Holding

The dismissal of the first suit on a technical ground does not constitute a final decision, and the two suits arise from distinct causes of action, so the second suit is not barred by res judicata or Order 2 Rule 2.

Summary

The State of Maharashtra entered into a construction contract with National Construction Co. and obtained a performance guarantee from the Central Bank of India. When the contractor abandoned the work, the State sued the bank alone for the guaranteed amount; the suit was dismissed for non‑joinder of the contractor and the appeal was also dismissed. The State then filed a special civil suit against both the contractor and the bank for damages, including the guarantee amount, which the trial court dismissed on the ground of res judicata and Order 2 Rule 2. The Supreme Court held that Section 11 of the CPC applies only when the matter in the former suit was finally decided, which was not the case here as the earlier suit was dismissed on a technical ground. It further held that the bank guarantee creates a cause of action distinct from the breach‑of‑contract claim, so Order 2 Rule 2 does not bar the second suit. Consequently, the appeal was allowed.

Issues considered

Whether the dismissal of the first suit on a technical ground of non‑joinder gives rise to res judicata under Section 11 of the CPC, 1908.
Whether Order 2 Rule 2 of the CPC bars the second suit on the ground that it includes a claim already raised in the first suit.
Whether a performance guarantee by a bank constitutes a separate cause of action distinct from the underlying contract.

Legislation cited

Code of Civil Procedure, 1908s. Order 2 Rule 2, s. Section 11

Subjects

res judicataCPC 1908Section 11Order 2 Rule 2performance guaranteebank guaranteecause of actionnon‑joindertechnical dismissalcontract breach

Judgment

.(/

STATE OF MAHARASHTRA AND ANR. A
v.
MIS. NATIONAL CONSTRUCTION CO., BOMBAY AND ANR.

JANUARY 9, 1996

[A.M. AHMADI, CJ. AND S.C. SEN, J.] B

Code ~f Civil Procedure, 1908 :

Section 11-Principle of res judicata--Applies only if the matter di-
rectly and substantially in issue in former suit has been heard arul finally
decided--Principle is inapplicable if former suit is dismissed merely on a
c
technical ground without adjudication.

Rule 2--0rder 2-Test for applicability--Suit--Dismissal of-Second
suit based on distinct cause of action--Held not barred.

Contract-Bank guarante~bligation of bank to honour.
D
•
In a contract between the appellant-State and the Respondent-
Company, the second respondent, the Central Bank of India, executed a
performance guarantee. Under the terms of the guarantee, the Bank was
jointly and severally liable with the contractor for. the latter's default in E
performance. As the contractor abandoned the work, the appellants
employed other agencies for completing the work and in that process they
claimed to have incurred expenses totalling Rs. 1,44,18,970.24. Conse-
quently, the appellants filed a Short Cause Suit only against the Bank in
the Bombay High Court praying for the recovery of Rs. 14,12,836, which
was the amount stipulated in performance guarantee with interest. The F
High Court dismissed the suit for non-joinder of parties, holding that the
contractor was a necessary party for deciding the issue of default and the
bank's consequent liability. In appeal against this order, the appellants
impleaded the contractor as a party, yet the appeal was dismissed.
Thereafter the appellants filed a Special Civil suit against both the G
contractor and the bank claiming Rs. 1,13,27,298.16 with interest from
i the contractor by way of damages for breach of contract. This was
inclusive of Rs. 14, 12,836 under the bank guarantee. The Civil Judge
dismissed the suit holding that as the cause of action was identical to the
one in the former suit, it was barred by res judicata, under section 11 as
H
293
294 SUPREME COURT REPORTS [1996] l S.C.R.
A also Order 2 Rule 2 of the Civil Procedure Code, 1908. The appellants

-
preferred appeal against this order contending that the two suits were
based on separate causes of action and the dismissal of the former on a
technical ground could not act as a bar against the latter. A Division
Bench of the High Court dismissed the appeal. Against the decision of
the High Court, the appellants preferred appeal before this Court.
B
Allowing the appeal, this Court

