Radhakrishnan J. Plaintiffs are the appellants. Suit was instituted for recovery of an amount of Rs. 10 lakhs with interest at the rate of 18% per annum from the date of the suit till realisation from the defendants jointly and severally. The relief sought for in the plaint is primarily based on a Bank guarantee, Ext. A3, dated 12-8-1981.
2. While the suit was pending, first plaintiff died and his legal representatives, plaintiffs 4 to 6 were impleaded as per order in LA. No. 3995 of 1986. Defendants 4 and 5 represent the State Bank of India, the successors of the erstwhile Bank of Cochin Ltd. who executed a Bank Guarantee at the instance of D1 to D3 in favour of the plaintiffs. Even though it is stated in the plaint that the amount is sought to be recovered jointly and severally from the defendants, counsel for the plaintiffs maintained the stand that he is mainly concerned with enforceability of the Bank guarantee executed by the erstwhile Bank of Cochin Ltd., now the State Bank of India.
3. Short facts which are necessary for the disposal of the appeal are as follows. Plaintiffs were erstwhile Directors of a private limited company, by name, Premier Steels Private Limited. While the plaintiffs were running the said company, husbands of defendants 1 to 3 negotiated with the plaintiffs for the purchase of the shares of the company as a running concern fora sum of Rs. 15 lakhs. During the course of finalisation of the negotiations, they requested that they may be relieved of paying the entire sale consideration in a lump, and payment of the purchase value of the shares be deferred to be paid in instalments. This was agreed to by the plaintiffs. An advance of Rs. 50,000/- was paid towards final settlement of the negotiations. This amount was advanced by cheque by one L.K. Prabhu, husband of the second defendant at the instance of defendants 1 to 3.
4. An agreement of sale, Ext. A2 was later executed for the purchase of the shares of the company by the defendants 1 to 3 for a sum of Rs. 15 lakhs as a sale consideration free from all encumberances. As per the terms of the agreements, defendants 1 to 3 have to pay the sum of Rs. 4.5 lakhs on execution of the agreement and balance of Rs. 10 lakhs to be paid by defendants 1 to 3 in instalments at the rate of Rs. 25,000/- per month, and such payment was to commence three months after the reconstitution of the Board of Directors. Simultaneous with the execution of the agreement, plaintiffs 1 to 3 transferred 55% of the shares of the company to defendants 1 to 3 and their nominees to enable them to have complete control over the company and assume management and to enable them to raise a loan of Rs. 5 lakhs from the Bank of Cochin Ltd., Trichur Branch. This was done to enable the defendants 1. to 3 to pay off Rs. 4.5 lakhs to the plaintiffs as per the terms of the agreement, and to re-pay an amount of Rs. 50,000/- to the husband of the second defendant, who had paid it as advance.
5. Defendants 1 to 3 accordingly raised an amount of Rs. 4, 5 lakhs Ion the assets of the company and paid Rs. 4.5 llakhs to the plaintiffs and Rs. 50,000/- to L.K. Prabhu. Board of Directors was later reconstituted on 12-8-1981 and consequently, instalments were liable to be paid by defendants 1 to 3 from 12-12-1981. Furnishing a bank guarantee for the balance consideration of Rs. 10 lakhs payable from 12-12-1981 was a specific term of the agreement. Defendants 1 to 3 then secured a bank guarantee dated 12-8-1981 for Rs. 10 lakhs from the Bank of Cochin Ltd., Emakulam the predecessor-in-interest of defendants 4 and 5, and furnished the same to plaintiffs. As per the agreement, defendants 1 to 3 assumed control of the company as a running concern from 7-8-1981 onwards.
