Law on Bank Guarantees - MCO Legals

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Law on Bank Guarantees

Date: 28th June, 2019

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List of Judgments

S.

No.

Date of

Judgment

Cause Title and

Citation

Notes Relevant

Para No.

Page Nos.

of

Judgments

1. 19.11.1987 U.P. Cooperative

Federation Limited

–Vs- Singh

Consultants and

Engineers (P)

Limited

(1988)1 SCC 174

An irrevocable commitment

either in the form of confirmed

bank guarantee or irrevocable

letter of credit cannot be

interfered with except in case

of fraud or in case of question

of apprehension of irretrievable

injustice has been made out.

Commitments of banks must be

honoured free from inference

by the courts.

It is only in exceptional cases

i.e. fraud or in case of

irretrievable injustice to be

done, the court should

interfere.

15, 16 and

21

5 to 29

2. 09.07.1996 Hindustan

Steelworks -Vs-

Tarapore & Co. &

Another

1996 SCC (5) 34

A Bank Guarantee is an

independent and distinct

contract between the bank and

the beneficiary.

It is not qualified by the

underlying transaction and the

primary contract between the

person at whose instance the

bank guarantee is given and the

beneficiary.

Commitment of banks must be

honoured free from

interference by the courts and

it is only in exceptional cases

that the court should interfere.

24, 25, 26

and 27

30 to 44

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List of Judgments

S.

No.

Date of

Judgment

Cause Title and

Citation

Notes Relevant

Para No.

Page Nos.

of

Judgments

3. 04.12.1996 U.P. State Sugar

Corporation vs.

M/S. Sumac

International Ltd.

(1997) 1 SCC 568

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 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.

There must be a fraud in

connection with the bank

guarantee.

Disputes between the parties

relating to the termination of

the contract cannot make

invocation of the bank

guarantees fraudulent.

11 to 14

and 16

45 to 55

4. 15.07.2005 Oil And Natural

Gas Corporation –

Vs- Jagson

International Ltd.

2005 SCC Online

Bom 810:

Invocation of the bank

guarantee cannot be interfered

with by the Court, unless there

is an established fraud or

irreparable injustice involved in

the case.

Mere allegation of fraud is not

enough to issue an injunction

against invocation of bank

20 and 21 56 to 66

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List of Judgments

S.

No.

Date of

Judgment

Cause Title and

Citation

Notes Relevant

Para No.

Page Nos.

of

Judgments

guarantee.

The allegation of fraud must be

established at least prima facie.

5. 16.12.2014 M/S RPP Infra

Projects Ltd. vs.

M/S NTPC Tamil

Nadu Energy &

Anr.

2014 SCC Online

Del 7161

Bank guarantees in dispute,

clearly in unequivocal terms

and unconditionally recite that

the amount would be paid

without demure or objection.

The bank guarantee thus is an

independent contract between

the bank and the beneficiary

and can be challenged only on

the ground of fraud and

irreparable injury.

12 67 to 73

6. 02.06.2017 Essar Projects

(India) Limited vs.

Indian Oil

Corporation

Limited

2017 SCC Online

Del 8817

The scope of interference by

courts in the invocation of the

bank guarantees is no longer

res integra.

It has been repeatedly held that

especially in cases of

unconditional bank guarantees,

the court should not interfere

unless the petitioner is able to

establish fraud of egregious

nature or is able to plead

special equities.

23, 24 and

29

74 to 81

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174 SUPREME COURT CASES (1988) 1 SCC

15. What is the position in the present case ? Here is a case where the Corporation invited tenders for the sale of the property under notification dated January 18, 1983. The appellant submitted the highest tender in response to the said notification. He was given all concessions for payment of the tender amount. But he did not. He negotiated with the Managing Director of the Corporation for facilities for payment by instalments. That was also granted to him. There again he failed. If the appellant could not act according to his tender, we fail to see why the property should not be offered to the person who was next in order. The Corporation, in our opinion, did not do anything unfair with P. M. Jacob. The Corporation got the tender amount raised from Rs 4,16.550 to Rs 4.50,000. It shows the fairness with which the Corporation dealt with the property.

16. On a consideration of all the facts and circumstances of the case, we nre satisfied that the action of the Corporation in offering the property to P. M. Jacob and selline the same at his request to M /s Gnmraj Plantations was perfectly justified and cannot be found fault with.

17. Tn the result the appeal fails and is dismissed. In the circumstances however, we make no order as to costs.

(1988) 1 Supreme Court Cases 174

( B r f o r t S a ryasacht M u k h a r .i i a n d K . J a g a n n a t h a S h h t t y , J J .)

U. P. COOPERATIVE FED ERA TIO N LTD. . . A ppellan t;

Civil Procedure Code, 1908 — Order 39, Rules 1 and 2 — Arbitration Act, 1940 — Section 41 — Where in a works contract bank guarantee executed bv bank on behalf of the contractor in favour of the principal, held, court cannot issue injunction under Section 41 of Arbitration Act read with Rules 1 and 2 of Order 39 CPC restraining the principal from invoking and encashing the guarantee except in cases of fraud or apprehension of irretrievable injustice to the contractor — Nature and importance of bank guarantee stated — Ranker and Cnstnmer — Bank guarantee

Versus

SINGH CONSULTANTS AND ENGINEERS (P ) LTD. Respondent.

Civil Appeal No. 3054 of 1987r, decided on November 19. 1987

tFrom the Judgment and Order dated February 20, 1987 of the Allahabad High Court in Civil Revision No. 157 of 1986

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U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS ( p ) LTD. 175

The respondent entered into an agreement with the appellant for constructing a vanaspati manufacturing plant for the latter. The contract required the respondent to furnish two bank guarantees for proper construction and successful commissioning of the plant. Accordingly the Bank of India executed two bank guarantees in favour of the appellants. Under the terms of the guarantees the bank undertook not to revoke the guarantee in any event before expiry of the due date and to make unconditional payments on demand without reference to the respondent. The guarantees also provided that the appellant would be the sole judge for deciding whether the respondent had fulfilled the terms of the contract or not.

Subsequently dispute arose between the parties as to erection and performance of the plant. The respondent approached the Court of Civil Judge by a petition under Section 41 of the Arbitration Act read with Rules 1 and 2 of Order 39 CPC seeking an injunction restraining the appellant from invoking the bank guarantees. The Court dismissed the petition. The respondent then moved a revision petition before the High Court. The High Court finding that the respondent had made out a prima facie case allowed the revision and proceeding on the basis that the injunction was sought not against the bank but against the appellant, restrained the appellant from invoking the bank guarantees, but directed the respondent to keep alive the guarantees during the pendency of the arbitration proceedings. Allowing the appeal by special leave the Supreme Court

Held:Per Mukharji, I.

This was not a case in which1 injunction should be granted. The nel effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated party in such circumstances is not remedyless. The respondent can sue the appellant for damages. There was no apprehension that irretrievable damages would be caused. Nor was any strong prima facie case of fraud in entering into a transaction made out. (Paras 21 and 35)

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 trading operation will get jeopardised. Upon bank guarantee revolves many of the internal trade and transactions in a country. (Paras 21, 28, 30 and 34)

Hamzeh Melas & Sons v. British Imex Industries Ltd., (1958) 2 QBD 127 ;R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd.,


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(1977) 2 All ER 862; Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., (1978) 1 All ER 976; United City Merchants (Investments) Ltd. v. Royal Bank of Canada, (1982) 2 All ER 720; Tarapore & Co., Madras v. M /s V /O Tractors Export, Moscow, (1969) 1 SCC 233 : (1969) 2 SCR 920; United Commercial Bank v. Bank of India, (1981) 2 SCC 766: (1981) 3 SCR 300 and Centax (India) Ltd. v. Vinmar Impex Inc., (1986) 4 SCC 136, relied on

Texmaco Ltd. v. State Bank of India, AIR 1979 Cal 44 ; State Bank of India v. Economic Trading Co. S.A .A ., AIR 1975 Cal 145 and B. S. Aujla Co. Pvt, Ltd. v. Kaluram Mahadeo Prosad, AIR 1983 Cal 106, approved

Union of India v. Meena Steels Ltd., AIR 1985 All 282, overruled

Arul Murugan Traders v. Rashtriya Chemicals and Fertilizers Ltd., Bombay, AIR 1986 Mad 161 : (1986) 59 Com Cas 399, explained

Elian and Rabbath v. Matsas and Matsas, (1966) 2 Lloyd’s List Law Reports 495, limited

Per Shetty, J. (concurring)The judgment of the High Court must be set aside. (Paras 38 and 55)

The basic nature of the case relates to the obligations assumed by the bank under the guarantees given to the appellant. If under law the bank cannot be prevented by the respondent from honouring the credit guarantees, the appellant also cannot be restrained from invoking the guarantees. What applies to the bank must equally apply to the appellant. Therefore, the frame of the suit by not impleading the bank cannot make any difference in the position of law. Equally, it would be futile to contend that the court was justified in granting the injunction since it has found a prima facie case in favour of the respondent. The question of examining the prima facie case or balance of convenience does not arise, if the court cannot interfere with the unconditional commitment made by the bank in the guarantees in question. (Para 43)

In modern commercial transactions, various devices are used to ensure performance by the contracting parties. The traditional letter of credit has taken a new meaning. In business circles, stand-by letters of credit are also used. Performance bond and guarantee bond are also the devices increasingly adopted in transactions. The courts have treated such documents as analogous to letter of credit. (Para 51)

“Bank Solvency and Guaranty Letters of Credit”, Stanford Law Review, V. 25, 1972-73, p. 719, referred to

Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defcnce except in a case



U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS ( ? ) LTD. (Mukharji, J.) 177

of fraud. But. the banker must be sure of his ground before declining to pay. The fraud should be of an “egregious nature as to vitiate the entire underlying transaction”. Tt is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction. The court, however, should not lightly interfere with the operation of irrevocable documentary credit. The sound banking system mav require more caution in the issuance of irrevocable documentary credits. Tt would be for the banks to safeguard themselves bv other means and generally not for the court to come to their rescue with injunctions unless there is established fraud.

(Paras 53, 54 and 55)

Sztejn v. Henry Schroder Banking Corporation, 31 NYS 2d 631, limitedHamzeh Melas & Sons v. British Imex Industries Ltd., (1958) 2 QBD

127 and R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., (1977) 2 All ER 862, referred to

Edward Owen Eneineerine Ltd. v. Barclays Bank International Ltd., (1978) 1 All ER 976 ; United Citv Merchants (Investments) Ltd. v. Roval Bank of Canada, (1982) 2 All ER 720: United Commercial Bank v. Bank of India. (1981) 2 SCC 766: (1981) 3 SCR 300; Centax (India) Ltd. v. Vinmar Impex Inc., (1986) 4 SCC 136 and Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 AH ER 351. relied on

R-M /8375/CAdvocates who appeared in this case :

A B. Divan, Senior Advocate (Sandeep Narain and Shri Narain, Advocates, with him), for the Appellant;

V. M. Tarkunde, Senior Advocate (Shakeel Ahmad Syed, Advocate, with him), for the Respondent.

The Judgments of the Court were delivered by

S a b y a s a c h i M u k h a r j i , J.— Special leave granted.

2. In the special leave petition notice was issued on July 13, 1987 and it was directed that the matter would be disposed of at the notice stage. After hearing the rival contentions, we grant leave to appeal and dispose of the appeal by the order hereunder.

3. This is an appeal from the judgment and order of the learned Single Judge of the Allahabad High Court (Lucknow Bench) in Revision Petition No. 157 of 1986. It appears that the appellant, a State Government enterprise, on or about May 17, 1983 entered




into a contract with the respondent — a private limited company for the supply and installation of a vanaspati manufacturing plant at Halduchaur in the District of Nainital, in the State of U ttar Pradesh. The contract bond contemplated, according to the appellant, guaranteed performance of work at various stages in accordance with the time schedule prescribed therein and provided for completion and commissioning of the plant after due trial run by M ay 15, 1984. The appellant contends that time was essentially and indisputably the essence of the contract.

4. The contention of the appellant was that as per the terms and conditions of the contract bond, the respondent was to furnish a performance bank guarantee for Rs 16 5 lakhs and yet another bank guarantee for Rs 33 lakhs as security for the monies advanced by the appellant to the respondent for undertaking the work. Both these two guarantees as also the contract bond entitled the appellant to invoke them and call for their realisation and encashment on the respondent’s failing to perform the obligations for which the appellant was made the sole judge.

5. M av 15. 1984 was the date fixed for completion and commissioning of the plant after 15 davs’ trial run for commercial production. Tt was alleged that between December 26, 1984 and January 28. 1985 the respondent defaulted at various stages and finally failed to complete the work within the stipulated time. The appellant invoked the two guarantees one after the other. The appellant thereafter on March 15. 1985 proceeded to have the plant completed and the plant was formallv inaugurated. The appellant contends that the plant could actually be commissioned for commercial production in Julv/August 1985. The respondent on August 4. 1986 filed a petition under Section 41 of the Arbitration Act. 1940 (hereinafter called the Arbitration A ct), in the Court of Civil Judge, Lucknow praying for an order restraining the appellant from realising and encashing the bank guarantees. The learned civil indge for the reasons indicated in his order dated August 8, 1986 declined to issue any injunction and dismissed the application.

6. Being aggrieved by the aforesaid decision, the respondent went up before the Allahabad High Court. The learned Single Judge of the Allahabad High Court, by the impugned judgment of February 20,1987, allowed the revision petition and held that the invocation of the performance guarantees were illegal and further held the contentions of the appellant that the performance guarantees constituted independent and separate contracts between the guarantor bank and the beneficiary and created independent rights, liabilities and obligations under the guarantee bonds themselves, as being “technical pleas” .



U .P.C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS ( p ) LTD. (Mukharji, J.) 179

7. On May 17, 1983, as mentioned hereinbefore, an agreement had been executed between the appellant and the respondent wherein it was decided as follows :

Whereas the PCF (the appellant herein) has decided to set up a Vanaspati Plant of 6 2 .5 M.T. per day vanaspati capacity, comprising of 70 M.T. per day hardening capacity based on 95 per cent of soya bean oil as raw oil 6 2 .5 M .T. per day, post-refining capacity, 72 M .T . deodorisation capacity and 72 M .T. filling and packing capacity, complete with all necessary utilities such as water and steam Distribution Equipments Oil Storage Section Electrification and Distribution Equipments Automatic Weighing filling and packing/sealing equipments and firefighting equipments etc., at Halduchaur, District Nainital (U P) lying at Bareilly — Haldwani road about 3 .5 kms. from Lalkuan towards Haldwani.

and the agreement further stated :And whereas the seller (the respondent herein) has under

taken to provide technical know-how and fabricate, design, engineer, manufacture, procure, import, supply, erect, instal, give trial runs and commission the Vanaspati Complex as referred to above complete in all respects at Halduchaur District Nainital (U P) as per specifications contained at Annexures ‘A’ to ‘Q’ and signed by both the parties in token of incorporation as an integral part of this agreement with guaranteed performance on the terms and conditions hereinafter appearing and contained.

And whereas the contract price hereinafter mentioned is based on the seller’s undertaking to commission and make ready for commercial production the said Vanaspati complex by M ay 15, 1984 and if the seller fails to do so the contract price shall stand reduced to the extent as hereinafter provided.

And whereas the contract price hereinafter mentioned is also based on the guaranteed performance of the said Vanaspati Complex as hereinafter provided and it is a term of this Agreement that if the said Vanaspati Complex fails to give the guaranteed performance as hereinafter specified, the contract price shall stand reduced to the extent hereinafter provided.

8. Clause 1 .6 stipulated that the date of commissioning and handing over shall be the date on which the PCF takes over the complete plant after successful commissioning and fulfilling of guaranteed performance specified in the agreement. This clause further stated :

The seller shall be deemed to have completed the erection


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and commissioning after giving successful trial runs for continuous period of 15 days with all the plants working simultaneously. However, the seller should fulfil the warrantees of individual plants separately also as given in the specifications. The complete warantees/performance guarantees shall be demonstrated by the seller over a continuous period of 15 days.

9. Thus the mutual obligations of the sellers as well as purchasers were stated in the contract. It is not necessary to set out in detail all the clauses, but Clauses 5 .2 and 5 .3 are relevant and provide as follows :

5 .2 . In case the seller fails to fulfil his obligations as referred to in this agreement the PC F shall be at liberty to get the same completed through any other agency or agencies without the approval of the seller and all the additional expenses so incurred by the PC F shall be recoverable from the seller.

5 .3 . The seller also agrees to exclude/include some of the m achines/equipments/components from the plants as may be desired by the PC F during the course of this agreement, and cost of such m achines/equipments/components on reasonable actual basis shall deducted/added to from the contract price and thus the reduced/increased contract price shall be paid by the PCF. However, the PC F should intimate such exclusion/inclusion within two months from the date of signing of the agreement. The said price of Rs 1.65,00,000 (Rs one crore and sixty five lakhs only) shall be paid by the PC F to the seller in the following manners :

10. On or about June 25, 1983 two bank guarantees were executed by Bank of India, Ghaziabad and the bank guarantee numbered 17/16 provided, inter alia, as follows :

Now, therefore, the Bank hereby guarantees to make unconditional payment of Rs 16 5 lacs (Rupees sixteen lacs fifty thousand only) to the Federation on demand at its office at Lucknow without any further question or reference to the seller on the seller’s failure to fulfil the terms o f the sale on the following terms and conditions : (emphasis supplied)

(A ) The sole judge for deciding whether the seller has failed to fulfil the terms of the sale, shall be the PCF.

(B) This guarantee shall be valid up to twelve months from the date of issue, i.e . up to June 24, 1984.

(C ) Claims, if any, must reach the Bank in writing on or before expiry date of this guarantee after which the Bank will no longer be liable to make payments to the PCF.


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U .P.C .F . LTD. V. SINGht CONSULTANTS AND ENGINEERS (P ) LTD. ( M u k h a r j i , J . ) 181

(D ) Bank’s liability under this guarantee deed is limited to Rs 16 5 lacs (Rupees sixteen lacs fifty thousand only).

(E ) This guarantee shall not be revoked by the Bank in anycase before the expiry of its date without written permission of the Federation.

11. The bank guarantee No. 17/15 of the said date further wenton to provide as follows :

And whereas to secure the said advance, the seller requested the Bank to furnish a bank guarantee of the said amount of Rs 33 lacs (Rupees thirty three lacs) in favour of the PC F and the bank accepted the said request and agreed to issue the required bank guarantee in favour of the Federation.

Now, therefore, in consideration of the aforesaid advance of the said sum of Rs 33 lacs (Rupees thirty three lacs only) to be paid by the PC F to the seller as aforesaid the Bank hereby agrees and guarantees to make unconditionally immediate payment to the Federation at its office at Lucknow of the sum of Rs 33 lacs (Rupees thirty three lacs only) or any part thereof, as the case may be, due to the PCF from the seller at any time on receipt of the notice of demand without any question or reference to the PCF or to the seller on the seller’s failure to fulfil the terms of said advance on the following terms and conditions :

(emphasis supplied)(1 ) The PCF shall be sole judge to decide whether the seller

has failed to fulfil any terms and conditions of the said advance and on account of the said failure what amount has become payable to the PCF under this guarantee.

(2) This guarantee shall be valid up to May 15, 1984 (Fifteenth May 1984) after which period this guarantee shall stand cancelled and revoked.

(3 ) The claims of the PCF, if any, under this guarantee, must reach the Bank on or before the date of expiry of this guarantee and after the date of expiry, no claim will

be entertained by the Bank.(4) The Bank shall not revoke this guarantee in any case

before its expiry date of May 15, 1984 except with the written permission of the PCF.

12. I have set out in extenso the terms in order to highlight the fact that under the terms agreed to between the parties, there is no scope ot injunction.

13. The tria l com t in its judgment held that the Bank should



be kept to fulfil its obligations and commitments and the court should not come in the way. But that principle was distinguished by the High Court on the ground that the respondent was seeking relief against the U. P. Cooperative Federation Ltd. and the subject matter of the dispute itself being as to whether the bank guarantee could be invoked and encashed. The High Court was of the view that even otherwise it cannot be doubted that the appellant cannot be permitted to take advantage of illegally invoking a bank guarantee on a technical plea that the guarantee was independent of the contract involving only the bank and the opposite party at pleasure. The High Court was of the view that prima facie it appeared that the plant was handed over after a trial run and that the commercial production had started and this has not been assailed as a fact. The High Court was of the view, that in these circumstances this cannot be said that the invocation order was final and irrevocable. The High Court was further of the view that having taken over the possession of the plant it was necessary to consider all the aspects and held that the bank guarantees could not be invoked. The High Court was of the view that it was not a question of restraining the performance of any bank guarantee.

14. I am, however, unable to agree. The principles upon which the bank guarantees could be invoked or restrained are well settled. Our attention was also drawn to several decisions of the High Court as well as of this Court. Reference had also been made to some of the English decisions. So far as the position of English law is concerned, the principles by now are well settled. I will refer to some of the decisions and explain the position.

15. The question arose before the Court of Appeal in England in Hamzeh Melas & Sons v. British Im ex Industries L td .1 There the plaintiffs, a Jordanian firm, contracted to purchase from the defendants, a British firm, a large quantity of reinforced steel rods, to be delivered in two instalments. Payment was to be effected by the opening in favour of the defendants of two confirmed letters of credit with the M idland Bank Ltd., in London, one in respect of each instalment. The letters of credit were duly opened and the first was realized by the defendants on the delivery of the first instalment. The plaintiffs complained that that instalment was defective and sought an injunction to bar the defendants from realizing the second letter of credit. Justice Donovan refused the application. The plaintiffs appealed to the Court of Appeal in England. It was held that although the court had wide jurisdiction to grant injunction, this was not a case in which, in the exercise of its discretion, it ought to do so. The Court of Appeal



U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS ( p ) LTD. (Mukharji, J.) 183

emphasised that an elaborate commercial system had been built up on the footing that a confirmed letter of credit constituted a bargain between the banker and the vendor of the goods, which imposed upon the banker an absolute obligations to pay, irrespective of any dispute there might be between the parties whether or not the goods were up to contract. The principle was that commercial trading must go on on the solemn guarantee either by the letter of credit or by bank guarantee or irrespective of any dispute between contracting parties whether or not the goods were up to contract. The banks cannot be absolved of their responsibility to meet the obligations. Lord Jenkins, L .J . observed that a vendor of goods selling against a confirmed letter of credit was selling under the assurance that nothing would prevent it from receiving the price. That was of no mean advantage when goods manufactured in one country were sold in another. Though, in this case no international trade was involved, bank guarantee was uninvocable and on that assurance parties have bargained. This principle enunciated by Lord Justice Jenkins has been invoked by this Court in some decisions in case of confirmed bank guarantee.