HELD : 1. Section 11 of the Code of Civil Procedure, 1908 deals with •
the doctrine of res judicata and provides that any matter which might or
'
ought to have been made a ground for defence or attack in the former suit
c shall be deemed to have been a matter directly and substantially in issue
in such suit. The important words are "has been heard and finally
decided". The bar applies only if the matter directly and substantially in
issue in the former suit has been heard and finally decided by a Court
· competent to try such suit. It means that on the matter or issue in question
D there has been an application of the judicial mind and a final adjudication
made. If the former suit is dismissed without any adjudication on the •
matter in issue merely on a technical ground of non-joinder, that cannot
operate as res judicata. [297-D; F-G]

2. The High Court failed to take note of the fact that the appellate
E court did not consider the merits of the case but confirmed the dismissal
of the suit by the lower court on a technical ground. Therefore, the
dismissal of the Short Cause suit and the subsequent appeal could not have
a
operated as bar to special civil suit. The plea based on the principle
"
of ra judicata fails. [297-H, 298-A; F]
F
Sheodhan Singh v. Daryao Kuanwar,AlR (1966) SC 1332=[1966] 3 SCR
300 and Inacio Martins v. Narayan Hari Naik, [1993] 3 SCC 123, relied on.

3. Both the principle of res judicata and Rule 2 of Order 2 are based
on the rule of law that a man shall not be twice vexed for one and the same
G cause. The cause of action for a suit comprises of all those facts which the
plaintiff must aver and, if traversed, prove to support his right to the
judgment. [299-C; El l_

Mohd. Khalil Khan v. Mahbub Ali Khan, AIR (1949) PC 78; Kewal
Singh v. Lajwanti, AIR (1980) SC 161 = [1980] 1 SCC 290 and Inacio
H Martins v. Narayan Hari Naik, [1993] 3 SCC 123, referred to.
STATE v. NATIONAL CONSTRUCTION CO., BOMBAY 295
4. A bank gnarantee is ordinarily a contract quite distinct and A
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 contact. When the appellants,
by way of short cause suit sought to enforce the performance guarantee,
they were seeking reliefs on the basis of a cause of action which was
distinct from the one upon which they subsequently based their claim in
B
Special civil suit. [300-D; _301,D]

Sidaramappa v. Rajashetty, AIR (1970) SC 1059, referred to.

5. A bank issuing a guarantee is not concerned with the underlying
contract between the parties to the contract. The duty of the bank under c
a performance gnarantee is created by the document itself. Once the docu-
ments are in order, the bank giving the guarantee must hononr the same
and make payment. Ordinarily, unless there is an allegation of fraud or the
like, the courts will uot interfere, directly or indirectly, to withhold pay-
ment, otherwise trust in commerce, internal and international, would be
D
• irreparably damaged. But that does not mean that the parties to the un-
derlying 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 ex-contractu is not barred and the cause of action for
the same is independent of enforcement of the guarantee. [300-A-C]
E
UCO Bank v. Bank of India, [1981] 3 SCR 300; Centax (India) Ltd. v.
Vinmar Impex Inc., [1986] 4 SCC 136 and U.P. Cooperative Federation Ltd.
v. Singh Consultants & Engineers (P) Ltd., [1988] 1 SCC 174, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1497 of
1996. F

From the Judgment and Order dated 9.7.93 of the Bombay High Court
in F.A. No. 151 of 1993.

D.M. Nargolkcr for the Appellants.

