Bank Guarantee; Fernas Construction Company Inc Vs. Gujarat State Petronet Ltd. [Gujarat High Court, 21-10-2016]

Contents

Bank Guarantee – Any existence of dispute between the parties to the contract cannot be a ground to restrain from evoking the bank guarantee.

# Bank Guarantee

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

CORAM: HONOURABLE MR.JUSTICE R.M.CHHAYA

Date : 21/10/2016

PETN. UNDER ARBITRATION ACT NO. 96 of 2016

FERNAS CONSTRUCTION COMPANY INC….Petitioner(s) Versus GUJARAT STATE PETRONET LTD & 1….Respondent(s) Appearance: MR RASHESH SANJANWALA, SR. ADVOCATE with MR. ARCHIT P JANI, ADVOCATE for the Petitioner(s) No. 1 MR SAURABH N. SOPARKAR, SR. ADVOCATE with MR ASPI M KAPADIA, CAVEATOR for the Respondent(s) No. 1

ORAL ORDER

1. By way of this petition under

# Section 9 of the Arbitration and Conciliation Act, 1996

read with provisions of the

# Commercial Courts, Commercial Division and Commercial Appellate Division of High Court Act, 2015

the petitioner has prayed for the following reliefs ­

“(a) restrain Respondent No.1 from implementing the termination letter dated 09.08.2016 (Annexure P­9) or any request made pursuant thereunder, including without limitation the demands made in Respondent No. 1’s e­mail dated 20.09.2016 (Annexure P­ 18);

(b) restrain Respondent No.1 from engaging a third party to implement the project;

c) restrain Respondent No.1 from invoking and/or encashing the Bank Guarantees i.e. Advance Bank Guarantee Vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs 7.50 Crores and Performance Bank Guarantee vide No. 1609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs. 27,29,69,140/­; and

(d) restrain Respondent No.1 from taking any other adverse action against the petitioner, including adjustment of securities, etc.

(e) pass ex­parte orders in terms of prayer (a) to (d) above and confirm the same after notice of motion;

(f) award costs; and

(g) pass any other or further relief in favour of petitioner which this Hon’ble Court deems fit and proper in the facts and circumstances of the case.”

2. The following relevant facts which emerge from the record of the petition are as under:

2.1 That the petitioner is a company incorporated under the laws of Turkey having its principal place of business at Ankara­Turkey. Respondent No.1, a public sector undertaking of the State of Gujarat awarded a contract to the petitioner vide Letter of Intent No.GSPL/TS/207/CS/LOI/402 dated 20.09.2012 for Gas Compressor Station in Gujarat. The further relevant facts as averred in the petition indicates that the LOI dated 20.09.2012 provides 17 months as completion time which includes 15 months for engineering, procurement and construction and additional 2 months for commissioning including operating acceptance from the date of the LOI. The record indicates that based upon LOI, the petitioner signed the contract on 26.02.2013 and the LOI was made effective from 25.11.2012. The record indicates that first extension of time was given by the respondent no.1 on 01.04.2014 and lastly it was extended till 31.08.2016. The record indicates that as per the contract the petitioner has given two bank guarantees to respondent no.1 by Axis Bank, respondent no.2 herein. As provided under clause 13.3.1 of the General Conditions of Contract (hereinafter referred to as “the Contract”) the petitioner gave an advance Bank Guarantee vide no. 1609FBG130018 dated 29.01.2013 for Rs.7.50 crores which is valid upto 31.12.2016 and Performance Bank Guarantee vide no. 1609FBG130009 dated 11.01.2013 for Rs.27,29,69,140.00 being valid upto 31.12.2018.

2.2 It is a matter of record that the respondent no.1 herein terminated the contract by a letter dated 09.08.2016. It is a matter of record that the petitioner herein filed a Special Civil Application 13640/16 before this Court and inter alia prayed as under:

“A. YOUR LORDSHIPS be pleased to restrain respondent No.1 from invoking and/or encashing the Bank Guarantees i.e. Advance Bank Guarantee vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs. 7.50 Crores and Performance Bank’ Guarantee vide No. 1609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs.27,29,69,140/­;

B. YOUR LORDSHIPS be further pleased to restrain the respondent No.2, its representatives, officers or agents to release the amount of Bank Guarantees i.e. Advance Bank Guarantee vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs.7.50 Crores and Performance Bank Guarantee vide No.609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs. 27,29,69,140/­ to the respondent No.1;

C. Pending hearing, admission and final hearing of the matter, YOUR LORDSHIPS be pleased to restrain respondent No.1 from invoking and / or encashing the Bank Guarantees i.e. Advance Bank Guarantee vide No. 1609FBG130018 dated 29.01.2013 valid upto 31.12.2016 for Rs. 7.50 Crores and Performance Bank Guarantee vide No. 1609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs. 27.29,69,140/­.