6. Plaintiffs submit that defendants 1 to 3 failed to pay the instalment amounts and kept the instalments in arrears in spite of repeated demands made by them for paying-off the instalment amounts and for getting remaining shares. According to them, defendants failed to remit the instalments which were payable at the rate of Rs. 25,000/- per month, commencing from 12-12-
1981. Plaintiffs I to 3 then sent a registered notice, A5 on 2-12-1982 calling upon the defendants 1 to 3 to make payments to plaintiffs within one week under intimation to the bank failing which Bank was directed to honour its commitments without any demur and obtain receipt from the plaintiffs. After receipt of the notice, it is seen that first defendant filed a suit, O.S.No. 623 of 1982. for an injunction restraining the plaintiffs from enforcing the bank guarantee. In the suit, first defendant initially obtained an interim in-
junction, but later vacated on 12-9-1983, and the petition was also dismissed. By that time, large amounts were due to the plaintiffs, due to the nonpayment of instalments.
7. As per the agreement, if the instalments are defaulted, plaintiffs could enforce the bank guarantee. Consequently, plaintiffs issued a lawyer notice Ext. A6 dated 4-10-1983 to the bank. It was stated in the said notice that as per the terms of the guarantee, bank is bound to pay the instalments as and when it becomes due to the plaintiffs, without any demur. It was pointed out that till that date 22 instalments were kept in abeyance, amounting to Rs. 5.5 lakhs. It was stated in Ext. A6 that even though plaintiffs made several requests, bank did not honour its commitments. Hence plaintiffs sent the said notice directing the bank to pay Rs. 5.5 lakhs with 20% interest per annum within three days from the date of the said letter. It was pointed out in the said notice that on failure of payment of the said amount, steps would be taken to recover the said amount from the bank.
8. In the meanwhile Bank of Cochin was amalgamated with State Bank of India and assets and liabilities, including the liability due to the plaintiffs, were taken over by the State Bank of India. Plaintiffs then issued a registered notice Ext. A7 dated 24-10-1985 to the State Bank of India demanding invocation of bank guarantee. Bank was directed to pay the balance consideration of Rs. 10 lakhs provided by the guarantee with interest at the rate of 18% per annum within 10 days from the date of receipt of the notice, failing which they were informed that plaintiffs would be constrained to initiate recovery proceedings. Copy of the notice was also sent to defendants 1 to 3. Since no action was taken by defendants to discharge the liability, plaintiffs instituted the present suit.
9. Written statements were filed by defendants 1, 3 and 4. In the written statement filed by the first defendant, it was stated that all negotiations for the transfer of the shares were made between the plaintiffs and one L.K. Pabhu, the husband of the second defendant. L.K. Prabhu later approached her husband for the purchase of shares of the company. It is her further case that Rs. 50,000/-was paid as advance by defendants 1 to 3 and not by L.R. Prabhu. According to her, as per the agreement dated 7-8-1981, plaintiffs had agreed to transfer 55% of the shares of the company on execution of the agreement, and transfer 45% of the shares on payment of Rs. 4.5 lakhs and on furnishing bank guarantee for Rs. 10 lakhs by defendants 1 to 3. Rs. 4.5 lakhs was then paid and the bank guarantee was also furnished on 12-8-1981 by the defendants. It is her further case that she had not taken loan of Rs. 5 lakhs from the Bank of Cochin. Loan was taken by the plaintiffs on 11-8-1981. According to her she became a share holder only on 12-8-1981 and her husband became a Director on 13-8-1981. It was alleged that the Board was reconstituted on 13-8 1981. and at that time nominees of defendants 1 to 3 were appointed as Directors of the company. According to her the bank guarantee was furnished on certain terms and conditions and plaintiffs failed to satisfy those terms and conditions. It was alleged that on 13-8-1981 plaintiff's liability was a little over Rs. 8 lakhs and the same was not discharged by the plaintiffs. With regard to filing of O.S.No. 623 of 1982 it was stated by the first defendant that the same was withdrawn with liberty to file a fresh suit. She has got a further case that liability under the bank guarantee expired before the amalgamation of the Bank of Cochin with State Bank of India, and the bank guarantee was valid upto 12-8-1985 and not upto 12-12-1985. It is also stated since the suit was not filed before 12-8-1985, suit itself is not maintainable.
