JUSTICE A. P. SAHI, PRESIDENT

 1.      The complainant has come up alleging deficiency in service on the part of the opposite party/ Canara Bank by not promptly invoking and encashing the unconditional bank guarantees drawn in favour of the complainant, who is a real estate developer. The bank guarantees were issued by the Branch Office of Canara Bank at 5, Community Centre, Mayapur, New Delhi. These bank guarantees were in relation to an agreement by the complainant with one M/s. G.S. Developers dated 26.12.2011, for carrying out civil structure works for basement and super structures of a multi-storied group housing complex at Gurgaon. M/s. G.S. Developers had agreed to furnish several bank guarantees and accordingly 9 bank guarantees were issued by the Bank in favour of the complainant.

2.       The condition imposed in the bank guarantees is extracted herein under:

“Notwithstanding anything contained hereinbefore, WE the Canara Bank, 5, Community Centre, Mayapuri, New Delhi hereby irrevocably and unconditionally undertake to pay our company, by banker's cheque/demand draft favouring "Gurgaon One Expense Account" and payable at New Delhi, on First Demand without protest or demur or proof of condition any and all amount demanded by your company in writing, with reference to the guarantee and that the liability of the Canara Bank, 5, Community Centre, Mayapuri, New Delhi under this   guarantee is restricted to Rs. 4,36,72,568/- (Rupees four crore thirty six lacs seventy two thousand five hundred sixty eight only). Our guarantee shall remain in force until 05/01/2014. Unless a claim in writing is presented to us during the validity period of this Guarantee, all your rights under this guarantee shall be forfeited and we shall be discharged of our liability hereunder. The liability under this guarantee shall be progressively reduced by the amount of repayment made by the contractor, from time to time or recoveries towards mobilization advance affected from the contractor's running account bills and certified by your company."

3.       Out of 9 bank guarantee, 5 of them are subject matter of the present dispute, which are as follows:

4.       These bank guarantees were amended at the request of the borrowers namely, M/s. G.S. Developers on 26.02.2014.

5.       All the bank guarantees were unconditional in nature and therefore the Bank had irrevocably and unconditionally undertaken the guarantee to pay the amounts upon the first written demand signed by the complainant/ authorized representative without any demur, cavil, dispute or protest or even without any deductions and reservations.

6.       What is more important in the said conditions, is the condition indicated in one of the bank guarantees which reads as under:

“immediately upon demand being made aforesaid, without in any manner referring to, or seeking consent of or instructions from the Contractor and without in any manner explicitly or by conduct, issuing notice of our intent to honour our commitment under this Guarantee or on the issue of any instructions to the contrary issued by the Contractor.”

7.       The complainant invoked the above noted five bank guarantees in writing on 24.11.2015 and the letters have been collectively filed as annexure C-5 to the complaint, requesting that the amount be encashed and transferred forthwith to the current account of the complainant in HDFC Bank, Safdarjung Development Area, New Delhi.

8.       Interestingly, the said letters upon receipt endorses a sentence “shall revert in 48 hours”. The said endorsement has been signed by Mr. Balaji Sanpath, Senior Manager of the branch. This endorsement is contained in all the five letters of request received by the Bank on 24.11.2015.

9.       The Bank did not encash the bank guarantees immediately and the complainant has alleged that the only reason that appears to be decipherable was to afford 48 hours’ time to the borrower, M/s. G. S. Developers to invoke arbitration and file a petition under Section 9 of the Arbitration and Conciliation Act, 1996 and obtain some order, so as to create an impediment in the encashment.

10.     It is alleged that the opposite party did not exercise caution and disregarded its obligation and appears to have disclosed this information to the borrower. The borrower seems to have obviously taken advantage of this gap.

11.     The complainant seems to have also filed a caveat before the Delhi High Court and after hearing the counsel the Division Bench passed an order on 26.11.2015 to the following effect:

“1. The caveator is represented in court and has been heard. The disputes in the present petition arise out of a building contract. The petitioner was appointed as a contractor to raise a construction on land of the respondents. The disputes have arisen between the parties and the respondents had sought invocation of five bank guarantees.

2. A stand is taken before us by the respondent no.1 on caveat that the contract with the petitioner stands cancelled which factor is disputed by the petitioner. A grievance is made by Mr. Raj Shekhar, learned counsel for the respondents that despite the admitted receipt of the letter of encashment of the bank guarantee on 24th November, 2015 by the respondent no.3, the amounts thereof have still not been remitted to the respondent no.1.

3. It is also submitted on behalf of the petitioner that out of the seven towers which the petitioner was to raise, the construction of three towers has been de-scoped and the work assigned to a third party. So far as the other four towers are concerned, Mr. Chaudhary, learned counsel for the petitioner would submit that construction of two of the towers is complete and the so far as the remaining two towers are concerned, 95% of the construction has been completed. It is further submitted by Mr. Chaudhary that 37 running account bills stand approved by the respondents qua the work which has been done and that 5 bills are pending with respondent no.1. Mr. Raj Shekhar, learned counsel for the respondent no.1 disputes the submission made on behalf of the petitioner and contends that the petitioner has not been able to complete the construction of the towers as contracted.

