G.K. Granites v. The Federal Bank Ltd. (Kizhakkambalam Branch) and Larsen and Toubro Ltd. (ECC Division)

**IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT:** **THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE** **&** **THE HONOURABLE MR. JUSTICE P.SOMARAJAN** **FRIDAY, THE 22ND DAY OF JUNE 2018 / 1ST ASHADHA, 1940** **RFA.No. 483 of 2009** **AGAINST THE JUDGMENT IN OS 139/2007 of SUB COURT, PERUMBAVOOR DATED 28-03-2009** **APPELLANT IN RFA-PLAINTIFF IN SUIT** **M/S G.K.GRANITES, OORAKKAD, KIZHAKKAMBALAM P.O., ERNAKULAM DISTRICT, KERALA, STATE, A PARTNERSHIP FIRM, REPRESENTED BY ITS, MANAGING PARTNER, GEORGE ANTONY, KUREEKKAL, HOUSE, KIZHAKKAMBALAM P.O., ERNAKULAM DISTRICT.** **BY ADV.SRI.JOSE ABRAHAM** ## **RESPONDENTS/DEFENDANTS IN SUIT:** **1. THE FEDERAL BANK LTD. KIZHAKKAMBALAM BRANCH, KIZHAKKAMBALAM P.O.,, REPRESENTED BY ITS SENIOR MANAGER.** **2. M/S.LARSEN AND TOUBRO LTD., E.C.C. DIVISION, 19, KUMARAKRUPA ROAD, FLOOR NOS. 1 AND 2, BANGALORE-560 001, KARNATAKA STATE, REPRESENTED BY ITS REGIONAL, MANAGER.** **R1 BY ADV. SRI.K.ANAND (A.201) R2 BY ADV. SRI.S.ANANTHAKRISHNAN R2 BY ADV. SRI.CHACKO GEORGE (SR.) CAVEATOR BY ADV. SRI.JOSE ABRAHAM R1 BY ADV. SRI.B.S.KRISHNAN (SR.) R1 BY ADV. SMT.LATHA KRISHNAN R2 BY ADV. SRI.N.K.SUBRAMANIAN** **THIS REGULAR FIRST APPEAL HAVING BEEN FINALLY HEARD ON 21.2.2018, THE COURT ON 22-06-2018 DELIVERED THE FOLLOWING:** ## **A.M.SHAFFIQUE & P.SOMARAJAN, JJ** - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - R.F.A. No. 483 of 2009 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 22[nd] day of June, 2018 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ## **JUDGMENT** ## **SHAFFIQUE, J.** This appeal is filed by the plaintiff in O.S.No 39 of 2007 of the Subordinate Judge's Court, North Paravur. The suit has been filed for a declaration that the plaintiff suffered damages and financial loss on account of the unlawful release of the amount covered by a bank guarantee violating an order of injunction; for a direction declaring that the defendants are liable to pay the amount of Rs. 57,00,000/- (Rupees fifty seven lakhs) covered by the Bank Guarantee No.20/2004 which was fraudulently invoked by the 2[nd] defendant and released by the 1[st] defendant; for a declaration that there is no proper invocation of the Bank Guarantee in tune with the conditions stipulated in the Bank Guarantee; for a declaration that the defendants colluded each other with a view to obtain the amount covered under the Bank Guarantee No.20/2004 acting against the legal and legitimate interest of the plaintiff and also to pay the interest on the Bank Guarantee at the rate of 14.75%. 2. The short facts that has prompted the plaintiff to file the suit are as under: The plaintiff entered into a contract with the 2[nd] defendant for supply of boulders and crushed aggregates used for construction of R.F.A. No.483 of 2009 -2- its Western Transport Corridor-Haweri Section of NH-4 rehabilitation and upgrading of Thumkur-Sira Section (KM 75 to KM 116.4) in the State of Karnataka. The said work was awarded to the 2[nd] defendant by the National Highway Authority of India. 3. The 2[nd] defendant had issued two letters of intent in favour of the plaintiff. One for supply of boulders for crushing into stone aggregates as per letter of intent dated 27.2.2002 and other for crushing of aggregates as per letter dated 26.2.2002. Subsequently after several discussions plaintiff agreed to supply aggregates at the rate of Rs.126.75 per metric tonne(MT). The plaintiff agreed to the said rate since the quarry which was taken on lease by the 2[nd] defendant was situated in the land comprising in Sy.No.4 of Seebi Agrahara Village, Sira Taluk in Thumkur District. The work had to be completed within a period of two years. But the 2[nd] defendant could not arrange the said quarry and more than 3 months' time had expired in between. They arranged another quarry at Yelladadlu after 3 months. According to the plaintiff this quarry did not have sufficient facility compared to the other quarry. 4. However, the plaintiff agreed to supply the materials as agreed. It is stated that the plaintiff installed machinery and other amenities to produce 400 tonnes per hour. The payment was to be made based on the tonnage of crushed aggregates as certified by the R.F.A. No.483 of 2009 -3- Construction Manager and it is agreed that the 2[nd] defendant would set up a suitable weigh bridge at site for weighing materials. It is alleged that the 2[nd] defendant refused to take the aggregates stating that the weigh bridge was faulty and requested for time to get it repaired and that more than 30 days elapsed in between. The aggregates were dumped in the premises itself. The 2[nd] defendant could not clear it and the plaintiff could not supply the same. Finally, the plaintiff requested the 2[nd] defendant either to repair the weigh bridge or install a new one at its own costs. That was also not done by the 2[nd] defendant. The plaintiff narrates several lapses on the part of 2[nd] defendant in carrying out their part of the contract. Finally, the plaintiff suffered severe loss. 5. On 10.8.2004, the 2[nd] defendant issued a letter to the plaintiff to stop production on 30.8.2004. When the plaintiff took steps to dismantle the unit, the 2[nd] defendant placed further orders of material and finally on 16.12.2004 they informed the plaintiff to supply 10,000 metric tonnes of rubbles more and to stop production on 25.12.2004. According to the plaintiff, as per the request of the 2[nd] defendant, they supplied 8.85 lakhs MT of aggregates and 1.3 lakhs MT of boulders. The plaintiff further alleged that after completion of work, through several communications, plaintiff requested the 2[nd] defendant for a meeting to discuss the various problems. But the 2[nd] defendant did not respond to the same. Ultimately, plaintiff issued R.F.A. No.483 of 2009 -4- letter dated 18.2.2005 requesting the 2[nd] defendant to issue the completion certificate so as to enable the plaintiff to submit final bills. 6. The plaintiff's contention is that as per the terms of the letter of intent, the 2[nd] defendant has to pay 10% of the contract value as mobilization advance against an unconditional bank guarantee. Plaintiff made arrangements on 26.2.2004 with the 1[st] defendant to issue bank guarantees to the 2[nd] defendant and accordingly 4 bank guarantees were issued in favour of the 2[nd] defendant each dated 12.7.2002. When the work progressed, the amounts were deducted by the 2[nd] defendant from the running bills of the plaintiff and finally, Bank Guarantee No. 20/04 amounting to Rs.57,00,000/- alone remained which was treated as performance guarantee. The said bank guarantee was renewed up to 30.6.2005. 