S. J. Sorabjee, Ms. Nandini Gore and Ms. Manik Karanjawala for the G
Respondents.

The Judgment of the Court was delivered by

AHMADI, CJ. The appellants are the State of Maharashtra and its
Executive Engineer who was posted at the Masonry Darn Division, Nathnagar. H
296 SUPREME COURT REPORTS [1996] 1 S.C.R.
A during the relevant period. In 1967, the appellants invited tenders for
performing work on the masonry portion of the Paithan Dam on Godavari
River, as part of the Jayakwadi Project, Stage-I (hereinafter called "the
work"). The first respondent, Mis. National Construction Company, Bombay
(hereinafter called "the contractor") submitted its tender offer for the work
which was conditionally accepted by the appellants on 30.3.1967.
B
On 6.1.1968, the second respondent, the Central Bank of India
(hereinafter called "the Bank"), executed performance guarantee No. 57/22 •
whereby it guaranteed that the contractor would faithfully conform to the
terms and conditions of the contract to be entered into between the appellants
C and the contractor. Under the terms of the guarantee, the Bank was jointly
and severally liable with the contractor for the latter's default in perform-
ance; the liability of the Bank being limited to Rs. 14,12,836, i.e. 5% of the
contract price. The guarantee was to remain in force till 3.7.1972. Soon
thereafter, on 8.1.1968, the contract for commencing construction was
executed. However, no work was initiated for almost two years. On
D 11.12.1969, the appellants gave an ultimatum to the contractor to begin work. •
It is alleged that instead of commencing work, the contractor abandoned the
work on 19.12.1969. The appellants allege that the contractor did not respond
to their repeated requests for recommencing work, forcing them to employ
other agencies for completing the work. In the process, by 31.5.1972, they
E claim they had incurred expenses to tailing Rs. 1,44, 18,970.24.

At this stage, on 21.6.1972, the appellants filed Short Cause Suit No.
491n2 only against the Bank on the original side of the Bombay High Court
•
praying for the recovery of Rs. 14,12,836, which was the amount stipulated
in performance guarantee No. 57/22, with interest. It would be pertinent to
F note that the suit was filed before the guarantee lapsed on 3.7.1972. On
17 .1.1983, the Bombay High Court dismissed the suit for non-joinder of
parties, holding that the contractor was a necessary party for deciding the issue
of default and the bank's consequent liability. In appeal against this order,
Appeal No. 303/83, the appellants included the contractor as a party in the
G cause title of the memo of appeal but the appeal was dismissed on 7.4.1983
on the very same ground. It may, however, be clarified that the contractor was
l.
not impleaded as a party by the Court's order.

On the same day, 7.4.1983, the appellants filed Spl. Civil Suit No. 29/
83 against both the contractor and the bank in the Court of the Civil Judge
H (Senior Division) at Aurangabad. In this suit, the appellants claimed Rs.
STATE v. NATIONAL CONSTRUCTION CO., BOMBAY [AHMADI, CJ.) 297
1,13,27,298.16, with interest, from the contractor by way of damages for A
~
breach of contract. This was inclusive of their claim for Rs. 14,12,836 against
the bank under the performance guarantee.

On 28.7.1992, the learned Civil Judge dismissed the suit holding that
as the cause of action was identical to the one in the former suit, it was barred
by res judicata under Explanation IV to S.11 as also Order 2 Rule 2 of the B
Civil Procedure Code, 1908 (hereinafter called "the Code"). The appellants
appealed against this order on the ground that the two suits were based· on
~
separate causes of action and the dismissal of the former on a technical ground
could not act as a bar against the latter. On 9.7.1993, a Division Bench of the
Bombay High Court by the decision impugned herein dismissed the appeal. c
Feeling aggrieved, the appellants have approached this Court by way of
special leave.

We may first dispose of the plea based on Section II, Explanation IV,
of the Code. That section deals with the doctrine of res judicata and provides
that any matter which might or ought to have been made a ground for defence D
--<
• or attack in the former suit shall be deemed to have been a matter directly and
substantially in issue in such suit. Since the plea of res judicata can be
disposed of on a narrow ground, it is not necessary to examine the ambit of
Explanation IV. The main text of Section 11 reads thus :

S.IJ Res Judicata - No Court shall try any suit or issue in which the E
matter directly and substantially in issue has been directly and
substantially in issue in a former suit between the same parties., or
.>
between parties under whom they or any of them claim, litigating
under the same title, in a Court competent to try such subsequent suit
or the suit in which such issue has been subsequently raised, and has F
been heard and finally decided by such Court."