16. The Court of Appeal in England had occasion once again to consider this question in Elian and Rabbath v. Matsas and Matsas2. In that case injunction was granted to prevent irretrievable injustice. There the facts were peculiar. In that case the first defendants’ Greek motor vessel Flora M was chartered by Lebanese charterers for carriage of plaintiffs’ cargo (consigned to Hungary) from Beirut to Rijeka. Discharge was delayed at Rijeka and ship owners exercised lien on cargo in respect of demurrage. This defendant bank put up guarantee in London in favour of second defendants (first defendants’ London agents) to secure release of cargo. There was a claim by Yugoslavians to distrain on goods, involving ship in further delay and master of Flora M, on lifting original lien, immediately exercised another lien in respect of extra delay (which was raised when Hungarian buyers put up £ 2 0 0 0 ) . Two years later, ship owners claimed arbitration with charterers to assess demurrage for which first lien was exercised and claimed to enforce guarantee. Plaintiff claimed declaration that guarantee was not valid and injunction to restrain ship owners or their agents from enforcing guarantee. First and second defendants appealed against granting of injunction by Blain, J. It was held by the Court of Appeal that it was a special case in which the court should grant an injunction to prevent what might be irretrievable injustice. Lord Denning, M .R ., observed that although the shippers were not parties to the bank guarantee, nevertheless they




had a most important interest in it. If the Midland Bank Ltd., paid under this guarantee, they would claim against the Lebanese bank, who in turn would claim against the shippers. The shippers would certainly be debited with the account. On being so debited, they would have to sue the ship owners for breach of their promise express or implied, to release the goods. Lord Denning, M .R ., further posed the question were the shippers to be forced to take that course ? Or can they short-circuit the dispute by suing the ship owners at once for an injunction ? He further observed on page 497 of the Report that this was a special case in which injunction should be granted. Lord Denning, M .R . went on to observe that there was a prima facie ground for saying that, on the telex messages which passed (and indeed, on the first three lines of the guarantee) the ship owners promised that, if the bank guarantee was given, they would release the goods. He further observed that the only lien they had in mind at that time was the lien for demurrage. But would anyone suppose that the goods would be held for another lien ? It can well be argued that the guarantee was given on the understanding that the lien was raised and no further lien imposed : and that when the ship owners, in breach of that understanding imposed a further lien, they were disabled from acting on the guarantee. But as mentioned hereinbefore, this was a very special case and I shall notice that Lord Denning, M.R. treated this as a very special case and in later decision he expressed his views on this matter.

17. This question was again considered by the Queen’s Bench Division by M r Justice Kerr in R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd:' In this case injunction was sought on a question in respect of performance bond. The learned Single Judge Kerr, J. gave the following views :

(i) Only in exceptional cases would the courts inteifere with the machinery of irrevocable obligations assumed by banks. In the case of a confirmed performance guarantee, just as in the case of a confirmed letter of credit, the bank was only concerned to ensure that the terms of its mandate and confirmation had been complied with and was in no way concerned with any contractual disputes which might have arisen between the buyers and sellers. Accordingly, since demands for payment had been made by the buyers under the guarantees and the plaintiffs had not established that the demands were fraudulent or other special circumstances, there were no grounds for continuine the injunctions. . . .



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U .P .C .F . l t d . v. siM G rt c o n s u l t a n t s a H d e H G iH e e rs ( p ) l t d . ( M u k h a r j i , S . ) 185

(ii) If it was right to discharge the injunctions against the bank, the fact that the Egyptian defendants had taken no part in the proceedings could not be a good ground for maintaining those injunctions. Further, equally strong considerations applied in favour of the discharge of the injunctions against the Egyptian defendants, and their failure to participate in the proceedings did not preclude the court from discharging the injunctions against them.

18. In my opinion the aforesaid represents the correct state of the law. The court dealt with three different types of cases which need not be dilated here.

19. In Edward Owen Engineering Ltd. v. Barclays Bank International Ltd.* English suppliers, entered into a contract with Libyan buyers to supply goods to them in Libya. The contract was subject to a condition precedent that the plaintiffs would arrange for a performance bond or guarantee to be given, for 10 per cent of the contract price, guaranteeing performance of their obligations under the contract. Accordingly, the plaintiffs instructed the defendants, their bankers, to give on their behalf a performance guarantee for the sum of £ 50,203. Acting on these instructions the defendants requested a bank in Libya to issue a performance bond to the buyers for that sum, and promised the Libyan bank that they would pay the amount of the guarantee on tirst demand, without any conditions or proof. The Libyan bank issued a letter of guarantee for £ 50,203 to the buyers. The contract between the plaintiffs and the buyers provided for payment of the price of the goods supplied by a confirmed letter of credit. The letter of credit opened by the buyers was not a confirmed letter of credit and did not, therefore, comply with the contract. Because of that non-compliance the plaintiffs repudiated the contract. Although it was the buyers who appeared to be in default and not the plaintiffs, the buyers nevertheless claimed on the guarantee given by the Libyan bank who in turn claimed against the defendants on the guarantee they had given. The plaintiffs issued a writ against the defendants claiming an injunction to restrain them from paying any sum under the performance guarantee. A judge granted the plaintiffs an interim injunction in the terms of the injunction claimed by the writ but subsequently another judge discharged the injunction. The plaintiffs appealed to the Court of Appeal in England. It was held by a Bench consisting of Lord Denning, M.R., Browne and Geoffrey Lane, L.J. that a performance guarantee was similar to a confirmed letter of credit. Where, therefore, a bank had given a performance guarantee



it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default. The only exception to that rule was where fraud by one of the parties to the underlying contract had been established and the bank had notice of the fraud. Accordingly, as the defendants’ guarantee provided for payment on demand without proof or conditions, and was in the nature of a promissory note payable on demand, and the plaintiffs had not established fraud on the part of the buyers, the defendants were required to honour their guarantee on the demand made by the Libyan bank. It followed that the judge had been right to discharge the injunction and that the appeal would be dismissed.

20. Lord Denning, M .R . held that Justice Kerr was right in discharging the injunction and reiterated that the bank must honour its commitment. The principle must be that upon that basis trade and commerce are conducted. Lord Denning, M .R ., indicated at page 984 that seeing that the bank must pay, and will probably come down on the English suppliers on their counter-guarantee, it followed that the only remedy of the English suppliers was to sue the Libyan customers for damages. The contract contained a clause giving exclusive jurisdiction to the courts of Libya.

21. In the instant case, the learned Judge has proceeded on the basis that this was not an injunction sought against the bank but this was the injunction sought against the appellant. But the net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated man in such circumstances is not remedyless. The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. In this case, there cannot be any basis for apprehension that irretrievable damages would be caused if any. I am of the opinion that this is not a case in which injunction should be granted. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well settled principle of the law in England. This is also a well settled principle of law in India, as I shall presently notice from some of the decisions of the High Court and decisions of this Court.

22. In the instant case, there was no fraud involved and no question of irretrievable injustice was involved.

23. Before, however, I deal with the decisions of India reference may be made to a decision of the House of Lords in United City



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U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS ( p ) LTD. (Mukharji, J.) 187

Merchants ( Investm ents) Ltd. v. Royal Bank oj Canada5 where it was reiterated that the whole commercial purpose for which the system of confirmed irrevocable documentary credits had been developed in inlernational trade was to give the seller of goods an assured right to be paid before he parted with control of the goods without risk of the payment being refused, reduced or deferred because of a dispute with the buyer. It followed that the contractual duty owed by an issuing or confirming bank to the buyer to honour the credit notified by him on presentation of apparently conforming documents by the seller was matched by a corresponding contractual liability on the part of the bank to the seller to pay him the amount of the credit on presentation of the documents. The bank’s duty to the seller was only vitiated if there was fraud on the part of the seller, and the bank remained under a duty to pay the amount of the credit to the seller even if the documents presented, although conforming on their face with the terms of the credit, nevertheless contained in a statement of material fact that was not accurate. These principles must in my opinion apply in case of bank guarantees in internal trade within a country.

24. I may notice that in India, the trend of law is on the same line. In the case of Texmaco Ltd. v. State Bank of India6 one of us (Sabyasachi M ukharji, J .) held that in the absence of special equities arising from a particular situation which might entitle the party on whose behalf guarantee is given to an injunction restraining the bank in performance of bank guarantee and in the absence of any clear fraud, the bank must pay to the party in whose favour guarantee is given on demand, if so stipulated, and whether the terms are such have to be found out from the performance guarantee as such. There the court held that where though the guarantee was given for the performance by the party on whose behalf guarantee was given, in an orderly m anner its contractual obligation, the obligation was undertaken by the bank to repay the amount on ‘'first demand” and “without contestation, demur or protest and without reference to such party and without questioning the legal relationship subsisting between the party in whose favour guarantee was given and the party on whose behalf guarantee was given”, and the guarantee also stipulated that the bank should forthwith pay the amount due “notwithstanding any dispute between the parties”, it must be deemed that the moment a demand was made without protest and contestation, the bank had obliged itself to pay irrespective of any dispute as to whether there had been performance in an orderly m anner of the contractual obligation by the

5. (1982) 2 All ER 7206. AIR 1979 Cal 44




party. Consequently, in such a case, the party on whose behalf guarantee was given was not entitled to an injunction restraining the bank in performance of its guarantee. It appears that special equities mentioned therein may be a situation where the injunction was sought for to prevent injustice which was irretrievable in the words of Lord Justice Danckwcrts* in Elian and Rabbath v. Matsas and Matsas2.

25. The same view was more or less expressed by the High Court of Calcutta in its decision in the case of State Bank of India v. Economic Trading Co. S .A .A .1 See also a decision in the case of B. S. Aujla Co. Pvt. Ltd. v. Kaluram Mahadeo Prosadh. In the instant caseI have emphasised the terms ot the bank guarantee.

26. Our attention was drawn to Bench decision of the Allahabad High Court in the case of Union of India v. Meena Steels Ltd!'' There a suit by a company was filed restraining Railways to encash bank guarantee. In that suit application was made for temporary injunction. The court was of the view that the matter would still be referred to arbitration and in those circumstances if bank guarantee were permitted to be encashed, it would be improper. I am however, unable to sustain this view, in view of the well .settled principle on which bank guarantees are operated.

27. Our attention was also drawn to the judgment of the learned Single Judge of the Madras High Court in A rid Muriigan Traders v. Rashtriya Chemicals and Fertilizers Ltd., Bombay10 where the learned Single Judge expressed the opinion that there was no absolute rule prohibiting grant of interim injunction relating to bank guarantees and in exceptional cases courts would interfere with the machinery of irrevocable obligations assumed by banks, and that the plaintiff must establish a prima facie case, meaning thereby that there is a bona fide contention between the parties or serious question to be tried, and further the balance of convenience was also a relevant factor. If the element of fraud exists, then courts step in to prevent one of the parties to the contract from deriving unjust enrichment by invoking bank guarantee. In that case the learned Single Judge came to the conclusion that the suit involved serious questions to be tried and particularly relating to the plea of fraud, which was a significant factor to be taken into account and claim for interdicting the enforcement of bank guarantee should have been allowed.

7. AIR 1975 Cal 1458. AIR 1983 Cal 1069. AIR 1985 All 282

10. AIR 1986 Mad 161 : (1986) 59 Com Cas 399



U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS (P ) LTD. ( M u k h a r j i , J . ) 1 8 9

28. I am, however, of the opinion that these observations must be strictly considered in the light of the principle enunciated. Tt is not the decision that there should be a prima facie case. 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 trading operation will get jeopardised.

29. In Tarapore & Co., Madras v. M /s V /O Tractors Export, Moscow11 this Court observed that irrevocable letter of credit had a definite implication. It was independent of and unqualified by the contract of sale or other underlying transactions. It was a mechanism of great imnortance in international trade and anv interference with that mechanism was bound to have serious repercussions on the international trade of this countrv. The court reiterated that the autonomy of an irrevocable letter of credit was entitled to protection and except in verv exceptional circumstances courts should not interfere with that autonomy.

30. These observations a fortiori applv to a bank guarantee because unon bank guarantee revolves manv of the internal trade and transactions in a countrv Tn United Commercial Bank v. Bank of India12. this Court was dealin" with iniunction restraining the bank in respect of letter of credit. This Court observed that the H b h Court was wrons in granting the tem rorarv iniunction restraining the anpellant bank from recalling the amount naid to the respondent bank. The Court reiterated that courts nsuallv refrain from granting iniunction to restrain the performance of the contractual obligations arising out of a letter of credit, or a bank guarantee between one bank and another. If such temporary iniunction were to be granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when pavment was made under reserve to another Lank or in terms of the letter of guarantee or credit executed bv it, the whole banking system in the country would fail.

31. The court however, observed that the opening of a confirmed letter of credit constituted a bargain between the banker and the seller of the goods which imposed on the banker an absolute obligation to pay. The banker was not bound or entitled to honour the bills of exchange drawn by the seller unless they and such accompanying documents

11. (1969) 2 SCR 920 : (1969) 1 SCC 233 : AIR 1970 SC 89112. (1981) 3 SCR 300: (1981) 2 SCC 766: AIR 1981 SC 1426



as might be required thereunder, were in exact compliance with the terms of the credit.

32. This principle was again reiterated by this Court in Centay (India) Ltd. v. Vinmar Im pex In c}3 where the appellant entered into a contract with the respondent company of Singapore for supply of certain goods to it. The contract, inter alia stipulated that the bills of lading should mention ‘shipping mark 5202’. Pursuant to the contract, at the request of the appellant the Allahabad Bank opened a letter of credit, in favour of the respondent. The respondent thereupon despatched the goods covered by the bills of lading.

33. This Court was concerned with the bank guarantee and referred to the previous decision of this Court in United Commercial Bank v. Bank of India12. This Court found that this case was covered. The court observed that the court should not, in transaction between a banker and banker, grant an injunction at the instance of the beneficiary of an irrevocable letter of credit, restraining the issuing bank from recalline the amount paid under reserve from the negotiating bank, acting on behalf of the beneficiary against a document of guarantee, indemnity at the instance of the beneficiary.

34. On the basis of these principles I reiterate that commitments of banks must be honoured free from interference bv the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. Tt is onlv in exceptional cases that is to sav in case of fraud or in case of irretrievable injustice be done, the court should interfere.

35. Mr Tarkunde submitted before us that in this case the grievance of the appellant was that there was delav in performance and defective machinery had been supplied. He submitted that if at this staf»e appellant was allowed to enforce the bank guarantee, damage would be done. He submitted before us that appellant could not be permitted to take advantage of illegality by invoking the bank guarantee. But in mv opinion these contentions cannot deter us — in view of the principle well settled that there should not be interference in trade. This is not a case where irretrievable injustice would be done by enforcement of bank guarantee This is also not a case where a strong prima facie case of fraud in entering into a transaction was made out Tf that is the position, then the High Court should not have interfered with the bank guarantee.

36. Tn the aforesaid view of the matter, this appeal must be allowed. The judgment and order of the Allahabad High Court




U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS (p) LTD. (Shetty, J.) 191

dated February 20, 1987 must be set aside and the order of the learned Civil Judge, Lucknow dated August 8, 1986 restored.

37. In the facts and circumstances of the case parties will bear their own costs of this appeal.

J a g a n n a t h a S h e t t y , J. ( concurring) — I agree respectfully with the judgment of my learned brother Sabyasachi M ukharji, J. I wish, however, to draw attention to some of the aspects of the matter to which I attach importance. The crux of the m atter relates to the obligation assumed by the bank under a performance guarantee. W hether the obligation is similar to the one arising under a letter of credit ? W hether the court could interfere in regard to such obligation, and if so, under what circumstances ? These are the questions raised in this appeal.

39. The facts which are relevant for my purpose are these : On M ay 17, 1983, M /s Singh Consultants & Engineers (Pvt.) Ltd. f“S C E (P ) L td .”] entered into a contract with U. P. Cooperative Federation Ltd. ( “U PCO F Ltd.” ) for constructing a Vanaspati m anufacturing plant at Halduchaur, District Naini+al. IT. P. The contract required that U PCO F Ltd. should be given two bank guarantees for proper construction and successful commissioning of the plant. In accordance with the terms of the contract, the Bank of India gave two guarantees in favour of U PCO F Ltd.. one for Rs 16,50,000 and another for Rs 33.00.000. These contain similar terms and conditions. Thereunder, the bank has undertaken not to revoke the guarantee in any event before the exnirv of the due date. The bank has also undertaken to make unconditional navments on demand, without reference to SC E (P ) Ltd. The °oarantee also Drovides that the U PC O F Ltd. was the sole iudee for deciding whether SCF,(T) Ltd. has fulfilled the terms of the contract or not. The guarantee was thus undisputedlv irrevocable with absolute discretion for U PC O F Ltd. to invoke the same.

40. The disrsute arose between the parties as to the erection and oerformance of the plant. The SC E (P ) Ltd annrehending that the bank guarantees would be invoked bv the U PCO F Ltd., approached the Court of the Civil Judge. Lucknow for a restraint order against the latter. The action was brought under Section 41 of the Arbitration Act read with Order 39 Rules 1 and 2 of the Code of Civil Procedure contending inter alia, that there was no default in the construction or delivery of possession of the plant. But the UPCOF Ltd. had a different version. Tt contended that the construction was not within the time schedule and performance of the plant was not up to the mark. It also contended that the court should not grant injunction in the matter.




41. The trial court refused to interdict UPCOF Ltd. The SC E(P) Ltd. took up the matter in revision before Lucknow Bench of the Allahabad High Court. The learned Judge before whom the matter came up for disposal was of the view that SC E(P) Ltd. has made out a prima facie case. It has prima facie proved that the plant was delivered after a trial run and commercial production had started. So stating, learned Judge allowed the revision and granted the relief sought for. The UPCOF Ltd. was restrained from invoking the bank guarantees. The learned Judge, however, issued a direction to SC E(P) Ltd. to keep alive the bank guarantees during the pendency of the arbitration proceedings.

42. The UPCOF Ltd., by special leave has come up before this Court challenging the validity of the order of the High Court. The primary question for consideration is whether the High Court was justified in restraining the appellant from invoking the bank guarantees ? The submission of Mr A. B. Diwan learned counsel for the appellant resled on the law governing the irrevocable letter of credit where courts keep themselves away from the liability assumed by the banks. In support of the submission, the counsel strongly relied upon the two decisions of this Court (i) United Commercial Bank v. Bank of India12 and (ii) Centax (India) Ltd. v. Vinmar Im pex Inc.13 MY V. M. Tarkunde. learned counsel for the respondent on the other hand, urged that both the said decisions are not relevant since the present ease concerns with rights and obligations of parties under a construction contract. The rights under the contract in question are justiciable in the court of law. Tine performance guarantee given by the bank flows from the terms of the construction contract. But the issues to be determined in the suit do not relate to the obligations of the bank under the guarantees given and the bank is also not a party to the suit. The counsel further urged that the respondent has established a prima facie case to justify the grant of injunction and this Court should not interfere with the discretionary relief granted.

43. The argument for the respondent is attractive but it seems to overlook and basic nature of the case. The basic nature of the case relates to the obligations assumed by the bank under the guarantees given to UPCOF Ltd. If under law, the bank cannot be prevented by SC E(P) Ltd. from honouring the credit guarantees, the UPCOF Ltd. also cannot be restrained from invoking the guarantees. What applies to the bank must equally apply to UPCOF Ltd. Therefore, the frame of the suit by not impleading the bank cannot make any difference in the position of law. Equally, it would be futile to contend that the court was justified in granting the injunction since it has found a prima facie case in favour of the SC E(P) Ltd. The


U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS (p ) LTD. ( Shetty , J.) 193

question of examining the prima facie case or balance of convenience does not arise if the court cannot interfere with the unconditional commitment made by the bank in the guarantees in question.

44. The modern documentary credit had its origin from letters of credit. Wc may, therefore, begin the discussion with the traditional letter of credit. Paul R. Verkuil in an article14 explains the salient features of a letter of credit in these terms :

The letter of credit is a contract. The issuing party — usually a bank — promises to pay the ‘beneficiary’ — traditionally a seller of goods — on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of credit thus evidences — irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit.

45. The letter of credit has been developed over hundreds of vears of international trade. Tt was most commonly used in conjunction with the sale of goods between "eosraphically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. Tt was found difficult for the seller to relv upon the credit of an unknown customer. It was also found difficult for a buyer to pav for goods prior to their delivery. The bank’s letter of credit came into existence to bridge this gap. In such transactions, the seller ("beneficiary) receives payment from issuins bank when he presents a demand as per terms of the documents. The bank must ray if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shinned the sroods or whether the goods conformed to the requirements of the contract. Anv dispute between the buyer and the seller must be settled between themselves. The courts, however, carved out an excention to this rule of absolute independence. The courts held that if there has been “fraud in the transaction” the bank could dishonour beneficiary’s demand for ravm ent. The courts have generally rerm itted dishonour only on the fraud of the beneficiary, not the fraud of somebody else.

46. Tt was perhaps for the first time the said exception of fraud to the rule of absolute independence of the letter of credit has been applied by Shientag, J. in the American case of Sztejn v. / . Henry

H . '‘Bank Solvency and Guaranty Letters of Credit-’, Stanford Law Review, V. 25 1972-73 at p 719





Schroder Banking Corporation15. M r Sztejn wanted to buy some bristles from India and so he entered into a deal with an Indian seller to sell him a quantity. The issuing bank issued a letter of credit to the Indian seller that provided that, upon receipt of appropriate documents, the bank would pay for the shipment. Somehow M r Sztejn discovered that the shipment made was not crates of bristles, but crates of worthless material and rubbi-h. He went to his bank which probably informed him that the lette of credit was an independent undertaking of the bank and it must pay.

47. M r Sztein did not take that sit ing down. He went to court and he sought an injunction. Now in 1941 people just did not get iniunctions against payment under letters of credit. The defendant bank, against its customer, filed the equivalent of a motion to dismiss for failure to state a claim. Tn that posture all the allegations of the complaint were taken as true, and those allegations were sross fraud that the holders in due course were involved. On those facts, the court issued an injunction against payment.

48. The exception of fraud created in the above case has been codified in Sections 5-114 of the Uniform Commercial Code. It has been accepted by courts in England. See : (i) Hamzeh Melas and Sons v. British hnex Industries L td } , (ii) R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd.3, (iii) Edward Owen Engineering Ltd. v. Barclays Bank International Ltd.* and (iv) UCM (Investments) v. Royal Bank of Canada5. The last case is of the House of Lords where Lord Diplock in his speech said (at p. 725) :

The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment.

To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception : that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in




U .P .C .F . LTD. V. SINGH CONSULTANTS AND ENGINEERS ( p ) LTD. (Shetty, J.) 195

the American cases, of which the leading or ‘landmark’ case is Sztejn v. / . Henry Schroder Banking Corp.™ This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd.* though this was actually a case about a performance bond under which a bank assumes obligations to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turbi causa non oritur actio or, if plain English is to be preferred, ‘fraud unravels all’. The courts will not allow their process to be used by a dishonest person to carry out a fraud.

49. This was also the view taken by this Court in United Commercial Bank case12. There A. P. Sen. J. speaking for the court, said (pages 323 and 324) : (SCC pp. 783-84. paras 40-42)

. . . the rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it. in the absence of the appropriate provisions in the letter of credit.

It is somewhat unfortunate that the High Court should have granted a temporary injunction, as it has been done in this case, to restrain the appellant from making a recall of the amount of Rs 85,84,456 from the Bank of India in terms of the letter of guarantee or indemnity executed by it. The courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another. If such temporary injunctions were to be granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or cerdit executed by it, the whole banking system in the country would fail.

In view of the banker’s obligation under an irrevocable letter of credit to pay, his buyer-customer cannot instruct him not to pay.

50. In Centax (India) Ltd}*, this Court again speaking through A . P. Sen, J. following the decision in the United Commercial Bank case said : “We do not see why the same principles should not apply to a banker’s letter of indemnity.”




