PUNJAB AND SIND BANK Vs. FENNER (INDIA) LTD.

JUDGEMENT

(1.) THE short but difficult question to be decided in this appeal is whether a bank guarantee executed by the appellant - -the Punjab and Sind Bank - -in favour of the respondent - -Fenner (India) Limited - -has come into operation in the facts and circumstances of the case. The trial court has held that it has come into operation and has granted a decree as prayed for, for realisation of a sum of Rs. 32,61,250 with 15 per cent, future interest per annum on the principal amount of Rs.30 lakhs from the date of suit till realisation and proportionate costs of the suit in enforcement of the bank guarantee sued upon, Aggrieved by the decree and judgment, the defendant has filed this appeal.

(2.) THE relevant facts necessary to be stated are thus : The respondent -company engaged in export business, entered into exhibit A -1 agreement dated April 23, 1991, with Vijay Exports, a business concern, for purchase of cashew kernels for the purpose of export. As per the agreement, Vijay Exports agreed to supply the respondent -company a minimum of two full container loads of cashew kernels every month for a period of 12 months commencing from August, 1991. The respondent, in its turn, agreed to make advance payment to Vijay Exports up to an amount of Rs. 30 lakhs for utilising it for procuring/processing cashew -nuts for supply to the respondent against security furnished by Vijay Exports by way of bank guarantee. Pursuant to the agreement, at the instance and request of Vijay Exports, the appellant executed and issued exhibit A -2, bank guarantee, dated April 24, 1991, in favour of the respondent. By the said guarantee, the appellant agreed to indemnify the respondent against any damages or loss that may be suffered by the respondent by reason of the non -fulfilment of any of the terms and conditions of exhibit A -1 agreement by paying the respondent on demand without any demur any sum that may be ascertained by the respondent as damages or loss they have suffered up to an amount of Rs. 30 lakhs. It was also agreed that the decision of the respondent on the question of breach of the performance of theunderlying agreement and extent of damages or loss suffered by them would be final, conclusive and binding on the appellant. Pursuant to exhibit A -1 agreement, the respondent admittedly gave a demand draft for Rs. 20 lakhs dated July 15, 1991, by way of purchase advance. According to the respondent, after receiving the purchase advance of Rs. 20 lakhs, Vijay Exports committed breach of the terms and conditions contained in exhibit A -1 and failed to supply the cashew kernels as agreed in spite of repeated demands. As a result of various discussions held later between the representatives of the respondent and Vijay Exports, it was agreed that Vijay Exports would arrange for shipment of one FCL on or before October 31, 1991, and another FCL on or before November 10, 1991, and after making the shipment, the respondent was to pay the balance sale price after adjusting the advance. It was also agreed that on failure to supply as agreed on October 31, 1991. the respondent is entitled to encash the bank guarantee. The terms of such agreement were reduced to writing and was signed by the parties. A copy of the agreement so reduced into writing was forwarded to the appellant also. Vijay Exports failed to honour the said agreement also. Further agreements to supply the goods alleged to have been entered into between the parties were also not honoured and ultimately the respondent invoked the bank guarantee by their letters, exhibits A -3 and A -4, dated December 4, 1991, and December 7, 1991, respectively. The appellant promptly informed the respondent that the terms and conditions of the bank guarantee had not been complied with by the respondent and hence the appellant is not liable to pay the respondent any amount, as per its communication, exhibit A -5, dated December 11, 1991. In view of the reply given by the appellant repudiating its liability to pay any amount on the basis of the bank guarantee, the respondent has filed the suit alleging breach on the part of the appellant in performing their obligation under the bank guarantee, for realisation of the amount of Rs. 30 lakhs agreed to be paid on demand without any demur after issuance of a notice claiming interest at the rate of 21 per cent, per annum from the date of demand, namely, December 4, 1991.

(3.) THE evidence in the suit consisted of the oral testimony of PW -1 and DW -1 and the documents produced on both sides marked as exhibits A -1 to A -12 series and exhibits B -1 to B -5. Interpreting exhibit A -2, the learned sub -judge came to the conclusion that on the payment of Rs. 20 lakhs exhibit A -2 bank guarantee has come into force and the commencement of the bank guarantee was not dependent upon the lump sum payment of Rs. 30 lakhs. It was found that everywhere in exhibit A -2 reference is seen made about exhibit A -1 primary agreement and a reading of the various terms and conditions of exhibit A -1 would go to show that what was contemplated by the parties was to make an advance up to Rs. 30 lakhs to Vijay Exports to facilitate supply of cashew kernels for export and in order to secure the repayment of the advance paid in case of default to supply, exhibit A -2 was executed. On the basis of the above reasoning, the learned sub -judge held that 'exhibit A -2 is liable to be enforced the moment the payment is made by the respondent to the processor towards purchase advance'. The contention that the respondent was bound to prove the damage actually sustained on account of the alleged breach of agreement committed by the supplier as a condition for claiming any amount on the basis of the bank guarantee was also found against holding that the respondent has been made the sole judge on the question of breach of the terms of the underlying agreement and the quantum of damages, etc., as per the terms contained in exhibit A -2. On the basis of the above findings, the respondent was found to be entitled to enforce the bank guarantee for the recovery of the amount as claimed in the plaint with interest. As regards the contention that Vijay Exports is a necessary or proper party, the same was considered by the court below as a preliminarypoint and has recorded a finding that the supplier is neither a necessary nor a proper party to the proceedings as per the order dated March 4, 1994. The claim for interest was allowed only from the date of the suit.