4. Be that as it may, we have not been called upon to adjudicate on the correctness of the submissions made on behalf of the petitioner today. The disputes between the parties arise out of commercial contract.

5. A statement is made on behalf of the respondent no.1 that the contract with the petitioner stands cancelled by the respondent vide their letter dated 18th November, 2015 sent to the petitioner by courier. Mr. Mohit Chaudhary, learned counsel for the petitioner submits that no such communication has till date been delivered upon his client and that the invocation of the five bank guarantees is consequently contrary to the terms of the agreement. A copy of the letter dated 18th November, 2015 has been handed over to Mr. Chaudhary, learned counsel for the petitioner.

6. Time is sought to examine the letter of cancellation and make submissions.

7. A request is made by both sides to explore the possibility of an amicable resolution of the disputes in a time bound manner. This matter certainly brooks no delay inasmuch as invocation of bank guarantees is at stake. However, the parties deserve to be given an opportunity to examine the possibility of a mediated settlement.

 In view of the above, it is directed as follows :

1. Till further orders, in case the amount of bank guarantees has not been handed over to the respondent, the same shall be retained by the respondent no.3 Canara Bank, Mayapuri Branch, Delhi. It is directed that the bank guarantees shall be kept alive till further orders of this court.

(ii) The parties shall appear through their authorized representatives before Mr. J.P. Sengh, Senior Mediator in the Delhi High Court Mediation and Conciliation Centre on 27th November, 2015 at 4:00 pm when efforts for a mediated settlement may be made.

List before court on 3rd December, 2015.

Copy of this order be sent to respondent no.3 Canara Bank, Mayapuri Branch, Delhi for compliance.

Dasti under signature of Court Master.”

12.     The Canara Bank was respondent no. 2 in the said proceedings, where a direction was issued that the bank guarantees shall not be handed over to the complainant and shall be retained by it till further orders and shall be kept alive. The Bank however did not appear in the proceedings and the complainant alleges that the Bank was indirectly trying to help the borrower, which is a clear deficiency on its part.

13.     The mediation proceedings failed and then upon noticing the said failure, the High Court passed the following order on 06.01.2016:

“Mr. Sandeep Sethi, the learned Senior Advocate for the respondents, submits that an arbitrator has been appointed. With the consent of the learned counsel for the parties, this petition shall be treated as an application under Section 17 of the Arbitration & Conciliation Act, 1996. The parties shall appear before the learned Arbitrator on 22nd January, 2016. Interim orders shall continue till they are otherwise varied by the learned Arbitrator. The petition is disposed off accordingly.”

14.     Thus, the interim orders passed on 26.11.2015 were continued till being varied by the Arbitrator.

15.     The Arbitrator passed a detailed order on 15.02.2016, refusing to grant any injunction and in effect dissolved the interim order with a direction that if the bank guarantees are enchased by the complainant they shall be kept in an interest bearing Escrow account in a public sector bank, disbursement of which shall be subject to claims and counter claims and the final award. Paragraph 24 of the order of the arbitrator and paragraph 26 thereof are extracted herein under:

“24. In order to balance equities it would be appropriate that the amount of the Bank Guarantee, if encashed by Magnum/ Alpha shall be kept in an interest bearing Escrow account in a public Sector Bank, the disbursement of which shall be subject to the claims and counter claims and the final Award.

XXXX

26. In the forgoing, permission having been granted by the Hon'ble High Court to the Arbitrator to alter or amend the order dated 6.1.2016, the interim order dated 6.1.2016 stands modified to the effect that:

1. Magnum/Alpha are at liberty to encash the 5 Bank guarantees as mentioned in the application and no injunction can be granted on encashment of Bank Guarantee.

2. However in order to balance equities it would be appropriate that the amount of the Bank Guarantee, if encashed by Magnum/Alpha shall be kept in an interest bearing Escrow account in a public Sector Bank, to await disbursement subject the final Award,

3. As directed by the Hon'ble High Court vide its order dated 12.1.2016, photographs of all the material of the petitioner/GSD lying on the site have to be made and handed over to the GSD and also an inventory of materials at site has to be made at the earliest.

Ordered accordingly.”

16.     The Bank was officially communicated the order on 16.02.2016, by the complainant requesting the Bank to encash the bank guarantees for being deposited in an interest bearing Escrow account as directed by the Arbitrator. The said letter was duly received by the very same senior Branch Manager, Mr. Balaji who has endorsed his signature thereon and is annexure C-11 to the complainant.

17.     The Bank did not honour the order of the Arbitrator nor did it encash the bank guarantees and on 17.02.2016, the borrower, M/s. G. S. Developers filed an appeal before the High Court of Delhi assailing the order of the Arbitrator referred to above.

18.     The Bank did not challenge it nor undertook any legal proceedings.

19.     The Delhi High Court took up the matter on 19.02.2016 and a learned Single Judge upheld the contention of the complainant and also clearly noted that the bank guarantees could be invoked as there was no fraud so as to vitiate the transaction. The direction issued by the Arbitrator was upheld, observing that the same protects the interest of the borrowers as well, as upon encashment the amount of the guarantees were to be deposited in an Escrow account. The order of the learned Single Judge is on record as annexure C-12. The fact remains that the opposite party/ bank still did not encash the bank guarantees even during this period.

