1991 (8) TMI 349

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....ontract value. On 28 October, 1986 respondent-1 furnished the bank guarantee to secure the mobilisation advance of Rs. 1,86,00,000. The guarantee was furnished by Hongkong & Shanghai Bank ('the Bank') respondent-2. 3. Respondent-1 instead of furnishing the two performance bonds, as agreed upon, wrote a letter dated 3 September, 1987, as follows: ... Sub: Jet Engine Test & Repair center at Palam Finance September 3, 1987 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 submitted and we have not to submit the Performance Bonds for 30% of the Contract value. Since the amount of Performance Bond shall be progressively utilised over the contract period, in order to reduce Bank charges and marginal money, we would like to suggest alternative proposals to meet with your requirements: AA. We propose to submit performance guarantees for 30% of the contract value duly signed by two directors in their personal capacity and countersigned by Punj Sons (Pvt) Ltd. Thi....

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.... learned Single Judge and stayed the encashment of the bank guarantee till the disposal of the respondent's suit. 6. 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: 1. In consideration of General Electric Technical Services co. Inc. Cincinnati, Ohio, U.S.A. C/o M/s. P.L. Jaitly and co. 1E/12, Jhandewalan Extension, New Delhi (hereinafter called the owner) having agreed to grant mobilisation advance of Rs. 18,600,000 [Rs. Eighteen million six hundred thousand only] to M/s. Punj Sons Pvt. Ltd., Industrial Area, Kalkaji, New Delhi 110019 (hereinafter called Contractor) under the terms and conditions of Tender No. HB-040-1 made by and between owner and Contractor for Indian Airlines Jet Engine Repair and Test Facilities Phase II Construction being undertaken at the Indira Gandhi International Airport, New Delhi (herein called the Agreement) on the production of Bank Guarantee for Rs. 18,600,000 [Rupees eighteen million six hundred thousand only] we, Hongkong & Shanghai Banking Corporation, ....

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....ll 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 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 of the owner in writing. Notwithstanding anything stated above, our liability under this Guarantee is restricted to a sum of Rs. 18,600,000 [Rs. eighteen million six hundred thousand only]. Our Guarantee shall remain in force until the (date named in the Agreement as the end of the warrant/maintenance period). Unless a demand is lodged with us on or before that date 13 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. 7. The relevant terms of the second composite bank guarantee dated 25 January 1988 are as follows: Bank Guarantee No. 86 NDH 918 dt. 28.10.1986 for Rs. 1,86,00,000 favouring M/s. General Electric & Technical Services Co. Inc....

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.... 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 without further reference to you. Our liability will continue only 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 discharged from all liabilities thereunder. 8. 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 performance bond. It further states that all the other terms and conditions of the original Guarantee will remain unchanged. The liability of the Bank shall automatically reduce from Rs. 2,12,25,000 to Rs. 1,06,12,500 on 30 June 1988, which will 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....

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....tty, J.) has observed that Whether it is a traditional bond or performance guarantee, the obligation of the Bank 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 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. 10. The High Court has observed that failure on the part of 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 put the bank to further inquiry as to what wa....