Texmaco Ltd. vs State Bank Of India And Ors

 Citation : AIR 1979 Cal 44, (1981) 1 CompLJ 356 Cal

1. This case very much describes the system of bank guarantee in India under which no bank or party can escape from liability in guarantee issued by it.

2. Texmaco Ltd.(petitioner) asked for an injunction against the State Bank of India, State Trading Corporation of India and the Projects and Equipment Corporation of India Ltd. restraining the State Bank of India from making any payments to the State Trading Corporation of India and the Projects and Equipment Corporation of India Ltd. under or in respect of the performance Guarantee issued by the State Bank of India.

3. the Community of the Yugoslav Railways and the State Trading Corporation of India Ltd. briefly referred to hereinafter as S. T. C. for manufacture in India and supply in Yugoslavia for different railways, known as ZTPs 1300 Gas type and 2300 EAS type wagons.

4. Back to back contract was done between the parities. Then, pursuant to the back to back contract, the State Bank of India, on or about 26th Feb. 1973 at the instance of the plaintiff gave a Bank guarantee in favour of S.T.C. for a sum of Rs. 49,50,570/- being 5 per cent of the price of the wagons for due performance by the plaintiff in an orderly manner their contractual obligations under the back to back contract.

5. In future events the back to back contracts are amended and some new contracts in order of other 433 G.A.S types wagons are made between the parties with its valid bank guarantee.  On 11th March 1977, the State Bank of India wrote to the defendant No. 3, the Project and Equipment Corporation of India Ltd. informing that the bank had received a cable from the foreign bankers of the ZTP claiming full payment of the Bank guarantee on the allegation that STC had failed to perform in orderly manner their obligations under the contract. Notwithstanding the foregoing STC maintains that TEXMACO failed to perform in an orderly manner its obligations under the aforesaid Back to Back contract. In view of the foregoing STC hereby calls upon to make full payment to it of the whole of the guaranteed amount of Rs. 21,51,875/-  under your aforesaid performance guarantee. Thereby, STC invoked the Bank guarantee and asked for full payment. Thereafter the suit was filed and interim injunction was obtained in this suit.

6. The question, is, whether the plaintiff petitioner is entitled to the injunction, as asked for restraining the State Bank of India from making any payment pursuant to the performance guarantee. The question was raised whether it is a Bank guarantee or a irrevocable letter of credit.  It was examined by the judgment in the case of State Bank of India v. Economic Trading Corporation & Minerals and Metals Trading Corporation of India v. Suryaballav Seth (1970) 74 Cal WN 991.  These cases, drew the distinction between the irrevocable letter of credit and the bank guarantee. So a payment under a bank guarantee is like payment under letter of credit become due only on compliance with the terms on which the bank was to pay under the respective documents.

 7. In the instant case before us, counsel for the State Bank of India, placed reliance on the use of the expression 'we indemnify you'. In this context indemnity is dealt under the provisions of S. 124 of the Indian Contract At which provides as follows :

'A contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person, is called a contract of indemnity.'The section, in its terms is dependent upon the obligation which arises on the loss caused to the party to be indemnified.

8. The law states that if the bank is obliged to pay and pay on terms it must depend upon the manner in which the document is written which frame it as a bank guarantee or a letter of credit as per the document. It is immaterial whether to contest the question of the performance guarantee similar to that letter of credit but the court of appeal says the bank must pay according to the guarantee on demand, if so stipulated. It further stipulated, that the decision of STC as to the liability of the bank under the guarantee and the amounts payable thereunder shall be final and binding on the bank. It has further stipulated that the bank should forthwith pay the amount due "notwithstanding any dispute between STC and Texmaco."  In the view the plaintiff is not entitled to an injunction in this application and was dismissed.