20.     Consequently, a notice was served by the complainant on 19.02.2016, clearly stating therein that the information with regard to the dissolving of the interim order and the direction to deposit the encashed amount in an Escrow account by the order dated 16.02.2016 has not been complied with, which should be immediately executed.

21.     In spite of the aforesaid clearance, the encashment was further delayed as the borrower had intimated the Bank that they were in the process of filing a special leave petition before the Apex Court assailing the order of the High Court dated 19.02.2016. The complainant was asked by the Bank to come back on 22.02.2016, without any reason. But in the background, which the complainants came to know, was the attempt being made by the borrower to obtain some order from the Supreme Court. Fortunately, the Apex Court dismissed the special leave petition on 22.02.2016 and the order is extracted herein under:

“The special leave petition is dismissed.

In view of the above, application (s), if any, stands disposed of.”

22.     The value of the five bank guarantees is to the tune of Rs.16,64,84,749/-.

23.     The opposite party/ Bank had failed to file their written version within the time prescribed and therefore their right to file the same was forfeited vide order dated 20.08.2018, which is extracted herein under:

“As per the track report, notice has been served in the matter to the opposite party on 16th May, 2018. Since the opposite party has not filed their written version within the stipulated period, their right to file the written version stands closed.

 List the matter for filing affidavit evidence by the complainant on 25th February 2019.”

24.     Learned counsel for the complainant had moved IA/18793/2017 for directing the opposite party to produce the complete documents and records, which is entailed in paragraph 5 of the said application. The same is extracted herein under:

“5. That the documents sought for, from the Opposite Party, which had also been sought for under the Right to Information Act, 2005 are described below:

a. Copy of the all Bank Guarantees along with their respective application/letters/forms filed by M/s G.S. Developers and Contractors Pvt. Ltd. to the Opposite Party herein, initially and pursuant to their amendments, if any.

b. List of respective date of invocation of all the said bank guarantees along with their respective date of encashment.

c. All internal file notings of the Opposite Party herein as regards the said bank guarantees, from their respective date of issuance till their respective date of encashment.

d. All correspondence between the Opposite Party herein and M/s G.S. Developers & Contractors Pvt. Ltd. as regards all the said bank guarantees, from their respective date of issuance till their respective date of encashment.

e. All internal correspondence with the Opposite Party herein as regards all the said bank guarantees, from their respective date of issuance till their respective date of encashment.

f. All additional documents/queries/information asked or submitted by M/s G.S. Developers & Contractors Pvt. Ltd., if any, as regards all the said bank guarantees, from their respective date of issuance till their respective date of encashment.”

          A reply to the said application was directed to be filed, after it was allowed on 09.09.2022. The order dated 09.09.2022 is extracted herein under:

“Mr. Abhishek Chakraborty, learned Counsel appearing for the Opposite Party on the instructions received has made a statement that the Application being IA/18793/2017 be allowed. 

 Accordingly, IA/18793/2017 is allowed.  The Opposite Party is directed to produce documents and records as mentioned in Para 5 of the Application.

List on 22/11/2022.”

25.     In compliance of the aforesaid order the opposite party/ Bank filed IA/7810/2023, bringing on record the additional documents which the complainant had desired through the application that was allowed by this Commission. The said application was moved on 09.06.2023 and accordingly the documents regarding the bank guarantees as also the communications between the parties has been brought on record.

26.     With the aid of these documents, Mr. Pattjoshi, learned senior counsel for the complainant has urged that these documents, which has been brought on record by the opposite party on the asking of the complainant, clearly demonstrate that the Bank had been virtually helping the borrower by postponing the encashment and in generating litigation as a result whereof the encashment of the bank guarantees was withheld. The terms and conditions of the bank guarantee confirm the contentions, which have been advanced on behalf of the complainant and the Bank was obliged to encash them for payment to the complainants. Mr. Pattjoshi urged that note 1 appended to appendix 16, which is the format for reporting the settlement claims of Bank Guarantees to the circle office of the Bank reads as under:

Note: 1. The claim shall be settled within 24 hours of the invocation letter received from the beneficiary.

He contends that this is the time period provided by the Bank itself, even though they have been contending that 48 hours’ time is required.

27.     He then submits that it is the Bank itself which was communicating with and informing the borrower regarding encashment, which was not required at all. In spite of this, the borrower and the Bank were in tandem with each other, which is evident from the letter dated 16.02.2016, sent by the counsel for the borrower to the Bank. This letter requests the Bank to maintain status quo in terms of the order passed by the High Court of Delhi, till the appeal filed by the borrower is heard by the High Court. Learned counsel submits that the encashment of the bank guarantees was being delayed on account of the intervention of the borrower and the Bank entertaining it.

28.     Learned counsel for the Bank has opposed the petition contending that the matter should be adjourned and this Commission may summon the Branch Manager, who may be in a better position to explain the circumstances under which the Bank had been pursuing the matter by seeking legal opinion or otherwise was genuinely attempting to clear the bank guarantees, keeping in view the background of the litigation. The backdrop, in which this is required to be gone into, is that there was a lot of litigation going on between the parties and therefore the Branch Manager according to the learned counsel was confused about what further steps were to be taken by him. The contention therefore is that the sad Branch Manager be summoned to explain the same. The aforesaid argument is to be noted only for being rejected, in as much as, this is a summary jurisdiction, where the case has to be decided on the basis of the evidence filed on oath and there is no requirement for summoning the Branch Manager to draw an inference on allegations made about which appropriate affidavits have already been filed on behalf of the Bank.

