Article

Factual Summary: When Buyer/Beneficiary made a short payment of RS 19,99, 338, Supplier/ Applicant claimed that the purchased power supply systems had been supplied as agreed. Buyer/ Beneficiary then agreed to pay the full sum, provided that Supplier/Applicant provide a performance bank guarantee for 10% of the value furnished.

Despite issuance of the bank guarantee, Buyer/ Beneficiary allegedly did not pay the amount owed and was in arrears by 8 lakhs. When Buyer/ Beneficiary also drew on the bank guarantee, Seller/ Applicant sought injunctive relief. The trial court denied the relief. On appeal, affirmed.

Legal Analysis:

1. Nature of Undertaking; Unconditional; Conditional Guarantee, Characterization Supplier/Applicant argued that payment by the Buyer/ Beneficiary was a precondition to the effectiveness of the bank guarantee. Buyer/Beneficiary argued that the amendment transformed what had been a conditional bank guarantee into an unconditional one.

The appellate court asked whether the bank guarantee was unconditional and irrevocable, or conditional. The court stated that, as issued, the guarantors were:

...responsible on behalf of the [Supplier/ Applicant] up to a total of Rs. 16,81,238.50 (Rupees sixteen lakhs eighty one thousand two hundred thirty eight and fifty paise only) and had undertaken to pay any sum or sums within that limit upon receipt of written demand from the [Buyer/Beneficiary] within the validity of bank guarantee provided it is established the [Supplier/ Applicant] to be in default for the performance of their warranty obligations under the contract. This makes it abundantly clear that what was furnished was a conditional bank guarantee and the guarantors were liable to pay the amounts only upon establishing the fact that the [Supplier/ Applicant] was in default for the performance of their warranty obligations under the contract.

As to the amended undertaking, the appellant court stated,

...The banks stood as guarantor and responsible on behalf of the [Supplier/Applicant] up to a total of Rs.16,81,238.50 (Rupees sixteen lakhs eighty one thousand two hundred thirty eight and fifty paise only) and had undertaken to pay any sum or sums within that limit upon receipt of written demand from the [Buyer/Beneficiary] within the validity of this bank guarantee. This amended clause makes it abundantly clear that the bank had undertaken to pay amounts up to a total of Rs.16,81,238.50. The condition that the amounts shall be paid only upon establishing the [Supplier/ Applicant] to be in default for the performance of their warranty obligation under the contract has been specifically deleted. In our considered opinion, the bank guarantee as amended replacing Paragraph 4 of the original bank guarantee makes the bank guarantee furnished as unconditional one. The bankers are bound to honour and pay the amounts at once upon receipt of written demand from the respondent.

Supplier/Applicant argued that the undertaking was not unconditional in that Buyer/Beneficiary "could claim any unfettered right to invoke the bank guarantee and demand immediate payment thereof from the bank." The appellate court stated,

In the present case the amended clause does not refer to any of the clauses specifically as such but on the other hand the bank had undertaken responsibility to pay any sum or sums within the guaranteed limit upon receipt of written demand from the Buyer/Beneficiary. The operative portion of the bank guarantee furnished by the bank does not refer to any of the conditions for payment under the bank guarantee. It is true that the bank guarantee furnished makes a reference to the principal agreement between the parties in its preamble. Mere fact that the bank guarantee refers to the principal agreement in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one unless any particular clause of the agreement has been made part of the Deed of Guarantee.

The appellate court also noted that "The recitals in the preamble in the deed of guarantee do not control the operative part of the deed." Based on this note, the court concluded that "After careful analysis of the terms of the guarantee we find the guarantee to be an unconditional one. The [Supplier/Applicant], therefore, cannot be allowed to raise any dispute and prevent the [Buyer/Beneficiary] from [drawing] the bank guarantee."

2. LC Fraud; Fraud; Independence; Exceptions; Injustice. The appellate court noted that "When in the course of commercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes." The court also stated, "It is equally well settled in law that bank guarantee is an independent contract between bank and the beneficiary thereof. The bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and of no consequence."

The appellate court, however, noted two exceptions: "a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of nonintervention is when there are special equities in favour of injunction, such as when irretrievable injury or irretrievable injustice would occur if such an injunction were not granted."

The appellate court stated that with respect to the Supplier/Applicant's claims, "such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less the fraud of an egregious nature as to vitiate the entire transaction", and noted that no special equities were pled.

Comments:

1. Conditional; Unconditional. The discussion regarding the character of the undertaking leaves much to be desired. All "guarantees" and LCs are conditional. The question is whether the conditional guarantee is dependent or independent.

2.Was there LC fraud? One wonders whether Beneficiary's conduct did not meet the test of LC fraud or abuse. Drawing on the guarantee while refusing to pay is fraudulent, unless there is a valid claim regarding the Applicant's performance.

Text:

The bank guarantee was issued with the following terms:

Whereas M/s Vinitec Electronics Pvt. Ltd. H- 33, Bali Nagar, New Delhi(hereinafter called the 'Supplier') supplied their Vinitec online UPS systems of various capacities pursuant to their Agreement dated 10th May, 2000 & P.O.No.4500011730 dated 30.05.00 (hereinafter called the 'Company') for the final Purchaser President of India through the Director, National Crime Records Bureau, Ministry of Home Affairs, Government of India, New Delhi (hereinafter called the 'Purchaser').

Whereas in terms of Clause No.15 of the Agreement for receiving the entire balance payments of Rs.49,99,335/- from the company, the supplier have agreed to provide a Performance Bank Guarantee equivalent to Rs.16,81,238.50 as 10% of the value of the contract to be kept valid till the warranty period during which times the Supplier is required to perform their warranty obligations to the Purchaser; and

Whereas pursuant to the application made by the supplier, we Oriental Bank of Commerce, Kirti Nagar, New Delhi (hereinafter called the "Bank") have accordingly agreed to give the supplier a bank guarantee for the aforesaid purpose.

Therefore, we, the bank, hereby affirm that we are guarantors and responsible on behalf of the supplier up to a total of Rs.16,81,238.50(Rupees sixteen la[kh]s eighty one thousand two hundred thirty eight and paise fifty only) and we undertake to pay any sum or sums within the limit of Rs.16,81,238.50(Rupees sixteen la[kh]s eighty one thousand two hundred thirty eight and paise fifty only) as aforesaid upon receipt of written demand from the purchaser and Company within the validity of this Bank Guarantee establishing the supplier to be in default for the performance of their warranty obligations under the contract.

We, the bank, affirm that our liability under this guarantee is limited to the total amount of Rs.16,81,238.50(Rupees sixteen la[kh]s eighty one thousand two hundred thirty eight and paise fifty only) and it shall remain in full force up to and including 31st August, 2003 and shall be extended from time to time for such further period(s) as desired by the purchaser, Company and supplier on whose behalf this Guarantee has been given.

The bank guarantee was subsequently amended in the following form:

Therefore, we, the Bank, hereby affirm that we are Guarantors and responsible on behalf of the supplier up to a total of Rs.16,81,238.50 (Rupees sixteen la[kh]s eighty one thousand two hundred thirty eight and paise fifty only) and we undertake to pay any sum or sums within the limit of Rs.16,81,238.50 (Rupees sixteen la[kh]s eighty one thousand two hundred thirty eight and paise fifty only) as aforesaid upon receipt of written demand from the Company within the validity of this Bank Guarantee.

[JEB/kae]

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