2003 JTR(SC) 218
2003 5 AIC 507 ; 2003 AIR(SC) 1786 ; 2003 AIR(SCW) 1225 ; 2003 1 ArbLR 501 ; 2003 3 AWC 2413 ; 2004 1 BankJ 193 ; 2003 2 BC 1 ; 2003 3 CivLJ 892 ; 2003 114 CompCas 19 ; 2003 3 CTC 317 ; 2003 103 DLT 361 ; 2003 DNJ 561 ; 2003 153 ELT 32 ; 2003 5 JT 64 ; 2003 2 Scale 463 ; 2003 4 SCC 690 ; 2003 2 SCR 276 ; 2003 2 UPLBEC 1705 ; 2003 2 WLC 40 ; 2003 KHC 989 ; 2003 2 Supreme 228
2003(2) Supreme 228
SUPREME COURT OF INDIA
(From Delhi High Court)
Syed Shah Mohammed Quadri & Ashok Bhan, JJ.
Daewoo Motors India Ltd. -Appellant
versus
Union of India & Ors. -Respondents
Civil Appeal Nos. 1502-03 of 2003
(Arising out of SLP (C) Nos. 14657-14658 of 2002)
With
Civil Appeal No. 1504 of 2003
(Arising out of SLP (C) No. 15022 of 2002)
Decided on 20-2-2003
Counsel for the Parties :
For the Appearing Parties : S.K. Chowdhary, H.D. Talwani, B.K. Satija, Sunil Dogra, Ms. Rashi Malhotra, Ms. Ritu Bhalla, K. Swami, K.C. Kaushik, B. Krishna Prasad, Anant Kumar, Samir S. Vasist, Pradeep Kumar Bakshi, Pranab Kumar Mullick, Sanjay Kapur, Advocates.
IMPORTANT POINT
The Bank guarantee is not conditional. The liability under the Bank guarantee is absolute and unequivocal. The Bank has no case to resist encashment of Bank guarantee on the ground of there being no non-fulfilment of the export obligation.
Act Referred :CONTRACT ACT : S.26
(A) The relevant provisions of the CONTRACT ACT, specifically Section 26, which addresses agreements in restraint of trading and the enforceability of conditional obligations, apply to this dispute in the context of an unconditional bank guarantee issued under an export promotion capital goods scheme. The interplay between the contractual terms of the guarantee, the statutory framework governing commercial contracts, and the enforcement of absolute obligations in the face of alleged breaches or extensions requires analysis under this provision to determine the validity of invoking the guarantee despite the underlying contract's complexities.
(B) Key legal principles include that a bank guarantee is unconditional and absolute, demanding payment upon demand without regard to disputes in the underlying transaction, except in cases of fraud. The guarantee explicitly waived the right to contest encashment based on non-fulfilment of export obligations, and the revoking of an extension does not automatically preclude encashment when the performance window has closed.
Facts of the case:
The Union of India, as the first respondent, invoked bank guarantees furnished by an appellant company under the Export Promotion Capital Goods Scheme after revoking an extension of the export obligation period. The appellant company challenged the validity of the encashment in a writ petition, arguing that the extension was still active and that its financial position warranted a stay, while the bank, as another appellant, argued it had no cause of action to contest the demand.
Findings of Court:
The court determined that the bank guarantee was an unconditional and absolute instrument, rendering the bank's resistance invalid. It further held that the demand by the President of India was conclusive and that the appellant company could not rely on the extended period when its plant had closed and production had ceased, making fulfilment of the export obligation impossible.
Issues:
The primary issue was whether the High Court's dismissal of the appellant company's writ petition, challenging the encashment of the bank guarantee, warranted interference by this Court under Article 136 of the Constitution, given the unconditional nature of the guarantee and the cessation of the underlying contractual performance.
Ratio Decidendi:
The court reasoned that an unconditional bank guarantee must be honoured upon demand, and the clauses explicitly negating any dispute as a condition precedent override the underlying contract's terms. Since the performance window had irrevocably closed and the plant was dismantled, the invocation of the guarantee was not premature or unjustified, warranting dismissal of the appeals.
Result:
The appeals were dismissed, with no order as to costs, upholding the High Court's decision to permit the encashment of the bank guarantee.
(A) The relevant provisions of the CONTRACT ACT, specifically Section 26, which addresses agreements in restraint of trading and the enforceability of conditional obligations, apply to this dispute in the context of an unconditional bank guarantee issued under an export promotion capital goods scheme. The interplay between the contractual terms of the guarantee, the statutory framework governing commercial contracts, and the enforcement of absolute obligations in the face of alleged breaches or extensions requires analysis under this provision to determine the validity of invoking the guarantee despite the underlying contract's complexities.
(B) Key legal principles include that a bank guarantee is unconditional and absolute, demanding payment upon demand without regard to disputes in the underlying transaction, except in cases of fraud. The guarantee explicitly waived the right to contest encashment based on non-fulfilment of export obligations, and the revoking of an extension does not automatically preclude encashment when the performance window has closed.