10. Third defendant in her written statement admitted execution of Ext. A2 agreement. It is her case that plaintiffs failed to honour terms of the agreement. According to her balance consideration of Rs. 10 lakhs was payable by third defendant and associates at the rate of Rs. 25,000/- per month only on clearance of all liabilities and encumbrances of the company and its assets by the plaintiffs, and on transfer of all shares. It was stated that the Board was reconstituted not in time, and the plaintiffs did not comply with the terms of the agreement and consequently, third defendant is not liable to pay the amount. Even though the execution of the bank guarantee was admitted by the third defendant, according to her, bank is not obliged to honour the guarantee. Since plaintiffs did not comply with the various terms and conditions of the agreement. According to her plaintiffs were obliged to clear arrears of Industrial loan availed of by them from the Kerala State Industries Department. An amount of Rs. 7 lakhs is payable by way of loan availed by the plaintiffs on 11-8-1982 from the Trichur Branch of the Bank of Cochin by way of term loan encumbering the company's assets. It is also her case that amount of Rs. 5.5 lakhs is also due to the Bank encumbering the company's assets. In short, the demand of the plaintiffs for payment, without clearing any of the above mentioned liabilities would not stand. She complained of collusion between the husband of the second defendant and plaintiffs. It was alleged as per the agreement defendants 1 to 3 have relinquished all their rights in favour of the second defendant and her associates.
11. Fourth defendant-bank filed a written statement. Execution of the bank guarantee was admitted. According to the bank, Bank Guarantee was not supported by any consideration and therefore was not enforceable. It is their case that plaintiffs failed to transfer the entire shares to defendants 1 to 3 and hence not entitled to invoke the Bank Guarantee. According to the Bank since the Bank Guarantee refers to the agreement Ext. A2 between the parties only if the plaintiffs perform the terms and conditions enumerated in Ext. A2, bank guarantee could be enforced.
12. Before the Court below third plaintiff was examined as PW1. First defendant's husband was examined as DW1. DW2 is the manager of the State Bank of India. On the side of the plaintiffs, Exts. A1 to A9(a) were produced and defendants produced Exts. B1 to B17.
13. After considering the oral and documentary evidence Court below came to the conclusion that Ext. A3 is a conditional bank guarantee, and since plaintiffs tailed to comply with the terms and conditions as per Ext. A2 agreement, bank is not bound to honour the bank guarantee. Court below further held that since the bank guarantee is not enforceable by the plaintiffs, they are not entitled to the balance consideration from defendants 1 to 3. It is ordered that plaintiffs could sue for the balance consideration only if they transfer the entire shares as agreed. It is also found that since the bank guarantee is not enforceable, plaintiffs can sue for specific performance of the contract and also for damages. Court below therefore dismissed the suit on the above findings. Aggrieved by the same plaintiffs have come up in appeal.
14. We heard counsel for the appellants Sri M.N. Venkitachalam and Sri. Dinesh Shenoi Bank's counsel for the respondents. Cross-objection was filed by the first defendant challenging the finding of the Court below that the suit is not barred by limitation. According to her, the trial Court ought to have found that the bank guarantee was valid only for 48 months and that it had expired on 12-8-1985. It is stated that issues Nos. 8 and 9 ought to have been found in favour of defendants.
15. In the present case, we are primarily concerned with the enforceability of the bank guarantee. While plaintiffs maintain the stand that it is an unconditional and irrevocable bank guarantee, defendants, including the bank, took the stand that it is a conditional bank guarantee. Therefore we have to examine the terms of the bank guarantee so as to decide whether it is an unconditional and irrevocable bank guarantee. If the bank guarantee is an unconditional and irrevocable, question as to whether it was plaintiffs or the defendants who were at fault need not be gone into.
