amount of Rs.1,06, 12,500 on a complaint that respondent-1,
    has failed to perform the contract as per the terms and conditions. The
    Bank_ has undertaken to pay this sum of money and it is a commitment
    of the Bank. The Bank must honour its commitment when demand is
D   made. Indeed, the Bank was prepared to pay and has in fact issued the
    Cashier's order as per demand from GETSCO, but the Court has
    directed the Bank not to pay under the guarantee.


        The question is whether the Court was justified in restraining the
E Bank from paying to GETSCO under the bank guarantee at the
  instance of respondent-1. The law as to the contractual obligations
  under the bank guarantee has been well settled in a catenae of cases.
  Almost all such cases have been considered in a recent judgment of
  this Court in U.P. Cooperative Federation Ltd. v. Singh Consultants
  and Engineers (P) Ltd., [1988] 1 SCC 174 wherein Sabyasachi
  Mukherji, J., as he then was, observed (at 189) 'that in order to rest-
F
  rain the operation either of irrevocable letter of credit or of confirmed
  letter of credit or of bank guarantee, there should be serious dispute
  and there should be good prima facie case of fraud and special equities
  in the form of preventing irretrievable in justice between the parties.
  Otherwise, the very purpose of bank guarantees would be negatived
  and the fabric of trading operations will get jeopardised'. It was
G
  further observed that the Bank must honour the bank guarantee free
  from interference by the Courts. Otherwise, trust in commerce inter-
  nal and international would be irreparably damaged. It is only in
  exceptional cases that is to say in case of fraud or in case of irretriev-
  able injustice, the Court should interfere. In the concurring opinion
H one of us (K. Jagannatha Shetty, J.) has observed that whether it is a
              ELECTRIC CO. v. PUNJ. SONS {SHETTY, J.]               421

traditional bond or performance guarantee, the obligation of the Bank A
appears to be the same. If the documentary credits are irrevocable and
independent, the Bank must pay when demand is made. Since the
Bank pledges its own credit involving its reputation, it has no defence
except in the case of fraud. The Bank's obligations of course should
not- be extended to protest the unscrupulous party, that is, the party
                                                                          B
who is responsible for the fraud. But the banker must be sure of his
ground before declining to pay. The nature of the fraud that the courts
talk about is fraud of an "egregious nature as to vitiate the entire
underlying transaction". It is fraud of the beneficiary, not the fraud of
somebody else.


       The High Court has observed that failure on the part of
                                                                            c
GETSCO to make a reference to mobilisation advance in the letter
seeking encashment of the bank guarantee would be tantamount to
suppression of material facts, in the sense that the mobilisation
advance was, under the contract to be recovered from the running
bills. It was further observed that disclosure of such facts would have     D
put the bank to further inquiry as to what was the amount covered by
those hills and what was the corresponding amo.unt of the mobilisation
advance and to what extent the amount coverd by the bank guarantee
remained payable. In any event, the High Court said, that GETSCO
could not demand full amount of the bank guarantee on 17 April 1989.
It seems to us that the High Court has misconstrued the terms of the        E
bank guarantee and the nature of the inter-se rights of the parties
under the contract. The mobilisation advance is required to be
recovered by GETSCO from the running bills submitted by the
respondent. If the full mobilisation advance has not been recovered, it
would be to the advantage of the respondent. Secondly, the Bank is
not concerned with the outstanding amount payable by GETSCO                 F
under the running bills. The right to recover the amount under the
running bills has no relevance to the liability of the Bank under the
guarantee. The liability of the Barik remained intact irrespective of the
recovery of mobilisation advance or the non-payment under the run-
ning bills. The failure on the part of GETSCO to specify the remaining
mobilisation advance in the letter for encashment of bank guarantee is      G
of little consequence to the liability of the Bank under the guarantee.
The demand by GETSCO is under the Bank guarantee and as per the
terms thereof. The Bank has to pay and the Bank was willing to pay as
per the undertaking. The Bank cannot be interdicted by the Cour_t at
the instance of respondent-1 in the absence of fraud or special equities
in the form of preventing irretrievable injustice between the parties.      H
    422                   SUPREME COURT REPORTS           [1991] 3 S.C.R.

A   The High Court in the absence of prima facie case on such matter> has
    committed an error in restraining the Bank from honouring its com-
    mitment under the bank guarantee.

          In the result, we allow the appeal, set aside the impugned judg-
B   ment and order of the High Court. The appellant is entitled to costs in
    this Court.

          S.L.P. (Civil) No.-of 1991

    (In CC-13153/91)

C         Since we have set aside the order of the Division Bench of the
    High Court this Special Leave Petition does not survive and is accord-
    ingly dismissed.

          No costs.

    V.P.R.                                                Appeal allowed.




    ,.