7. Though the 2[nd] defendant did not issue the completion certificate the plaintiff issued final bill amounting to 9.68 crores under cover of a notice dated 1.4.2005. Plaintiff received a reply on 4.5.2005 from 2[nd] defendant's lawyer raising untenable and unfounded contentions. It was admitted that an amount of Rs.59,74,124/- was payable to the plaintiff. Subsequently on 28.6.2005, the plaintiff received a letter from the 2[nd] defendant calling upon the plaintiff to pay an amount of Rs.1,29,52,876/-. According to the plaintiff the said letter is a fraud perpetrated by the 2[nd] defendant to invoke the bank R.F.A. No.483 of 2009 -5- guarantee of Rs. 57 lakhs. Though the letter was dated 20.5.2005 the envelope shows that it is registered on 24.6.2005. The plaintiff received the same on 28.6.2005. The plaintiff submitted that the content of letter clearly indicates the intention of the 2[nd] defendant to invoke the bank guarantee amounting to Rs.57 lakhs. It is further submitted that the plaintiff had come to know about the invocation of bank guarantee from the office of the 1[st] defendant at 4.30 on 28.6.2005. The plaintiff immediately approached the 1[st] defendant and requested not to release the bank guarantee and the Senior Manager advised the plaintiff to submit a written application. Accordingly, he gave a letter to Bank stating that the invocation is bad in law. 8. However, on 29.6.2006 the 1[st] defendant made arrangements to release Rs.57 lakhs against the bank guarantee. The plaintiff approached the 1[st] defendant and its Senior Manager and again requested not to pay the amount covered by the bank guarantee. The 1[st] defendant assured that the same will not be done. However, the plaintiff filed O.S.No. 279 of 2005 before the Sub Court, North Paravur, seeking a permanent prohibitory injunction restraining the Bank from releasing the amount covered by the Bank guarantee. Along with the suit he filed I.A.No.2611 of 2005 seeking an interim injunction to restrain the bank from paying the amount to the 2[nd] defendant. An interim order was passed by the court, as per order R.F.A. No.483 of 2009 -6- dated 1.7.2005 and it was communicated to the Bank. But later it was noticed that the amount covered by the bank guarantee was paid on 28.6.2005 itself. By the time the order of injunction was passed, the bank guarantee has been disbursed to the 2[nd] defendant by demand draft dated 1.7.2005. The plaintiff was advised to communicate the order of injunction to the service branch. Subsequently, plaintiff got information from the the 1[st] defendant's officials that the amount covered by the bank guarantee was released to 2[nd] defendant by 6 demand drafts of Rs.9.5 lakhs each, all dated 1.7.2005. The plaintiff took steps to inform the injunction order to Bangalore Service Branch which was served on 2.7.2005. The matter was also informed to all higher officials of Federal bank. 9. The plaintiff further contended that the counsel for plaintiff himself contacted the Manager Sri. Mathew Jacob to communicate the order. The order was communicated to the 1[st] defendant through process server at 4.30 pm. It is further contended that on 1.7.2005, the plaintiff/its representatives contacted the Senior Manager of the 1[st] defendant, more than 6 times between 12.45 pm to 2.30 pm as a follow up measure. The representative of the plaintiff's firm visited 1[st] defendant and requested them to comply with the order. But despite all these efforts, the amount covered by the bank guarantee was disbursed to the 2[nd] defendant on 1.7.2005. It is therefore contended R.F.A. No.483 of 2009 -7- that the 1[st] defendant flouted the injunction order passed by the court. Though an application under Order XXXIX Rule 2A of the Code of Civil Procedure was submitted, since it was wrong payment, the suit has been filed on the allegation that plaintiff has suffered severe loss on account of the wrongful payment. 10. During the pendency of the case, the suit was amended by incorporating additional pleadings. The additional pleadings were incorporated as paragraphs 43A to 43J. 11. Substantially, the contention of the plaintiff in the suit is that invocation of bank guarantee was wrongful as no amount was payable by plaintiff to the 2[nd] defendant, whereas the 2[nd] defendant has admitted that they were liable to pay more than Rs.57 lakhs to the plaintiff towards the value of aggregates. The 2[nd] defendant in their written statement admitted the agreement between the parties as per letters of intent dated 26.2.2002 and 27.2.2002. However, it is contented that as per the terms of the contract it was the responsibility of plaintiff to locate the quarry and take the land on lease. They admit that they were under obligation to pay 10% of the contract value as against an unconditional bank guarantee and an advance of 5% was given as mobilization advance after successful commissioning of crushing plant at site and on hypothecation of plaint and machinery to the 2[nd] defendant. The plaintiff submitted bank R.F.A. No.483 of 2009 -8- guarantee only for 10% of the total value and according to the 2[nd] defendant payments were made as per the terms of the agreement. 12. The 2[nd] defendant denied having violated any of the conditions of the Letter of Intent. They also denied the fact that there was a break down of the weigh bridge. According to them, there was another weigh bridge adjoining the weighing area which was used for weighing the materials. It is further contended that the quantity of 8.85 lakhs MT of aggregates claimed to have been supplied by the plaintiff was short of 18 lakhs MT, which was the contracted quantity. The 2[nd] defendant did not issue the completion certificate as the plaintiff did not complete the contract as per the agreed terms. The 2[nd] defendant however admits that the plaintiff had issued a notice making a demand for Rs.9.68 crores, to which a reply was sent stating that Rs.1,29,52,876/- was due to the 2[nd] defendant. The 2[nd] defendant denied the allegation of fraud and contended that amounts which were legally demanded were not paid and therefore the bank guarantee was invoked. They also denied any collusion between defendants 1 and 2. It is further contended that the suit is not maintainable as it is barred under order II Rule 2 of the Code of Civil Procedure. The plaintiff has already filed a suit as O.S.No. 279 of 2005 and the relief sought for in the said suit cannot be claimed in the present suit. After the amendment of pleadings, additional written R.F.A. No.483 of 2009 -9- statement has been filed denying the allegations and claims. 