D. Be pleased to pass any other order interest of Justice.”

2.3 This Court (Coram : Mr. Rajesh.H. Shukla, J.), by judgment and order dated 04.10.2016, was pleased to dismiss the same against which the petitioner filed Letters Patent Appeal being LPA No.995/16 and the said LPA was dismissed vide order dated 05.10.2016. Thereafter, the present application is filed by the present petitioner under section 9 of the Arbitration and Conciliation Act, 1996.

3. The petitioner has raised various contentions and allegations as regards performance of the contract and the conduct of the respondent no.1 and has prayed for as indicated above. The respondent no.1 has appeared through caveat and has filed a preliminary affidavit in reply.

4. Heard Mr. Rashesh Sanjanwala, learned Sr. Advocate with Mr. Archit P. Jani, learned advocate for the petitioner, Mr. Saurabh Soparkar, learned Sr. Advocate with Mr. Aspi Kapadia, learned advocate for the caveator.

5. Mr. Sanjanwala, learned counsel appearing for the petitioner has taken this Court through the basic facts of the Letter of Intent and the contract entered into by the petitioner with the respondent No.1 and other relevant clauses of the General Conditions of Contract including clause no.9 and has contended that the petitioner has undertaken 63% of the work and as such, the time was extended by the respondent no.1 till 31.08.2016. However the contract has been wrongly terminated on 09.08.2016.

5.1 Mr. Sanjanwala has contended that as on date, no amount is due and payable by the petitioner contractor to the respondent and though the bank guarantee is unconditional, right of encashment would arise only when any amount is due and payable and the same is adjudicated. Mr.Sanjanwala further contended that the no such event has occurred for encashment of bank guarantee and further asserted that an amount of about 48 crores is with the respondent no.1. It was also further contended that the respondent no.1 would be entitled to the same only when there is proof of the same and in such circumstances, the claim has to be adjudicated claim and only adjudicated claim would justify evocation of Bank Guarantee. It was further asserted that any unadjudicated claim would not qualify as an amount due to justify evocation of a performance guarantee.

5.2 It was further contended by Mr. Sanjanwala, learned counsel appearing for the petitioner that even if the Bank Guarantee is unconditional, right to evoke the same is qualified by the General Conditions of Contract, and therefore, there is no payment due from the contractor to the owner. It was further submitted that there is no adjudicated claim for any loss or damage and therefore, as per the terms of the contract, respondent no.1 is not entitled to utilise the performance security. It was further contended that under the contract, bank guarantee is by way of performance security capable of being utilised only for payment.

5.3 Relying upon the conditions of the contract, it was further contended that the respondent no.1 would be entitled to maximum amount of 10% of the contract value and therefore, assuming that anything is payable to the respondent, it would be subject to maximum cap of 10% of the contract value and the same amount is secured, which is already retained by the respondent no.1. It was further contended that without showing as to what amount was due and payable as per clause 9, which establishes the claim, evocation of Bank Guarantee should not be permitted.

5.4 Relying upon the judgment of the Apex Court in the case of M/s. Gangotri Enterprises Ltd. v. Union of India and Ors. in Civil Appeal No. 4814/16, it was contended by Mr. Sanjanwala that even in the case on hand, the facts are similar and the injunction as prayed for deserves to be granted.

5.5 Mr.Sanjanwala however candidly submitted that as far as the Bank Guarantee Vide No. 1609FBG130018 dated 29.01.2013, which stood for Rs.7.50 crores has already been encashed and therefore, this petition is limited to consideration of Performance Guarantee No. 1609FBG130009 dated 11.01.2013 for Rs.27,29,69,140/­. It was therefore submitted by Mr. Sanjanwala that the petition requires consideration and the petitioner is entitled to the reliefs claimed for.

6. Per contra Mr. S.N. Soparkar has raised a preliminary issue to the effect that the prayers prayed for in this petition are similar to the prayers prayed for in the earlier petition being SCA No. 13640/16 wherein the learned Single Judge of this Court has already decided the said issue and even the LPA filed against the said judgment is dismissed by the Hon’ble Division Bench of this Court.