51. It is true that both the decisions of this Court dealt with a contract to sell specific commodities or a transaction of sale of goods with an irrevocable letter of credit. But in modern commercial transactions, various devices are used to ensure performance by the contracting parties. The traditional letter of credit has taken a new meaning. In business circles, stand-by letters of credit are also used. Performance bond and guarantee bond are also the devices increasingly adopted in transactions. The courts have treated such documents as analogous to letter of credit.

52. A case involving the obligations under a performance guarantee was considered by the Court of Appeal in Edward Owen Engineering Ltd. v. Barclay’s Bank International Ltd.* The facts in that case are these : English sellers entered into a contract to supply and erect glass-houses in Libya. The Libyan buyers were to open an irrevocable letter of credit in favour of the sellers. The sellers told their English bank to give a performance guarantee. The English bank instructed a Libyan bank to issue a performance bond in favour of the buyers for a certain sum and gave their guarantee payable on demand without proof or conditions to cover that sum. The Libyan bank issued a bond accordingly. The sellers received no confirmed letter of credit and refused to proceed with the contract. The sellers obtained an interim injunction to prevent the English bank from paying on the guarantee. On appeal Lord Denning, M .R . said :

So, as one takes instance after instance, these performance guarantees are virtually promissory notes payable on demand. So long as the Libyan customers make an honest demand, the banks are bound to pay and the banks will rarely, if ever, be in a position to know whether the demand is honest or not. At any rate they will not be able to prove it to be dishonest. So they will have to pay.

And said :

All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the custom er; nor with the question whether the supplier has performed his contractual obligation or n o t ; nor with the question whether supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice.



U .P .C .K LTD. V. SlNGH CONSULTANTS AND ENGINEERS ( p ) LTD. (Shetty, J.) 197

53. Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank’s obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an “egregious nature as to vitiate the entire underlying transaction”. It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction.

54. The court, however, should not lightly interfere with the operation of irrevocable documentary credit. I agree with my learned brother that in order to restrain the operation of the irrevocable letter of credit, performance bond or guarantee, there should be serious dispute to be tried and there should be a good prima facie acts of fraud. As Sir John Donaldson, M . R . said in Bolivinter Oil SA v. Chase Manhattan Bank16 :

The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank’s knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged.

55. From the above discussion, what appears to me is this : The sound banking system may, however require more caution in the issuance of irrevocable documentary credits. It would be for the banks to safeguard themselves by other means and generally not for the court to come to their rescue with injunctions unless there is established fraud. In the result, this appeal must be allowed. The




judgment and order of the Allahabad High Court dated February 20, 1987 must be set aside and the order of learned Civil Judge, Lucknow dated August 8, 1986 restored.


( B e f o r e Sa b y a sa c h i M u k h a r j i a n d S. R a n g a n a t h a n , JJ.)

GOVIND . . A ppellan t;Versus

D r JEETSINGH Respondent.

Civil Appeal No. 3117 of 1984f, decided on November 25, 1987

Rent Control and Eviction — Eviction — Bona fide requirement of landlord — To be assessed objectively — Regard to subsequent events — Scope of High Court’s interference in second appeal with findings of fact of first appellant court — M. P. Accommodation Control Act, 1961, Section 12(l)(e)

The respondent-landlord had in his possession six rooms out of which three rooms were being used by his first wife. The appellant-tenant was also residing in the same building. The respondent filed an eviction suit under Section 12(l)(e) of the M. P. Accommodation Control Act on ground that the premises let out to the appellant was required bona fide for his own occupation. The trial court decreed the suit, but the first appellate court set aside the decree and the High Court reversed the finding of the first appellate court and restored that of the trial court. However, subsequent to the decision of the High Court the first wife of the landlord had died and three rooms which were in her occupation became vacant. Allowing the tenant’s appeal the Supreme Court

Held :Whether in a particular situation the need was reasonable or bona

fide must be judged from the objective viewpoint and not merely by assertion or denial of the parties. In doing so court should take into cautious consideration all subsequent events. In the present case prima facie it might be possible that the High Court was in error in interlermg with the findings of the appellate court as in second appeal the scope of interference by the High Court is limited, but in view ot the subsequent event of the death of the landlord’s wife after decision of the High Court, it must be held that there was no more bona fide need of the landlord to evict the tenant of the premises in question. (Paras 6 and 8)

Mattulal v. Radhe Lai, (1974) 2 SCC 365 : (1975) 1 SCR 127, relied onR-M/ 8416/C

tFrom the Judgment and Order dated December 16, 1983 of the Madhya Pradesh High Court in Civil Second Appeal No. 166 of 1980


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15. Accordingly, the appeals are allowed and the orders of the Claims Tribunal and the High Court are modified where only the appellant has been held to be liable to pay the compensation and the respondent-insurance a company has been absolved of the liability. The respondent-insurance company shall be jointly and severally liable to pay the compensation to the claimants. There shall be no order as to costs.

(1996) 5 Supreme Court Cases 34 b(Before S.C. A graw aland G.T. N anavati, JJ.)

HINDUSTAN STEELWORKSCONSTRUCTION LTD. . . Appellant;

VersusTARAPORE & CO. AND ANOTHER . . Respondents, c

Civil Appeals Nos. 4713-14 of 1990+, decided on July 9, 1996 B anker and Custom er — Bank guarantee — Injunction restraining

encashm ent of — Held, can be granted by court only in case of frau d or in case of irretrievable injustice if encashm ent allowed — Any other special circum stances and/or special equity would not constitute ground for granting injunction — C ontract of bank guarantee between the bank and the beneficiary (j is independent of the prim ary contract between the party furnishing the bank guarantee and the beneficiary — Therefore, encashm ent of an unconditional bank guarantee does not depend upon adjudication of dispute between the parties to the prim ary contract — For encashm ent no distinction can also be m ade between bank guarantee for due perform ance of the works contract and th a t given tow ards security deposit for the contract o r any other kind of guarantee — W here bank guarantee stipulated tha t the beneficiary shall be the e sole and final judge on the question of breach of the prim ary contract and the bank shall pay the am ount covered by the guarantee on dem and w ithout any dem ur and on th a t basis beneficiary m ade dem and for encashm ent of the bank guarantee on breach of the prim ary contract, held, High C ourt, in the absence of a plea of fraud , erred in granting injunction restraining the encashm ent on the ground th a t special circumstances and/or special equities existed in view of pendency of dispute relating to the prim ary contract which had to be f adjudicated by a rb itra to r and th a t the stipulation m aking the beneficiary as the sole judge was invalid — Civil Procedure Code, 1908, Or. 39 R. 1 — C onstitution of India, A rt. 226 — Stay/injunction

A works contract was awarded by the appellant HSCL to the respondent contractor. A bank gave a number of guarantees in favour of HSCL at the instance of the respondent. Those bank guarantees were towards mobilisation of advances, _ security deposit, securing the working funds provided by HSCL to the respondent and due performance of the contract. By these bank guarantees, except the guarantee which was to secure the working funds, the bank undertook to indemnify HSCL against any loss or damage caused to or suffered by it by reason of any breach by the contractor of any term and condition of the contract. It was also stipulated in the bank guarantees that HSCL shall be the sole judge on the question as to whether the

t From the Judgment and Order dated 28-12-1989 of the Andhra Pradesh High Court in C R.Ps.Nos 3865 and 3866 of 1989




H IN D U STA N STEELW O R K S C O N ST R U C TIO N LTD. v. TA RA PO R E & CO . 35

contractor had committed any breach of the contract and what was the extent of loss or damage. It was further stipulated therein that the decision of HSCL in this behali shall be treated as final and binding on the bank. By furnishing the bank guarantee to secure the working funds the bank undertook to pay HSCL on demand any amount payable by the contractor without any demur and protest, without any reference to the contractor and such demand by HSCL had to be regarded as conclusive and binding on the bank notwithstanding any difference between the HSCL and the contractor. As the contractor could not complete the works under the contract within the stipulated time and even within the extended time, a dispute arose between the

£ parties which were referred to arbitrators. During the pendency of the dispute before arbitrators, by mutual agreement the contract work was reduced but when even the reduced work could not be completed by the contractor within the further extended time, HSCL rescinded the contract and demanded encashment of the bank guarantees by the bank because of breach of the contract committed by the contractor. The contractor filed petitions under Section 41 (b) read with Schedule II of the Arbitration Act in court seeking injunction restraining HSCL from encashing

c the bank guarantees. The court finding that bank guarantees were unconditional refused to grant the injunction and dismissed the petitions. But the High Court in revision, after taking note that fraud was not pleaded went on to examine whether there were special equities or special circumstances justifying granting of an injunction. It took the view that a term in a bank guarantee making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages was invalid and that no amount could be said to be due till an adjudication in that

d behalf was made either by a court or an arbitrator, as the case may be. It also took the view that in India only a reasonable amount could be awarded by way of damages even when the parties to the contract provided for liquidated damages. On these grounds the High Court rejected the contention raised on behalf o f HSCL that it was the sole judge to decide as to whether the contractor had committed a breach of the contract and what was the extent o f damage caused to it. It also held that no irretrievable injustice would be caused to HSCL as it could recover damages from

e the bank and the contractor in case it succeeded in the case and that the interest of HSCL could be safeguarded by directing the contractor to go on extending the bank guarantees till the matter was settled by the arbitrators. The High Court therefore allowed the revision petitions and by an order of injunction restrained HSCL from enforcing the bank guarantees, except the one which was to secure the working funds, till the arbitrators pass an award in its favour. As regards the bank guarantee

, relating to secure the working funds, also it has restrained HSCL from encashing the said guarantee till the balance of the amounts advanced together with interest and the value of the material supplied was ascertained. Before the Supreme Court in appeal by special leave by HSCL it was submitted that in the matter of encashment of a bank guarantee interference by courts is permissible only when fraud is pleaded and prima facie established and it is further shown that irretrievable injustice would otherwise be caused. On the other hand the respondent contended that fraud was not

g the only ground requiring interference by courts and if it was made out that exceptional circumstances creating special equities existed then the court could and should restrain the beneficiary from encashing the bank guarantee. Allowing the appeals with costs

A 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 guarantee is given and the beneficiary. What the High Court has observed would be applicable only to the

H e ld :




36 SUPREME COURT CASES (1996)5 SCC

parties to the underlying transaction or the primary contract but can have no relevance to the bank guarantee given by the bank, as the transaction between the bank and the beneficiary is independent and of a different nature. In case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute ot proceeding between the party at whose instance the bank guarantee is given and the beneficiary. Commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere. In this case fraud had not been pleaded and the relief for injunction was sought by the fo respondent contractor on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or special equities which had been pleaded in this case were that there was a serious dispute on the question as to who had committed breach of the contract, that the contractor had a counter-claim against the appellant, that ihe disputes between the parties had been referred to the arbitrators and that no amount could be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. These factors c are not sufficient to make this case an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, therefore, not right in restraining the appellant from enforcing the bank guarantees.

(Paras 14 and 23)U.P Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC

174; General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd., (1991) 4 SCC 230, explained and relied on d

United Commercial Bank v. Bank o f India, (1981) 2 SCC 766: (1981) 3 SCR 300; Centax (India) Ltd. v. Vmmar lmpex Inc., (1986) 4 SCC 136; Tarapore & Co. v. V.O. Tractors Export, (1969) 1 SCC 233: (1969) 2 SCR 920, relied on

Svenska Handelsbanken v. Indian Charge Chrome, (1994) 1 SCC 502, explained and distinguished

Hamzeh Malas and Sons v. British Imex Industries Ltd., (1958) 2 QB 127: (1958) 1 All ER 262; R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., (1977) 3 WLR 752: (1977) 2 All ER 862, approved

Edward Owen Engg. Ltd. v. Barclays Bank International Ltd., (1978) 1 All ER 976: (1977)3 WLR 764; Union o f India v. Raman Iron Foundry, (1974) 2 SCC 231: AIR 1974 SC 1265; Elian and Rabbath v. Matsas and Matsas, (1966) 2 Lloyd’s Rep 495; Handerson v. Canadian Imperial Bank of Commerce and Peat Marwick Ltd., 40 British Columbia LR 318; Itek Corpn. v. First National Bank o f Boston, 566 Fed Supp 1210, referred to f Further, the H igh Court also erred in drawing distinction between a guarantee

for due performance o f a works contract and a guarantee given towards security deposit for that contract. The said distinction appears to be the result o f the same fallacy com m itted by the High Court o f not appreciating the distinction between the primary contract between the parties and a bank guarantee and also the real object o f a bank guarantee and the nature o f the bank’s obligation thereunder. W hether the bank guarantee is towards security deposit or m obilisation advance or working funds g or for due performance o f the contract if the sam e is unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without a demur and that the beneficiary shall be the sole judge not only on the question o f breach o f contract but also with respect to the amount o f loss or damages, the obligation o f the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee. (Para 14)



HINDUSTAN STEELWORKS CONSTRUCTION LTD. v. TARAPORE & CO. (Nanavati, J.)

37

General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd., (1991) 4 SCC 230; Larsen and Toubro Ltd. v. Maharashtra SEB, (1995) 6 SCC 68; Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd., (1995) 6 SCC 76, retied on

R-M/T/l 6386/CAdvocates who appeared in this case :

Dr Shankar Ghosh, Senior Advocate (Badar Durrez Ahmed, Advocate, with him) for the Appellant;

G.L. Sanghi, Senior Advocate (K.R. Nambiar and R. Murari, Advocates, with him) for the Respondents.

Chronological list o f cases cited 1.

on page(s)(1995) 6 SCC 76, Hindustan Steel Workers Construction Ltd. v. G.S. Atwal

& Co. (Engineers) (P) Ltd. 4 3 /(1995) 6 SCC 68, Larsen and Toubio Ltd. v. Maharashtra SEB 4 3 /(1994) 1 SCC 502, Svenska Handelsbanken v. Indian Charge Chrome 46b (1991) 4 SCC 230, General Electric Technical Services Co. Inc. v. Punj

Sons (P) Ltd. 43d, 45f-g (1988) 1 SCC 174, U.P. Coop. Federation Ltd. v. Singh Consultants and

Engineers (P) Ltd. 40a, 41 a, 42d, 44c, 45d. 45g, 46d-e(1986)4SC C 136, Centax( India) Ltd. v. Vimnar Impex Inc. 41a,42c-<f (1981) 2 SCC 766: (1981) 3 SCR 300, United Commercial Bank v. Bank o f

India 4 la ,4 le ,4 2 b(1978) 1 All ER 976: (1977) 3 WLR 764, Edward Owen Engg. Ltd. v.

Barclays Bank International Ltd. 39g-h (1977) 3 WLR 752: (1977) 2 All ER 862, R.D. Harbottle (Mercantile) Ltd.

v. National Westminster Bank Ltd. 41/, 45a (1974) 2 SCC 231: AIR 1974 SC 1265, Union o f India v. Raman Iron

Foundry 40c-d (1969) 1 SCC 233: (1969) 2 SCR 920, Tarapore & Co. v. V.O. Tractors

Export 4 \b -c(1966) 2 Lloyd’s Rep 495, Elian and Rabbath v. Matsas and Matsas 46g (1958) 2 QB 127: (1958) 1 All ER 262, Hamzeh Malas and Sons v. British

Imex Industries Ltd. 41c566 Fed Supp 1210, Itek Corpn. v. First National Bank o f Boston 47 a-b 40 British Columbia LR 318, Handerson v. Canadian Imperial Bank of

Commerce and Peat Marwick Ltd. 46g-h

The Judgment of the Court was delivered byN a n a v a t i , J.— These two appeals, by special leave, are directed against

the judgment and order passed by the Andhra Pradesh High Court in Civil Revision Petitions Nos. 3865 and 3866 of 1989. The High Court allowed the revision petitions, set aside the common order passed by the Subordinate Judge, Visakhapatnam in OPs Nos. 456 and 457 of 1988 and passed an order of injunction restraining Hindustan Steelworks Construction Ltd. (the appellant and for short referred to as HSCL) from encashing the bank guarantees given by Bank of India in its favour at the instance of M/s Tarapore & Co. (Respondent 1 and hereinafter referred to as the contractor).

2. The HSCL awarded a contract to the contractor for construction of civil works in its Visakhapatnam Steel Plant. On 16-3-1984 a letter of intent

2.3.4.

5.

6. 7.

9.

10.

11 .

12.13.

14.15.





was issued and the formal contract was signed on 25-10-1984. It was a lump sum contract for Rs 19,21,36,804 and was to be completed on or before 15-11-1985. The contractor was not able to complete the work within the a stipulated time and at its request the time for completion of the work was extended till 31-3-1987. Even during this extended period the contractor could not complete the work. It appears that some disputes arose between the appellant and the contractor and on 28-8-1986 the contractor appointed an arbitrator and called upon the appellant to appoint its arbitrator for deciding those disputes. Now those disputes are pending before the two b arbitrators appointed by the parties. In August 1988 by mutual agreement the contract work was reduced and the contract price was fixed at Rs 4.5 crores. This reduced work also was not completed within the extended time and at the request of the contractor the time for completing the work was extended till 30-9-1988. As the contractor did not complete the work by that time the HSCL rescinded the contract on 17-10-1988. c

3. In between 30-1-1984 and 8-12-1987, Bank of India gave 14 guarantees in favour of HSCL at the instance of the contractor. Bank Guarantee No. 3/21 was furnished on 28-1-1984 and No. 3/39 on 21-2-1984 for Rs 10 lakhs and 40 lakhs respectively towards mobilisation advances. Bank Guarantee No. 3/58 dated 28-3-1984 for Rs 17,04,580 was towards security deposit. Bank Guarantee No. 6/175 given on 31-7-1987, initially for d Rs 45 lakhs and subsequently reduced to Rs 36,25,000, was to secure the working funds provided by HSCL to the contractor and also for due performance of the contract. Rest of the bank guarantees were furnished on different dates as and when security deposits were released by HSCL. By these bank guarantees, except Bank Guarantee No. 6/175, the bank has undertaken to indemnify HSCL against any loss or damage caused to or e suffered by it by reason of any breach by the contractor of any term and condition of the contract. It is also stipulated in the bank guarantees that HSCL shall be the sole judge on the question as to whether the contractor has committed any breach of the contract and what is the extent of loss or damage. It is further stipulated therein that the decision of HSCL in this behalf shall be treated as final and binding on the bank. By furnishing Bank f Guarantee No. 6/175 the bank has undertaken to pay HSCL on demand any amount payable by the contractor without any demur and protest, without any reference to the contractor and such demand by HSCL has to be regarded as conclusive and binding on the bank notwithstanding any difference between the HSCL and the contractor.

4. On the very day on which the appellant rescinded the contract, that is 9 on 17-10-1988, HSCL by three separate demand letters informed the bank that the contractor has failed to fulfil its obligations under the contract and has committed breach of its terms and conditions and by reasons thereof it has suffered loss/damage far exceeding the amount guaranteed by the bank, but for the purpose of invoking the bank guarantees it has assessed such loss/ damage at Rs 1,49,76,580. By those letters it also called upon the bank to ^ pay to the appellant the said sum without any demur or protest.


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HINDUSTAN STEELWORKS CONSTRUCTION LTD. v. TARAPORE & CO 39 (Nanavati, J.)

5. The contractor on coming to know of this demand filed OPs Nos. 456 a of 1988 and 457 of 1988 under Section 41 (b) read with Schedule II of the

Arbitration Act in the Court of Principal Subordinate Judge at Visakhapatnam and prayed for an injunction restraining HSCL from encashing the bank guarantees. OP No. 457 of 1988 was in respect of Bank Guarantees Nos. 3/21 and 3/39 and OP No. 456 of 1988 for the other bank guarantees. The ground urged for granting the injunction was that there are

b genuine disputes between the parties and those disputes have been referred to the arbitrators for adjudication. The court finding that the bank guarantees are unconditional refused to grant injunction and dismissed both the petitions by a common judgment.

6. The contractor thereupon filed two revision petitions before the Andhra Pradesh High Court. CRP No. 3865 of 1989 was filed against the

c judgment and order passed in OP No. 456 of 1988 and CRP No. 3866 of 1989 was filed against the judgment and order passed in OP No. 457 of1988. It was contended on behalf of the contractor that the bank guarantees were given by way of security for due performance of the contract and for the purposes connected therewith and therefore they would be encashable only when the arbitrators decide that the contractor has committed a breach

d of the contract and the amount of loss or damage caused to or suffered by HSCL is quantified. It was submitted that as the disputes in this behalf are pending before the arbitrators the demand for encashment of the bank guarantees was premature. After referring to this contention the High Court observed as under:

“It is now well established that unless there is fraud or special e circumstances or equities exist, the beneficiary cannot be restrained

from encashing the letter of credit, even if there are disputes between the beneficiary and the person at whose instance the letter of credit was given by the bank. The same principle is extended in regard to the performance guarantees or performance bonds executed by the banks in favour of the beneficiaries. So injunctions have to be refused restraining

the beneficiary from encashing the letter of credit or performance guarantee or bond and the only exceptions are in cases of fraud or where special equities exist or where special circumstances warrant issue of injunction to prevent irretrievable injustice being caused.”

The High Court after taking a note of the fact that fraud is not pleaded in this case, went on to examine whether there were special equities or special

3 circumstances justifying granting of an injunction. It then considered the reasons why the courts refuse to grant injunction against encashment of confirmed letter of credit and the case-law on the point. Thereafter it referred to Edward Owen Engg. Ltd. v. Barclays Bank International Ltd.1 wherein it is held that performance guarantee stands on the same footing as a confirmed letter of credit and then observed that principles underlying the

1 (1978) 1 All ER 976: (1977) 3 WLR 764


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40 SUPREME COURT CASES ( 1996) 5 SCC

letters of credit are made applicable in England even in regard to performance guarantees or bonds. It distinguished the decision of this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.2 a on the ground that “it is not a case where it was observed that in our country also the performance guarantee should be treated which is like confirmed letter of credit in order to consider whether injunction has to be refused or granted”. After noticing that bank guarantees in this case except Bank Guarantees Nos. 3/21, 3/39 and 6/175 were given towards security deposits only it observed that: “Neither of the learned counsels had drawn attention ^ of this Court to any decision granting or refusing injunction in regard to a bank guarantee given by way of security deposit to indemnify against any loss or damage caused by breach of the terms and conditions of the contract.” It then considered the position of law with respect to liquidated damages in our country and observed that: “Hence there cannot be any agreement in regard to the amount that has to be allowed except the upper c limit that can be fixed, in case of breach.” Relying upon the decision of this Court in Union o f India v. Raman Iron Foundry3 the High Court held that any term in the agreement that one of the parties shall be the sole judge to quantify the same has to be held as invalid. According to the High Court liability to pay damages would arise only after it is established that there is a breach of the contract and it is for the court or the arbitrator to decide as to ^ who has committed the breach. Till the liability is ascertained, it cannot be said that there is a “debt due or debt owing”. On these grounds the High Court rejected the contention raised on behalf of HSCL that it was the sole judge to decide as to whether the contractor has committed a breach of the contract and what is the extent of damage caused to it. It also held that in the absence of any determination by the Court or the arbitrator no amount can be said to be payable by the contractor to HSCL by way of damages and, e therefore, it will be just and proper to restrain HSCL from enforcing the bank guarantees. It also held that no irretrievable injustice would be caused to HSCL as it can recover damages from the bank and the contractor in case it succeeds in the case and that the interest of HSCL can be safeguarded by directing the contractor to go on extending the bank guarantees till the matter is settled by the arbitrators. The High Court therefore allowed both the revision petitions and by an order of injunction has restrained HSCL from enforcing the bank guarantees, except Bank Guarantee No. 6/175, till the arbitrators pass an award in its favour. As regards Bank Guarantee No. 6/175 also it has restrained HSCL from encashing the said guarantee till the balance of the amounts advanced together with interest and the value of the material supplied is ascertained. For ascertaining the amount due, the High g Court has remanded OP No. 456 of 1988 to the lower court.