29.     Learned counsel however urged that the Bank was bound to obey the Court orders and therefore the injunction issued by the Delhi High Court had to be respected. The Bank did not withhold the encashment on its own or deliberately as the said interim order continued, whereafter the Arbitrator finally on 15.02.2016, directed the amount to be encashed and kept in an interest bearing Escrow account. However, the borrower filed an appeal against the said order before the Delhi High Court and on 19.02.2016, the High Court refused to interfere with the order of the Arbitrator.

30.     It is pointed out that the Senior Branch Manager of the Bank on 16.02.2016 wrote to the legal section of the Canara Bank, New Delhi, intimating them about the order of the Sole Arbitrator seeking advice for further course of action. The said letter is extracted herein under:

“From: “SR Manager Maya Puri”Date: 16 February 2016 15:40

To:   “Legal sec co. delhi”CC: “manu legal”Attach: gsd alphacorpn.pdf

Subject: arbitration order g s developers

Dear sir

We are forwarding herewith the copy of the letter recd from the sole arbitrator Dt. 15.02.2016, concerning invocation of guarantees issued on behalf of g s developers fvg alpha group. 

Pls advise us further course of action. 

Regards

Sr. manager 

Mayapuri”

          The reply to the said email was given by the Senior Branch Manager through email dated 17.02.2024, which is extracted herein under:

“From: “Manu Pandey”Date: 17 February 2016 14:25

To:   “SR Manager Maya Puri”Subject: RE: g s developers gntee of alpha therm

Dear Sir 

Apart from the order dated 26/11/2015 you have also forwarded to us order dated 6/1/2016 wherein the matter was referred to Sole Arbitrator by Delhi High Court. It was clarified by High Court in the said order mat Interim orders shall, continue till they are otherwise varied by the learned Arbitrator. Now the Arbitrator in its order dated 15/2/2016 the learned arbitrator has stated that. IAlpha are at Liberty to encash the 5 Bank Guarantees as mentioned in the application no injunction can be granted on encashment of Bank Guarantee. Hence the order of Arbitrator is in terms of the Delhi High Court order wherein Delhi High Court have themselves given the right to the Arbitrator to modify the Interim order. Under such circumstances the Beneficiary can invoke the Bank Guarantee. Hope the matter is clear.”

31.     This was in response to the clarification sought by the  Senior Branch Manager through his email of the same date seeking advice, whether the payment against the bank guarantees could be made ignoring the High Court order. This was replied by the email, which is on record at page 149 of the additional documents filed by the opposite party. In my opinion when the order was unambiguous and clear there was no need to seek clarification.

32.     On 19.02.2016, the counsel for the complainant sent an email to the Bank requesting them to confirm compliance of the order of the Delhi High Court upholding the order of the Arbitrator. On this mail the Senior Branch Manager instead of complying, again wrote to its legal office for guidance on issues which were unwarranted. The clarification sought by the Chief Manager, Mr. Manmohan Singh, is extracted herein under:

“From: “CM Maya Puri”Date: 20 February 2016 12:31

To:   CC: Attach: ORDER 19.02.2016 G.S. Developers.pdf

Subject: Fw: Orders of the Hon’ble High Court of Delhi passed today

Dear Sir, 

Please find attached herewith orders of Hon'ble High Court vacating the stay on encashment of bank guarantees. Bank guarantees were issued by us on behalf of our client M/s GS Developers and contractors Pvt Ltd in favour of M/s Alpha G Corp Development Pvt Ltd. The guarantees were invoked by the beneficiary and stay order on encashment was obtained by M/s G S Developers and contractors Pvt Ltd.

 We request you to guide us on the following: 

 1. Whether we are in order in making payment to the beneficiary by way of demand draft 

 2. Please provide us format of the notice to be sent to M/s G S Developers and Contractors Pvt Ltd regarding payment of BGs, making arrangement of funds and adjustment of BG margin.

Regards

Manmohan Singh

Chief Manager 

Canara Bank Mayapuri Delhi -64

Oh- 011-28115212”

33.     All the requisite information including the vacation of the stay order was available with the Bank, yet the matter continued to be delayed even further. Interestingly enough, what is to be noted is that in appendix 16, which is the form for reporting settlement of bank guarantee claims that has been referred to earlier, at item no. 13 poses a question and the information given in relation thereto confirms that the bank had been intimating the borrower about invocation of the bank guarantees. The said question with the answer, which is contained at page 164 of the additional documents filed by the opposite party is extracted herein under:

34.     A perusal of the same indicates that the Bank had informed the borrower namely, M/s. G. S. Developers about their intention to invoke the bank guarantees on 24.11.2015, 20.02.2016 and again on 26.02.2016. These dates are significant, in as much as, the borrower obtained an interim order from the Delhi High Court on 26.11.2015, which is just one day after the information received by them as indicated above.