Facts of the case:
The Union of India, as the first respondent, invoked bank guarantees furnished by an appellant company under the Export Promotion Capital Goods Scheme after revoking an extension of the export obligation period. The appellant company challenged the validity of the encashment in a writ petition, arguing that the extension was still active and that its financial position warranted a stay, while the bank, as another appellant, argued it had no cause of action to contest the demand.
Findings of Court:
The court determined that the bank guarantee was an unconditional and absolute instrument, rendering the bank's resistance invalid. It further held that the demand by the President of India was conclusive and that the appellant company could not rely on the extended period when its plant had closed and production had ceased, making fulfilment of the export obligation impossible.
Issues:
The primary issue was whether the High Court's dismissal of the appellant company's writ petition, challenging the encashment of the bank guarantee, warranted interference by this Court under Article 136 of the Constitution, given the unconditional nature of the guarantee and the cessation of the underlying contractual performance.
Ratio Decidendi:
The court reasoned that an unconditional bank guarantee must be honoured upon demand, and the clauses explicitly negating any dispute as a condition precedent override the underlying contract's terms. Since the performance window had irrevocably closed and the plant was dismantled, the invocation of the guarantee was not premature or unjustified, warranting dismissal of the appeals.
Result:
The appeals were dismissed, with no order as to costs, upholding the High Court's decision to permit the encashment of the bank guarantee.
BankGuarantee - The case was distinguished as being of no avail because the bank guarantee in the present case was unconditional, unlike the conditional guarantee in that case.
ORDER
Leave is granted.
2. These appeals arise from a common judgment of the High Court at Delhi in Civil Miscellaneous No. 67/4 of 2002 in Civil Writ Petition No. 2002 of 2002 and in Civil Writ Petition No. 2002 of 2002 dated July, 16, 2002.
3. The controversy in these appeals relates to the encashment of the bank guarantee by the Union of India, the first respondent. As an import policy during the period 1995-1996, the first respondent introduced an Export Promotion Capital Goods (E.P.C.G.) Scheme. The Scheme envisaged exemption from custom duty on the imported goods, plants and equipment, etc., subject to the conditions incorporated in Exemption Notification No. 111/95-CUS dated 5th June, 1995 which was issued under Section 25(1) of the Customs Act, 1962. The appellant in the appeals arising out of S.L.P. (C) Nos.14657-14658 of 2002, M/s. Daewoo Motors India Limited, availed the Scheme which, inter alia, provided that upon importing plants, and equipment, it should fulfil the export obligation equivalent to six times the CIF value of the goods which had been imported on FOB basis, or alternatively four times the CIF value of the goods imported on net foreign exchange basis within a period of eight months. The period was divided into different blocks. Agreeing to fulfil the export obligation, the appellant obtained various import licences in respect of which bank guarantees were furnished by it from various banks, one of them being the Times Bank Limited, now H.D.F.C. Bank Limited, which is the appellant in the appeal arising out of S.L.P. (C) No. 15022 of 2002. It appears that in respect of CIF value of Rupees one hundred crore and more, period to fulfil the export obligation was extended. But later, the Deputy Director General of Foreign Trade, by communication dated February 25, 2002, revoked the export obligation extension period and invoked various bank guarantees.
4. The appellant-company filed writ petition in the High Court at Delhi challenging the validity of the said order invoking the bank guarantee. The High Court took the view that as the writ petition involved disputed questions of fact and as the subject-matter related to encashment of bank guarantee, it would not be appropriate to exercise extra-ordinary jurisdiction of the High Court under Article 226 of the Constitution. It also observed that the order impugned before the High Court was an appealable order and in that view also, the writ petition ought not to be entertained. The writ petition was, thus, dismissed on July 16, 2002. It is against the correctness of this order that the present appeals have been preferred.
5. Insofar as the CIF value of the licences exceeding Rupees one hundred crores are concerned, this court granted stay of encashment of bank guarantee but in respect of the licences having CIF value of less than Rupees one hundred crore, the first respondent was at liberty to encash the bank guarantee. In the present appeals, we are concerned only with the licences where the CIF value exceeds Rupees one hundred crore.
6. Mr. S.K. Chowdhary, learned counsel appearing for the appellant company contends that in respect of the licences of CIF value exceeding Rupees one hundred crores, the period for compliance of the export obligation was extended and as such the first respondent cannot be permitted to encash the bank guarantee when ample time is available to the appellant-company to discharge the export obligation. It was pleaded that in view of the critical financial position of the company, there have been negotiations to sell the assets altogether and if, at this stage, the bank guarantees are allowed to be encashed, the company would be put to great hardships and irreparable loss.