13. The 1[st] defendant also filed written statement denying the allegation of fraud and collusion between defendants 1 and 2. In their written statement it is contended that the amount covered by the bank guarantee was paid prior to getting information regarding the order of injunction which was served on the bank only at 4.30 pm, whereas the demand drafts were issued much earlier. 14. Based on the above pleadings, the court below framed the following issues: “1) Whether the first defendant released bank guarantee violating the injunction order? 2) Whether the first defendant was liable to pay the amount under the bank guarantee to the 2[nd] defendant? 3) Whether the plaintiff is entitled to realise damages from the defendants? 4) If so, what is the quantum? 5) Whether the 2[nd] defendant perpetuated fraud on the plaintiff by invoking the bank guarantee? - 6) Reliefs and costs?” 15. Before the trial court four witnesses were examined on behalf of the plaintiff and they placed reliance on Exts. A1 to A97. The representative of the 1[st] defendant was examined as DW1 and the representative of the 2[nd] defendant was examined as DW2 and they relied upon Exts.B1 to B30. R.F.A. No.483 of 2009 -10- 16. Learned counsel for the appellant/plaintiff urged that the court below had not properly appreciated the factual and legal matters involved in the matter. The present case reflects an instance where a bank guarantee for an amount of Rs.57 lakhs was invoked wrongfully and the payments were effected wrongfully and in collusion between the defendants. The court below has not considered the aforesaid aspect. When a suit is filed for recovery of the amount covered by the bank guarantee, it is for the 2[nd] defendant to substantiate by appropriate pleadings and evidence that they were legally entitled to invoke the bank guarantee. Apart from making certain vague allegations that they were entitled to recover more than Rs.1.29 crores from the plaintiff, no material has been placed to arrive at such a conclusion. The bank guarantee given by the plaintiff was for return of the mobilization advance, which had already been collected from the pending bills. The bank guarantee could not have been invoked for the amounts which were not legally due from the plaintiff to the 2[nd] defendant. 17. On the other hand, learned counsel appearing for the 2[nd] respondent/2[nd] defendant contended that, when the bank guarantee was unconditional, it is open for the beneficiary to invoke the bank guarantee, when there is breach of contract. When it is admitted in the plaint that the plaintiff was unable to supply the contracted quantity, it R.F.A. No.483 of 2009 -11- amounts to clear breach of contract and for the loss suffered by the 2[nd] defendant in respect of the said transaction, the 2[nd] defendant is entitled to invoke the bank guarantee. It is further argued that the suit is not based on the underlying contract between the parties. The allegation is that of fraud and collusion, which the plaintiff is bound to prove. There is no material to prove either fraud or collusion. When there is no basis for the claim made in the suit, the court below was justified in dismissing the suit. 18. Learned counsel appearing for the 1[st] respondent/1[st] defendant also supported the judgment of the Court below. 19. Before proceeding further, it will be useful to consider the manner in which the court below had dismissed the suit. Exts.A6 and A7 are the letters of intent for supplying aggregates and boulders to the 2[nd] defendant. The court below finds that as per Exts.A6 and A7 the plaintiff agreed to supply 18 lakhs MT aggregates within a period of two years from 26.2.2002. One of the contentions urged by the plaintiff was that it was not given the quarry at Seebi Agrahara, whereas the 2[nd] defendant located a quarry at Yelladadlu. The court below finds that Ext.A9 letter issued by the plaintiff to 2[nd] defendant on 18.3.2002 would indicate that the plaintiff has abandoned the quarry at Seebi Agrahara due to local problem. The court below therefore finds that the contention of the plaintiff that the 2[nd] defendant violated R.F.A. No.483 of 2009 -12- the contract cannot be accepted. That apart, as per Ext.A6, the required quantity to be supplied is 18 lakhs MT and the assured quantity would be around 15 lakhs MT, whereas the plaintiff could supply only 10.59 MT up to 16.12.2004. It is found that the denial of Seebi Agrahara quarry and the expenses incurred by the plaintiff for moving over to Yelladadlu cannot be reasons for non performance of the contract. The plaintiff having undertook to take steps to supply aggregates from Yelladadlu quarry cannot complain that due to change of site it could not perform the contract. Further it was found that the 2[nd] defendant claimed an amount of Rs.1.29 crores out of which Rs.78.27 lakhs and Rs.75 lakhs were claimed as damages on account of the non performance of the agreement. The court below finds that the claim of Rs.78.27 lakhs was towards the excess amount paid to the plaintiff and Rs.75 lakhs for poor performance of the agreement. It is found that in so far as Ext.B5 is an unconditional bank guarantee which itself is a performance guarantee and in Ext.A57 the 2[nd] defendant claimed Rs.36 lakhs for not achieving the targets, the said amount is allowable in terms of Ext.A6 letter of intent. Therefore the contention of the plaintiff that bank guarantee cannot be invoked on the basis of Ext.A57 reply notice is not fully correct. 20. Coming to the contention regarding collusion between defendants 1 and 2, it is stated that Ext.B1 letter was received by the R.F.A. No.483 of 2009 -13- bank on 29.6.2005. The court below ruled out the possibility of any fraud being committed on account of discrepancy in Exts.B1, B7 and B30. It was found that suit was filed on 1.7.2005 and an order of injunction was passed at 12.45 pm on the same day. PW1 has a case that the same was communicated to the 1[st] defendant at 1 pm. The court below finds that the order of injunction was served on the 1[st] defendant at 3.30 pm on 1.7.2005. Demand drafts were drawn by the bank at about 1 pm on 1.7.2005. Therefore there is no violation of the court order. It is found that there is no material to prove that order of injunction was communicated to the 1[st] defendant before the disbursal of money. The contention of plaintiff that it was communicated to the 1[st] defendant over telephone, the court below finds that it is not sufficient to say that the 1[st] defendant has released bank guarantee in violation of the order of injunction. 