35.     The second information was given after the Delhi High Court had upheld the order of the Arbitrator on 19.02.2016, which matches with the information given to the borrower on 20.02.2016. Encashment was not done and the complainant was asked to come back on 22.02.2016, on which date the Supreme Court was to take up the matter. As noted above the Apex Court dismissed the appeal filed by the borrower on the same day and these dates of information by the Bank to the borrower therefore stands tallied and correlated to the orders passed by the Courts.

36.     Learned counsel for the Bank has urged that this information was not in any way to help the borrower but to keep the concerned parties apprised of the steps taken by the Bank and not to avoid encashment.

37.     The opening of the Escrow account had already been intimated and according to the letter dated 23.02.2016, the bank guarantees were encashed and the same were remitted in the Escrow account as directed by the learned Arbitrator. It is through a letter dated 17.03.2016 that the Punjab National Bank intimated the Canara Bank about the receipt of the said amount.

38.     M/s. G. S. Developers has also been communicating with the Bank informing them about the progress of the litigation and the opening of the Escrow account which is evidenced by the letters dated 16.02.2016 and 20.02.2016.

39.     These documents have been filed by the opposite party pursuant to the directions of this Commission on the application of the complainant and have been taken on record.

40.     Having heard learned counsel for the parties and having perused the documents as referred to hereinabove, it is appropriate to refer to the law relating to bank guarantees and it has been settled by the Apex Court that no injunction should be granted against the invocation of bank guarantees unless fraud is established. Reference should be made to the case of Himadri Chemicals Industries Vs. Coal tar Refining Company, (2007) 8 SCC 110 followed by the judgment in the case of Gujarat Maritime Board Vs. L & T Infrastructure Development Projects Limited & Ors., (2016) 10 SCC 46. It is categorically ruled that the bank guarantee is a separate and independent contract and is not qualified by the contract on performance of the obligations. The invocation is only against a breach of the condition in the letter of intent and hence a bank guarantee, which is absolute and unconditional cannot be a subject matter of injunction except in situations of fraud or irrevocable injury. This has again been reiterated by the Apex Court in the case of Standard Chartered Bank Vs. Heavy Engineering Corporation Limited, (2020) 13 SCC 574, where it has been held therein as follows:

19. The law relating to invocation of bank guarantees with the consistent line of precedents of this Court is well settled and a three-Judge Bench of this Court in Ansal Engg. Projects Ltd. v. Tehri Hydro Development Corpn. Ltd. [Ansal Engg. Projects Ltd. v. Tehri Hydro Development Corpn. Ltd., (1996) 5 SCC 450] held thus: (SCC p. 454, paras 4-5)

“4. It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor.

5. … The court exercising its power cannot interfere with enforcement of bank guarantee/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as triable issue by strong evidence so as to prevent irretrievable injustice to the parties.”

(emphasis supplied)

20. A bank guarantee constitutes an independent contract. In Hindustan Construction Co. Ltd. v. State of Bihar [Hindustan Construction Co. Ltd. v. State of Bihar, (1999) 8 SCC 436] , a two-Judge Bench of this Court formulated the condition upon which the invocation of the bank guarantee depends in the following terms: (SCC p. 442, para 9)

“9. What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of the bank guarantee are, therefore, extremely material. Since the bank guarantee represents an independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.”

21. The same principle was followed in SBI v. Mula Sahakari Sakhar Karkhana Ltd. [SBI v. Mula Sahakari Sakhar Karkhana Ltd., (2006) 6 SCC 293] wherein a two-Judge Bench held thus: (SCC p. 301, paras 33-34)

“33. It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction.

34. If a construction, as was suggested by Mr Naphade, is to be accepted, it would also be open to a banker to put forward a case that absolute and unequivocal bank guarantee should be read as a conditional one having regard to circumstances attending thereto. It is, to our mind, impermissible in law.

22. Taking note of the exposition of law on the subject in Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. [Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110] , a two-Judge Bench of this Court in Gujarat Maritime Board v. Larsen & Toubro Infrastructure Development Projects Ltd. [Gujarat Maritime Board v. Larsen & Toubro Infrastructure Development Projects Ltd., (2016) 10 SCC 46 : (2017) 1 SCC (Civ) 458] has laid down the principles for grant or refusal for invocation of bank guarantee or a letter of credit. The relevant paragraph is as under: (Himadri Chemicals Industries Ltd. case [Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110] , SCC pp. 117-18, para 14)

“14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:

(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.

(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

(iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit.

(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.

(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.”

23. The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary and 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 is of no consequence. There are, however, exceptions to this rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee.”

41.     Considering the aforesaid ratio of the decisions cited by Mr. Pattjoshi, learned Senior Counsel for the complainant, the settled position is that a bank guarantee is an independent contract between the Bank and the beneficiary  and the Bank is obliged  to honour its bank guarantee as long as it is an unconditional or irrevocable one. In a dispute between the beneficiary and the party as whose instance, the bank has given the guarantee is immaterial and is of no consequence, except in cases of fraud, irretrievable injustice or special equities.