The important words are "has been heard and finally decided". The bar applies
only if the matter directly and substantially in issue in the former suit has been
heard and finally decided by a Court competent to try such suit. That clearly
means that on the matter or issue in question there has been an application of G
the judicial mind and a final adjudication made. If the former suit is dismissed
l without any adjudication on the matter in issue merely on a technical ground
of non-joinder, that cannot operate as res judicuta.

In its impugned order, the High Court of Bombay has taken note of the
H
298 SUPREME COURT REPORTS [1996] 1 S.C.R.
A fact that the Short Cause Suit was dismissed on the technical ground of non-
joinder of a ~ecessary party i.e. the contractor. It has, however, stressed the
fact that in the appeal against the Order of the lower Court, the appellants had
made Lhe contractor a party and yet the appeal was dismissed. The High Court
has relied on this fact to come to the conclusion that the second suit was barred
-
by res judicata. However, the High Court did not take note of the fact that in
B
rejecting the appeal, the appellate Court had held that the suit was bad since
there was no adjudication or legal determination of the plaintiffs dues and,
for this reason, the suit was not maintainable against the 2nd Defendant only.
The High Court, therefore, failed to take note of the fact that the appellate
•
"'
Court did not consider the merits of the case, but confirmed the dismissal of
c the suit by the lower court on a technical ground. .
This statement of the law by the High Court is, with respect, incorrect
in view of the decision of this Court in Sheodhan Singh v. Daryao Kuanwar,
AIR (1966) SC 1332 at p.1336 = [1966] 3 S.C.R. 300 at 307 where, while
considering the meaning of the words "heard and finally decided", used in S.
D 11 of the Code, it was held :
>
' ~

"Where, for example, the former suit was dismissed by the Trial Court
for want of jurisdiction .......... or on the ground of non-joinder o.f
parties ........... and the dismissal is confirmed in appeal (if any), the
decision~ not being on the merits, would not be res judicata in a
E
subsequent suit." (emphasis supplied )

This Court in its recent decision, Inacio Martins v. Narayan Hari Naik, [ 1993]
3 sec has reiterated this proposition. It is, therefore, clear that the dismissal
of the Short Cause Suit and the subsequent appeal could not have operated as
F a bar to Spl. Civil Suit No. 27/83. The plea based on the principle of res
judicata fails.

We may now deal with the issue involving Order 2 Rule 2 of the Code
which reads as under :

G "2. Suit to include the whole claim. - (1) Every suit shall include the
whole of the claim which the plaintiff is entitled to make in respect
of the cause of action; but a plaintiff may relinquish any portion of t
his claim in order to bring the suit within the jurisdiction of any court.

(2) Relinquishment of part of claim. - where a plaintiff omits to sue
H in respect of, or intentionally relinquishes, any portion of his claim,
STATE'· NATIONAL CONSTRUCTION CO., BOMBAY [AHMADI, CJ.] 299
he shall not afterwards sue in respect of the portion so omitted or A
relinquished.

(3) Omission to sue for one of several reliefs. - A person entitled
to more than one relief in respect of the same cause of action may
sue for all or any of such reliefs; but if he omits, except with the
leave of the Court, to sue for all such reliefs, he shall not afterwards B
sue for any relief so omitted." (Explanation omitted)

Both the principle of res judicata and Rule 2 of Order 2 are based on the
rule of law that a man shall not be twice vexed for one and the same cause.
In the case of Mohd. Khalil khan v. Mahbub Ali Khan, AIR 1949 PC 78 at
p. 86, the Privy Council laid down the tests for determining whether Order c
2 Rule 2 of the Code would apply in particular situation. The first of these
is, "whether the claim in the new suit is in fact founded upon a cause of
action distinct from that whicl) was the foundation for the former suit." If
the answer is in the affirmative, the rule will not apply. This decision has
been subsequently affirmed by two decisions of this Court in Kewal Singh D
v. Lajwanti, AIR (1980) SC 161 at p.163 =(1980) 1 SCC 290 and in Inacio
Martins's case (supra).