16. Execution of Ext. A3 bank guarantee is not disputed by any of the parties. In this connection we may refer to the relevant terms in the bank guarantee, which are extracted below:
"Whereas in consideration of the beneficiaries having agreed to transfer all their aforesaid shares numbering in all 3045 in the aforesaid Premier Steels (P) Ltd., to the purchasers or their nominees on the aforesaid deferred payment terms on the production of bank guarantee, we, Bank of Cochin Ltd., do hereby undertake to pay you the Beneficiaries an amount not exceeding Rs. 10 lakhs (Rupees ten lakhs only) in case of purchasers fail to pay the said sum of Rs. 10 lakhs (Rupees ten lakhs only) to the beneficiaries in terms of the agreement aforesaid and also against any loss or damage caused to or suffered or would be caused to or suffered by the beneficiaries by reason of any breach of the said purchasers of any of the aforesaid terms and conditions under which the beneficiaries have transferred the aforesaid shares to the said purchasers or their nominees.
AND whereas the Branch Manager of the Bank is duly authorised by its Head Office. We, the Bank of Cochin Ltd., hereby undertake to pay the amount due and payable under this guarantee without any demur on mere demand from you stating that the amount claimed is due to you by the said purchasers as per the aforesaid on fulfilment of vour part of the agreement, towards the balance sale consideration of the shares trans-ferred by you. Any such demand made on the Bank shall be conclusive regards the amount due and payable by the Bank under this guarantee However, our liability under this guarantee shall be restricted to an amount not exceeding Rs. 10 lakhs (Rupees ten lakhs only).
We, Bank of Cochin Ltd., further agree with the beneficiaries that the beneficiaries shall have the fullest liberty without our consent and without affecting in any manner our obligations hereun-der to vary any of the terms and conditions of the payment of the aforesaid deferred quantum of sale consideration or to extend time of payment by the said purchasers from time to time or to postpone for any time or from time to time any of the powers exercisable by the beneficiaries against the said purchasers and to forbear or enforce any of the terms and conditions relating to the said deferring payment and we shall not be relieved from our liability by reason of any such variations or extensions being granted the said purchaser or any forbearance act or omission on the pan of the beneficiaries or any indulgence by the beneficiaries to the said purchaser or by any such matter or thing whatsoever which under the law relating to the sureties would but for this provisions have the effect of relieving us. Notwithstanding anything contained in the foregoing, our liability under this guarantee is restricted to Rs. 10 lakhs (Rupees ten lakhs only) and other guarantee shall remain in full force for a period of 48 months i.e. upto 12-12-1985. Unless a suit or action to enforce a claim under this guarantee is filed against us within this period all the rights of the beneficiaries under this guarantee shall be forefeited and the bank shall be relieved and discharged from all liabilities under the guarantee. We, the Bank of Cochin Ltd., further agree and undertake not to revoke this guarantee during its currency except with the previous consent of the beneficiaries in writing."
17. It is therefore evident from the above mentioned terms of the bank guarantee that the bank had undertaken to pay the amount due and payable under the guarantee to the beneficiaries without any demur on mere demand stating that the amount claimed is due to them by the purchas-
ers as per the agreement on fulfilment of their part of the agreement towards the balance consideration of the shares transferred by them. Any such demand made on the Bank shall be conclusive as regards the amount due any payable under the guarantee. The condition for invocation of Bank Guarantee is only a demand from the beneficiaries stating that the amount claimed is due to them on fulfilment of their part in the agreement. Counsel appearing for the defendants argued that bank guarantee is a conditional one and therefore the question as to whether plaintiffs have performed their part of the agreement is a matter which can be gone into by the Bank before honouring the Bank Guarantee. It is their case, burden is on the plaintiffs to establish that they have complied with the terms of the agreement entered into between the parties.