21. With reference to the issue relating to the wrongful invocation bank guarantee, the court below finds that a reading of Exts. B5 and B6 would show that the guarantees were issued for the performance of the contract. If the plaintiff has performed their part of the agreement, then the performance guarantee could not be invoked. The court below, placing reliance on Exts.A9, A21, A35, A49 etc forms an opinion that the plaintiff's performance was not in terms of contract and he could supply only 10.125 lakhs MT aggregates. Yet R.F.A. No.483 of 2009 -14- another contention raised was regarding the person who had invoked the bank guarantee. The court below finds that in so far as the bank guarantee was given in favour of the 2[nd] defendant and one of the officers has sent letter invoking the bank guarantee, that itself would suffice and therefore, there is no irregularity in invoking the bank guarantee. To the contention that the bank guarantee cannot be invoked to recover damages, the court below finds that in so far as Ext.B5 is an unconditional bank guarantee, the 1[st] defendant has no option other than to pay the amount covered by it. Further, there is no condition attached to Ext.B5 bank guarantee and therefore 1[st] defendant cannot be found fault with in paying the amount covered by the bank guarantee. In regard to the contention that the plaintiff is entitled to recover Rs.57 lakhs as damages from the 2[nd] defendant, it was found that the plaintiff has not proved, that by invocation of the bank guarantee he has sustained damages. 22. With reference to the allegation of fraud by the 2[nd] defendant, one of the main contentions urged by the plaintiff is that 6 separate demand drafts were issued. Ext.B9 is the DD issued register and court below finds that the same would show that on 1.7.2005 6 DDs were issued in favour of the 2[nd] defendant to overcome the stipulation in Ext.B11 that the Bank is not entitled to issue a single DD for amount exceeding Rs.10 lakhs. Further it is found that if Rs.57 R.F.A. No.483 of 2009 -15- lakhs was received by the 2[nd] defendant unauthorisedly from the plaintiff, the plaintiff can get back the money by filing a suit. The liability of the 2[nd] defendant to repay this money is a matter of dispute which is to be agitated by the plaintiff in another forum. 23. In regard to the relief sought for by way of a declaration that the plaintiff is entitled to recover Rs.57 lakhs, the court below found that there is no specific prayer to allow the same. Even though a contention was raised that the court can mould the relief, the court finds that there is no reason why the relief should be moulded when the plaintiff has opportunity to seek for appropriate reliefs. Accordingly, the suit has been dismissed. 24. The principles governing invocation of Bank guarantee is well settled by the Apex Court in **U.P. State Sugar Corporation v. Sumac International Ltd** . (1997) 1 SCC 568. In this judgment the Apex Court was considering the principles relating to the payment of the amount covered by a bank guarantee. It was held that except under certain special circumstances, namely, a fraud being committed in the notice of the bank which would vitiate the very foundation of the guarantee or encashment of the bank guarantee would result in irretrievable harm or injustice of the kind which make it impossible for the guarantor to reimburse himself, it may not be possible for the court to interfere with the invocation of the bank guarantee. R.F.A. No.483 of 2009 -16- Paragraphs 11 and 12 are relevant which reads as under: “11. These bank guarantees which are irrevocable in nature, in terms, provide that they are payable by the guarantor to the appellant on demand without demur. They further provide that the appellant shall be the sole judge of whether and to what extent the amount has become recoverable from the respondent or whether the respondent has committed any breach of the terms and conditions of the agreement. The bank guarantees further provide that the right of the purchaser to recover from the guarantor any amount shall not be affected or suspended by reason of any disputes that may have been raised by the respondent with regard to its liability or on the ground that proceedings are pending before any Tribunal, Arbitrator or Court with regard to such dispute. The guarantor shall immediately pay the guaranteed amount to the appellant-purchasers on demand. 12. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in R.F.A. No.483 of 2009 -17- connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases. xxxxxxx” 25. In **S.A. Sattar v. Kuruvilla** 1998 AIR (Ker) 292, a Division Bench judgment of this Court, considered the obligation of the bank to pay the amount covered by the bank guarantee. The court was basically concerned with the enforcebility of the bank guarantee and the principles relating to the invocation of bank guarantee as held in **U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd** , (1988) 1 SCC 174 and the judgment in **U.P. State Sugar Corporation** (supra) was also relied on. Finally, it was found that the plaintiff has invoked the bank guarantee in time as per R.F.A. No.483 of 2009 -18- the terms of the bank guarantee by issuing proper notice. The bank ought to have honoured the bank guarantee and failure to do so is clearly illegal and violation of the terms of the bank guarantee. 26. There cannot be any dispute regarding the Bank's obligation to pay the amount covered by the bank guarantee and if the bank guarantee is invoked is as per terms of the guarantee, the Bank is bound to pay the said amount. In the case on hand, primarily two issues arises for consideration. One is whether the invocation of bank guarantee was wrongful and if so what is the relief that the plaintiff is entitled to. Secondly whether the 1[st] defendant bank was justified in paying the amount covered by the bank guarantee. 27. Coming to the first issue the parties are not in dispute relating to the terms of contract. The letters of intent which has been produced as Exts.A6 and A7 contains the terms agreed between the parties. Ext.A6 is a letter issued by 2[nd] defendant to the plaintiff which contains the letter of intent and also the terms and conditions. The letter of intent has been issued for aggregate crushing work conforming to the quantity requirements and fractions as required in contract with NHAI. The price details are mentioned in Annexure-1 and Annexure-2. As per Annexure 1, the charges for handling of boulder, crushing and supplying of aggregates per metric tonne for a quantity of 18 lakhs metric tonnes was fixed at Rs.81.75 per metric R.F.A. No.483 of 2009 -19- tonne. 