42.     In the instant case none of these instances were available to justify any interference by any court, which was ultimately upheld by the Delhi High Court. The Bank therefore had no option on the facts of the present case except to have encashed the bank guarantees, which were irrevocable and unconditional. The attempt by the Bank to seek advice and to postpone the encashment with information received from the borrower was totally unjustified, more so when the Bank itself had indicated that encashment would be done within 24 hours. It is thus evident that inspite of the complainant having demanded encashment, in terms of the conditions of the bank guarantees on 24.11.2015, the borrower complicated the matter by obtaining an interim order from the Delhi High Court, which was dissolved by the Arbitrator, as per the directions of the Court itself  on 15.02.2016. This period of the interim order from 26.11.2015 to 15.02.2016 was to the benefit of the borrower and the Bank retained the money. It is the complainant who was put to loss of interest on this huge amount. The Arbitrator’s order was upheld by the Delhi High Court in Appeal on 19.02.2016, traversing the entire law on bank guarantees, holding that the Bank could not have withheld the invocation nor was the borrower entitled to any such injunction. The dissolution of the interim order by the Arbitrator and the order being upheld by the Delhi High Court established that no advantage can be gained as the interim order was ultimately found to be not in consonance with the law. This stands substantiated with the judgments of the Apex Court referred to hereinabove.

43.     For the aforesaid reasons, the complainant was entitled to the encashment on 24.11.2015, itself within 24 hours or to say the least within 48 hours. It is the borrower and the Bank, who took the shelter of the interim order. The Bank did not contest the interim order or challenge it nor did their Law Officer or anyone else including the Senior Branch Manager take up the matter for immediate encashment. The Branch Manager and the law section of the Bank that had been communicating with each other cannot be presumed to be ignorant of the legal status of interference in case of bank guarantees, which was settled decades ago by the Apex Court and has been repeatedly holding the same view as indicated above. There cannot be any presumption that the Bank officials did not know the progress of law or the settled position in relation to bank guarantee as discussed hereinabove.  There was no attempt on the part of the Bank to contest the orders obtained by the borrower, and rather to the contrary, the Bank Manager seems to have been intimating the borrower from time to time of their intention to proceed for invocation, as is evident from the facts indicated above without actually encashing it. This time space was being availed of by the borrower to gain some advantage by delaying the encashment. Consequently, the Bank has equally been deficient in its approach towards the encashment inspite of  the dissolution of the interim order. They kept on waiting till the Special Leave Petition was finally dismissed on 22.02.2016.

44.     Apart from this, the complainant made efforts to obtain the information, and having failed to get it, had to move an application before this Commission for production of these documents, which have now been filed by the opposite party through IA/7810/2023 dated 09.06.2023.The disclosure of these facts therefore establishes that the Bank had been apparently shielding the borrower and was also clearly resisting the encashment till 22.02.2016, when they state that they had issued an advice for its deposit in the Escrow account with the Punjab National Bank.

45.     Mr. Pattjoshi has urged that in order to contest this matter tooth and nail, the complainant apart from having lost interest on the entire encashed amount of the bank guarantee, had to additionally undertake legal expenses for which payments have been made by cheque to the legal teams engaged at different levels and this consolidated statement is stated  to be as follows:

46.     He submits that the aforesaid cost of litigation should also be awarded in addition to the claim of compensation, damages and other amounts including interest on the five bank guarantees from the due date till the date of their encashment and deposit in the Escrow account.

47.     Keeping in view the nature of the transactions, the question as to whether the nature of transactions would allow the complainant to fall within the definition of a consumer, it has been now settled position that the word ‘person’ used in the Consumer Protection Act, 1986 also includes a company. Reference be had to the judgment of the Apex Court in the case of Kozyflex Mattresses Private Limited Vs. SBI General insurance Company Limited & Anr., 2024 SCC OnLine SC 341.

48.     Apart from this, it has been held in the case of Arun Bhatiya Vs. HDFC Bank & Ors., 2022 SCC OnLine SC 1017 that a person who avails of any service from the Bank will fall within the purview of the definition of ‘consumer’. Paragraph 20 of the judgment reported in 2022 SCC OnLine SC 1017 is extracted herein under:

“20. The respondent bank does not dispute that the appellant, along with his father, opened a joint FD with the bank. A person who avails of any service from a bank will fall under the purview of the definition of a ‘consumer’ under the 1986 Act. As a consequence, it would be open to such a consumer to seek recourse to the remedies provided under the 1986 Act.”

49.     This judgment was delivered after considering the meaning of the expression ‘service’ as defined in Section 2 (1) (o) of the Consumer Protection Act, 1986. The service of the bank guarantee rendered to by the Bank to the complainant and then not encashing it as per  the terms thereof, inspite of the fact that it was irrevocable and unconditional, is a clear deficiency in service. The complainant is therefore entitled to compensation on that count.

The question is now regarding quantum of compensation.