7. What was contended by Dr Shankar Ghosh, the learned Senior Counsel for the appellant, was that the High Court has not stated nor applied the law correctly. He submitted that in the matter of encashment of a bank

2 (1988) 1 SCC 1743 (1974) 2 SCC 231: AIR 1974 SC 1265


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HINDUSTAN STEELWORKS CONSTRUCTION LTD. v. TARAPORE & CO. 41 (Nanavati, J.)

guarantee the Court should not as a rule interfere unless it is a clear case of a fraud and is likely to result in irretrievable injustice. The law is so declared,

according to him, by the decisions of this Court in United Commercial Bank v. Bank o f India4, Centax (India) Ltd. v. Vinmar Impex Inc.5, U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd1. The learned counsel for the respondents, on the other hand, contended that though fraud is an established exception to the general rule regarding

b interference with the autonomy of irrevocable letter of credit or a bank guarantee that is not the only exception and the Court can and should interfere where special circumstances or special equities exist and they are likely to result in irretrievable injustice.

8. With respect to an irrevocable letter of credit this Court in the case of Tarapore & Co. v. V.O. Tractors Export6 pointed out that such a contract

c between the banker and the beneficiary is independent of and unqualified by the contract of sale or other underlying transaction and quoted with approval the following observations made by Jenkins, L.J. in Hamzeh Malas and Sons v. British Imex Industries Ltd.1-. (SCC p. 241, para 18)

“We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit

d constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers’ confirmed credits are of that character, and in my judgment, it would be wrong for this

e Court in the present case to interfere with that established practice.”9. In United Commercial Bank v. Bank o f India4 this Court again

emphasised that obligation of a bank in such a case is absolute, as a letter of credit constitutes the sole contract with the banker and the bank issuing the letter of credit has no concern with any question that may arise between the seller and the purchaser of the goods. Therein the following passage from

f the judgment o f Kerr, J. in R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd.* was quoted as a correct statement of law on the point: (SCC p. 784, para 43)

“It is only in exceptional cases that the courts will interfere with the machinery o f irrevocable obligations assumed by banks. They are the lifeblood o f international commerce. Such obligations are regarded as

g collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants

4 (1981) 2 SCC 766: (1981) 3 SCR 3005 (1986) 4 SCC 136

^ 6 (1969) 1 SCC 233: (1969) 2 SCR 9207 (1958) 2 QB 127: (1958) 1 All ER 2628 (1977) 3 WLR 752: (1977) 2 All ER 862




to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks a which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments o f banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international commerce could be irreparably damaged.”10. In United Commercial Bank case4 the High Court had granted a fo

temporary injunction restraining the United Commercial Bank from makinga recall of the amount paid by it under reserve against the relative bills of exchange drawn against the letter of credit issued by it, from the Bank of India, and in terms of the letter of guarantee or indemnity executed by that Bank. While allowing the appeal this Court observed that the courts usually refrain from granting injunction to restrain the performance of the c contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another.

11. In Centax (India) Ltd.5 it has been held in clear terms that a bank guarantee resembles and is analogous to a letter of credit and the same considerations which apply to a letter of credit in the matter of interferenceby the court should apply to a bank guarantee. ^

12. In U.P. Coop. Federation Ltd.2 also Mukherji, J. in para 21 of his judgment has observed as under: (SCC p. 186, para 21)

“... An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well-settled principle of the law e in England. This is also a well-settled principle of law in India....”13. It is, therefore, difficult to appreciate the attempt of the High Court

to distinguish that decision and to raise a doubt whether in India also the same principles apply in case of a performance guarantee issued by a bank.In our opinion, the High Court was not right either in its attempt to distinguish that decision or to raise a doubt regarding the correct position of f law.

14. The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that in India only a reasonable amount can be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a termin a bank guarantee making the beneficiary the sole judge on the question of g breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till an adjudication in that behalf is made either by a court or an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a 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 guarantee is




HINDUSTAN STEELWORKS CONSTRUCTION LTD. v. TARAPORE & CO. 43 (Nanavati, J.)

given and the beneficiary. What the High Court has observed would be a applicable only to the parties to the underlying transaction or the primary

contract but can have no relevance to the bank guarantee given by the bank, as the transaction between the bank and the beneficiary is independent and of a different nature. In 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

b and the beneficiary. The High Court thus failed to appreciate the real object and nature of a bank guarantee. The distinction which the High Court has drawn between a guarantee for due performance of a works contract and a guarantee given towards security deposit for that contract is also unwarranted. The said distinction appears to be the result of the same fallacy committed by the High Court of not appreciating the distinction between the

c primary contract between the parties and a bank guarantee and also the real object of a bank guarantee and the nature of the bank’s obligation thereunder. Whether the bank guarantee is towards security deposit or mobilisation advance or working funds or for due performance of the contract if the same is unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without a demur and that the

^ beneficiary shall be the sole judge not only on the question of breach of contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee. In General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd.9 while dealing with a case of bank guarantee given for securing mobilisation advance it has been held that the right of a contractor to recover certain amounts under

e running bills would have no relevance to the liability of the bank under the guarantee given by it. In that case also the stipulations in the bank guarantee were that the bank had to pay on demand without a demur and that the beneficiary was to be the sole judge as regards the loss or damage caused to it. This Court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to

discharge its liability as per the terms of the bank guarantee. Larsen and Toubro Ltd. v. Maharashtra SEBn) and Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd. 11 were also cases of work contracts wherein bank guarantees were given either towards advances or release of security deposits or for the performance of the contract. In both these cases this Court held that the bank guarantees being

9 irrevocable and unconditional and as the beneficiary was made the sole judge on the question of breach of performance of the contract and the extent of loss or damages an injunction restraining the beneficiary from invoking the bank guarantees could not have been granted. The above-referred three

^ 9 (1991) 4 SCC 23010 (1995) 6 SCC 6811 (1995) 6 SCC 76




subsequent decisions of this Court also go to show that the view taken by the High Court is clearly wrong.

15. In view of the settled legal position and unsustainable view taken by a the High Court, the learned counsel for the contractor has rightly not attempted to defend the judgment of the High Court except on the ground that in view of the exceptional circumstances and special equities of this case, it was justified in granting the injunction. He submitted that fraud is not the only ground requiring interference by courts and if it is made out that exceptional circumstances creating special equities exist then the court can b and should restrain the beneficiary from encashing the bank guarantee. On the other hand the learned counsel for the appellant contended that interference by courts is permissible only when fraud is pleaded and prima facie established and it is further shown that irretrievable injustice would otherwise be caused. In support of his contention, the learned counsel for the appellant has heavily relied upon the following observations, made by c Mukherji, J. in para 28 and by Shetty, J. in para 53 of the judgment in U.P. Coop. Federation Ltd.2 (SCC pp. 189-197, paras 28-53)

“28. ... 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 shoidd be good prima facie case o f fraud and special equities in the form of preventing irretrievable ^ injustice between the parties....

* * *53. ... Since the bank pledges its own credit involving its reputation,

it has no defence except in the case o f fraud. The bank’s obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. ... The nature of the fraud that e the courts talk about is fraud of an ‘egregious nature as to vitiate the entire underlying transaction’. It is fraud of the beneficiary, not the fraud of somebody else. ...” (emphasis supplied)16. On the basis of these observations the learned counsel submitted that

the law laid down by this Court is that except in case of fraud and that too when it creates special equities in the form of irretrievable injustice, the f courts should not interfere by restraining the beneficiary from encashing the bank guarantee. We have carefully gone through the judgments delivered by Mukherji and Shetty, JJ. and in our opinion that is not the ratio of the judgment. In that case the court was not called upon to decide whether apart from fraud there can by any other valid ground for interference. Moreover, the said observations cannot be read like a text of a statute or out of context, g Observations made by Mukherji, J. in other parts of his judgment (see paras 24 and 34) and his opinion stated in para 21, with which Shetty, J. also agreed, do not support that submission. Mukherji, J. in the paragraph has stated his opinion as under: (SCC p. 186, para 21)

“21. ... An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with ^



HINDUSTAN STEELWORKS CONSTRUCTION LTD v TARAPORE & CO. (Nanavati, J.)

45

except in case o f fraud or in case o f question o f apprehension o f irretrievable injustice has been made out.” (emphasis supplied)17. Mukherji, J. referred to the following paragraph from the judgment

in R.D. Hurbottle (Mercantile) Ltd. v. National Westminster Bank Ltd.* and then stated that in his view the said view represents the correct state of law:

(SCC p. 184, para 17)“Only in exceptional cases would the courts interfere with the

machinery of irrevocable obligations assumed by banks. In the case of a confirmed performance guarantee, just as in the case of a confirmed letter of credit, the bank was only concerned to ensure that the terms of its mandate and confirmation had been complied with and was in no way concerned with any contractual disputes which might have arisen between the buyers and sellers. Accordingly, since demands for payment had been made by the buyers under the guarantees and the plaintiffs had not established that the demands were fraudulent or other special circumstances there were no grounds for continuing the injunctions....”

(emphasis supplied)18. What Mukherji, J. has stated in para 34 of his judgment, namely,

that: *‘[I]t is only in exceptional cases that is to say in case of fraud or in case irretrievable injustice be done, the courts should interfere” is really the ratio of the decision of this Court in U.P. Coop. Federation Ltd2. Therefore, fraud cannot be said to be the only exception. In a case where the party approaching the court is able to establish that in view of special equities in his favour if injunction as requested is not granted then he would suffer irretrievable injustice, the court can and would interfere. It may be pointed out that fraud which is recognised as an exception is the fraud by one of the parties to the underlying contract and which has the effect of vitiating the entire underlying transaction. A demand by the beneficiary under the bank guarantee may become fraudulent not because of any fraud committed by the beneficiary while executing the underlying contract but it may become so because of subsequent events or circumstances. We see no good reason why the courts should not restrain a person making such a fraudulent demand from enforcing a bank guarantee.

19. The learned counsel for the appellant also drew our attention to a three-Judge Bench decision of this Court in General Electric Technical Services Co. Inc.9 to which Shetty, J. was also a party. The learned counsel submitted that after referring to the observations of Mukherji, J. in para 28 and that of Shetty, J. in para 53 of the judgment in U.P. Coop. Federation Ltd.2 this Court in para 9 of that judgment has observed that what is stated therein is the settled position of law. What is overlooked by the learned counsel is that in that very paragraph the opinion of Mukherji, J. that: “ [I]t is only in exceptional cases that is to say in face of fraud or in case irretrievable injustice be done the courts should interfere” is also quoted, (emphasis supplied) Moreover, while dealing with the facts of that case this Court in paragraph 10 of the judgment has stated that: “The bank cannot be interdicted by the court at the instance of Respondent 1 in the absence of




fraud or special equities in the form of irretrievable injustice between the parties.” (emphasis supplied) This observation would clearly go to show that the three-Judge Bench has approved the view that fraud and other a exceptional circumstances leading to irretrievable injustice are exceptions to the rule.

20. Lastly, the learned counsel for the appellant relied upon the following observations made in para 60 of the three-Judge Bench decision of this Court in Svenska Handelsbanken v. Indian Charge Chrome12: (SCCp. 523, para 60) b

“60. We have referred to the observations of both Sabyasachi Mukherji as well as Shetty, JJ. in extenso to emphasise that in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud.”21. In that case the question which fell for consideration was whether the c

High Court was right in taking the view that while deciding an application for interim relief against enforcement of a bank guarantee general principlesof injunction on lenders should be applicable and not the principles of injunction in relation to bank guarantee. This Court was not called upon to decide whether apart from the case of fraud there can be any other exceptional case wherein the Court can interfere in the matter of encashment d of a bank guarantee. It is also significant to note that the said observation in para 60 has been made after quoting the following observation made by Mukherji, J. in para 21 of his judgment in U.P. Coop. Federation Ltd.2: (SCC p. 186, paras 21-22)

“... An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except e in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well-settled principle of the law in England. This is also well-settled principle of law in India...

* * *... no fraud involved and no question of irretrievable injustice was

involved.”22. Therefore, we cannot attach much importance to the use of the word

‘and’ in the observation that “it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case ...”. It is also significant to note that in that case this Court referred to the decision of the Court of Appeal in England in the case of Elian and Rabbath v. Matsas and Matsas13 and distinguished it by stating that the facts of that case were peculiar but did not state that the view taken in that case is not correct. The decision in Handerson v. Canadian Imperial Bank o f Commerce and Peat Marwick Ltd.14 was also referred to and distinguished on the ground that the facts of

12 (1994) 1 SCC 50213 (1966) 2 Lloyd’s Rep 49514 40 British Columbia LR 318

f




HINDUSTAN STEELWORKS CONSTRUCTION LTD. v TARAPORE & CO. 47 (Nanavati, J.)

that case were peculiar but with respect to the decision in that case also it a has not been stated that it does not represent the correct position o f law. That

was not a case o f that type o f fraud which has been recognised as an exception to the rule though the request by the beneficiary for payment was considered fraudulent in the circumstances because there was no right to payment. This Court also referred to the case o f Itek Corpn. v. First National Bank o f Boston15. In that case the underlying contract had becom e

b im possible o f performance, because o f “force majeure” . It was an event subsequent to the execution o f the contract. Yet injunction was granted by the court on the ground that the plaintiff had no adequate remedy at law and the allegations o f irreparable harm were not speculative but genuine and im mediate and the plaintiff would have suffered irreparable harm if the request for relief was not granted. Though this Court observed that “this

c judgm ent is based on peculiar facts” it has not disapproved the v iew taken in that case.

23 . We are, therefore, o f the opinion that the correct position o f law is that com m itm ent o f banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice w ould be done if bank guarantee is

^ allow ed to be encashed, the court should interfere. In this case fraud has not been pleaded and the relief for injunction was sought by the contractor/ Respondent 1 on the ground that special equities or the special circum stances o f the case required it. The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has com m itted breach o f the contract, that the contractor has a counter-claim against the appellant, that the disputes between the parties have been referred to the arbitrators and that no amount can be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors are not sufficient to make this case an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The H igh Court was, therefore, not right in restraining the appellant from enforcing the bank guarantees.

24. These appeals are, therefore, allowed. The judgm ent and order passed by the High Court are set aside. However, in view o f the fact that no stay was granted by this Court during the pendency o f these appeals and in view o f the statement made by the learned counsel for Respondent 1 that the arbitrators are likely to declare the award within a short time, w e direct that

9 the appellant shall not call upon the bank, Respondent 2 to discharge its obligations under the bank guarantees till 31-7-1996. If by that time, the arbitrators declare the award then obviously the parties w ill have to reconsider their position in the light o f the correct legal position and the

h 15 566 Fed Supp 1210




observations made in this judgment. Respondent 1 shall pay the cost o f these appeals to the appellant.

----------- a


( B e f o r e M .M . P u n c h h i a n d S u j a t a V . M a n o h a r , JJ.)PATTAM KHADER KHAN . . Appellant;

VersusPATTAM SARDAR KHAN AND ANOTHER . . Respondents.

Civil Appeal No. 4171 of 1995^, decided on July 9, 1996 Limitation Act, 1963 — Art. 134 — Auction-sale of immovable property in

execution of decree — Application under Or. 21 R. 95 CPC for delivery of possession of the property to the purchaser — Limitation period for — Held, starts running from the date when sale becomes absolute on confirmation under c Or. 21 R. 92(1) and not when certificate of sale issued under Or. 21 R. 95 CPC— Sale certificate under R. 95 does not by itself create any title but it is an evidence of title — Failure or delay of court in issuing the certificate or inaction of purchaser in completing the formalities, held, irrelevant — Appellant therefore relegated to the remedy of suit for possession — Civil Procedure Code, 1908, S. 65 and Or. 21, Rr. 92,94 and 95

In execution o f a decree, auction-sale o f a house was conducted and the sale was d knocked down in favour o f the first respondent. N o objection o f any sort from any quarter was raised against the sale or the conduct thereof. The sale was thus confirm ed by the court on 7-8-1984 . A sale certificate was issued in favour o f the auction-purchaser about five and quarter years later on 9-11 -1989. The matter in this way stood finalised. Having obtained the sale certificate, an application under Order 21 Rule 95 read with Section 151 o f the C ivil Procedure Code was m oved by the auction-purchaser first respondent on 9-11-1989, seeking delivery o f possession ol e the auctioned house. An objection was raised thereto by the appellant stating that since the application o f the first respondent was barred by the limitation prescribed under Article 134 o f the Limitation Act, 1963, no order for delivery o f possession could be given in favour o f the first respondent. The executing court sustained the objection regarding bar o f limitation but the High Court allowed the revision filed by the respondent holding that the limitation would run from the date o f issuance o f the sale ceitificate and as such the application for delivery o f possession was within the f period o f limitation under Article 134 o f the Limitation Act. A llow ing the appeal H eld:

A court sale is a com pulsory sale, conducted by or under orders o f the court.The title to the property sold does not vest in the purchaser im mediately on the sale thereof unlike in the case o f a private sale. The law requires that it does not becom e absolute until som etim e after the sale; a period o f at least 30 days must expire from the date o f sale before the sale can becom e absolute. In that, the sale is susceptible o f 9 being set aside at the instance o f the judgment-debtor on the ground o f irregularity in publication or conduct o f the sale or on defalcation as regards deposit o f m oney etc., as envisaged in Rules 89 and 90 o f Order 21. W here no such application is made, as is the case here, the court was required, as indeed it did, to make an order, confirm ing the sale and it is upon such confirmation that the sale becom es, and

t From the Judgment and Order dated 29-11-1993 of the Andhra Pradesh High Court in C R P No 880 of 1991




price to the transferor-Company was liable to pay retrenchment compensation to the em ployees. The assertion of the Board that the purchase money was more than adequate to pay retrenchment compensation to the a em ployees has not been denied.

13. In view of the aforesaid, w e allow Civil Appeal No. 10220 o f 1995, preferred by the Board, and dismiss Civil Appeal No. 10219 o f 1995, preferred by the em ployees. There will be no order as to costs in both these appeals.

(1997) 1 Supreme Court Cases 568( B e f o r e M.M. p u n c h h i a n d S u j a t a V . M a n o h a r , JJ.)

U.P. STATE SUGAR CORPORATION . . Appellant;

Versus c

SUMAC INTERNATIONAL LTD. . . Respondent.

Civil Appeal No. 15357 of 19961', decided on December 4, 1996 Banker and Customer — Bank guarantee — Enforcement of — Irrevocable

and unconditional bank guarantee payable on demand without demur — Whenever such bank guarantee is sought to be encashed by the beneficiary, bank is bound to honour the guarantee irrespective of any dispute raised by the d customer (at whose instance the guarantee was issued) against the beneficiary — This is, however, subject to two exceptions viz. a fraud 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 — Except under these circumstances. Courts should not readily issue injunction to restrain realisation of the bank guarantee — Mere fact that the e beneficiary had terminated the contract on ground that time was of the essence of the contract, which fact was disputed by the contractor (at whose instance bank guarantee was issued), that would not amount to fraud — Nor the fact that bank guarantee was invoked earlier also but was later withdrawn would be a circumstance which would taint the subsequent invocation of the guarantee with fraud — Further, pendency of reference of the contractor company before j BIFR under Sick Industrial Companies (Special Provisions) Act would not be sufficient to constitute irretrievable injustice — Sick Industrial Companies (Special Provisions) Act, 1985, Ss. 16(4), 17, 22 — Civil Procedure Code, 1908,Or. 39 — Injunction against encashment of bank guarantee

The appellant-Corporation entered into a contract with the respondent-Company for setting up a com plete sugar plant. The contract contained stipulation regarding time for com pletion o f the work. The respondent was also required to furnish bank g guarantees for due delivery and for the advance price to be paid by the appellant to the respondent. The guarantees were irrevocable in nature, payable by the guarantor to the appellant on demand without demur. It was provided that the appellant shall be the so le judge o f whether and to what extent the amount had becom e recoverable from the respondent or whether the respondent had comm itted any breach o f the

t From the Judgment and Order dated 15-12-1995 of the Allahabad High Court in C R. No 488 of 1995




U P STATE SUGAR CORPORATION v SUMAC INTERNATIONAL LTD 569

terms and conditions o f the agreement. The bank guarantees further provided that the right o f the purchaser to recover from the guarantor any amount shall not be affected

a or suspended by reason o f any disputes that might have been raised by the respondent with regard to its liability or on the ground that proceedings were pending before any Tribunal, Arbitrator or Court with regard to such dispute. The guarantor shall im m ediately pay the guaranteed amount to the appellant-purchasers on demand. W hen the respondent failed to com plete the work within the extended tim e granted, the appellant terminated the contract and invoked the bank guarantees. The respondent thereupon filed a petition under Section 20 o f the Arbitration Act for

Ij appointment o f an arbitrator since the agreement between the parties provided for arbitration. The respondent also filed tw o applications for interim relief under Section 41(b) o f the Arbitration A ct seeking interim stay against encashm ent o f the bank guarantees. The C ivil Judge dism issed the applications but in revision, the High Court allow ed the same and granted an injunction restraining the appellant from enforcing the bank guarantees. A llow ing the appeal

c W hen in the course o f comm ercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective o f any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective o f any dispute raised by its customer. The very purpose o f g iving such a bank guarantee w ould otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain

^ the realization o f such a bank guarantee. The existence o f any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcem ent o f bank guarantees. The courts have carved out only tw o exceptions. A fraud in connection with such a bank guarantee w ould vitiate the very foundation o f such a bank guarantee. H ence i f there is such a fraud o f which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allow ing the encashm ent o f an unconditional bank guarantee w ould

e result in irretrievable harm or injustice to one o f the parties concerned. Since in most cases paym ent o f m oney under such a bank guarantee w ould adversely affect the bank and its custom er at w hose instance the guarantee is given, the harm or injustice contem plated under this head must be o f such an exceptional and irretrievable nature as w ould override the terms o f the guarantee and the adverse effect o f such an injunction on comm ercial dealings in the country. The tw o grounds are not necessarily connected, though both may coexist in som e cases. (Paras 12 and 16)

f U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174; Svenska Handelsbanken v. Indian Charge Chrome, (1994) 1 SCC 502; Larsen & Toubro Ltd. v. Maharashtra SEB, (1995) 6 SCC 68; Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd., (1995) 6 SCC 76; National Thermal Power Corpn. Ltd. v. Flowmore (P) Ltd., (1995) 4 SCC 515; State o f Maharashtra v. National Construction Co., (1996) 1 SCC 735 : JT (1996) 1 SC 156, Hindustan Steelworks Construction Ltd. v. Tarapore & Co., (1996) 5 SCC 34 : JT (1996)

g 6 SC 295, relied onA s regards the exceptional ground o f fraud the fo llow ing observations o f Sir

John D onaldson, M .R. in B oliv in ter O il SA v. C hase M anha ttan B ank have been approved by the Supreme Court in an earlier decision at (1988) 1 SCC 174 at p. 197:

“The w holly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or

^ w hich m ay thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact o f fraud and as to the bank’s know ledge. It w ould

H e ld :