It is well settled that the cause of action for a suit comprises of all those
facts which the plaintiff must aver and, if traversed, prove to support his right
to the judgment. E

., It is the contention of the appellants that the two suits are in respect
of two separate causes of action. The first suit was filed to enforce the bank
guarantee, while the second suit was filed to claim damages for breach of
the contract relating to the work.
F
In the plaint of the Short cause suit, the foundation of the appellants
claim rested upon the performance guarantee No. 57 /22. The basis of the
appellants' claim was that·under the terms of the bank guarantee, the Bank was
liable to make good to the appellants all losses that became due by reason
of any default on the part of the contractor in the proper performance of the
terms of the contract. The appellants annexed particulars and laid out facts
G
to show that the contractor had, by allegedly abandoning the work, failed to
observe the terms of the contract. The appellants further alleged that these
actions of the contract had caused them to incur losses of Rs. 76,37,557.76.
However, in view of the limitation prescribed in the bank guarantee, the
appellants had limited their claim to Rs. 14,12,836. H
300 SUPREME COURT REPORTS [1996] 1 S.C.R.
A At this juncture it seems necessary to analyse the law relating to bank
guarantees. 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
B
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
c the contract. The remedy arising ex-contractu is not barred and the cause of
action for the same is independent of enforcement of the guarantee. See UCO
Bank v. Bank o.f India, [1981] 3 SCR 300 at 325; Centax (India) Ltd. v.
Vinmar Impex Inc., [1986] 4 SCC 136; and U.P. Cooperative Federation Ltd.
v. Singh Consultants & Engineers (P) Ltd., [1988] 1 SCC 174.
D
The legal position, therefore, is 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.
However, in the present case we are handicapped because the High Court
E (both the learned Single Judge and Division Bench) had no occasion to
analyse the nature of the bank guarantee. We, therefore, refrain from making
any observation regarding the true nature of the bank guarantee except
pointing out that the two causes of action may not be identical. That would
be a matter for the Trial Court to consider on a true analysis of the bank
F guarantee at the appropriate stage.

In the plaint of the Spl. Suit, the main relief sought by the appellants
was on the basis of the contact entered into between the appellants and the
contractor. The appellants alleged and laid out facts and particulars to the
effect that the abandonment of work by the contractor was in breach of the
G contract and this had caused the appellants to suffer losses worth Rs.
1,13,27,298.16. This amount was inclusive of the claim of Rs. 14,12,836
based on the performance guarantee No. 57 /22 for which the contractor and
the Bank were jointly and severally liable.

H The relief sought in the Short Cause Suit was therefore based on a
STATE v. NATIONAL CONSTRUCI10N CO., BOMBAY [AHMADI, CJ.) 301
different cause of action from that upon which the primary relief in the Spl. A
Suit was founded.

In Sidramappa v. Rajashetty, AIR (1970) SC 1059 at pp. 1060-61 =
[1970] I SCC 186 at 189, this Court held that where the cause of action on
the basis of which the previous suit was brought, does not form the foundation
of the subsequent suit, and in the earlier suit, the plaintiff could not have B
claimed the relief which he sought in the subsequent suit, the plaintiffs
subsequent suit is not barred by Order 2 Rule 2. Applying this ruling to the
facts of the present case, it is clear that, in the first suit, the appellants could
only claim reliefs in respect of Rs. 14,12,836 which was the maximum amount
stipulated in the performance guarantee. They could not have claimed reliefs c
of Rs. 1,13,27,298.16 which they did in the second suit on the basis of the
contract relating to the work to be performed by the contractor.

It is, therefore, clear that when the appellants, by way of Short Cause
Suit No. 49 ln2, sought to enforce the performance guarantee no. 57/22, they
were seeking reliefs on the basis of a cause of action which was distinct from D
the one upon which they subsequently based their claim in Spl. Civil Suit No.
29/83.

In the result, both the issues are decided in favour of the appellants.
The appeal succeeds. No costs.
E
T.N.A. Appeal allowed