18. Law relating to invocation of bank guarantee is well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted the beneficiary is entitled to realise the said bank guarantee in terms thereof, irrespective of any pending disputes. Bank giving such a bank guarantee is to honour as perits terms, irrespective of any dispute raised by the parties. The very purpose of giving bank guarantee would otherwise be defeated. Supreme Court in, U.P, Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, after considering various case laws on the question of enforceability of the bank guarantee held as follows:
"Commitments of banks must be honoured free from interference by the Courts. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of traditing operation will get jeopardised. Upon bank guarantee revolves many of the internal trade and transactions in a coun-try."
Supreme Court also in, National Thermal Power Corporation Ltd. v. Flowmore Pvt. Ltd., (1995) 4 SCC 515 : (1995 AIR SCW 4360), has taken the view that a bank guarantee which is payable on demand implies that the bank is liable to pay as and when a demand is made upon the bank by the beneficiary. The bank is not concerned with any inter se disputes between the beneficiary and the person at whose instance the bank had issued the bank guarantee. Two exceptions which the Courts have laid down against the invocation of bank guarantee are fraud and irretrievable injustice. If there is fraud of which the beneficiary seeks to take advantage of, he may be restrained from doing so because Courts will not aid perpetration of fraud. So also allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned, the Court could interfere. The above exceptions were elaborately considered by the Supreme Court in, U.P. Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568 : (AIR 1997 SC 1644), relevant portion of which is extracted below for easy reference:
"When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realise 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 realisation of such a bank guarantee. The existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. Courts have carved out only two exceptions. A fraud in 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 fronxdoing 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 co-exist in some cases."
The Supreme Court followed the above mentioned decisions in, ITC Ltd. v. Debts Recovery Appellate Tribunal, (1997) 10 JT (SC) 334.
19. It is therefore well settled that an unconditional and irrevocable bank guarantee could be interfered with only when ffaud or irretrievable injustice or harm is established. We have already gone through the terms of the bank guarantee in the instant case and we have found that it is an unconditional and irrevocable bank guarantee. The bank has therefore to honour the terms of the bank guarantee without any demur or mere de-mand from the beneficiaries, stating that the amount claimed by them is due to them. As per the terms of the bank guarantee such a demand is conclusive as regards the amount due and payable by the bank. Bank has no legal right to go into the question as to whether the beneficiaries have complied with their part of the terms of the contract. On the other hand, a mere statement that they have performed their part of the contract and the amount is due to them from the payee would be sufficient to honour the bank guarantee.
20. A bank guarantee executed by the bank for due performance of an agreement or contract between the parties is generally distinct and separate. Bank is not generally a party to the underlying contract. Supreme Court in the decision in State of Maharashtra v. M/s. National Construction Company, Bombay, (1996) 1 JT (SC) 156 : (AIR 1996 SC 2367), held as follows (at p. 2370 of AIR):
"The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order, the bank giving the guarantee must honour the same and make payment. Ordinarily unless there is an allegation of fraud or the like, the Courts, will not interfere directly or indirectly to withhold payment, otherwise trust in commerce, internal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle their disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising excontractu is not barred and the cause of action for the same is independent of enforcement of the guarantee."
So the legal position is well settled that a bank guarantee is ordinarily a contract quite distinct and independent of the underlying contract, the performance of which it seeks to secure. To that extent, it can be said to give rise to a cause of action separate from that of the underlying contract. Same is the view taken by the Supreme Court in, UCO Bank v. Bank of India, (1981)3 SCR 300 : (AIR 1981 SC 1426), Centax (India) Ltd. v. Vinmar Impex Inc., (1986) 4 SCC 136 : (AIR 1986 SC 1924) and U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineer (P) Ltd., (1988) 1 SCC 174. In the instant case, bank guarantee is an unconditional and irrevocable one. Bank guarantee generally creates a separate cause of action, and therefore could be enforced dehors the dispute between the parties. Supreme Court in, Hindustan Steel Works Construction Ltd. v. Tarapore and Co., AIR 1996 SC 2268, reiterated the position 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 primary contract between the person at whose instance the bank quarantee is given and the beneficiary. In the case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary. In this connection it is worthwhile to note that the Supreme Court in, Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engg. Works (P) Ltd., AIR 1997 SC 2477, took strong exception to the approach made by the Allahabad High Court in granting an injunction against invoking the bank guarantee. The Supreme Court made the following observations (at p. 2484 of AIR):
"It is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be followed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decision will not be of much importance was clearly a method adopted by it in avoiding to follow and apply the law as laid down by this Court. Yet another serious error which was committed by the High Court in the present case was not to examine the terms of the bank guarantee- and consider the letters of invocation which had been written by the appellant. If the High Court had taken the trouble of examining the documents on record, which had been referred to by the trial Court, in its order refusing to grant injunction, the Court would not have granted the interim injunction...."