5 7 0 SUPREME COURT CASES (1 9 9 7 ) 1 SC C

certainly not norm ally be sufficient that this rests on the uncorroborated statem ent o f the customer, for irreparable dam age can be done to a bank’s credit in the relatively brief tim e which m ust elapse betw een the granting o f such an injunction and an application by the bank to have it charged.” (Para 12)

Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351, approved U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174,

relied onIrretrievable injury, which is the second exception to the rule against granting of

injunctions when unconditional bank guarantees are sought to be realised, m ust be of the kind w hich was the subject-m atter o f the decision in the Itek Corpn. case. To avail o f this exception, therefore, exceptional circum stances which m ake it im possible for the guarantor to reim burse him self if he ultim ately succeeds, will have to be decisively established. A m ere apprehension that the other party will not be able to pay, is not enough. (Para 14)

Itek Corpn. v. First National Bank o f Boston, 566 Fed Supp 1210, explained and approved In the present case there was no fraud. The view o f the High Court that the

term ination o f the contract by the appellant and his claim that tim e was o f the essence o f the contract, w ere not based on the terms o f the contract and, therefore, there was a fraud in the invocation o f the bank guarantee is erroneous. The disputes between the parties relating to the term ination o f the contract cannot make invocation o f the bank guarantees fraudulent. The High Court also erred in relying on the conduct o f the appellant o f invoking the bank guarantees on an earlier occasion and subsequently withdrawing such invocation for taking its view that the tim e was not o f the essence o f the contract. An earlier invocation o f the bank guarantees and subsequent withdrawal o f this invocation cannot m ake the bank guarantees or their invocation tainted with fraud in any manner. Under the term s of the contract it was stipulated that the respondent was required to give unconditional bank guarantees against advance paym ents as also a sim ilar bank guarantee for due delivery o f the contracted plant within the stipulated period. In the absence o f any fraud the appellant is entitled to realise the bank guarantees. (Para 16)

It is also not possible to accept the contention that in this case there would be irretrievable injustice to the respondent if the bank guarantees are allowed to be realised because the appellant is a sick industrial com pany in respect o f which a reference is pending before the Board for Industrial and Financial Reconstruction under the Sick Industrial Com panies (Special Provisions) Act, 1985 and even if it succeeds before the A rbitrator it would not be able to realise its claim from the appellant. The m ere fact that a reference under the Sick Industrial Com panies (Special Provisions) Act, 1985 is pending before the Board, is not sufficient to bring the case in the am bit o f the “irretrievable injustice” exception. In view o f Sections 16(4) and 17 o f that Act, there can be no presum ption that the com pany will, in no circum stance, be able to discharge its obligations. N or can be contention o f the respondent that its right to realise its claim, if established, would be affected by reason o f Section 22 o f the said A ct be accepted. There is no material to show that the appellant-Corporation cannot make its net worth positive. No scheme has been fram ed under the said Act so far. Even under Section 22 there is no absolute bar against any suit for the recovery o f money. The suit cannot be proceeded with except with the consent o f the Board or the Appellate Authority. Therefore, in an appropriate case, the Board or the A ppellate A uthority is entitled to give its consent to such a claim being proceeded with. This is not a situation o f the kind envisaged in the case o f Itek Corpn. w here there was no possibility w hatsoever o f recovery o f any am ount from the purchaser. In the present case, there is a good possibility o f such



U.P. STATE SUGAR CORPORATION v. SUMAC INTERNATIONAL LTD. 571

recovery. In any case, the counsel for the appellant has, on instructions, stated that a the appellant-Corporation undertakes to earm ark the amounts realised from the bank

guarantees in question for the purpose o f recovery o f claims, if any, w hich the respondent m ay ultim ately be found to be entitled to recover from the appellant. Any schem e w hich the Board may fram e under the said A ct will be subject to this undertaking given by the appellant to set apart the am ounts realised under the bank guarantees in question for meeting any validly adjudicated claim s o f the respondent against the appellant under or arising from the said contract. If any schem e is

fo required to be framed, the Board shall take into account this undertaking, while

Dushyant Dave, Senior Advocate (Pradeep Misra, Advocate, with him) for the

c V.C. Mahajan, Senior Advocate (Anil Kumar Sangal, Advocate, with him) for the

2. The appellant, U.P. State Sugar Corporation entered into an agreement dated 2 -8 -1 9 8 9 with the respondent, M/s Sumac International Pvt. Ltd. under which the respondent agreed to design, to prepare an engineering layout and to manufacture or procure and supply to the appellant the machinery and equipment for a complete sugar plant for extension and modernisation of the

9 appellant’s existing sugar plant at Rohana Kalan, District Muzaffarnagar, U.P. The respondent was required to set up a new plant of 2 5 0 0 TCD at a new site or an adjoining site close to the existing sugar plant of the appellant. The total contract price was fixed under clause 2.1 of the contract at Rs 1780

3. Under the terms of the agreement the respondent was required to set h up the plant and make it ready for commercial production by 3 0 -1 1 -1 9 9 0 .

The agreement stated that in this regard time was the essence of the contract




572 SUPREME COURT CASES (1 9 9 7 ) 1 SCC

and if the respondent failed to do so the consequences were also spelt out in the contract. Under clause 3 o f the contract a m onth-wise progressive delivery report was to be submitted by the respondent and a PERT/CPM a chart had to be submitted and adhered to. Clause 4 which dealt with delivery required the respondent to complete all supplies by 15-11-1990 so that the plant could be com m issioned by 30-11-1990. Under clause 11.1 the respondent-seller was entitled to a reasonable extension o f time as decided by the purchaser if the purchase order was expressly suspended for no fault o f the seller. b

4. Under clause 15 the respondent-seller was required to furnish to the appellant five bank guarantees as specified therein. These were:

1. A bank guarantee for timely delivery o f plant and machinery as provided in clause 14.1 representing five per cent o f the contract price referred to in clause 2.1. This was required to be furnished within 3*/2 months o f the signing o f the agreement. c

2. The seller was required to furnish a bank guarantee in respect o f guaranteed performance o f the plant and machinery for an amount representing 5% o f the contract price. This guarantee was required to be furnished eight months before the scheduled date o f com m issioning mentioned in clause 4.1 or within six months from the date o f the signing o f the agreement or after 2Vi months o f the opening o f the Letter d o f Credit whichever o f these dates was earlier.

3. Three bank guarantees in respect o f advance payments to be made by the appellant to the respondent under clauses 13.2(a) to 13.2(c) were required to be for Rs 89 lakhs, Rs 178 lakhs and Rs 89 lakhs respectively, representing 5%, 10% and 5% o f the contract price respectively. e5. Under clause 13.2 on receipt o f the first o f these bank guarantees for

Rs 89 lakhs the first instalment o f advance would be paid within a week from the date o f signing o f the agreement. On receipt o f the second bank guarantee for Rs 178 lakhs the second advance would be paid by the appellant to the respondent within 2V4 months o f the signing o f the agreement subject to the respondent furnishing various statements, certificates etc. as set out in that clause. The third bank guarantee for Rs 89 lakhs was to be furnished against the advance to be paid by the appellant to the respondent with 3*/2 months from the date o f the signing o f the agreement. These three bank guarantees are thus in respect o f the advance payments required to be made by the appellant to the respondent.

6. Under clause 15.5 all these bank guarantees are payable on demand. It is expressly provided that it shall not be open to the guarantor to know the reasons o f or to investigate or to go into the merits o f the demand invoking the bank guarantee or to question or challenge the demand or to require the proof o f the liability o f the seller before paying the amount demanded. It is further provided that the invocation o f the bank guarantee shall be binding /■, on the respondent and that the invocation o f the bank guarantee would not be




U P STATE SUGAR CORPORATION v SUMAC INTERNATIONAL LTD 573 (Sujata V. Manohar, J.)

affected in any manner by reason o f the fact that any dispute or disputes hada been raised by the respondent with regard to its liability. Nor would it be

affected by the fact that proceedings were pending before any Tribunal, Arbitrator or Court with regard thereto.

7. Accordingly, the respondent furnished, inter alia, four bank guarantees, one being a guarantee for due delivery and the other three being the bank guarantees in respect o f advance payment o f price. The total

b amount covered by the bank guarantees securing advance payments is Rs 3.56 crores, which amount was paid by the appellant to the respondent as advance.

8. The contract was not carried out within the time envisaged under the contract. Thereafter, at a meeting held on 1-10-1991 between the appellant and the respondent, the time for com pletion o f this project was extended up

c to May 1992 and a detailed chart was drawn up for the com pletion o f the project by that date. N o further extension o f time has been given by the appellant to the respondent thereafter. The respondent, however, did not com plete the said project within the extended period.

9. By their letter dated 6-9-1995 the State o f U.P. through the Special Secretary, Government o f U.P. informed the M anaging Director o f the appellant that it had been decided to transfer the Rohana Kalan (M uzaffamagar unit) o f the appellant to the joint sector. A s a result, the expansion project o f this unit should be cancelled and appropriate action in accordance with law should be taken. Thereupon the appellant cancelled the agreement by its letter dated 7-9-1995 addressed to the respondent. The appellant claim ed a refund o f the advance payment o f Rs 3,14,78,093 as

e unutilised and unadjusted amount o f advance payment. The appellant, by its four letters all dated 28-10-1995 addressed to the respondent invoked the three bank guarantees in respect o f advance payments after giving credit to the respondent for material worth Rs 42 lakhs which had been supplied till then. The appellant also invoked the delivery guarantee for Rs 89 lakhs. The bank guarantees so invoked are: Bank Guarantee No. 9/47 dated 10-8-1989 for Rs 89 lakhs. In this bank guarantee credit for Rs 42 lakhs has been given and the invocation o f the bank guarantee is only for the balance sum o f Rs 47 lakhs. The second bank guarantee so invoked is No. 9/64 dated 20-11 - 1989 for Rs 178 lakhs. The third bank guarantee is No. 9/70 o f 6 -1-1990 for Rs 89 lakhs and the fourth, delivery guarantee is N o. 12/88 dated 13-11-1990 for Rs 89 lakhs.

10. On 5-10-1995 the respondent filed a petition under Section 20 o f the Arbitration A ct for appointment o f an arbitrator since the agreement between the parties provides for arbitration. The respondent also filed two applications for interim relief under Section A\{b) o f the Arbitration Act seeking interim stay against encashment o f bank guarantees. The Civil

^ Judge, Senior D ivision, Muzaffamagar before whom these applications were filed, dism issed these applications. In revision, however, these applications



5 7 4 SlfPREM ECOURTCASES (1 9 9 7 ) 1 SC C

have been allowed by the High Court and an injunction has been granted restraining the appellant from enforcing these bank guarantees. Hence, the a appellant has com e by way o f the present appeal.

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 o f whether and to what extent the amount has becom e recoverable from the respondent or whether the respondent has committed any breach o f the terms and conditions o f the agreement. The bank guarantees further provide that the right o f the purchaser to recover from the guarantor any amount shall not be affected or suspended by reason o f 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 c guaranteed amount to the appellant-purchasers on demand.

12. The law relating to invocation o f such bank guarantees is by now w ell settled. When in the course o f commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective o f any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms d irrespective o f any dispute raised by its customer. The very purpose o f 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 connection with such a bank guarantee would vitiate the very foundation o f such a bank guarantee. Hence if there is such a fraud o f which e the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment o f an unconditional bank guarantee would result in irretrievable harm or injusticeto one o f the parties concerned. Since in most cases payment o f money under such a bank guarantee would adversely affect the bank and its customer at w hose instance the guarantee is given, the harm or injustice f contemplated under this head must be o f such an exceptional and irretrievable nature as would override the terms o f the guarantee and the adverse effect o f such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in som e cases. In the case o f U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. 1 which was the case o f a works contract where the g performance guarantee given under the contract was sought to be invoked, this Court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor h





with the question whether the supplier is in default or not. The bank must a pay according to the tenor o f its guarantee on demand without proof or

condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud o f which the bank has notice. The fraud must be o f an egregious nature such as to vitiate the entire underlying transaction. Explaining the kind o f fraud that may absolve a bank from honouring its guarantee, this Court in the above case quoted with approval the

b observations o f Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank2 (A ll ER at p. 352): (at SCC p. 197)

“The w holly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made w ill clearly be fraudulent. But the evidence must be clear both as to the fact o f fraud

c and as to the bank’s knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement o f the customer, for irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the granting o f such an injunction and an application by the bank to have it charged.”

This Court set aside an injunction granted by the High Court to restrain the d realisation o f the bank guarantee.

13. The same question came up for consideration before this Court in Svenska Handelsbanken v. Indian Charge Chrome3. This Court once again reiterated that a confirmed bank guarantee/irrevocable letter o f credit cannot be interfered with unless there is established fraud or irretrievable injustice involved in the case. Irretrievable injury has to be o f the nature noticed in

e the case o f Itek Corpn. v. First National Bank o f Boston4. On the question of fraud this Court confirmed the observations made in the case o f U.P. Coop. Federation Ltd. 1 and stated that the fraud must be that o f the beneficiary, and not the fraud o f anyone else.

14. On the question o f irretrievable injury which is the second exception j to the rule against granting o f injunctions when unconditional bank

guarantees are sought to be realised the court said in the above case that the irretrievable injury must be o f the kind which was the subject-matter o f the decision in the Itek Corpn. case4. In that case an exporter in U SA entered into an agreement with the Imperial Government o f Iran and sought an order terminating its liability on stand by letters o f credit issued by an American Bank in favour o f an Iranian Bank as part o f the contract. The relief was sought on account o f the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the

^ 2 (1984) 1 All ER 3513 (1994) 1 SCC 5024 566 Fed Supp 1210



576 SUPREM ECOURTCASES (1997) 1 SCC

jurisdiction o f United States and had cancelled the export contract. The Court upheld the contention o f the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be a executable in Iran under these circumstances and realisation o f the bank guarantee/letters o f credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail o f this exception, therefore, exceptional circumstances which make it im possible for the guarantor to reimburse him self if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is fc> not enough. In Itek case4 there was a certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee.

15. Our attention was invited to a number o f decisions on this issue — among them, to Larsen & Toubro Ltd. v. Maharashtra SEB5 and Hindustan c Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd.6 as also to National Thermal Power Corpn. Ltd. v. Flowmore (P) Ltd.1 The latest decision is in the case o f State o f Maharashtra v. National Construction Co.8 where this Court has summed up the position by stating: (SCC p. 741, para 13)

“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 o f the bank under a performance guarantee is created by the document itself. Once the documents are m order the bank giving the guarantee must honour the same and make payment ordinarily unless there is an allegation o f fraud or the like. The courts will not interfere directly or indirectly to withhold payment, otherwise trust in commerce e internal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle the disputes with respect to allegations o f breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause o f action for the same is independent o f enforcement o f the guarantee.” ^

The other recent decision is in Hindustan Steelworks Construction Ltd. v. Tarapore & Co.9

16. Clearly, therefore, the existence o f any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement o f bank guarantees. There must be a fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seem s to have com e to the conclusion that the termination o f the

5 (1995) 6 SCC 686 (1995) 6 SCC 767 (1995)4 SCC 515 ^

8 (1996) 1 SCC 735 ■ JT (1996) 1 SC 1569 (1996) 5 SCC 34 JT (1996) 6 SC 295





contract by the appellant and his claim that time was o f the essence o f the a contract, are not based on the terms o f the contract and, therefore, there is a

fraud in the invocation o f the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination o f the contract cannot make invocation o f the bank guarantees fraudulent. The High Court has also referred to the conduct o f the appellant in invoking the bank guarantees on an earlier occasion on 12-4-1992 and subsequently

b withdrawing such invocation. The court has used this circumstance in aid o f its view that the time was not o f the essence o f the contract. We fail to see how an earlier invocation o f the bank guarantees and subsequent withdrawal o f this invocation make the bank guarantees or their invocation tainted with fraud in any manner. Under the terms o f the contract it is stipulated that the respondent is required to give unconditional bank guarantees against

c advance payments as also a similar bank guarantee for due delivery o f the contracted plant within the stipulated period. In the absence o f any fraud the appellant is entitled to realise the bank guarantees.

17. Before us, however, in the course o f argument, the learned advocate for the respondent urged for the first time that in this case there would be irretrievable injustice to the respondent if the bank guarantees are allowed to

d be realised because the appellant is a sick industrial company in respect o f which a reference is pending before the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985. The respondent contends that even if it succeeds before the Arbitrator it w ill not be able to realise its claim from the appellant. The mere fact that a reference under the Sick Industrial Companies (Special

e Provisions) Act, 1985 is pending before the Board, is, in our view, not sufficient to bring the case in the ambit o f the “irretrievable injustice” exception. Under the scheme o f the said Act the Board is required to make such inquiry as it may deem fit for determining whether any industrial company has becom e a sick industrial company. Under Section 16(4) where the Board deem s it fit to make an inquiry or to cause an inquiry to be made

f in this connection, it may appoint one or more persons to be special directors for safeguarding the financial and other interests o f the company or in the public interest. Under Section 17 after making an inquiry, if the Board is satisfied that a company has becom e a sick industrial company, the Board may then decide, by an order in writing, whether it is practicable for company to make its net worth exceed the accumulated losses within a

Q reasonable time. If this is practicable, then the Board shall give such company the opportunity to make its net worth exceed the accumulated losses. Under sub-section (3) o f Section 17 if the Board decides that this is not practicable within a reasonable time, it may adopt measures specified in Section 18 and provide for a scheme for appropriate measures in relation to that company. There can, therefore, be no presumption that the company

h w ill, in no circumstance, be able to discharge its obligations.



578 SUPREM ECO UR TCASES (1997) 1 SCC

18. Under Section 22 on which the respondent relies, where in respect of an industrial company, an inquiry under Section 16 is pending, or any scheme under Section 17 is under preparation or a sanctioned scheme is a under implementation or when an appeal under Section 25 is pending, then no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or the appointment of a receiver in respect thereof can be proceeded with; and no suit for the recovery of money or for the enforcement of any security against the industrial company shall lie or be proceeded with ^ except with the consent of the Board or, as the case may be, the Appellate Authority. The respondent contends that its right to realise its claim, if established, would be affected by reason of Section 22 of the said Act. There is no material before us to show that the appellant-Corporation cannot make its net worth positive. No scheme has been framed under the said Act so far. Even under Section 22 there is no absolute bar against any suit for the recovery of money. The suit cannot be proceeded with except with the consent of the Board or the Appellate Authority. Therefore, in an appropriate case, the Board or the Appellate Authority is entitled to give its consent to such a claim being proceeded with. This is not a situation of the kind envisaged in the case of Itek Corpn.4 where there was no possibility whatsoever of recovery of any amount from the purchaser. In the present case, there is a good possibility of such recovery. In any case, the learned ^ counsel for the appellant has, on instructions, very fairly stated that the appellant-Corporation undertakes to earmark the amounts realised from the bank guarantees in question for the purpose of recovery of claims, if any, which the respondent may ultimately be found to be entitled to recover from the appellant. Any scheme which the Board may frame under the said Act will be subject to this undertaking given by the appellant to set apart the e amounts realised under the bank guarantees in question for meeting any validly adjudicated claims of the respondent against the appellant under or arising from the said contract. If any scheme is required to be framed, the Board shall take into account this undertaking, while framing the scheme.

19. Both sides are agreed that for a speedy resolution of their disputes they are willing to refer all their disputes under or arising from the said f contract to the sole arbitration of Justice R.M. Sahai (Retd.), a retired Judge of this Court. We accordingly refer all disputes between the parties under or arising from the contract to the sole arbitration of Justice R.M. Sahai (Retd.). The arbitrator may fix his remuneration in consultation with the parties. The parties shall obtain appropriate directions from the learned arbitrator in connection with the filing of claims, replies etc. in accordance with law. The g petition filed by the respondent before the Court of the Chief Judicial Magistrate/Civil Judge, Muzaffarnagar under Section 20 of the Arbitration Act is disposed of accordingly.

20. The appeal is allowed and the impugned judgment and order of the High Court is set aside and the injunction granted by the High Court is vacated. Parties will bear their own costs. h


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2005 SCC OnLine Bom 814 : (2005) 3 Mah LJ 1141 : (2005) 5 Bom CR 58 : AIR 2005 Bom 335 : (2005) 3 Arb LR 167 : (2006) 1 BC 37 : 2006 CLC 803

Bombay High CourtArbitration and Conciliation Actr Section 37 : No Period of Limitation Prescribed

(Bombay)(B e f o r e D .K. D e s h m u k h , J.)

Oil and Natural Gas Corporation Ltd. ... Appellant;Versus

Jagson International Ltd. ... Respondent.Arbitration Appeal No. 1 of 2005

Decided on July 15, 2005

(a) Arbitration and Conciliation Act (26 of 1996), S. 37 — Appeal under section 37 — No period of limitation for filing appeal has been prescribed.

When the Legislature provided the remedy against the arbitral award, it also provided a period of limitation for making an application under section 34. Perusal of the provisions of section 11, section 13 and section 16 show that the Legislature has mentioned a period of time for taking various steps. Therefore, it is clear that while the Legislature was aware of the necessity of providing a period of limitation and wherever the Legislature thought that providing a period of limitation is necessary it has been so provided for by various provisions of the Act. However, while providing an appeal under section 37, the Legislature has chosen not to prescribe any period of limitation. Even the general law of limitation does not provide a period of limitation. Therefore, the objection raised on behalf of the respondent that appeal is barred by the provisions of the Limitation Act and it has not been filed within the time prescribed has no substance.

(b) Arbitration and Conciliation Act (26 of 1996), S. 37 — Appeal under section 37 — Requirement of filing within a reasonable time in absence of limitation period prescribed.

Where in absence of any period of limitation prescribed for filing appeal under section 37, it was contended that the appellant has to approach the court in a reasonable time,

Page: 1142

Held, that this requirement will not apply while considering the aspect of maintainability of the appeal. The appeal would be maintainable whenever filed, the question whether the appellant has approached the court promptly or he is guilty of laches may be considered by the Court while considering whether the relief which is in the discretion of the court should be granted in favour of such appellant, who is guilty of laches or not. In other words the aspect of laches in invoking the remedy will be relevant when the court considers the question whether the appellant is entitled to the reliefs from the court which is in the discretion of the Court and not when the court considers the question of maintainability of the appeal.

(c) Arbitration and Conciliation Act (26 of 1996)r S. 42 — Bar of section 42 — Applicability.If an application is made in a court, it is only that court which has the jurisdiction in relation to any

subsequent applications. But the first application which is made, in order that the bar of section 42 is attracted, must be a competent application and not just any application. Respondents filed application under section 9 before Delhi High Court. The respondent conceded the position that the Delhi High Court does not have the jurisdiction and accepting that concession the Delhi High Court permitted the respondents to withdraw the petition. Therefore, it will not be in the interest of justice to permit the respondents to resile from that position. It is nobody's case that this court will not have the jurisdiction. The tender was admittedly accepted in Bombay. Therefore, in terms of clause 29.1 of the tender document, it is this court which will have the jurisdiction. In the face of the application of the respondents

(Paras 14 and 15)

(Para 15)


see:ONLINE

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filed before the Delhi High Court, it cannot now be permitted to raise the objection to the maintainability of the present appeal before this Court. The objection thus, has no substance.

(Para 19)(d) Arbitration and Conciliation Act (26 of 1996), S. 17 — Invocation of bank guarantee —

Mere allegation of fraud is not enough to issue an injunction against invocation of bank guarantee.