28. Annexure-2 contains the terms and conditions. The quantity mentioned in the bill of quantities, that is, 18 lakhs MT is stated to be tentative with an assured quantity of 15 lakhs mt with a variation of (+/-) 5%. The location of quarry to be taken on lease is stated to be in Sy.No.4 of Seebi Agrahara Village, Sira Taluk in Tumkur District. Clause 5 states that time is the essence of contract and the time for completion had been separately specified for establishment of crusher unit for which 3 months' time was given from the issue of letter of intent (LOI )i.e., from 26.2.2002 and production should be stabilized by 6[th] month; a minimum production of 3 lakhs MT from 7[th] -9[th] month; from 10[th] to 12[th] month a minimum production of 6 lakhs MT; from 13[th] to 15[th] month a minimum production of 9 lakhs MT; from 16[th] to 18[th] month a minimum production of 12 lakhs MT; from 19[th] to 21[st] month a minimum production of 15 lakhs MT; and from 22[nd] to 24[th] month a minimum production of 18 lakhs MT. Clause 6 refers to the mobilization advances. Clause 6.1 states that a mobilization advance of 10% of contract value would be paid against an unconditional bank guarantee and another advance of 5% will be paid on mobilization and successful commissioning of crushing plant at site and on hypothecation to L & T. The advances so paid shall be recovered on prorata basis. Clause 6.2 relates to performance R.F.A. No.483 of 2009 -20- guarantee. It is stated that on recovery on 2.5% of mobilization advance, bank guarantee of equivalent value shall be converted as performance security. Clause 6.6 further indicates that 5% of gross value of each running bill shall be deducted from the monthly bills towards retention money. The retention money will be released after completion of the entire scope of work. Clause 6.10 relates to bonus and liquidated damages. This clause indicates that the contractor should indicate the programme concurred by it indicating mile stone completion. An incentive of Rs.1 per MT for production and supply of average minimum production of above 1 lakh MT per month in each quarter for the full quantity produced would be paid. Otherwise a penalty of 6 lakhs per quarter will be deducted, i.e., at the rate of Rs.2 per MT. Clause 17 refers to termination of contract, which reads as under: “17.0 TERMINATION OF CONTRACT. If, your progress is consistently found to be below the accepted construction programme, and if, the quality of work being executed by you falls below the expected standards laid down by us, in such cases, in the interest of timely completion of the project and to maintain the high quality of work, we reserve the right to delete any part of the scope of work, or, the entire balance work to be taken away from you, and get such works executed by other agencies, at your risk and costs. For all work being R.F.A. No.483 of 2009 -21- executed by us, we shall debit additional 20% as our overheads over and above the cost. In such a case, we shall make no compensation or damages or any other extra payment to you.” 29. Ext.A7 is the letter dated 27.7.2002. which relates to supply of boulders for crushing into stone aggregates for the very same work for which a separate price has been specified at Rs.45/- per MT. Other terms and conditions are virtually similar. Payments terms are also specified which are as under: _“A mobilization advance of 15% of order value will be paid against unconditional irrecoverable bank guarantee valid for 2 years. The advance will be recovered on prorata basis from monthly bills. After recovery of 2.5% of order value, the same will be secured and retained as performance bank guarantee till the completion of the scope of supply.”_ 30. From the pleadings which has already been referred by us, plaintiff had given a bank guarantee for 10% of the contract value towards mobilization advance. Amounts were recovered from running bills for liquidating the advance, and finally Bank Guarantee No. 20/04 for an amount of Rs.57 lakhs alone remained which was treated as performance guarantee. 31. Therefore the admitted position of the parties is that the R.F.A. No.483 of 2009 -22- bank guarantee of Rs.57 lakhs was treated as performance bank guarantee. Now the question is whether the plaintiff committed breach of contract which would enable the 2[nd] defendant to invoke the bank guarantee. The contract contains a clear stipulation that the plant and machinery for quarrying and aggregate crushing has to be put up by the plaintiff at Sy.No.4 Seebi Agrahara Village Sira Taluk in Thumkur District. Both parties have agreed that the plaintiff was unable to put up the quarry in the said area on account of local disturbances. According to the 2[nd] defendant the quarrying area was suggested by the plaintiff, whereas according to the plaintiff, the 2[nd] defendant had suggested the said quarry. We do not think that said issue is relevant, especially when the LOI does only indicate that the contractor has been asked to put up quarry by the 2[nd] defendant at Sy.No.4 of Seebi Agrahara Village, Sira Taluk in Tumkur District. The fact that the said quarry could not commence within the time of completion as specified in clause 5 of Annexure-2 of Ext.A6 is not disputed. Fact remains that, the quarrying area was shifted to another place at Yelladadlu. According to the plaintiff, the said quarry was identified after 3 months. Therefore it cannot be stated that the plaintiff was responsible for the delay in setting up the quarry. The very site, where the quarry had to be put up required to be relocated on account of the issues which either of the parties could not handle. R.F.A. No.483 of 2009 -23- But it appears that despite the fact that the time schedule could not be maintained on account of unforeseen circumstances parties did not choose to mutually decide on a fresh time limit. They continued with the work and continued with the supplies. 32. Plaintiff's contention is that despite the fact that the minimum requirement was 15 lakhs MT (+/-) 5%, whatever the 2[nd] defendant had requested for has been supplied. When they asked for stopping production it was stopped. The contention raised by the learned counsel for the 2[nd] defendant is that when the contracted quantity is 15 MT with (+/-) 5 lakhs MT, the plaintiff ought to have supplied the said quantity within the time specified in the contract. But as already stated, time cannot be stipulated as the essence of contract on account of the admitted fact that the quarrying site had to be changed and there is no material to indicate that the parties agreed to complete the work within a fresh time schedule. In such circumstances, despite the fact that time is specified as essence of the contract, the same cannot be a reason for the 2[nd] defendant to contend that there is breach of contract by the plaintiff. However, a question may arise whether the plaintiff was under obligation to supply minimum quantity of 15 lakhs MT in order to justify the stand of the 2[nd] defendant that the plaintiff failed to perform the contract in accordance with terms of the letter of intent. The 2[nd] defendant R.F.A. No.483 of 2009 -24- contends