21. Counsel for the defendants tried to establish that the bank guarantee is vitiated by fraud. We have gone through the written statement filed by defendants and we notice that there is no allegation of fraud, much less any proof thereof. The allegation of fraud must be specifically pleaded and established. Fraud cannot be presumed from mere circumstance or suspicion and burden of proving the charge of fraud lies upon the person who seeks to impeach the validity of any transaction on those grounds. Supreme Court in, National Thermal Power Corporation Ltd. v. Flowmore (P) Ltd., (1995) 4 SCC 515 : (1995 AIR SCW 4306), held that the fraud must be of an egregious nature so as to vitiate the entire underlying transaction. Counsel for the defendants also tried to bring in their case within the exception enumerated by the Court and contended that irretrievable harm or injustice would be caused to them if the bank guarantee is honoured. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance bank 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. To avail of that exception, the Supreme Court held in U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC "568 : (AIR 1997 SC 1644), exceptional circumstances which make it impossible for the guaran-torto reimburse himself if he ultimately succeeds, will have to be decisively established. A mere apprehension that the other party will not be able to pay, is not enough. We are therefore of the view that in this case defendants fail to establish that their case would fall within the two exceptions as mentioned above.
22. In the cross-objection filed, the first defendant assailed the finding of the Court below that suit is not burred by limitation. It is seen Ext. A3 bank guarantee is issued on 12-8-1981. It is provided in the bank guarantee that it would be in force for 48 months, that is up to 12-12-1985. Plaintiffs filed the suit on 10 12-1985. The life period of the guarnatee, Ext. A3, is up to 12-12-1985. In Ext. A3 it is clearly provided that the first instalment is payable on 12-12-1981. Therefore the period of guarantee would commence from 12-12-1981 onwards. The bank guarantee is taken for the balance consideration of Rs. 10 lakhs. It is provided in Ext. A3 the conditions on which the plaintiffs could enforce the bank guarantee, if the defendants I to 3 defaulted in payment of the instalments. As per Ext. A3 the first instalment would commence on 12-12-1981. Therefore the period of bank guarantee would commence from 12-12-1981 onwards. From 12-12-1981 the bank guarantee will be valid for 48 months, in the event of which it will be valid up to 12-12-1985. On going through the above mentioned terms of Ext. A3, we are clear in our minds that the bank guarantee is in force for a period of 48 months from 12-12-1981, that is up to 12-12-1985. The contention of counsel for the defendants that 12-12-1985 is a mistake cannot be accepted. We therefore agree with the finding of the Court below that the suit is not barred by limitation.
23. We have already found that Ext. A3 bank guarantee is an unconditional and irrevocable bank guarantee. Since the defendants did not comply with terms of the agreement, Ext. A2, plaintiffs sent a lawyer notice Ext. A5 dated 2-12-
1982 to defendants 1 to 3 and the bank stating that defendants 1 to 3 defaulted payment of the instalments. In the notice, reference was made for the balance amount due to them. The bank was reminded that bank guarantee was an unconditional and irrevocable and that plaintiffs have fulfilled their part of the contract. Defendants I to 3 were called upon to pay the amount defaulted within 7 days from the date of notice, and intimate the same to the bank. Bank was also informed in case defendants 1 to 3 failed to comply with the demand of the plaintiffs, they should pay the, amount as per the bank rriiarnalcc within a period of 14 days of the receipt of the claim by the plaintiffs. Yet another lawyer notice, Ext. A6 dated 4-10-
1983 was issued by the plaintiffs to the bank to honour its commitments as per the bank guarantee. Plaintiff's also sent Ext. A7 notice dated 24-10-1985 calling upon the defendants including the bank to honour their commitments. Bank was also called upon to honour the bank guarantee without any demur in case defendants 1 to 3 failed to pay the amount as per Ext. A2 agreement. Bank was informed if the amount is not paid, plaintiffs would be constrained to proceed against them for enforcement of the bank guarnatee.