Where the respondents moved an application before the Arbitral Tribunal under section 17 of the Arbitration and Conciliation Act seeking stay of encashment of the bank guarantee and the Arbitral Tribunal granted temporary injunction only because the respondents have made allegations of fraud,

Held, that invocation of the bank guarantee cannot be interfered with by the Court, unless there is an established fraud or irreparable injustice involved in the case. It is thus clear that mere allegation of fraud is not enough to issue an injunction against invocation of bank guarantee. The allegation of fraud must be established at least prima facie. An interim order o f injunction can be made only when the court or the tribunal finds that apart from the fact that the applicant making out a strong prima Facie case and showing that the balance of convenience is in favour of grant of the temporary injunction, the applicant would suffer an irreparable injury if the temporary injunction is not granted to him. Thus for grant of temporary injunction a finding that in case injunction is not granted, the applicant would suffer irreparable injury is a condition precedent. While granting the interim order by the order impugned the Arbitral Tribunal has not recorded any such finding. Therefore, even if it is assumed that the appellant was not justified in invoking the bank guarantee, the Arbitral

Page: 1143

Tribunal while deciding the matter finally would be within its power in making an order for payment of that amount by the appellant to the respondents with interest at an adequate rate. Considering that appellant is ONGC, there can be no doubt that the decree for any amount that may be made would be executable and thus, there is no possibility of the respondents suffering any irreparable injury due to invocation of the bank guarantee. Therefore, as there is no possibility of the respondents suffering any irreparable injury, there was no justification whatsoever for making an order restraining the appellant from invoking the bank guarantee. The impugned order made by the Arbitral Tribunal is, therefore, liable to be set aside.

(Para 21)For appellant: Rajiv Kumar instructed by Divya Shah and Associates For respondent: Janak Dwarkadas instructed by Ashwin Shankar

L ist o f c a s e s referred:

1. Uttam Namdeo Mahale v. Vithal Deo, (1997) 6 S C C 73 (Para 1

2. U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 (Para 2S C C 568

JUDGMENTBy this Appeal filed under section 37 of the Arbitration and Conciliation Act, the

appellants challenge the order dated 9th August, 2004 passed by the Arbitral Tribunal.2. The facts that are material and relevant for deciding this Appeal are : in July, 1999,

the appellants invited a tender bearing No. MRBC/DBG/MM/RIGS (CH)/51(46)/990T-873 for the charter hire of one slot/Cantilever type Jack up rig.

3. In response to the invitation of the aforesaid tender, five bidders submitted their offers including the respondents and one M/s Neptune Exploration and Industries Ltd. (hereinafter referred to as "M/s Neptune") was also one of the bidders. The respondents and M/s Neptune offered the same Rigs "Sakhalinskaya" and "Kurilskaya" for the said tender. The appellants had called upon the respondents and M/s Neptune to clarify and inter alia confirm the availability of the said Rigs. M/s Neptune furnished to the appellants a letter dated 8th December, 1999 from M/s Osneft Sakhalinmorneftegaz, the rig owners



regarding the availability of the two rigs to the aforesaid two bidders namely M/s Neptune and the respondents. By a letter dated 22nd December, 1999, the appellants called upon the respondent inter alia to confirm : (a) continued availability of Rig Sakhalinskaya against tender along with confirmation thereof from the owners to enable the appellants to consider the offer for the said Rig; (b) to confirm details in respect of the said rig Kurilskaya with documentary proof from the owner, as details submitted by M/s Neptune were different from those submitted by the respondents. By this letter, the appellants intimated the respondents that they were in receipt of communication dated 8th December, 1999 which had been addressed to the respondents by the owners of the Rig Sakhalinskaya. Due to the said letter having been communicated to the appellants, the appellants had sought clarification from the respondents regarding the continued availability of the said rig. By letter dated 22nd December, 1999, the respondents replied to the appellants' letter dated 22nd December, 1999. The respondents stated that they had signed agreement dated 20th August, 1999 with the owner of the rig and as per the said agreement, the owner of the said rig would invest in the rig for upgradation to meet the appellants' tender

Page: 1144

specifications. In respect of Rig Sakhalinskaya, the respondents submitted MOU dated 20th August, 1999 executed with the owners to the appellants. Letter from M/s Soil Mee which is referred to in the respondents' aforesaid letter is dated 13th December, 1999 confirming that upgradation of rig from 850 thousand LBS to 13 lakhs LBS (Mast) was possible. The respondents stated that they had valid documents in their favour for mobilization of both the rigs and assured the appellants that Rig Sakhalinskaya would be available to them for the duration of contract. By letter dated 3rd January, 2000, the appellants informed the respondents that their offer for both the rigs i.e. Sakhalinskaya and Kurilskaya was being considered for the price bid opening. The price bids were opened on 6th January, 2000 and the respondents were found to be the lowest tenderer in respect of the said two rigs. By letter dated 17th January, 2000 addressed by the owners of the rig with copy to the respondent that rig owners recorded that Rig Kurilskaya was being withdrawn from the appellants tender so as not to jeopardize the drilling programme of the appellants. On 20th January, 2000, the appellants placed on the respondents, a firm work order bearing No. DY8DF158 for charter hire of one rig by the name "Sakhalinskaya" with an ODR of US $ 21,637 and EDR US$ 21,990.21.

4. The respondents furnished to the appellants an irrevocable and unconditional Performance Bank Guarantee bearing No. IDBIBK/No/BG-2000/F-l dated 3rd February, 2000 for a sum of US$ 601,982.00 issued by JDBI Bank Ltd., Siri Fort Branch, New Delhi. By the said guarantee, it was agreed by the bank that any such demand by appellants on the bank shall be conclusive and binding without any proof on the Bank as regards the amount due and payable, notwithstanding any disputes pending before any Court, Tribunal, Arbitrators and/or any other matter or things whatsoever, as liability under the Guarantee being absolute and unequivocal. The said Bank Guarantee is amended on 5th February, 2000 and further amended 20th April, 2000.

5. Thereafter, the respondents requested the appellants to add the Rig Kurilskaya in the firm order. On basis of representations made by the respondents, the appellants issued an amendment dated 13th April, 2000 to the firm fax order dated 20th January, 2000 amending the firm order so as to include (1) "Sakhalinskaya/Kurilskaya", (2) the mobilization time of 180 days was to be reckoned from the date of issue of the amended order and (3) the time of 60 days for offering the rig for inspection will also be reckoned from the date of issue of the amended order. All other terms and conditions of the firm order dated 20th January, 2000 remained unchanged. The respondents accordingly, furnished to the appellants an amended Performance Bank Guarantee dated 3rd February,



2000 bearing No. IDBIBK/ND/BG-2000/F-l issued by JJ3BI Bank Ltd Siri Fort Branch, New Delhi for an amount of US$ 601982.00 forming an integral part of the Original Bank Guarantee.

6. As per the terms and conditions stipulated under the firm order dated 13th April, 2000, the respondents were under an obligation to offer any of the two rigs for inspection on or before 11th June, 2000 i.e. within 60 days from 13th April, 2000 and mobilize the rig latest by 10th October, 2000 i.e. within 180 days from 13th April, 2000. The appellants rely on clause 6 of the tender documents, which reads as under: —

Page: 1145

"6. Inspection Clause. — The bidder should confirm in the unpriced bid that the equipment of the offered rig are in good working condition and the acceptance of the following 'Inspection Clause': —

6.1. ONGC shall get the rig and equipment inspected through any of the following internationally reputed third party inspection agency as per the Tender specifications. ONGC and its option can nominate any one of the following third party inspection agency for the inspection of the rig and the cost of the third party inspection will be borne by ONGC: —

a) MODU SPECSb) ABSc) Oilfield Audit Services Inc.d) DNV6.2. ONGC will accept the rig only after ONGC nominated third party inspection

agency confirms that the rig is as per tender specifications.6.3. Bidders should confirm that they would offer rig(s) for inspection by ONGC

nominated third party inspection agency, within 60 days from the date of issuance of firm order.

6.4. Notice for inspection as per (6.3) above is required to be given by the contractor 15 days in advance.

6.5. Maximum time allowed to board the rig for inspection of the rig is 20 Mans days per rig. The contractor has to offer the rig for inspection on complete readiness of the rig. In case inspection takes more than 20 mans days, the cost of inspection beyond 20 man days would be to the account of the Contractor. In case inspection team is to be mobilized subsequently, for compliance of deficiencies during first inspection, then entire cost, towards second or subsequent inspections shall be to the account of the Contractor."7. By a letter dated 17th April, 2000 the appellants called upon the respondents to

furnish the time schedule along with action plan and programme latest by 24th April, 2000 and to intimate the steps taken by the respondents for adhering to the time schedule given for inspection of the rig within 60 days and mobilization within 180 days from 13th April, 2000. The respondents were also requested to submit the progress on the above schedule by fax every Monday.

7A. There was correspondence exchanged between the parties regarding inspection of the rigs. But it transpires that the rigs were never offered for inspection. It further appears that by letter dated 24th May, 2000, a copy of draft contract was sent by the appellant to the respondent to be signed by the parties. But it appears that the draft contract was also not signed. By letter dated 5th October, 2000 the appellant recorded that the respondent had failed to comply with the terms and conditions of the tender, the firm work order with regard to inspection of the rig and signing of the contract and had failed to submit the Droaramme for mobilization of the ria. It. thus, appears that the dispute between the



parties arose. Ultimately in January, 2002, the respondent moved an application under section 9 of the Arbitration and Conciliation Act before the Delhi High Court seeking interim relief against the appellant restraining it from invoking the bank guarantee. In that application an ex parte injunction was secured. It appears that that application was heard finally by the Delhi High

Page: 1146

Court and the order was reserved. The respondent moved an application before the Delhi High Court for permission to withdraw that application and that application was ultimately withdrawn by the respondent.

8 . Thereafter, the respondents moved an application before the Arbitral Tribunal under section 17 of the Act seeking stay of encashment of the bank guarantee. That application has been decided by the Appellate Tribunal by order dated 9th August, 2004. Present appeal has been filed challenging that order.

9. The present appeal has been filed in the Court on 11-1-2005.10. Preliminary objections to the maintainability of the appeal have been raised on

behalf of the respondents. The first objection raised on behalf of the respondents is that the appeal has not been filed within the period allowed by the Arbitration and Conciliation Act, 1996. It is submitted that though section 37 of the Act does not prescribe any limitation for filing an appeal, provisions of section 37 should be read along with the provisions of section 34 of the Act and the same period of limitation which is provided by section 34 of the Act for making an application should be made applicable to the appeal filed under section 37. If so done, the appeal is barred by the law of limitation, because it was not filed within the period of limitation provided by section 34. It is further submitted that even assuming that there is no period of limitation provided by section 37, there would be an obligation on the appellants to file an appeal within a reasonable time and if the matter is looked at from this point of view, there is inordinate delay in filing the appeal and therefore the appeal should not be considered on merits. The second objection that is raised is that the petition under section 9 of the Act was filed before the Delhi High Court by the respondent, that petition was withdrawn by the respondents, as the application was in fact made before the Delhi High Court in view of the provisions of section 42 of the Act, the present appeal will not be maintainable before this Court and it is only the Delhi High Court which will have the jurisdiction to entertain the appeal.

11. So far as the first objection raised on behalf of the respondents is concerned, the appellant submitted that this is an appeal filed against the interim order passed by the Arbitral Tribunal under section 17 of the Arbitration Act. Section 37 of the Act itself does not provide any period of limitation and therefore there is no justification for importing and making applicable the period of limitation provided by section 34. It is next submitted that as per the terms of the contract between the parties, as the contract was entered into at Bombay, it is the Court in Bombay which has the jurisdiction to entertain the application filed under section 9 of the Act. This objection was raised before the Delhi High Court and the respondent withdrew that application filed under section 9 before the Delhi High Court, after it was fully argued and the judgment in that application was reserved. In the application filed by the respondents for permission to withdraw the application, it was stated that the respondents want to withdraw the application with liberty to file before the Bombay High Court and therefore, now the respondent cannot contend that it is not the Bombay High Court but the Delhi High Court which has the jurisdiction. It is submitted that in order that the bar of section 42 operates to oust the jurisdiction of this Court, it must be shown that the application that was filed before the Delhi High Court was a competent application and it was maintainable before the Delhi High Court.



Page: 1147

12. So far as merits of the controversy are concerned, on behalf of the appellants it is contended that an injunction against the invocation of the bank guarantee has been issued by the Arbitral Tribunal contrary to the settled law on the point. It is submitted that the Arbitral Tribunal has granted an injunction against the invocation of the bank guarantee merely because the allegations of fraud have been made. The Arbitral Tribunal has not gone into the question whether the allegations of fraud have, prima facie, been established by the respondents. It is further submitted that what has been done is that the temporary injunction against the invocation of the bank guarantee has been granted. Had the injunction not been granted the bank guarantee would have been invoked. In case, the respondents ultimately succeeds, he would be entitled to get the amount of bank guarantee back, therefore, had the temporary injunction been declined there is no possibility of any irreparable loss being caused to the respondents. Because loss of money is capable of being compensated in terms of money and it can never be termed as irreparable loss and therefore, according to the appellant, there was no justification for the Arbitral Tribunal to grant the temporary injunction against invocation of the bank guarantee.

13. Now, in the light of these rival submissions if the record of the case is perused, it becomes clear that the present appeal has been filed under section 37 of the Arbitration and Conciliation Act challenging the order passed under section 17 of the Act by the Arbitral Tribunal. Section 37 of the Act reads as under: —

37. Appealable Orders,— (1) An appeal shall lie from the following orders (and fromno others) to the Court authorised by law to hear appeals from original decrees of theCourt passing the order, namely:(a) granting or refusing to grant any measure under section 9;(b) setting aside or refusing to set aside an arbitral award under section 34.(2) An appeal shall also lie to a Court from an order of the arbitral tribunal—(a) accepting the plea referred to in sub-section (2) or sub-section (3) of section 16; or(b) granting or refusing to grant an interim measure under section 17.

(3) No second appeal shall lie from an order passed in appeal under this section, butnothing in this section shall affect or take away any right to appeal to the SupremeCourt.14. Perusal of the above quoted provisions of section 37 shows that sub section (2) of

section 37 in terms provides for an appeal against the order granting or refusing to grant interim measure under section 17. Perusal of section 37 also shows that there is no period of limitation laid down for filing an appeal under that provision. Perusal of the provision of section 34 shows that there is a clear provision made for filing an application under that provision for challenging an award made by the Arbitral Tribunal. Therefore, when the Legislature provided the remedy against the arbitral award, it also provided a period of limitation for making an application under section 34. Perusal of the provisions of section11, section 13 and section 16 show that the Legislature has mentioned a period of time for taking various steps. Therefore, it is clear that

Page: 1148

while the Legislature was aware of the necessity of providing a period of limitation and wherever the Legislature thought that providing a period of limitation is necessary it has been so provided for by various provisions of the Act. However, while providing an appeal under section 37, the Legislature has chosen not to prescribe any period of limitation. In



this view of the matter, therefore, in my opinion, the Court will not be justified in importing the period of limitation provided by section 34 for filing an application and making it applicable to an appeal filed under section 37. Sub-section (1) of section 43 makes the provisions of Limitation Act applicable to arbitration as it applies to proceedings in Court. Perusal of the provisions of the Limitation Act also shows that the Limitation Act does not provide for any period of limitation for filing an appeal under section 37. It is second Division of the Schedule to the Limitation Act which deals with appeal. Perusal of those provisions show that Articles 114 and 115 lays down period for filing an appeal under the Code of Criminal Procedure and Article 116 provides for limitation for filing an appeal under the Code of Civil Procedure and Article 117 provides period of limitation for filing an appeal from decree or order passed by the High Court to the same Court. Thus in the Limitation Act there is no provision made prescribing the period of limitation for filing an appeal under section 37. Perusal of Article 119, which is found in Third Division the heading of which is "application" shows that there is a period of limitation laid down by Article 119 for making application under the Arbitration Act, 1940. The intention of the Legislature, in my opinion, therefore is clear that there is no period of limitation laid down for filing an appeal under section 37. In my opinion, in this situation, therefore, the observations of the Supreme Court in its judgment in the case of Uttam Namdeo Mahaie v. Vithai Deo, (1997) 6 SCC 73, are relevant. It is paragraphs 3 and 4 of that judgment, which are material. They read as under: —

3. The admitted position is that respondent No. 1 is the owner of the property and earlier a notice was issued to the appellant to vacate the land in question. That order of eviction became final with the confirmation of the order by this Court in a special leave petition. Thereafter, proceedings were initiated for execution. An objection has been raised on the ground that since more than 12 years have elapsed, the order cannot be implemented. The High Court has pointed out that under section 21 of the Mamlatdar's Court Act, 1906, it has not prescribed any limitation for execution of the orders vide the Division Bench judgment of the High Court of Bombay in Balaji Bin Khanduji Patii v. Kushaba Bin Ramji Patii.

4. Mr. Bhasme, learned counsel for the appellant, contends that in the absence of fixation of the rule of limitation, the power can be exercised within a reasonable time and in the absence of such prescription of limitation, the power to enforce the order is vitiated by error of law. He places reliance on the decisions in State o f Gujarat v. Patii Raghav Natha; Ram Chand v. Union o f India and Mohd, Kavi Mohamad Amin v. Fatmabai Ibrahim. We find no force in the contention. It is seen that the order of ejectment against the applicant has become final. Section 21 of the Mamlatdar's Court Act does not prescribe any limitation within

Page: 1149

which the order needs to be executed. In the absence of any specific limitation provided thereunder, necessary implication is that the general law of limitation provided in the Limitation Act (Act 2 of 1963) stands excluded. The Division Bench, therefore, has rightly held that no limitation has been prescribed and it can be executed at any time, especially when the law of limitation for the purpose of this appeal is not there. Where there is statutory rule operating in the field, the implied power of exercise of the right within reasonable limitation does not arise. The cited decisions deal with that area and bear no relevance to the facts.

15. Perusal of the above quoted paragraphs of the judgment of the Supreme Court show that the Supreme Court has laid it down as a law that when the special statute which creates the remedy does not provide limitation, for invoking that remedy general law of limitation cannot be made applicable to provide limitation. In the present case,



however, as observed above, even the general law of limitation does not provide a period of limitation. In my opinion, therefore, the objection raised on behalf of the respondent that appeal is barred by the provisions of the Limitation Act and it has not been filed within the time prescribed has no substance. So far as the contention that though there is no period of limitation laid down, the appellant has to approach the Court in a reasonable time is concerned, in my opinion, this requirement will not apply while considering the aspect of maintainability of the appeal. The appeal would be maintainable whenever filed, the question whether the appellant has approached the Court promptly or he is guilty of laches may be considered by the Court while considering whether the relief which is in the discretion of the Court should be granted in favour of such appellant, who is guilty of laches or not. In other words the aspect of laches in invoking the remedy will be relevant when the Court considers the question whether the appellant is entitled to the reliefs from the Court which is in the discretion of the Court and not when the Court considers the question of maintainability of the appeal.

16. So far as the second objection raised to the maintainability of the appeal is concerned, Clause 29.1 of the tender document is relevant. Clause 29 and clause 29.1 reads as under: —

29.0. Jurisdiction and Applicable Law.29.1. This agreement including all matter connected with this Agreement shall be

governed by the laws of India (both substantive and procedural) for the time being in force and shall be subject to exclusive jurisdiction of the Indian Courts (the place where the contract is signed in India)17. Despite this clause, an application under section 9 of the Act was filed by the

respondents before the Delhi High Court. Maintainability of that application was objected to by the appellant. The Delhi High Court heard both the/ parties on the application and reserved its order. At that stage, while application was reserved for orders, the respondents moved an application. Paragraphs 4, 5 and 6 of that application are relevant. They read as under: —

4. That it is submitted that during the course of arguments the respondent raised the preliminary objection in respect of territorial jurisdiction of this Hon'ble Court to entertain the present petition. The respondent

Page: 1150

contended that only the Courts in Bombay has jurisdiction to entertain the present petition.

5. That it is submitted that in view of the contentions made by the respondent the petitioner wishes to withdraw the present proceedings to be filed in the appropriate Court of Bombay. Further this Hon'ble Court on 11-1-2002 passed stay against the respondent for encashment of the Bank Guarantee in question. It is respectfully submitted that the said stay be continued for fifteen days from the date of the withdrawal of the present petition for filing the same in appropriate Court having territorial jurisdiction to try the same.

6. That the respondent would suffer irreparable loss and injury if the present application is not by this Hon'ble Court and the suit is not allowed to be withdrawn to be filed in the appropriate Court in Bombay.18. Perusal of this application shows that the respondents conceded the position by the

application that the Delhi High Court does not have the jurisdiction and that it is only the appropriate Court, in Bombay which will have the jurisdiction to entertain the application. On this application, the Delhi High Court made an order permitting the respondents to withdraw the application. Instead of filing the application under section 9 before the Court in Bombay, the respondents filed an application under section 17 before the Arbitral



Tribunal. The objection of the respondents is based on the provisions of section 42 of the Arbitration Act. Section 42 reads as under: —

42. Jurisdiction — Notwithstanding anything contained elsewhere in this Part or in any other law for the time being in force, where with respect to an arbitration agreement any application under this Part has been made in a Court, that Court alone shall have jurisdiction over the arbitral proceedings and all subsequent applications arising out of that agreement and the arbitral proceedings shall be made in that Court and in no other Court.19. Perusal of the above quoted provision shows that if an application is made in a

Court it is only that Court which has the jurisdiction in relation to any subsequent applications. But the first application which is made, in order that the bar of section 42 is attracted, must be a competent application and not just any application. The respondents filed the application before the Delhi High Court, an objection was raised as to the jurisdiction of that High Court to entertain the application. It was possible that the objection would have been upheld by that High Court. In that situation the respondents would not have been entitled to claim that because that application was filed before the Delhi High Court it is that High Court before which, because of the provisions of section 42 of the Act, all subsequent applications should be made. Now, therefore, when the respondent withdrew the application conceding the position that the Delhi High Court does not have the jurisdiction to entertain the application, it will be unjust and unfair to permit him to raise the objection. In my opinion, the conduct of the respondents of withdrawing the application filed in Delhi High Court because of the objection raised by the appellant disentitles it to turn around and say that it is the Delhi High Court which has the jurisdiction and not this Court. The respondent had conceded the position that the Delhi High Court does not have

Page: 1151

the jurisdiction and accepting that concession the Delhi High Court permitted the respondents to withdraw the petition. In my opinion, therefore, it will not be in the interest of justice to permit the respondents to resile from that position. In any case I find that it is nobody's case that this Court will not have the jurisdiction. The tender was admittedly accepted in Bombay. Therefore, in terms of clause 29.1 of the tender document, it is this Court which will have the jurisdiction, in my opinion, in the face of the application of the respondents filed before the Delhi High Court, it cannot now be permitted to raise the objection to the maintainability of the present Appeal before this Court. The objection thus, has no substance.

20. So far as the order of the Arbitral Tribunal granting temporary injunction restraining invocation of the bank guarantee is concerned, perusal of the order of the Arbitral Tribunal shows that the Arbitral Tribunal has granted temporary injunction only because the respondents have made allegations of fraud. Perusal of the order shows that the Arbitral Tribunal has not gone into the allegations to find out whether, prima facie, the respondents have been able to establish the involvement of fraud. In my opinion, this approach adopted by the Arbitral Tribunal is totally impermissible. So far as the law relating to invocation of the bank guarantee is concerned, it is well settled because of series of judgments of the Supreme Court. In my opinion paragraphs 12 and 13 of the judgment of the Supreme Court in the case of JJ.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568, makes the law on the point absolutely clear. They read as under: —

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 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 or commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases. In the case of U.P. Co-op. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. which was the case of a

Page: 1152

works contract where the performance guarantee given under the contract was sought to be invoked, this Court, after referring extensively; to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer not with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the bank has notice. The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honouring its guarantee, this Court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in Boiivinter Oil SA v. Chase Manhattan Bank (All ER at p. 352): (at SCC P. 197)

"The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it charged."