6.1 It was further contented that therefore this Court, as a Single Judge, cannot sit in appeal. Mr. Soparkar further contended that the issues which are decided by the learned Single Judge in the earlier petition binds the parties and the said issues stand concluded between the parties and therefore, now it is not open to say to this Court that the said issue is open. It was further contended that the same argument against the Bank Guarantees came to be raised and is decided between the parties. Mr. Soparkar submitted that though other prayers are made the petitioner has only argued as regards the evocation of bank guarantee.

6.2 Mr. Soparkar further submitted that respondent no.1 is a State authority. It was further contended that encashment of Bank Guarantee is a separate and independent contract between the respondent no.1 and the Bank which is unconditional guarantee and therefore, respondent no.1 has a right to revoke the Bank Guarantee. Mr. Soparkar asserted that the facts clearly spells out that a contract was given and it is not in dispute that the work was not completed in time. It was further contended that several replies were given and huge losses had to be suffered by the respondent no.1.

6.3 Mr. Soparkar further submitted that the reading of clause 9 and the assertion that there is 10% cap is without any pleadings and as such there is no cap. Relying upon the clause 30 of the Contract, it was therefore submitted that the factual assertions made in the petition are incorrect.

6.4 Mr. Soparkar has further relied upon the following judgments ­

# 1. U.P. State Sugar Corp. v. Sumac International Ltd. ­ (1997) 1 SCC 568

# 2. Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd. & Anr. ­ (2007) 6 SCC 470

# 3. Himadri Chemical Industries Ltd. v. Coal Tar Refining Company – (2007) 8 SCC 110

# 4. Vinitec Electronics Private Ltd. v. HCL Infosystems Ltd. ­ (2008) 11 SCC 544

# 5. Gujarat Maritime Board v. L & T – Civil Appeal No.9821 of 2016 dated 28.09.2016

6.5 Mr. Soparkar further contended on the basis of the ratio laid down by the Apex Court in the judgments referred to hereinabove that in case of unconditional bank guarantee, the law is settled and the contentions which are raised in this petition are fully covered by the ratio laid down by the Apex Court. Mr. Soparkar contended that the bank guarantee being a separate and distinct contract, as per the law laid down by the Apex Court, the respondent no.1 has a right to evoke the bank guarantee. It was further submitted by the learned counsel that in the instant case there is no allegation of fraud or irretrievable injury and therefore, the petitioner is not entitled to any injunction as prayed for.

6.6 Mr. Soparkar submitted that the respondent no.1 is a company of State of Gujarat whereas, the petitioner is a company registered in Turkey which has no assets in India and therefore, the facts and circumstances of this case would show that the respondent no.1 is entitled to evoke the bank guarantee.

6.7 Mr. Soparkar further submitted that the judgment of the Apex Court in Gangotri Enterprises Ltd. (supra) is not applicable to the facts of the present case. Mr. Soparkar, referring to the fact which are considered by the Apex Court in the case of Gangotri Enterprises Ltd. (supra) submitted that in this case, Bank Guarantee was given for a contract which was completed successfully and even the certificate was given by Union of India. It was further submitted that in the said case, the Union of India wanted to encash the Bank Guarantee for a contract in which no Bank Guarantee was given and further that the earlier order passed by the Court whereby the injunction was granted was not even challenged. It was therefore contended that in the said judgment is distinguishable in the facts of the present case and the same is not applicable. Mr. Soparkar further reiterated tha in the instant case the bank guarantee is unconditional and therefore the petitioner is not entitled for the injunction as prayed for. Mr. Soparkar further submitted that in the event the arbitration is held, the petitioner can place his case on merits, however, the petitioner is not entitled for any stay against the evocation of Bank Guarantee and the case of the respondent no.1 is supported by the judgments of the Apex Court relied upon by the respondent no.1. It was therefore submitted that the petition is devoid of any merits and the same deserves to be dismissed.

