Author: Surya, 3rd Year student at RNB Global University, Bikaner.
Citation: AIR 1985 Cal 23
Date of Decision: 19 September, 1984
Bench: A K Sen, S R Roy
Original Copy: N/A
Statutes involved: Indian Contract Act, 1872, Indian Arbitration and Conciliation Act
Issue in question:
- Whether the petitioner is lawfully entitled to enforce the Bank guarantee?
- Whether the learned Subordinate Judge has jurisdiction to pass an order of injunction for restraining the petitioner from enforcing the Bank guarantee?
- Whether a third party has a locus standi to challenge the enforcement of the guarantee?
Background of the Case:
- As per the Companies Act, 1956, National Projects Construction Corporation Ltd. (NPCC) is a Government Company. This company entered into a contract with Coal India Ltd. for setting up a Housing Complex at Dankuni, Hooghly.
- The petitioner issued a tender on 23rd Feb. 1982 for construction of the complex. The other party M/s. G. Ranjan which is a firm made an offer by a letter dated 22 April, 1982.
- A bi-lateral agreement was executed and it was provided that the petitioner would give advance to the extent of 5% of the value of the contract to the contractor of the opposite party. And the same will be given against the production of Bank guarantee from a nationalised bank.
- It was agreed that 18.5% interest would be charged against advance and the same would be recovered on a pro rata basis from the running bills of the opposite party. It was also agreed that the recovery will be completed before 80% of the work is executed.
- A letter of intent and a provisional work order was executed on 12 -05-1982 and on 7-05-1983 respectively. It also contains various terms and conditions.
- In May 1982 the bank guarantee of Rs. 3,50,000/- was furnished in favour of the Petitioner, by the Bank of Baroda, Tollygunge Branch. And by way of mobilisation advance the petitioner made an advance to the contractor of the opposite party.
- And it was said that if the opposite party failed to perform the contract or the petitioner failed to recover the full amount then in this condition the bank would be unconditionally liable to pay to the petitioner on demand and the same would be paid with the interest of 10% per annum.
- The petitioner rescinded the contract by a notice dated the 24th Sept. 1983, because the opposite party had failed to perform the contract within the time limit.
- Then the petitioner further sent a letter to direct the opposite party to pay the remaining amount of Rs. 2,65,400/- with interest of 18.5% per annum and it was also directed that the same must be paid within 7 days from the receipt of the letter. And if the opposite party failed to pay then the petitioner would ask the Bank of Baroda to pay the said sum.
- After receiving the letter, the opposite party (M/s. G. Ranjan) filed a suit under Section 20 of the Arbitration Act and asked for appointment of arbitrator for resolution of dispute that had arisen out of the contract. And he also filed an application under Section 41 of the Arbitration Act for an order of injunction to restrain the present petitioner, its servants and agents from enforcing the Bank guarantee.
- It was submitted that NPCC Ltd. had wrongfully rescinded the contract and M/s. G. Ranjan had a claim against the petitioner exceeding Rs. 19,00,000/-.
- On 22 Dec.1983 the learned Subordinate Judge issued an interim order of injunction and the same was made absolute by an order dated 11 May, 1984.
- The petitioner came up with a revision against the order of the Subordinate Judge.
- It was contended that the Subordinate judge had no jurisdiction to restrain the petitioner from encashing the bank guarantee. It was also said that the opposite party had no locus standi to restrain the petitioner from enforcing the bank guarantee. The petitioner submitted that the bank guarantee was an independent transaction and therefore the petitioner could not be restrained from enforcing the said guarantee.
- The opposite party contended that the bank guarantee was not absolute and it was conditional that could only be enforced on fulfilment of the conditions. The learned counsel submitted that the opposite party would be affected by enforcement of bank guarantee thus it has locus standi to obtain an order of injunction. He contended that the clause 2 of bank guarantee is making the petitioner the judge of its own cause and it is against public policy. Here the learned counsel also referred to the Latin maxim of “nemo judex in causa sua” which means no one can be a judge in his own cause.
- It was held that there is no prima facie reason to restrain the petitioner from enforcing the bank guarantee. Petitioner’s right to realise that balance is not dependent upon adjudication of the dispute raised and referred to Arbitration. The Bank guarantee can be enforced on its own.
- The court said that the liability became absolute once the terms and conditions of the Bank guarantee were fulfilled. Thus, the court held that the impugned bank guarantee is enforceable.
- It was said that the learned Subordinate Judge had failed to exercise properly the jurisdiction vested in him by law. He acted improperly in restraining the petitioner from enforcing the Bank guarantee by an order of injunction, therefore the impugned order of injunction passed by him on May 11, 1984 cannot be sustained.
- Thus, the impugned order was set aside by the court and the revisional application succeeds.
- The court has rightly held that the impugned order should be set aside because it was the right of the petitioner to enforce the bank guarantee.
- Some conditions were provided in the Bank Guarantee and on fulfilment of those conditions the petitioner would be able to enforce the bank guarantee against the bank of Baroda and these conditions were:
- failure of the contractor to utilise the said advance for the purpose of the contract and/or
- the Corporation (Petitioner) is not able to fully recover the said advance together with interest.
- The petitioner relied on the second condition for enforcement of bank guarantee because it was not able to recover the whole amount out of the running bills of the opposite party.
- Thus the court has given a right decision by setting aside the injunction order passed by the Subordinate Judge, Alipore.