This Court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee.

13. The same question - came up for consideration before this Court in Svenska Handelsbanken v. Indian Charge Chrome. This Court once again reiterated that a confirmed bank guarantee/irrevocable letter of credit cannot be interfered with unless there is established fraud or irretrievable injustice involved in the case. Irretrievable injury has to be of the nature noticed in the case of Itek Corpn. v. First National Bank o f Boston. On the question of fraud this Court confirmed the observations made in the case of U.P. Co-op. Federation Ltd. and stated that the fraud must be that of the beneficiary, and not the fraud of anyone else.21. Perusal of the above quoted paragraphs of the judgment of the Supreme Court

clearly shows that invocation of the bank guarantee cannot be interfered with by the Court, unless there is an established fraud or irreparable injustice involved in the case. It



is thus clear that mere allegation of fraud is not enough to issue an injunction against invocation of bank guarantee. The allegation of fraud must be established at least prima facie. It is further to be seen here that the result of invocation of the bank guarantee is that the amount for which the bank guarantee is given is recovered. Therefore, the party which has given the bank guarantee suffers loss of money. Loss of money never causes any irreparable injury. An interim order of injunction can be made only when the Court or the tribunal finds that apart from the fact that the applicant making out a strong prima

Page: 1153

facie case and showing that the balance of convenience is in favour of grant of the temporary injunction, the applicant would suffer an irreparable injury if the temporary injunction is not granted to him. Thus for grant of temporary injunction a finding that in case injunction is not granted, the applicant would suffer irreparable injury is a condition precedent. While granting the interim order by the order impugned the Arbitral Tribunal has not recorded any such finding. Therefore, even if it is assumed that the appellant was not justified in invoking the bank guarantee, the Arbitral Tribunal while deciding the matter finally would be within its power in making an order for payment of that amount by the appellant to the respondents with interest at an adequate rate. Considering that the appellant is ONGC, there can be no doubt that the decree for any amount that may be made would be executable and thus, there is no possibility of the respondents suffering any irreparable injury due to invocation of the bank guarantee. In my opinion, therefore, as there is no possibility of the respondents suffering any irreparable injury, there was no justification whatsoever for making an order restraining the appellant from invoking the bank guarantee. The impugned order made by the Arbitral Tribunal is, therefore, liable to be set aside.

22. In the result, therefore, the appeal succeeds. The order impugned in the appeal is set aside. The respondents are directed to pay costs of this petition as incurred by the appellant.

Appeal allowed.

Disclaimer: W hile every e ffo r t Is m ade to avo id arty m istake or om iss ion , th is casen o te / h e a dno te / ju d g m e n t/ a c t/ ru le / re g u la tio n / c irc u la r/ n o tif ica tio n is being c ircu la te d on th e con d itio n and u n d e rs tand ing th a t th e pu b lish e r wou ld no t be lia b le in any m anner by reason o f any m is take or om iss ion or fo r any action ta ke n or o m itte d to be taken or advice rendered o r accep ted on th e basis o f th is casen o te / hea d n o te / ju d g m e n t/ a c t/ ru le / re g u la tio n / c ircu l a r/ n o t if ic a tio n . A ll d ispu tes w ill be su b je c t e x c lu s iv e ly to ju r is d ic t io n o f cou rts , t r ib u n a ls and fo ru m s a t Lucknow on ly . The a u th e n tic ity o f th is te x t m u s t be ve rifie d from th e o rig ina l source.

©Journal Publications, Nagpur.


see:ONLINE



O.M.P. 924/2014

RPP Infra Projects Ltd. v. NTPC Tamil Nadu Energy

2014 SCC OnLine Del 7161

( B e f o r e D e e p a S h a r m a , J .)

M/s. RPP Infra Projects Ltd...... PetitionerMr. Dayan Krishnan, Senior Advocate with Mr. Govind Manoharan, Advocate.

v.M/s. NTPC Tamil Nadu Energy & A n r ...... Respondents

Mr. Bharat Sangal with Ms. Anusuya Choudhury, Advocate for respondent No. 1.Ms. Padma Priya, Advocate for respondent No. 2/Indian Overseas Bank.

O.M.P. 924/2014 & I.A. No. 16356/2014 Decided on December 16, 2014

Debt, Financial and Monetary Laws — Banks — Bank Guarantee — Invocation of — Sought to be restrained — Ground — Irreparable injury — Petitioner contended that having financial problems he would suffer irreparable loss, if the respondent be allowed to encash the bank guarantees — Such plea of irreparable injury on facts held, rejected — Civil Procedure Code, 1908, Or. 39

(Paras 13 to 18)

U.P. State Sugar Corpn. v. Sumac International Ltd., (1997) 1 SCC 568; Itek Corporation v. First National Bank of Boston, 566 F Supp 1210, relied on

JUDGMENT1. The present petition has been filed by the petitioner with the prayer that the

respondent no. 1 be restrained from invoking and encashing the bank guarantee and respondent no. 2 from making payment to respondent no. 1 in respect of bank guarantees.

2. The admitted facts of the case are that the petitioner was awarded the township work in the vicinity of power plant on a turnkey basis with residential and non- residential buildings and other services vide LPA No. NTECL/C&M/Township (CS-0260- 364-9)/LOA/09-10/201 dated 30.01.2010 by respondent no. 1. Thereafter the agreement/contract was drawn on 25.03.2010. The work was for a value of Rs. 137.847 Crores. The completion period was 24 months. However, since the work could not be completed within 24 months, the period was extended by respondent no. 1 from time to time but the work could not be completed even after expiry of 53 months. The petitioner could complete the work worth of 35% of the awarded contract value by April, 2014.

3. At the time when the contract was drawn, the petitioner had furnished security in the form of bank guarantees, the details of the bank guarantees are reproduced as under:

S. No. Date Nature of B.G. Bank Guarantee No.

Amount

1. 10.02.2010(Bankguarantees as on date extended upto

B.G. for security deposit

1015/1LG/5/10-11

3,06,33,000/-


see:ONLINE



27.10.2014)2. 22.10.2013

(Bankguarantees as on date extended upto 19.10.2014

Security Deposit 5/2013 4,41,63,765/-

3. 27.02.2013(Bankguarantees as on date extended upto 25.08.2014

Additional security deposit

9/2013 1,25,00,000/-

4. 02.04.2014(Bankguarantees as on date extended upto 03.10.2014

Additional Security Deposit

ILG 42/14 3,00,00,000/-

4. After April, 2014, the petitioner wrote a letter dated 02.06.2014 for further extension of time for completing the work. The respondent no. 1 rejected the request of the petitioner for extension. The case of the petitioner is that the respondent threatened to encash the bank guarantee. Thereafter vide letter dated 28.08.2014 the respondent o . l term inated the agreement. Before that the petitioner had moved this court seeking restrain on encashment of the above mentioned bank guarantees and the matter was listed before this court on 08.08.2014. The respondent was represented in court on that date through counsel on caveat and informed the court that they were not likely to invoke the bank guarantees until the next date of hearing. Meanwhile the respondent had moved an application being I.A. No. 16356/2014 and the petitioner also filed the reply of the said application. During the pendency of the present petition also vide its letter dated 05.09.2014, the petitioner invoked the arbitration clause and raised a summary of claims worth of Rs. 15,87,33,026.90/- (Rupees fifteen crores eighty seven lacs thirty three thousand and twenty six and ninety paise). In reply to the said invocation the respondent no. 1 vide its letter dated 01.10.2014 appointed Mr. Rakesh G. Samuel, GM (Vallur Project), Project-in-Charge of the Vallur Thermal Power Project, as the Arbitrator to decide disputes between the parties.

5. The case of the petitioner is that the said invocation of the bank guarantees is bad in law and contrary to the provisions of the contract. It is submitted that bank guarantees were deposited towards security deposit in terms of clause 9.1 of the GCC. It is submitted that these bank guarantees are not performance bank guarantees and therefore cannot be invoked. It is further submitted that under clause 9.4 of GCC, respondent no. 1 is empowered to deduct all compensation or other sums of money payable by the contractor from security deposit and this clearly indicates that without determ ining the amount payable by the petitioner, the respondent no. 1 cannot invoke the bank guarantees. It is also submitted that in view of clause 9.7 of GCC read with Condition 33 of the GCC, respondent no. 1 had to give 7 days' notice for curing the defects and thereafter adjust the outstanding amount, if any, from the security deposits if the defects were not cured within the stipulated period. It is submitted that there is nothing on record to show that there was any defect which was required to be cured by the petitioner, hence, the respondent is not entitled to invoke the bank guarantees. It is further submitted that under clause 9 of GCC, the respondent no. 1 is only required to deduct from the security deposit on a proportionate basis and therefore, the respondent no. 1 cannot invoke entire security deposit. It is further submitted that the petitioner herein was facing hardships. The site was situated in a



low lying area and in a coastal region and during the monsoons there was water logging and because of this nature of the site and the climatic conditions of the region delay was caused in construction. This issue was brought to the notice of the respondent vide several letters dated 12.03.2010, 18.03.2010, 19.03.2010,12.05.2010, 17.05.2010, 09.01.2012, 11.01.2012, 29.03.2012, 25.02.2013,17.05.2014, 04.03.2014, 08.04.2014, 19.04.2014 and 02.06.2014. The delay had also occurred on account of respondent no. 1 failing to clear bills raised by the petitioner. This fact was also brought to the notice of the respondent. It is submitted that approval for work programs, drawing etc. and clearance and instructions could not be obtained in time during the first two years of the contract and this had affected the petitioner's work progress to a great extent. It is submitted that the drawings provided were completely wrong and there were frequent changes. The said facts have been brought to the notice of the first respondent vide letters dated 12.03.2010,18.03.2010, 19.03.2010, 12.05.2010, 17.05.2010, 09.01.2012, 11.01.2012, 29.03.2012, 25.02.2013, 17.05.2014, 04.03.2014, 08.04.2014, 19.04.2014 and02.06.2014. It is also submitted that the surrounding locality near the site was an industrial area, which extensively engages labour force. Due to this, the petitioner had to face several frequent disturbances like politically motivated problems, problems created by people living around the site which had an impact on the progress of the work. Despite bringing these facts within the knowledge of respondent no. 1 vide letter dated 20.08.2010 the respondent no. 1 did not come forward to help the petitioner. It is submitted that delay had occurred due to the reasons beyond the control of the petitioner and the petitioner could complete only 35% of the work. It is submitted that in view of this, it is clear that balance of convenience lies in favour of the petitioner and petitioner shall suffer irreparable injury and the financial loss. It is submitted that special equities also lies in favour of the petitioner. Reliance has been placed on the findings in case of U.P. Co-operative Federation Ltd. v. Singh Consultants reported in (1988) 1 SCC 174 and U.P. State Sugar Corporation v. Sumac International Ltd. reported in (1997) 1 SCC 568.

6. It is subm itted that findings in U.P. State Sugar Corporation' case (supra) are not relevant because the questions involved in the said matter was in relation to the encashment of bank guarantees that were given as performance guarantees and not towards security deposits. On these facts, it is submitted that petitioner be given relief.

7. The claim is contested by the respondent on the ground that even before furnishing the bid the bidder were advised to inspect the site and it was expected that the petitioner would have given the bid only after inspection of the site. Clause 6 of the contract also bound down the contractor to inspect the site and its surroundings and satisfy himself before submitting his tender. Under Clause 19 of the agreement the duty was of the contractor to remove water accumulated at the site during the progress of the work at his own risk.

8. Clause 41 empowers the respondent no. 1 to cancel the contract by written notice in case the contractor fails to complete the work within stipulated period. It is argued that existence of any pending dispute between the parties cannot be a ground for preventing the invocation of the bank guarantee. Reliance has been placed on Vinitec Electronics Private Ltd. v. HCL Infosystems Ltd. reported in (2008) 1 SCC 544 and U.P. State Sugar Corporation’s case (supra). It is further argued that the invocation of the bank guarantee can be challenged only on the ground of fraud and irreparable injury and the nature of irreparable injury has been defined by the Supreme Court in U.P. State Sugar Corporation's case (supra) and Itek Corporation v. First National Bank o f Boston reported in 566 F. Sup. 1210. It is submitted that the petitioner has failed to show that it has suffered irreparable loss and injury and therefore is not entitled for the relief. It is submitted that the security has been



furnished by the petitioner in the form of unconditional bank guarantee and the bank guarantee is an independent contract between the bank and the beneficiary and its invocation cannot be stopped. It is further submitted that it was the petitioner who has failed to honour the contract despite the fact that the respondent had given extension of time for completion of work on several occasions in pursuance to Clause 32 of GCC. It is submitted that therefore the petitioner is liable for liquidated damages.

9. I have heard arguments and have perused the relevant record. There is no dispute to the fact that under Clause 9.1 of GCC the petitioner was required to furnish security deposit. This clause also gives liberty to the petitioner to deposit the security either in cash or in the form of government securities or fixed deposit receipts or bank guarantees furnished by any of the nationalised banks. The petitioner had chosen to furnish the said security deposit in the form of bank guarantees. From the language of the bank guarantee it is apparent that all the bank guarantees are unconditional bank guarantees. The bank has clearly stated "to unconditionally pay the am ount claimed by the Corporation on demand and without dem ur to the extent aforesaid".

10. Paragraph 2 of the said bank guarantee also reads as under:2. We, Indian Overseas Bank, Surampatti Branch, further agree that the Corporation

shall be the sole judge o f and as to whether the said Contractor has committed any breach or breaches o f any o f the terms and conditions o f the said Contract and the extent o f lossr damage, costs, charges and expenses caused to or suffered by or that may be caused to or suffered by the Corporation on account thereof and the decision o f the Corporation that the said Contractor has committed such breach or breaches and as to the amount or amounts o f loss, damage, costs charges and expenses caused to o r suffered by o r that may be caused to o r suffered by the Corporation from time to time shall be final and binding on us."

11. The nature and purpose of bank guarantee has been discussed by Supreme Court in the case of Hindustan Construction v. State o f B ihar (1999) 8 SCC 436, relied upon by the petitioner. The relevant paragraphs 8 and 9 of the said judgm ent are reproduced as under:-

"8. Now, a bank guarantee is the common mode o f securing paym ent o f money in commercial dealings as the beneficiary, under the Guarantee, is entitled to realise the whole o f the am ount under that Guarantee in terms thereof irrespective o f any pending dispute between the person on whose beha lf the Guarantee was given and the beneficiary. In contracts awarded to private individuals by the Government, which involve huge expenditure, as, for example, construction contracts, Bank Guarantees are usually required to be furnished in favour o f the Government to secure payments made to the contractor as "advance" from time to time during the course o f the contract as also to secure performance o f the work entrusted under the contract. Such Guarantees are excusable in terms thereof on the lapse o f the contractor either in the performance o f the work o r in paying back to the "Government Advance", the Guarantee is invoked and the amount is recovered from the Bank. It is for this reason that the Courts are reluctant in granting an injunction against the invocation o f Bank Guarantee, except in the case o f fraud, which should be an established fraud, o r where irretrievable injury was likely to be caused to the Guarantor. This was the principle laid down by this Court in various decisions. In U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers Pvt. Ltd.: [1988] 1 SCR 1124, the law laid down in Boliv inter Oil SA v. Chase Manhattan Bank [1984] 1 A ll E.R. 351 was approved and it was held that an unconditional Bank Guarantee could be invoked in terms thereof by the person in whose favour the Bank Guarantee was given and the Courts would not grant any injunction restraining the invocation except in the case o f fraud o r irretrievable injury. In Svenska Handeisbanken v. Indian Charge Chrome: AIR 1994 SC 626; Larsen &



Toubro Ltd. v. Maharashtra State Electricity Board: AIR 1996 SC 334; Hindustan Steel Works Construction Ltd. v. G.S. A twal & Co. (Engineers) (P) Ltd.: AIR 1996 SC 131; National Thermal Power Corporation Ltd. v. Flowmeore (P) Ltd.: AIR 1996 SC 445; State o f Maharashtra v. National Construction Co.: [1996] 1 SCR 293; Hindustan Steel Works Construction Ltd. v. Tarapore & Co: AIR 1996 SC 2268 as also in U.P. State Sugar Corporation v. Sumac International Ltd.: AIR 1997 SC 1644, the same principle has been laid down and reiterated.

9. What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the am ount would be paid without dem ur or objection and irrespective o f any dispute that m ight have cropped up or might have been pending between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished. The terms o f the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms o f the Bank Guarantee; or else, the invocation itse lf would be bad."

12. As discussed above, the bank guarantees in dispute, clearly in unequivocal terms and unconditionally recite that the amount would be paid without demure or objection. The bank guarantee thus is an independent contract between the bank and the beneficiary and can be challenged only on the ground of fraud and irreparable injury.

13. In the present case, the petitioner has challenged the invocation of the bank guarantee only on the ground of irreparable injury. The plea of irreparable injury is based on the contentions that the petitioner since having financial problems would suffer irreparable loss, if the respondent be allowed to encash the band guarantees. Whether this constitutes irreparable injury of the nature which is sufficient to restrain the respondent from invoking the bank guarantees is the matter which requires consideration. Now what is an irreparable loss and injury on the basis o f which court can restrain the respondents, has been discussed and the principle laid down by the supreme court in the U.P. State Sugar Corporation's case (supra). The petitioner has also relied on this case. The Supreme court has held as under:

"on the question o f irretrievable injury which is the second exception to the rule against granting o f injunctions when an unconditional bank guarantees are sought to be realised the irretrievable injury must be o f the kind which was the subject m atter o f the decision in the Itek Corporation Case.

14. In Itek Corporation v. First National Bank o f Boston 566 F. Supp. 1210, the Masachusetts District Court of the United States has held as follows:

"at the risk o f stating the obvious, I take jud ic ia l note o f the fact that conditions in Iran has changed radically since that time. What was contractually 'customary' and 'necessary' in 1977 does not, in the face o f dramatically changed circumstances, exert binding force on the parties and this court more than six years later. I reiterate my earlier finding that 'the present domestic situation there has rendered access to Iranian courts futile. Therefore I do not find that Itek should be required to pursue its remedies in the Iranian Courts before having resort to this forum.

Because I find that Itek has demonstrated that it has no adequate remedy at law, and because I find that the allegations o f irreparable harm are not speculative, but genuine and immediate, I am satisfied that Itek will suffer irreparable harm if the requested re lie f is not granted."

15. From the principles laid down in the abovesaid case, it is apparent that the petitioner can be said to have suffered irreparable injury if he has been able to show that he shall suffer irreparable harm.

16. In the present case, the petitioner has failed to bring on record which can show



that the petitioner shall suffer an irreparable harm. The petitioner has failed to show that in case he succeeds before the arbitrator, he will not be able to recover the refund of his security amount. It is not his case that the respondent is not financially sound or would not be in a position to refund the decretal amount.

17. Let us now examine this case from a different angle. There is no dispute to the fact that these bank guarantees have been furnished by the petitioner towards the security deposit. He had the liberty pursuant to clause 9.1 of GCC to deposit the security either in cash or in the form of bank guarantee or in the form of other securities. The petitioner has chosen to deposit the security in the form of bank guarantees. Suppose the petitioner would have deposited the security amount in cash, what would have been the situation? The cash security deposit would have remained with respondent no. 1 and the petitioner would have been entitled to its refund in terms of the GCC. Clause 9.6 of the GCC deals with the refund of security deposit. It reads as under:

9.6. Refund o f Security Deposit:- One ha lf o f the Security deposit refundable to the Contractor worked out on the basis o f the value o f work completed shall be re-funded to the Contractor on the Engineer-in-Charge certifying in writing that the work has been completed as per condition 31 hereof etc."

18. This clause clearly contemplates that the security deposit is refundable only on completion of the work and after the engineer-in-charge certifies in writing that the work has been completed as per the condition 31. Admittedly, in the present case the petitioner has only completed work of 35% worth of contract amount and thus in view of clause 9.6 of GCC the petitioner is not entitled for the refund of security deposit and the security deposit is to remain with respondent no. 1. For this reason also the petitioner is not entitled for the relief.

19. Mere pendency of a reference before the arbitrator is also not a ground to issue restrain order to the bank guarantee.

20. This Court in a recent judgm ent Consortium of Deepak Cable India Lim ited (supra), has held as under:-

"145............Disputes pertaining to the main contract cannot be considered by acourt when a claim under a bank guarantee is made and the court would be precluded from embarking on an enquiry pertaining to the prima facie nature o f the respective claim o f the litigating parties relatable to the main dispute. The dispute between the parties to the underlying contract has to be decided at the civil forum i.e. a civil su it if there exists no arbitration clause in the contract or before the arbitral tribunal i f there exists an arbitration clause in the contract. Pendency o f arbitration proceedings is no consideration while deciding on the issue o f grant o f an interim injunction. That certain amounts have been recovered under running bills and have to be adjusted for is o f no concern in matters relating to invocation o f bank guarantee. That there are serious disputes on questions as to who committed the breach o f the contract are no circumstances justify ing granting an injunction pertaining to a bank guarantee. Plea o f lack o f good faith and/or enforcing the guarantee with an oblique purpose or that the bank guarantee is being invoked as a bargaining chip, a deterrent o r in an abusive manner are all irrelevant and hence have to be ignored. There are only two well recognized exceptions to the rule against perm itting payment under a bank guarantee. The same are: -

A.A fraud o f egregious nature;B. Encashment o f the bank guarantee would resuit in irretrievable harm or injustice

o f an irreversible kind to one o f the parties."21. Therefore, the pendency of the arbitration proceedings also is not a ground to

restrain the respondent no. 1 from invoking the bank guarantees. Also in the case of Vinitec Electronics Private Ltd. v. HCL Infosystems Ltd. reported in (2008) 1 SCC 544



the Supreme Court has clearly held that the process of the arbitral proceedings is not a ground to restrain the invocation of the bank guarantees especially when there is no allegation that it would be difficult to realise the amount from the respondent. The court has held as under:

"There is no dispute that arbitral proceedings are pending. The appellant can always get the re lie f provided he would make his case before the Arbitral Tribunal, There is no allegation that it would be difficult to realise the amounts from the respondent in case the appellant succeeds before the arbitral tribunal,"

22. For the foregoing reasons, I found no ground to hold that the petitioner is entitled to any relief. The petition is hereby dismissed. The stay granted by this court stands vacated.

Disclaimer: W hile e v e ry e f fo r t is m ade to a vo id any m is ta k e o r om ission,, th is ca s e n o te / h e a d n o te / ju d g m e n t / a c t / ru le / re g u la t io n / c irc u la r / n o t if ic a tio n is b e ing c irc u la te d on th e c o n d it io n and u n d e rs ta n d in g th a t th e p u b lis h e r w o u ld n o t be lia b le in any m a n n e r by reason o f any m is ta ke o r o m iss io n o r f o r a n y a c tio n ta k e n o r o m it te d to be ta k e n o r a d v ice re n d e re d o r accep ted on th e basis o f th is c a s e n o te / h e a d n o te / ju d g m e n t / a c t/ ru le / re g u la t io n / c irc u la r / n o t if ic a t io n . A ll d is p u te s w ill be s u b je c t e x c lu s iv e ly to ju r is d ic t io n o f co u rts , t r ib u n a ls and fo ru m s a t Luckn ow o n ly . The a u th e n t ic ity o f th is t e x t m u s t be v e r if ie d fro m th e o r ig in a l source .