50.     The claim is of 24% interest on the total amount of bank guarantee of Rs.16,64,84,749/-. Further 5% of the value of the defective goods have also been claimed as per the proviso to Section 14 (ha). Further amount of damages of Rs.2,00,00,000/- and punitive damages of Rs.10,00,00,000/- has been claimed. The extent of claim made is wide off the mark in the sense that there is no foundation to demand such an exaggerated claim. The non-encashment was on account of the judicial interventions as referred to above, which was taken shelter of by the Bank. The bank guarantee was invoked on 24.11.2015, but was not encashed till 26.11.2015, when the interim order of the Delhi High Court was passed. The said interim order came to be dissolved with the passing of the order of the Arbitrator on 15.02.2016. According to the facts noted hereinabove, the borrower was indulging in continuous litigation without any success as his appeal before the Delhi High Court against the order of the Arbitrator was dismissed on 19.02.2016 and the Special Leave Petition was also dismissed on 22.02.2016. There is nothing on record to indicate that any injunction was operating after 15.02.2016 till 22.02.2016. The encashed amount reached the Escrow account as indicated by the opposite party on 22.02.2016.

51.     The question is as to whether the injunction orders as referred to above, between 26.11.2015 to 15.02.2016, culminating with the with the order of the Arbitrator can be taken protection of by the Bank under the garb that the borrower had obtained injunction orders. It is to be noted that it is the Bank, which is seeking the benefit of that injunction order and it is under the umbrella of the said order that the Bank refrained from encashing the bank guarantees. The Bank was under a legal obligation to satisfy the encashment, but it postponed the encashment on the ground of the interim orders obtained by the borrower. In this background, the impact and the consequence arising out of an interim order has to be legally dealt with. The law on this subject is that there is a difference between a stay order and a final order, in as much as, a stay order is an interim order that puts in abeyance any action, but does not dissolve it. It is only when final orders are passed affirming an interim order that it becomes absolute and is dependent on the final disposal of the lis. On the other hand, if the final order goes against the party, who had been successful in getting an interim relief or was being benefitted by it, then the successful party will have to be placed in the same position as was existing on the date of the lis on the principle of restitution that has been acknowledged to be a duty of the court in several decisions supported by authorities. Analysing such a situation, the Apex Court in the  case of South Eastern Coalfields Ltd. Vs. State of M. P. and Ors., (2003) 8 SCC 648 in paragraph 25 to 29 of the report, has held as under:

“25. On the principle which we have upheld just hereinabove, it would not have been necessary to enter into this aspect of the issue, however, it becomes necessary to deal therewith inasmuch as it was submitted on behalf of the consumers/purchasers that their non-payment of enhanced amount of royalty was protected by judicial orders, though of an interim nature, passed by the courts, and therefore, they should not be held liable for payment of interest so long as the money was withheld under the protective umbrella of the court order. Merely because the writ petitions were finally held liable to be dismissed, it cannot be urged that the interim orders passed by the courts were erroneous. Soon on dismissal of their writ petitions, the payment of the enhanced amount of royalty which was disputed earlier was promptly cleared by the writ petitioners and, therefore, their act was bona fide. We find no merit in this submission either.

26. In our opinion, the principle of restitution takes care of this submission. The word “restitution” in its etymological sense means restoring to a party on the modification, variation or reversal of a decree or order, what has been lost to him in execution of decree or order of the court or in direct consequence of a decree or order (see Zafar Khan v. Board of Revenue, U.P. [1984 Supp SCC 505 : AIR 1985 SC 39] ) In law, the term “restitution” is used in three senses: (i) return or restoration of some specific thing to its rightful owner or status; (ii) compensation for benefits derived from a wrong done to another; and (iii) compensation or reparation for the loss caused to another. (See Black's Law Dictionary, 7th Edn., p. 1315). The Law of Contracts by John D. Calamari & Joseph M. Perillo has been quoted by Black to say that “restitution” is an ambiguous term, sometimes referring to the disgorging of something which has been taken and at times referring to compensation for injury done:

“Often, the result under either meaning of the term would be the same. … Unjust impoverishment as well as unjust enrichment is a ground for restitution. If the defendant is guilty of a non-tortious misrepresentation, the measure of recovery is not rigid but, as in other cases of restitution, such factors as relative fault, the agreed-upon risks, and the fairness of alternative risk allocations not agreed upon and not attributable to the fault of either party need to be weighed.”

The principle of restitution has been statutorily recognized in Section 144 of the Code of Civil Procedure, 1908. Section 144 CPC speaks not only of a decree being varied, reversed, set aside or modified but also includes an order on a par with a decree. The scope of the provision is wide enough so as to include therein almost all the kinds of variation, reversal, setting aside or modification of a decree or order. The interim order passed by the court merges into a final decision. The validity of an interim order, passed in favour of a party, stands reversed in the event of a final decision going against the party successful at the interim stage. Unless otherwise ordered by the court, the successful party at the end would be justified with all expediency in demanding compensation and being placed in the same situation in which it would have been if the interim order would not have been passed against it. The successful party can demand (a) the delivery of benefit earned by the opposite party under the interim order of the court, or (b) to make restitution for what it has lost; and it is the duty of the court to do so unless it feels that in the facts and on the circumstances of the case, the restitution far from meeting the ends of justice, would rather defeat the same. Undoing the effect of an interim order by resorting to principles of restitution is an obligation of the party, who has gained by the interim order of the court, so as to wipe out the effect of the interim order passed which, in view of the reasoning adopted by the court at the stage of final decision, the court earlier would not or ought not to have passed. There is nothing wrong in an effort being made to restore the parties to the same position in which they would have been if the interim order would not have existed.