that the quarry at Yelladadlu was handed over on 5.4.2002, whereas according to the plaintiff it was handed over on 20.5.2002. Reference is made to Ext.B20 and B23 to prove that there was a revised time schedule. Ext.B20 is a letter dated 11.9.2002 issued by the 2[nd] defendant to the plaintiff wherein they have indicated that the new quarry was given to the plaintiff of 5.4.2002. But the contractor had applied for mining licence only on 6.7.2002. The plaintiff was under obligation to take all necessary licences. The plaintiff started production of GSB from a small crusher only on 12.6.2002. The production had to be stopped for want of licence. According to them the delay in processing the documents is not at all connected to the 2[nd] defendant and the plaintiff who is the supplier had to take such responsibilities. Ext.B23 is a letter dated 20.9.2002 sent by 2[nd] defendant to plaintiff, proceeding on the basis that the revised date for establishment of unit is from 5.4.2002 to 5.7.2002 and the revised date for starting and stabilization of production is from 5.7.2002 to 5.10.2002. According to them based on such revised target plaintiff was no where near the actual requirement. They also states that on account of delay, the project completion is severely hampered and 2[nd] defendant suffered huge financial loss. The contractor was informed that if they fail to produce the aggregates as per the requirement by 23.09.2002, the required aggregates for the work will be purchased R.F.A. No.483 of 2009 -25- from outside, at plaintiff's costs. 33. Learned counsel for the 2[nd] defendant submits that 2[nd] defendant has to make alternative arrangements to purchase aggregates from other sources and therefore they have suffered a loss. Reference is made to Exts.A19, 20, 21, 35, 39, 49, B19, B20, B21 and B23. Ext.A19 is a letter dated 2.12.2002 sent by 2[nd] defendant to plaintiff, wherein they stated that the mobilization advance was paid on 19.7.2002. It is further stated that by 5.7.2002 the unit ought to have been established and on 5.10.2002 the contractor should have started and stabilized production of aggregates. By 5.1.2002 the contractor should have supplied at least 3 lakhs MT, whereas the production achieved nowhere near the requirement. Hence they informed that they were not in a position to give further advance until it is proved that contractor can produce 1 lakh MT as per the agreed specification. 34. By Ext.A20, dated 3.12.2002 which seems to be a reply to Ext.A19 sent by the plaintiff to the 2[nd] defendant, the plaintiff further requested for releasing the mobilization advance of Rs.116 lakhs. Ext.A21 is a letter issued by 2[nd] defendant to plaintiff on 7.12.2002, wherein they again referred to the time schedule based on the fact that mobilization advance was paid on 19.7.2002. It is stated that the contractor has produced and supplied only 47,000 MT as against the R.F.A. No.483 of 2009 -26- minimum quantity of 3 lakhs MT by November 2002. It is stated that they will be able to release further advance only if it is proved that the contractor can produce 1 lakh MT per month. Ext.A35 is a letter dated 4.2.2003 issued by 2[nd] defendant to plaintiff, wherein they stated that though the contractor has completed half of the formalities during September 2002, still another half of formalities is pending towards completion to produce targeted quantity. In this letter they referred to a meeting between the parties on 16.12.2002 wherein they referred that the contractor had assured that all necessary steps will be taken to commission the plaint in line with the requirement and agreed to supply 40,000 tonnes of materials (30,000 MT of aggregate and 10,000 MT of GSB) between 17.12.2002 to 3.1.2003 to prove the actual commissioning of the plant. They further stated that if this target is not achieved, the plaintiff have to achieve 1 lakh tonnes upto January 2003 end. It is further agreed that the quarrying and crushing operations were stopped on 30[th] and 31[st] January, 2003 and the plaintiff could resume work only on 1 February, 2003. They further stated that _“irrespective of the problem, you should have achieved 94,000 tonnes by 29.1.2003, keeping, 7000 tonnes shortage towards this problem,whereas you have achieved only 27716 tonnes, which clearly indicates that the plant is not yet commissioned to produce the targeted quantity._ ” Ext.A39 is another letter dated 13.3.2003 issued R.F.A. No.483 of 2009 -27- by 2[nd] defendant to plaintiff in reply to letters dated 28.2.2003 and 1.03.2003 sent by plaintiff and has reference to avoid the problems at site. It is stated that though the contractor has started crushing on August 2002 with 350 tonne capacity crusher, the plaintiff was able to produce only 1,60,000 MT which is against the contractual requirement of 5,30,000 MT from 5.10.2002. It is further stated that though the plaintiff has sufficient stock of boulders they suffered mechanical problem which affected the production of aggregates. 35. Ext.A49 is yet another letter dated 28.8.2004 from 2[nd] defendant to the plaintiff. This letter had been issued in reply to plaintiff's letter dated 31.7.2004. The plaintiff had made certain claims which have been rejected by the 2[nd] defendant. By this letter it is stated that since the plaintiff could not supply the aggregates as per the agreed terms, he is liable to compensate the 2[nd] defendant for Rs.36 lakhs. They further indicated that due to the poor performance and non compliance of the work order terms and conditions and to keep up the commitments with NHAI they were forced to source additional resources of two numbers of 150 TPH crushing plant to meet the requirement which the plaintiff failed to do. It is stated that the cost incurred for mobilization, civil works and erection by the 2[nd] defendant, due to plaintiff's inability will be recovered from plaintiff's balance payment. Ext.B19 is a letter dated 22.8.2002 issued by 2[nd] R.F.A. No.483 of 2009 -28- defendant to plaintiff, wherein they stated that their requirement of GSB products have already been started and the project would require 1.25 lakhs MT aggregates from 15.9.2002 onwards and if immediate action is not taken it would be difficult to meet the project requirement. 