7. Mr. P. Chidambaram, learned senior counsel appearing for the appellant-Bank, has argued that having regard to the wording of the bank guarantee furnished by the bank to the first respondent, it is a conditional guarantee and as there is enough time to fulfil the export obligation, the bank guarantee cannot be encashed, except by an arbitrary action of the first respondent.
8. Mr. Soli J. Sorabjee, the learned Attorney General appearing for the first respondent, on the other hand, submits that the extension of time has been revoked, thus, the very foundation on which the company is resting its defence is not available to it. He contends that the Bank has no locus, no cause of action has accrued to it to file the appeal and/or to contest the invocation of the bank guarantee.
9. The short point that arises for our consideration is, whether the impugned order of the High Court dismissing the writ petition of the appellant-company warrants any interference in exercise of the jurisdiction of this Court under Article 136 of the Constitution.
10. It is too well-settled a proposition to admit of detailed reasoning that for encashment of bank guarantee, the bank cannot have any valid resistance, except, of course, in a case of fraud. The clause in the bank guarantee, on which Mr. Chidambaram relies, reads as under:
"We Times Bank Ltd., PTI Building, Parliament Street, New Delhi -110001 do hereby unconditionally and irrevocably agree to pay the President of India on Demand without any demur or protest the amount due and payable under the above said bond not exceeding Rs. 4,80,00,000/- (Rupees Four crore eighty lac only) by way of loss or damage caused or suffered by the President of India by reason of non-fulfilment of the export obligation under the above said Notification or by reason of any breach of any of the terms and conditions of the above said bond By M/s. DAEWOO MOTORS INDIA LIMITED."
11. He has emphasised on the words "by reason of non-fulfilment of the export obligation under the above said Notification" and argued that as there is no case of default or non-fulfilment of the export obligation as there is ample time, at any rate till 2004, so the first respondent is not entitled to invoke the bank guarantee. We are afraid, we cannot accede to the contention of the learned senior counsel. The words, quoted above, cannot be read in isolation by dissociating them from the context in which they have been used. A reading of the bank guarantee as a whole and the above extracted paragraphs in particular leaves us in no speck of doubt that those words only qualify the preceding words, "loss or damage caused or suffered by the President of India", and do not constitute a condition precedent for the first respondent to invoke the bank guarantee, much less they give any cause of action to the bank to contest the encashment of the bank guarantee on the ground of there being no non-fulfilment of the export obligation.
12. Further, it would be appropriate to read here the following clauses of the bank guarantee:
"We Times Bank Ltd., PTI Building, Parliament Street, New Delhi, 110001 further agree that the demand made by the President of India any money so demanded notwithstanding any dispute raised by M/s. Daewoo Motors India Ltd. in any proceeding before any court or Tribunal;
We Times Bank Ltd., PTI Building, Parliament Street, New Delhi - 110001 further agree that the demand made by the President of India shall be conclusive as regards the amount due and payable by us under these presents as out of liability under these presents are absolute and unequivocal;"
13. From a perusal of the above clauses, it is abundantly clear that the bank guarantee furnished by the bank is an unconditional and absolute bank guarantee. The bank has rendered itself liable to pay the cash on demand by the President of India "notwithstanding any dispute raised by M/s. Daewoo Motors India Limited in any proceeding before any court or Tribunal". It is worth noticing that the clause in the bank guarantee specifically provides that the demand made by the President of India shall be conclusive as regards the amount due and payable by the bank under this guarantee and the liability under the guarantee is absolute and unequivocal. In the face of the clear averments, it is trite to contend that the bank guarantee is a conditional bank guarantee. Therefore, the bank has no case to resist the encashment of the bank guarantee. Inasmuch as we have held that the bank guarantee is an unconditional bank guarantee, the case of M/s. Hindustan Construction Company Limited vs. State of Bihar & Ors., reported in 1999 (8) S.C.C. 436, is of no avail to the appellant.
14. It is true that the bank guarantee has to be read in conjunction with the terms of the contract but when the bank guarantee itself is in absolute terms, the agreement between the company and the first respondent would be of no avail to the bank.
15. Insofar as the contention of the appellant-company is concerned, firstly, the order extending the export obligation period has been revoked. Even assuming that the revocation is not a valid revocation, the fact remains that the plant of the appellant-company has been closed down; the entire production of the appellant-company has come to an end. It is also on record that public notices have been issued for auctioning the plant of the appellant-company by the company itself. In such circumstances, when there is no apparent possibility of the fulfilment of the export obligation, the appellant-company cannot seek refuge under the extended period. In our considered view, when it becomes apparent on the facts and circumstances of the case that there is no chance of the appellant fulfilling its export obligation, the action of the first respondent in invoking the bank guarantee cannot be said to be premature and unjustified, much less arbitrary and illegal so as to warrant any interference by this Court.
16. For the above-mentioned reasons, the appeals fail. They are, accordingly, dismissed. In the facts and circumstances of the case, we make no order as to costs.
(N.K.R.) Appeal dismissed.
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