24. The fact that plaintiffs have invoked the bank guarantee in time is also evident from Ext. B 10 letter dated 30-10-1985 issued by the fourth respondent to third defendant. It is stated in the said letter that beneficiaries have invoked the guarantee and the bank was called upon to pay the amount to them since she has failed to honour the terms of the agreement. Third defendant was directed to deposit the amount immediately in the bank on the receipt of the said letter. She was also directed to get the demand of the beneficiaries cancelled. It is stated that if the third defendant is not acceding to this request, bank would be constrained to take suitable action without any notice. Exts. B 11 and B 12 are similar notices issued to defendants 1 and 2 as well. Ext. B 13 is a letter issued by the first defendant to bank stating that bank shall not honour the bank guarantee since the claim of the beneficiaries is based upon a fraudulent transaction. It is also stated that the life of the bank guarantee has already expired on 12-8-1985. It is also pointed out that beneficiaries have not performed their part of the agreement and consequently, bank is not liable to honour the bank guarantee. Ext. B14 is a fetter sent by the third defendant to the bank stating that plaintiffs did not perform their part of the agreement and therefore bank guarantee is not enforceable. Ext. B 15 is a reply notice sent by counsel for the bank to the plaintiff's counsel stating that they are not in a position to honour the bank guarantee since they have reason to believe that the bank guarantee was brought into existence as a result of fraud and collusion on the part of the plaintiffs.
25. It is evident from the above-mentioned communications that the plaintiffs have invoked the bank guarantee in time as per its terms, by issuing proper notice. The bank ought to have honoured the bank guarantee. The failure to honour the bank guarantee is illegal and in clear violation of the terms and conditions in the bank guarantee.
26. Ext. B 17, we notice, is a counter guarantee executed by defendants 1 to 3 in favour of Bank of Cochin Ltd. By the counter guarantee they have undertaken to indemnify the bank if any loss is caused to the bank by reason of performance of the bank guarantee. Ext. B 17 is an unconditional counter guarantee. Counter guarantee has been issued in consideration of the fact that bank had agreed to pay to the extent of Rs. 10 lakhs to the plaintiffs for due fulfilment of rhe terms of the agreement by the defendants. Ext. B17 further establishes the fact that Ext. A3 is an unconditional and irrevocable bank guarantee. Fulfilment of various terms and conditions by the beneficiaries is not a condition precedent for enforcement of Ext. B17.
27. In view of the above mentioned reaspns, we are of the view that fourth respondent was legally obliged to honour the Bank Guarantee Ext. A3. We find that the Court below has committed a grave error in dismissing 'he suit. Counsel for the appellants-plaintiffs submitted that he is primarily concerned with the validity of the bank guarantee and not with regard to inter se dispute between defendants 1 to 3 and plaintiffs. Since in this case, this Court is concerned with the validity of the bank guarantee, other disputes between the parties are not being adjudicated. We therefore do not express any opinion with regard to inter se dispute between the plaintiffs and defendants 1 to 3.
We therefore decree the suit as against the fourth defendant and declare that the plaintiffsare entitled to have the bank guarantee encashed with interest at the rate of 18% per annum from the date of the suit till realisation. Plaintiffs are also entitled to get costs from the defendants.
Appeal is allowed as above.