36. Apparently, the materials placed on record indicates that the plaintiff could not meet the requirement taking into account the revised time schedule. But two aspects are to be borne in mind before complaining of breach of contract by the plaintiff. One is that the initial time schedule could not be complied with as there was a change in the quarry site itself. After the date on which the 2[nd] quarry has been handed over, a fresh time schedule for completion has been insisted by the 2[nd] defendant. But it could be seen that it was a unilateral fixation of time as the plaintiff does not seem to have agreed upon such time. However, the materials on record would indicate that, despite the delay, plaintiff agreed to supply the materials as per the terms and conditions agreed upon. One factor which requires to be borne in mind is that as per Ext.A6 the 2[nd] defendant was under obligation to pay mobilization advance of 15% of the contract value. The 2[nd] defendant paid only 10%. They did not pay the balance 5% by contending that the plaintiff was unable to show that they could supply 1 lakh MT of aggregates per month. As per clause 6.1 further 5% of R.F.A. No.483 of 2009 -29- mobilization advance is to be paid on mobilization and successful commissioning of crushing plant at site and on hypothecation to L & T. 37. Successful commissioning of crushing plant at site is not related to the quantity to be supplied. If the 2[nd] defendant had paid the entire mobilization advance, then they could have complained of breach. The mobilization advance has to be realised from part bills. Therefore there is no difficulty for the 2[nd] defendant to recover the said amount and once the mobilization advance is paid, i.e., 15% and thereafter when there is failure they could have complained for non performance. As far as performance is concerned only 2.5% of total value is to be considered in the form of performance guarantee. In an instance where one of the parties to contract fails to comply with their part of contract they cannot insist the other party to the contract to comply with their obligation under contract. The fact that the plaintiff had put up a stone crushing unit is not in dispute. The only dispute is that they did not supply the material as per the contract, whereas plaintiff contends that what ever quantity had been requested has been supplied. 38. Two provisions in the contract requires to be considered. The liquidated damages and termination clause. The obligation to pay liquidated damages arises only if there is delay in performance of the contract, and the amount specified as damages is the maximum. In R.F.A. No.483 of 2009 -30- this case we have already found that the time schedule cannot be kept, on account of the delay in shifting the site itself and there was no mutually agreed fresh time schedule. The factual aspects involved in the matter indicates that, at any rate plaintiff agreed to supply the material as and when requested. Of course, the defendant's complained upon non performance by the plaintiff, by not achieving the target. Clause 17 of the contract relates to termination, which has already been extracted. It clearly indicates that, if the progress of supply is consistently found to be below the accepted construction programme, or if the quality of work executed by the plaintiff falls below the expected standards laid down by the 2[nd] defendant, they reserve the right to delete any part of the scope of work, or, the entire balance work to be taken away from the plaintiff, and get such works executed by other agencies, at the plaintiff's risk and costs. For which they shall debit additional 20% as overheads over and above the cost. But it appears that no steps were taken by the 2[nd] defendant to terminate the contract or delete any portion of work, or to get the work executed through another contractor/agency. Though it is contended by the 2[nd] defendant that they have incurred a loss of Rs.75 lakhs for making alternative arrangements, no evidence has been adduced to substantiate such a loss. Only if there is proper pleading and proof to indicate that due to non supply of materials by the R.F.A. No.483 of 2009 -31- plaintiff, they have obtained such materials from other sources and as a result of which they had to suffer loss by incurring additional expenditure, then they are entitled to recover any amount as damages from the plaintiff. 39. In the instant case, the plaintiff's case is borne out by Ext.A54 dated 18.2.2005 wherein the plaintiff has stated that the entire requirement of the 2[nd] defendant placed on them by way of purchase order/work order were supplied during the contractual period of 24 months which expired on 25.2.2004. Even thereafter since further orders were placed, the plaintiff continued to supply the order as per requirement till 22.12.2004, as a gesture of good will. The plaintiff therefore sought for payment of the balance amount due. 40. Ext.A57 is a lawyers notice issued by the 2[nd] defendant to the plaintiff dated 4.5.2005. This has been issued in reply to letter dated 1.4.2005. In the said letter, there is a narration of the breach of contract committed by the plaintiff, wherein it is stated that the claim made by the plaintiff was not correct, whereas as per the 2[nd] defendant's book, the amount payable to the contractor is only Rs.59,74,124/- and the break up of the said amount is as under: Payment outstanding as per work order bills = Rs.16,33,632/Payment outstanding as per supply bills = Rs.3,64,867/Retention amount payable = Rs.39,65,696/- R.F.A. No.483 of 2009 -32- 41. They further denied all other claims made by the plaintiff. However, in paragraph 37, the 2[nd] defendant claimed Rs.36 lakhs as liquidated damages. A further amount of Rs.78.27 lakhs has been claimed as refund of excess amount paid for 6,66,097 MT, up to July 2004. This claim is based on the fact that though the contractor was required to supply aggregates of different dimensions, it did not match the IS standards, Plaintiff opted for the production of GSB alone. Rs.126.75 per MT was paid based on an average cost of entire products. According 2[nd] defendant, production of GSB has resulted in substantial savings to the contractor since there is no wear and tear for GSB due to non-sheaving and re-crushing process when compared with aggregate production. If such cost is considered there will be a reduction of Rs.11.75 per MT and the production cost would be Rs.115/- per MT as against Rs.126.76 per MT which is already paid. Yet another claim made is for Rs.75 lakhs alleging, poor performance and non compliance of work order's terms and conditions, due to which the 2[nd] defendant has to source additional resources of two numbers of 150 TPH crushing plant, to meet the site requirement and the same way done at the cost of the plaintiff, who is liable to refund the cost incurred towards the mobilization, civil works and erection of those crushers. 42. In Ext.A57, for the alleged poor performance the claim is R.F.A. No.483 of 2009 -33- made only for Rs.36 lakhs and that too as liquidated damages. The other claim is 1) towards recovery of amounts already paid as per final bills and 2) for additional facilities the 2[nd] defendant had made, for performing the contract with NHAI. The contention of the 2[nd] defendant is that the bank guarantee was invoked to recover the aforesaid amounts. They however admit the fact that Rs.59,74,124/- was payable to the plaintiff. 