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O.M.P. (I) (COMM) 232/2017

Essar Projects (India) Limited v. Indian Oil Corporation Limited

2017 SCC OnLine Del 8817

In the High Court of Delhi at New Delhi( B e f o r e G .S . S is t a n i , J.)

Essar Projects (India) Limited .... PetitionerMr. Gopal Jain, Senior Advocate with Mr. Puneet Singh Bindra, Ms. Sumanta Nayak,

Mr. Aslam Ahmad, Mr. Sharad Khaira, Ms. Hema Patnaik and Mr. Sonal Alagh, Advocates

Indian Oil Corporation Limited & A n r ...... RespondentsMr. Abhinav Vashist, Senior Advocate along with Mr. Am it Meharia, Ms. Tannishtha

Singh and Ms. Ayushi Gupta, Advocates for respondent No. 1.O.M.P. (I) (COMM) 232/2017

Decided on June 2, 2017

Arbitration — Arbitration and Conciliation Act, 1996 — S. 9 — Arbitration proceedings — Interim measures bv court till final resolution of dispute — Invocation of bank guarantee — Scope of court's interference under S. 9 — Law restated that bank guarantee is an independent document — Court does not normally interfere in bank guarantee matters, particularly in case of unconditional bank guarantee — However, two exceptional circumstances warranting court's interference are, (i) fraud of egregious nature, and (ii) special equities — On facts held, none of these two factors existed — Dispute pertained to petitioner's liability, if any, arising out of delay in completion of work undertaken by it — Fact noted that respondent was a State controlled organisation — There was no real danger that it would not honour ultimate outcome of arbitration proceedings — Even assuming that respondent owed a large sum to petitioner on account of work already done, held, encashment of bank guarantee can be taken into account at the time of final resolution of dispute — Court's intervention in stalling enforcement of bank guarantee was not called for— Banking law — Bank guarantee — Independent document — Enforcement — Court's intervention — Civil Procedure Code, 1908, S. 151, Or. 39, Rr. 1 and 2

Partly dism issing application for stay, the High Court of Delhi,

In case of bank guarantees in general and specially in case of unconditional bank guarantees, the court should not interfere unless petitioner is able to establish fraud o f egregious nature, or is able to plead special equities. The petitioner has provided unconditional bank guarantee to respondent 1. The attribution of the guilt for the delay and the consequent or other claims of the petitioner can be adjudicated before the arbitral tribunal. Respondent 1 being an instrumentality o f the state, there is no danger of the petitioner being unable to recover any am ounts it claims, should the same be awarded to it in the arbitral proceedings. The petitioner has not been able to establish any special equities in claim or counter claim, against a ground to stay the bank guarantee which is an independent document. There is no stay the invocation o f the two bank guarantees.

G.S. Sistan i, J. (Oral)CAV. PET./2017 (to be numbered)

1. A caveat is said to have been filed, the same is not on record. Let the same be brought on record and numbered. Mr. Abhinav Vashist, Senior Advocate, on instructions, has appeared.

2. Accordingly, the caveat stands disposed of.

Held :

(Paras 23, 27 29)



I.A. 7117/2017 (Exemptions3. This is an application filed by petitioner under Section 151 of the Code of Civil

Procedure seeking exemption from filing original documents relied upon by the petitioner at this stage.

4. The original documents relied upon shall be filed by the petitioner within eight weeks from today.

5. Application stands disposed of.I .A. 7118/2017 (Exemption-!

6. This is an application filed by petitioner under Section 151 of the Code of Civil Procedure seeking exemption from filing typed copy of dim annexures relied upon by the petitioner.

7. Let the legible copies/typed copy of the dim annexures be filed by the petitioner within eight weeks from today.

8. Application stands disposed of.I.A. 7116/2017 (Exemptions

9. This is an application filed by petitioner under Section 151 of the Code of Civil Procedure seeking exemption from filing complete copy of Contract dated 28.02.2011.

10. Let the complete set of Contract be filed by the petitioner within six weeks from today.

11. Application stands disposed of.P.M.P. (IS fCOMMS 232/2017

12. This petition under Section 9 of the Arbitration and Conciliation Act, 1996 has been listed upon mentioning.

13. By the present petition, the petitioner inter alia prays for restraining the respondents from encashing bank guarantees no. 160004IBGA00036 and 16000IBGA00037 dated 28.03.2016.

14. Mr. Gopal Jain, learned Senior Counsel for the petitioner submits that the petitioner was awarded a contract (for short 'EPC contract') on 28.02.2011, also known as Paradip Refinery Project (hereinafter referred to as the 'Project') o f Indian Oil Corporation ('IOC')/respondent no. 1. It is the case of the petitioner that M/s. Foster Wheeler was appointed as the Project Management Consultant and the project stands concluded and was, in fact, inaugurated by the Prime Minister of India on 07.02.2016. During the pendency of the works, the petitioner had tendered two bank guarantees no. 160004IBGA00036 and 16000IBGA00037 dated 28.03.2016 in the sum of Rs. 50 crores (previously 72 crores, later reduced to Rs. 50 crores by amendment dated 12.04.2016) and Rs. 31 crores respectively. The petitioner claims to have achieved mechanical clearance in 2015, but claims that mechanical completion was delayed due to reasons attributable to IOC. The mechanical completion certificate was issued to the petitioner after substantial delay in January-April, 2016. The petitioner claims that after mechanical completion, commissioning and PGTR including handover were required to take place within one month of mechanical completion; however, the same was taken up by the IOC only after March, 2017 for Part A Unit and for Part B was not taken up. Thereafter, the petitioner sought extension of time for Part A Units and Part B Units vide Letters dated 29.07.2016 and 23.09.2016 respectively.

15. Thereafter, the petitioner claims that after the completion of the project, the petitioner waited for IOC to issue completion certificate; but since the same was not issued, the petitioner was constrained to write a letter dated 15.03.2017 requesting Foster to issue completion certificate. Ultimately, the petitioner raised a draft final bill claim ing the pending amounts as well as additional sums on 22.03.2017. The petitioner by a detailed legal notice dated 12.04.2017 has invoked the arbitration clause and nominated a former Judge of the Supreme Court of India as the Arbitrator.



It is the case of the petitioner that large sums of money are due from the respondent no. 1 amounting to Rs. 82 crores, additional claim of Rs. 347 crores which has not been processed and an additional claim of Rs. 500 crores. It is also the case of the petitioner that post receipt of the legal notice in which the petitioner had detailed various disputes which had arisen between the parties and the amount due, the respondent no. 1 in a hurry has created a demand in their favour in a clandestine manner and in utter haste invoked the bank guarantee by a communication dated 01.06.2017.

16. Mr. Jain submits that in the absence of any adjudication with regard to any amount due to the respondent no. 1, the bank guarantee cannot be invoked. He further submits that for the delay in completion of the work, extensions have already been granted in favour of the petitioner's contractor which is evident upon reading of communication dated 24.04.2017, wherein extension was granted of 1138 days excluding extension of 244 days. Another extension was granted by a communication dated 10.12.2016 of 116 days, while extension of 82 days was rejected.

17. The sum and substance of the argument of the learned counsel for the petitioner is that the claims sought to be adjusted by the respondent no. 1 have not been adjudicated and it is the petitioner who has to recover almost Rs. 900 Crores from the respondent no. 1. The learned Senior Counsel for the petitioner submits that the petitioner would be put to irreparable loss and till the final determ ination of the claims of the respondents are adjudicated upon and in case the bank guarantees are allowed to be encashed, the petitioner would be put to serious loss and thus, special equities flow in favour of the petitioner would be lost. Mr. Jain has strenuously urged before this Court that the respondent has given no reasons for invocation of the bank guarantee. Reliance is placed in the case of A.S. Motors Pvt. Ltd. v. Union o f India (UOI), (2013) 10 SCC 114 (paragraph 24).

18. Relying upon J.G. Engineers Pvt. Ltd. v. Union o f India (UOI), (2011) 5 SCC 758 (paragraph 19 and 20) and State o f Karnataka v. Shree Rameshwara Rice Mills, ThirthahaUi, (1987) 2 SCC 160, Mr. Jain has further submitted that the respondent no. 1 cannot be an arbiter in its own cause and decide both the question of breach and the quantum of damages and therefore, the petitioner is entitled to an injunctive order against the respondents.

19. Per contra, Mr. Abhinav Vashist, learned Senior Counsel appearing for the respondent no. 1, while relying on the terms of the bank guarantee submits that the bank guarantees in question are unconditional bank guarantees and an independent contract between the bank and the respondent no. 1. It is submitted that in invocation of the bank guarantee, the amounts are to be paid without any protest or demur, which is incorporated in the terms of the bank guarantee and provided by the petitioner with open eyes. The learned Senior Counsel submits that both the bank guarantees are identical and relies on the following conditions of the bank guarantees:

'W e IDBI Bank Limited, a company incorporated and registered under the Companies Act, 1956 and a banking company within the meaning o f Section 5(c) o f the Banking Regulation Act, 1949, having registered office at IDBI Tower, WTC Complex, Cuffe Parade, Mumbai-400005 and, inter alia, a Branch Office at TPC, Mafatlal Centre, 4th Floor, Mumbai-400021 (hereinafter called the "Bank" which expression shall include its successors and assigns) a t the request o f the Contractor and with the intent to b ind the Bank and its successors and assigns, do hereby unconditionally and irrevocably undertake to pay the Corporation at forthwith on first demand without protect o r dem ur or p roo f o r satisfaction and without reference to the Contractor, any and a ll amounts demanded from us by the Corporation with reference to this Undertaking upto an aggregate lim it o f Rs. 31,00,00,000/- (Rupees Thirty One Crores only).


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Hi) The obligations o f the Bank to the Corporation hereunder shall be as surety and shall be wholly independent o f the Contract and it sha ll not be necessary for the Corporation to proceed against the Contractor before proceeding against the Bank and the guarantee/undertaking herein contained shall be enforceable against the Bank as Principal debtor notw ithstanding the existence o f any undertaking or security for any indebtedness o f the Contractor to the Corporation(including relative to the said Payment) and notw ithstanding that any such undertaking o r security shall a t the time when claim is made against the bank o r proceedings taken against the Bank hereunder, be outstanding o r unrealized.

iv) A s between the Bank and the Corporation fo r the purpose o f this undertaking, the am ount stated in any claim, demand o r notice made by the Corporation on the Bank with reference to this undertaking sha ll be final and binding upon the Bank as to be the am ount payable by the Bank to the Corporation hereunder.

v) The liability o f the Bank to the Corporation under this undertaking shall remain in fu ll force and effect notwithstanding the existence o f any difference or dispute between the Contractor and the Corporation, the Contractor and/or the Bank and/or the Bank and the Corporation o r otherwise howsoever touching or affecting these presents or the liability o f the Contractor to the Corporation, and notw ithstanding the existence o f any instructions o r purported instructions by the Contractor or any other person to the Bank not to pay o r for any cause withhold or defer paym ent to the Corporation under these presents, with the intent that notw ithstanding the existence o f such difference, dispute o r instruction, the Bank shall be and remain liable to make paym ent to the Corporation in terms thereof."

(Emphasis Supplied)20. It is contended by Mr. Vashist that on reading of the bank guarantee, it would

leave no room for doubt that the parties had agreed that the petitioner would provide unconditional bank guarantees. The terms of the bank guarantees are clear and explicit and as an independent contract, the respondent no. 2 bank is not concerned with the disputes between the petitioner and respondent no. 1. He submits that the law is well-settled that the courts would be slow in granting stay of invocation of an unconditional bank guarantee. He relies on the judgment in the case of Hindustan Steelworks Construction Ltd. v. Tarapore & Co., (1996) 5 SCC 34 (paragraphs 14 and 23) in support o f his submission.

21. I have heard the learned counsel for the parties and considered their rival submissions.

22. The only ground urged before this Court is that special equities exist in favour of the petitioner entitling it to an injunction against the respondents. Mr. Jain substantiated his argument by submitting that extensions of time were granted by the respondent no. 1, the amount due from the petitioner has not been computed and that on the contrary, IOC owes about 900 crores to the petitioner therein.

23. The scope of interference by courts in the invocation of the bank guarantees is no longer res Integra. It has been repeatedly held that specially in cases of unconditional bank guarantees, the court should not interfere unless the petitioner is able to establish fraud of egregious nature or is able to plead special equities. I need not burden my opinion with numerous judicial pronouncements, suffice it to reproduce the relevant paragraphs of a judgm ent of this very Court in CWHEC-HCIL (JV) v. Calcutta Haldia Port Road Co. Ltd., ILR (2008) 1 Del 353:

"10. In light o f the aforesaid discussion, the following principles governing the invocation o f bank guarantees are culled out:

(i) A bank guarantee is an independent and distinct contract between the bank and the beneficiary.


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(ii) In the case o f unconditional bank guarantees, the bank undertakes to give money to the beneficiary on demand, without dem ur or protest.

(Hi) Further, in unconditional bank guarantees, the nature o f the obligation o f the bank is absolute and not dependent upon any dispute or proceeding between the beneficiary o f the bank guarantee and the party at whose instance the bank guarantee.

(iv) As bank guarantees are fundamental to trade and commerce, both at the domestic and international level, the general rule is that courts o f law should be slow and cautious in granting injunction to restrain their realization. For instance, courts should refrain from probing into the disputes between the parties o r from embarking on questions as to whether the beneficiary is trying to take undue enrichment, etc.

(v) However, there are four exceptions to the aforesaid general rule, that is, the court may grant injunction restraining the invocation o f bank guarantee, if:(a) there is a fraud o f an egregious nature in connection with the bank

guarantee which would vitiate the very foundation o f such guarantee and the beneficiary seeks to take advantage o f such fraud.

(b) the applicant, in the facts and circumstances o f the case, clearly establishes a case o f irretrievable injustice or irreparable damage.

(c) the applicant is able to establish exceptional o r special equities o f the kind which would outrage the conscience o f the court.

(d) the bank guarantee is not invoked strictly in its terms and by the person empowered to invoke under the terms o f the guarantee.

42. The importance o f bank guarantees in facilitating trade and commerce, both nationally and internationally, cannot be understated. An unconditional bank guarantee creates an irrevocable obligation on the bank to honour the bank guarantee irrespective o f any dispute between the party furnishing the bank guarantee and the beneficiary thereof. This obligation o f the bank manifests an act o f trust and faith in order to mobilize practices pertaining to trade and commerce. The courts o f law, too, should be extremely circumspective and sporadic in interfering with the invocation o f bank guarantees, lest the free flow o f trade and commerce is imperiled. The general rule is that the court, ordinarily, should avoid granting injunction to restrain the invocation o f bank guarantee, unless it is prima facie satisfied that the act o f the beneficiary/respondents is so glaring and unreasonable so as to cause irretrievable injury to the petitioner. The principle underlying the maxim jud lc is est in pronuntiando sequl reouiam. exceptions non probat should be strictly adhered to bv the Court in matters pertaining to stay on invocation o f bank guarantees. That is to sav. the judge in his decision ought to follow the rule, when the exception is not made apparent."

(Emphasis Supp lied)24. The first question which arises for consideration is whether the two bank

guarantees which are identical in nature are unconditional or not. Reading of the terms of the bank guarantee, more particularly the clauses extracted in paragraph 20 aforegoing, leave no room for doubt that the petitioner had provided unconditional bank guarantees to the respondent no. 1. [See Constructora Sanjose S.A. v. Delhi Development Authority, 2016 SCC OnLine Del 6078]

25. As regards, the submission of Mr. Jain that the respondent no. 1 has acted as an arbiter in its own cause and decided the quantum of damages unilaterally, the question, in my view, stands fully answered in the case of Hindustan Steelworks Construction Ltd. (Supra). In the case, the appellant had granted a contract for



construction of civil works in a steel plant to the contractor, which despite extensions was unable to complete the project within the stipulated time and the appellant rescinded the contract. As per the terms of the contract, the appellant assessed the loss/damages and invoked the bank guarantees. The contractor rushed before the Trial Court praying for an injunction restraining the appellant from invoking the bank guarantees to no avail and then approached the Andhra Pradesh High Court alleging that since the bank guarantees were given for securing due performance, the same would be encashable only after the arbitrators decide the factum of breach as well as the damage suffered. The High Court reversed the decision of the Trial Court finding that the liability to pay damages would arise only after it is established that there is a breach of contract and same could be ascertained by the arbitrator. This did not find favour with the Apex Court, which allowed the appeals and observed as under:

"6. ...After noticing that bank guarantees in this case except Bank Guarantees Nos. 3/21, 3/39 and 6/175 were given towards security deposits only it observed that: "Neither o f the learned counsels had drawn attention o f this Court to any decision granting or refusing injunction in regard to a bank guarantee given by way o f security deposit to indemnify against any loss o r damage caused by breach o f the terms and conditions o f the contract." It then considered the position o f law with respect to liquidated damages in our country and observed that: "Hence there cannot be any agreement in regard to the am ount that has to be allowed except the upper lim it that can be fixed, in case o f breach." Reiving upon the decision o f this Court in Union of India v. Raman Iron Foundry [(1974) 2 SCC 231: AIR 1974 SC 1265] the High Court held that any term in the agreement that one o f the parties shall be the sole iudae to quantify the same has to be held as invalid. According to the High Court liab ility to pav damages would arise only after it is established that there is a breach o f the contract and it is for the court or the arb itrator to decide as to who has committed the breach. Till the liability is ascertained, it cannot be said that there is a "debt due or debt owing". On these grounds the High Court rejected the contention raised on behalf o f HSCL that it was the sole judge to decide as to whether the contractor has committed a breach o f the contract and what is the extent o f damage caused to it. It also held that in the absence o f any determ ination by the Court or the arb itrator no amount can be said to be payable by the contractor to HSCL by way o f damages andr therefore, it will be ju s t and proper to restrain HSCL from enforcing the bank guarantees. ..."

14. The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that in India only a reasonable amount can be awarded by way o f damages even when the parties to the contract have provided for liquidated damages and that a term in a bank guarantee making the beneficiary the sole judge on the question o f breach o f contract and the extent o f loss o r damages would be invalid and that no am ount can be said to be due til! an adjudication in that beha lf is made either by a court or an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified bv the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. What the High Court has observed would be applicable only to the parties to the underlying transaction o r the primary contract but can have no relevance to the bank guarantee given bv the bank, as the transaction between the bank and the beneficiary is independent and o f a different nature. In case o f an unconditional bank guarantee the nature o f obligation o f the bank is absolute and not dependent upon anv dispute o r proceeding between the party at whose instance the bank guarantee is given and the beneficiary. The High Court thus failed to


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appreciate the real object and nature o f a bank guarantee. The distinction which the High Court has drawn between a guarantee for due performance o f a works contract and a guarantee given towards security deposit for that contract is also unwarranted. The said distinction appears to be the result o f the same fallacy committed by the High Court o f not appreciating the distinction between the primary contract between the parties and a bank guarantee and also the real object o f a bank guarantee and the nature o f the bank's obligation thereunder. Whether the bank guarantee is towards security deposit o r mobilisation advance or working funds o r for due performance o f the contract i f the same is unconditional and if there is a stipulation in the bank guarantee that the bank should pav on demand without a dem ur and that the beneficiary shall be the sole judge not only on the question o f breach o f contract but also with respect to the amount o f loss or damages, the obligation o f the bank would remain the same and that obligation has to be discharged in the m anner provided in the bank guarantee. In General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd. [(1991) 4 SCC 230] while dealing with a case o f bank guarantee given for securing mobilisation advance it has been held that the right o f a contractor to recover certain amounts under running bills would have no relevance to the liability o f the bank under the guarantee given by it. In that case also the stipulations in the bank guarantee were that the bank had to pay on demand w ithout a dem ur and that the beneficiary was to be the sole judge as regards the loss o r damage caused to it. This Court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to discharge its liability as pe r the terms o f the bank guarantee. Larsen and Toubro Ltd. v. Maharashtra SEB [(1995) 6 SCC 68] and Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd. [(1995) 6 SCC 76] were also cases o f work contracts wherein bank guarantees were given either towards advances or release o f security deposits o r for the performance o f the contract. In both these cases this Court held that the bank guarantees being irrevocable and unconditional and as the beneficiary was made the sole judge on the question o f breach o f performance o f the contract and the extent o f loss or damages an injunction restraining the beneficiary from invoking the bank guarantees could not have been granted. The above-referred three subsequent decisions o f this Court also go to show that the view taken by the High Court is clearly wrong.

23. We are, therefore, o f the opinion that the correct position o f law is that commitment o f banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case o f fraud o r in a case where irretrievable injustice would be done If bank guarantee is allowed to be encashed, the court should interfere. In this case fraud has not been pleaded and the re lie f for injunction was sought by the contractor/Respondent 1 on the ground that special equities o r the special circumstances o f the case required i t The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach o f the contract. that the contractor has a counter-claim against the appellant. that the disputes between the parties have been referred to the arbitrators and that no am ount can be said to be due and payable bv the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors are not sufficient to make this case an exceptional case justify ing interference bv restraining the appellant from enforcing the bank guarantees. The High Court wasr therefore, not right in restraining the appellant from enforcing the bank guarantees."

(Emphasis Supplied)



26. (Also see Era Infra Engineering Ltd. v. CentraI Public Works Department, 2017 SCC OnLine Del 8349)

27. Hence, neither J.G. Engineers Pvt. Ltd. (Supra) nor Shree Rameshwara Rice Mills (Supra) come to the aid of the petitioner as both the judgments do not pertain to invocation of bank guarantees and relate to computation of damages between two contracting parties.

28. Even the other grounds urged by the learned senior counsel for the petitioner fail to establish a case of special equities. The attribution of the guilt for the delay and the consequent or other claims of the petitioner can be adjudicated before the arbitral tribunal. Further, the respondent no. 1 being an instrumentality o f the state, there is no danger of the petitioner being unable to recover any amounts it claims should the same be awarded to it in the arbitral proceedings. I may also note that sim ilar grounds pertaining to outstanding bills, amounts and attribution of blame for delay in execution of project were raised before this Court in CWHEC-HCIL (JV) and were rejected (paragraphs 2-4, 19, 41 and 44).

29. The decision in the case of A.S. Motors Pvt. Ltd. (Supra) is also inapplicable to the facts of the present case as in that case, invocation of the bank guarantee was quashed by the High Court and upheld by the Supreme Court by finding that the respondent had already received a sum greater than the amount payable to it under the contract if the same was performed diligently till its end and hence, the additional invocation of bank guarantee without proper estimation was found to be improper; which is not the case before this Court.

30. In the present case, the petitioner has not been able to establish any special equities in claim or counter claim on behalf o f the petitioner against a ground to stay the bank guarantee which is an independent document. Therefore, I find no grounds to stay the invocation of the two bank guarantees.

31. Accordingly, the prayers (a), (b) and (c) of the petition under Section 9 are rejected.

32. Issue notice to the respondents with regard to prayer (d).33. List on 17.07.2017 before the Roster Bench.34. Parties to explore as to whether the arbitrators can be appointed expeditiously.

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Law on Bank Guarantees - MCO Legals

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