27. Section 144 CPC is not the fountain source of restitution, it is rather a statutory recognition of a pre-existing rule of justice, equity and fair play. That is why it is often held that even away from Section 144 the court has inherent jurisdiction to order restitution so as to do complete justice between the parties. In Jai Berham v. Kedar Nath Marwari [(1922) 49 IA 351 : AIR 1922 PC 269] Their Lordships of the Privy Council said: (AIR p. 271)

“It is the duty of the court under Section 144 of the Civil Procedure Code to ‘place the parties in the position which they would have occupied, but for such decree or such part thereof as has been varied or reversed’. Nor indeed does this duty or jurisdiction arise merely under the said section. It is inherent in the general jurisdiction of the court to act rightly and fairly according to the circumstances towards all parties involved.”

Cairns, L.C. said in Rodger v. Comptoir D'Escompte de Paris [(1871) 3 PC 465 : 7 Moo PCC NS 314 : 17 ER 120] : (ER p. 125)

“[O]ne of the first and highest duties of all courts is to take care that the act of the court does no injury to any of the suitors, and when the expression, ‘the act of the court’ is used, it does not mean merely the act of the primary court, or of any intermediate court of appeal, but the act of the court as a whole, from the lowest court which entertains jurisdiction over the matter up to the highest court which finally disposes of the case.”

This is also on the principle that a wrong order should not be perpetuated by keeping it alive and respecting it (A. Arunagiri Nadar v. S.P. Rathinasami [(1971) 1 MLJ 220] ). In the exercise of such inherent power the courts have applied the principles of restitution to myriad situations not strictly falling within the terms of Section 144.

28. That no one shall suffer by an act of the court is not a rule confined to an erroneous act of the court; the “act of the court” embraces within its sweep all such acts as to which the court may form an opinion in any legal proceedings that the court would not have so acted had it been correctly apprised of the facts and the law. The factor attracting applicability of restitution is not the act of the court being wrongful or a mistake or error committed by the court; the test is whether on account of an act of the party persuading the court to pass an order held at the end as not sustainable, has resulted in one party gaining an advantage which it would not have otherwise earned, or the other party has suffered an impoverishment which it would not have suffered but for the order of the court and the act of such party. The quantum of restitution, depending on the facts and circumstances of a given case, may take into consideration not only what the party excluded would have made but also what the party under obligation has or might reasonably have made. There is nothing wrong in the parties demanding being placed in the same position in which they would have been had the court not intervened by its interim order when at the end of the proceedings the court pronounces its judicial verdict which does not match with and countenance its own interim verdict. Whenever called upon to adjudicate, the court would act in conjunction with what is real and substantial justice. The injury, if any, caused by the act of the court shall be undone and the gain which the party would have earned unless it was interdicted by the order of the court would be restored to or conferred on the party by suitably commanding the party liable to do so. Any opinion to the contrary would lead to unjust if not disastrous consequences. Litigation may turn into a fruitful industry. Though litigation is not gambling yet there is an element of chance in every litigation. Unscrupulous litigants may feel encouraged to approach the courts, persuading the court to pass interlocutory orders favourable to them by making out a prima facie case when the issues are yet to be heard and determined on merits and if the concept of restitution is excluded from application to interim orders, then the litigant would stand to gain by swallowing the benefits yielding out of the interim order even though the battle has been lost at the end. This cannot be countenanced. We are, therefore, of the opinion that the successful party finally held entitled to a relief assessable in terms of money at the end of the litigation, is entitled to be compensated by award of interest at a suitable reasonable rate for the period for which the interim order of the court withholding the release of money had remained in operation.

 29. Once the doctrine of restitution is attracted, the interest is often a normal relief given in restitution. Such interest is not controlled by the provisions of the Interest Act of 1839 or 1978.”

52.     The aforesaid ratio and principle enunciated as extracted hereinabove, applies with full force on the facts of the present case, in as much  as, the complainant was unjustifiably denied the consequences of the encashment of the bank guarantees, resulting in a direct pecuniary loss to the complainant. Consequently, the complainant is justified in claiming the reliefs sought for in the present complaint to the extent permissible in law.

53.     The act and omissions of the Bank are in clear violation of the guidelines of the Reserve Bank of India as also the terms and conditions of the bank guarantee itself which required the encashment within 24 hours. The complaint therefore has successfully established the deficiency on the part of the Bank in having withheld the amount for no justification either legal or factual for the period as indicated above. The complainant is therefore entitled to interest, which on standard bank rates is liable to be paid @ 9%  simple interest on the sum of Rs.16,64,84,749/- with effect from the due date i.e., 24.11.2015 till 21.02.2016.

54.     Apart from this, the complainant is also entitled to the costs of litigation. The amounts which has been claimed by the complainant and has been urged by Mr. Pattjoshi on the strength of the receipts on record deserves to be moderated, which in the opinion of this Commission can be quantified lump sum at Rs.5,00,000/-.

55.     With the aforesaid directions, the complaint is allowed. The amount shall accordingly calculated and paid to the complainant by the opposite party/ bank within one month from today. On default, the rate of interest shall stands enhanced to 12% on both amounts.