43. In the present lis, there is no claim made for the amount of Rs.59,74,124/-, whereas a claim is made only based on the wrongful invocation of bank guarantee. Liquidated damages is claimed if there is delay in supply, which apparently cannot be claimed in the present facts of the case; since the contention is of non performance and not delay. Even assuming that liquidated damages is payable, the same could be adjusted from the amount payable to the plaintiff. If liquidated damages is payable for breach of contract, there cannot be any other claim at all. The maximum amount payable is only Rs.36 lakhs as compensation, for which sufficient amount was available with the 2[nd] defendant. 44. Second claim of the 2[nd] defendant is for Rs.78.27 lakhs. Such an amount cannot be claimed on the basis of the contract. The 2[nd] defendant had paid the amounts as per contract, treating the supply at the rate of Rs.126.75 per MT. The bank guarantee cannot be R.F.A. No.483 of 2009 -34- invoked merely because there is a claim, which is not in terms of the agreement between the parties. Payments voluntarily made cannot be recovered on the ground that it was a wrong payment, unless the mistake is so patent. That is not the situation here. The payment was affected for the aggregate supply at Rs.126.75 per MT, without raising any dispute. Later on it cannot be contended that the plaintiff has made a profit out of it. Under such circumstances, the said claim is totally unjustified and is not based on any provision in the contract. 45. The other claim is on the ground that the 2[nd] defendant had incurred a loss of Rs.75 lakhs for setting up two numbers 150 TPH crushing plant to meet the site requirement. As already stated, the only provision in the contract which enables the 2[nd] defendant to recover such costs is based on clause 17. Two aspects has to be taken note of in this regard. One is that there is no termination of contract for the alleged delay in supply, deletion of work order alleging non performance. Secondly, there is no proof regarding alternate arrangements being made by the 2[nd] defendant to make up the deficiency in supply. Even before this court, no attempt has been made by the 2[nd] defendant to prove the said claim, that they have put up two 150 TPH equipment, as an alternate source for aggregates. 46. In a case where plaintiff alleges that the amount covered by the bank guarantee was recovered wrongfully and not in R.F.A. No.483 of 2009 -35- accordance with the terms of contract, necessarily it is for the 2[nd] defendant to plead and prove that they had the right to invoke the bank guarantee. 47. With regard to the 2[nd] issue wherein the plaintiff has alleged collusion between the defendants 1 and 2, we do not think that the 1[st] defendant had committed any illegality in paying the amount covered by the Bank guarantee. When a Bank guarantee has been issued by the 1[st] defendant and the beneficiary invokes the Bank guarantee, it is the obligation of the Bank to honour the guarantee. In this case admittedly, the 2[nd] defendant had invoked the Bank guarantee and as the guarantor, the Bank is under obligation to pay the said amount without any demur. Despite the arguments raised by the learned counsel for the appellant that the 1[st] defendant had paid the amount, after having knowledge about the interim order being passed by the civil court, we do not think that such a contention is justifiable. There is no material to arrive at such a conclusion. Documents available on record clearly indicates that the amount was paid on 1.7.2005 and it is after the demand drafts were issued that the order of injunction had been communicated to the 1[st] defendant. Therefore we do not find any fault on the part of the 1[st] defendant in the above matter. 48. The court below had proceeded on the basis that being an R.F.A. No.483 of 2009 -36- unconditional Bank guarantee, it is always open for the beneficiary to receive the amount. Their right to receive the amount under the Bank guarantee arises only if any amount is payable by the plaintiff. Of course, while invoking the Bank guarantee, the Bank have no right to object to the payment nor can the plaintiff object to it. But in a suit filed by the plaintiff alleging that the beneficiary could not have invoked the Bank guarantee and invocation is wrongful, it is the obligation of the beneficiary/2[nd] defendant to substantiate the contention that the Bank guarantee was validly invoked and they are entitled for the payment. 49. We have already held that apart from the claim for liquidated damages, none of the other claims were legally justifiable. In an action seeking recovery of the amount covered by the Bank guarantee, it is for the beneficiary/2[nd] defendant to plead and prove before the court that they were legally justified in invoking the Bank guarantee and adjusting the amount towards damages. In this case, the 2[nd] defendant had hopelessly failed to adduce evidence regarding the steps they have taken pursuant to Clause 17 and that they had actually suffered any loss on account of the alleged non performance by the plaintiff. Under such circumstances, they are liable to refund the amount recovered by them by invoking the Bank guarantee. In an instance where sufficient court fee had been paid and an allegation has R.F.A. No.483 of 2009 -37- been made that the invocation of Bank guarantee was wrongful, the court cannot stand on technicalities when it is found that the beneficiary was not entitled to recover the amount covered by the Bank guarantee from the plaintiff. Therefore, this is an instance where the plaintiff having proved that the invocation of Bank guarantee was wrongful and he is entitled to get a decree for the said amount. Accordingly, this appeal is allowed. The judgment and decree of the court below is set aside, the suit is decreed, directing the 2[nd] defendant to pay the plaintiff a sum of Rs.57,00,000/- with interest at the rate of 9% per annum from the date of suit till realisation and costs before the trial court as well as this Court. Sd/- ## **A.M.SHAFFIQUE, JUDGE sd/P.SOMARAJAN, JUDGE** kp The suit number “ **O.S.No.39 of 2007** ” occurring in the 1[st] line of the 1[st] paragraph and the name of the Court “ **North Paravur** ” occurring in the 2[nd] line of the 1[st] paragraph of the judgment dated 22.06.2018 in R.F.A.No.483/2009 are suo motu corrected and substituted as “ **O.S.No.139/2007** ” and “ **Perumbavoor** ” respectively, as per the order dated 03.07.2018 in R.F.A.No.483/2009. Sd/- Registrar (Judicial)