7. Mr. Sanjanwala, in further rejoinder contended that the respondent no.1 is estopped from raising the ground of res judicata as it was respondent no.1 who contended in the earlier petition that the petition should not be entertained in view of section 9 of the Arbitration Act and the said contention is accepted by the learned Single Judge of this Court in the earlier petition. It was further contended that to attract bar of res judicata, there has to be conclusive adjudication on merits and in absence of final adjudication, bar of res judicata would not apply. It was further contended that when the petition was dismissed on alternative remedy under section 9 of the Act, the observations which are made in such order touching the merits are tentative and cannot bind subsequent proceedings in a properly constituted proceedings. It was further submitted that as observed in paras 9 and 10 of the judgment of the learned Single Judge in the earlier petition, the same do not deal with the issue finally and leaves it open to the applicant to file application under section 9 of the Arbitration Act. It was contended that if the learned Single Judge intended to decide on merits, then the question of not entertaining the earlier petition on the ground of alternative remedy would not have arisen and hence, bar of res judicata would not apply and this Court can examine on merits. It was also contended that though the law on Bank Guarantee is well settled and even though the Bank Guarantee is unconditional, it is equally true that clause 9 of the conditions of contract puts condition on evocation and therefore, inquiry into the question whether such condition is fulfilled is always permissible and the contract contemplates certain conditions which can be looked into by this Court. Mr. Sanjanwala therefore submitted that the judgments relied upon by the respondent no.1 will not come in way in deciding the issue raised by the petitioner and in light of the ratio laid down by the Apex Court in Gangotri Enterprises Ltd. (supra), the petitioner is entitled to the interim relief as prayed for.

8. No other or further submissions are made by the learned counsels for the parties.

9. Upon considering the submissions made by the learned counsel for the parties and the record of this petition, it deserves to be noted that in earlier writ petition being SCA No.13640/16, the petitioner had prayed for an appropriate writ order or direction restraining the respondent no.1 from evoking and/or encashing the bank guarantee as stated in detail in the prayer clause. While dismissing the same, this Court (Coram : Rajesh H. Shukla, J) has observed in paras 8 to 10 of the order dated 04.10.2016, as under­ “8. In light of these rival submissions and having regard to the background of facts as well as considering the rival submissions which have been canvassed at length, the moot question is whether such a petition could be entertained.

9. There is no issue with regard to the inherent lack of jurisdiction but rather a matter of propriety while exercising such discretionary jurisdiction. As rightly contended by learned Sr. Counsel Shri Soparkar, it will have to be considered in light of the provisions of sec. 9 of the Arbitration Act and when the parties have a remedy under the statute itself where the court can examine and scrutinize on the basis of the material and evidence, the present petition under Art. 226 may not be justified. Again, the submissions made by learned Sr. Counsel Shri Thakore referring to the aspect of special equities with reference to the observations made in the two judgments also cannot be considered in absolute proposition inasmuch as if that is accepted then in every case mutual obligations and rival allegations in every contractual matters will have to be examined meaning thereby it would be a matter to be considered on the basis of evidence losing significance of the bank guarantee particularly in such commercial transactions. In fact, the Hon’ble Apex Court in a series of judicial pronouncements having considered the importance of such bank guarantee in commercial transactions has held that apart from the principal agreement or the contract between the parties referring to the mutual rights and obligations once the bank guarantee is executed it is a separate commercial agreement or contract has to be considered on its own and the court would be slow in interfering with the execution of such bank guarantee. Again, it has been specifically provided that normally the court would interfere only in case of fraud or “irretrievable injury”. Therefore, this may be an issue where non­granting of stay of the execution may result in a situation which cannot be subsequently cured and therefore the interference may be justified. However, that is not so in the facts of the case.

10. One more aspect which is required to be considered is about the maintainability of the petition and exercise of discretion under Art. 226 in background of the facts as well as the contentions raised by learned Sr. Counsel Shri Soparkar. It is well­ accepted that there is no lack of inherent jurisdiction qua exercise of discretion under Art. 226, but it is rather a matter of propriety. In any case, as discussed hereinabove, this issue does not require much deliberation in light of the discussion made hereinabove regarding the merits of the matter, particularly with regard to the accepted principles regarding invocation of the bank guarantee and the scope of judicial interference in such matter.

10. The Hon’ble Division Bench (Coram : R. Subhash Reddy, C.J., & Vipul M. Pancholi, J.) in LPA No.995/16, in paras 5, 7 and 8 has observed thus­

“5. Having considered the limited submissions as advanced on behalf of learned advocates appearing for the parties, the only issue which is required to be considered is whether the learned Single Judge has committed any error while not extending the interim relief.

7. Thereafter, when the matter was adjourned, learned Single Judge by an order dated 29.08.2016 observed that statement made and recorded in the order dated 11.08.2016 will continue that the encashment may not be made till the next date. The said statement was continued from time to time and ultimately when the learned Single Judge has dismissed the petition vide order dated 04.10.2016, the request made by the learned advocate appearing for the appellant petitioner for extension of interim relief was turned down. Thus, from the record, it is clear that the learned Single Judge has not granted any interim relief but the statement which was made by the learned advocate appearing for the respondent No.1 on the date of first hearing was extended from time to time and therefore when the learned Single Judge has dismissed the petition, we are of the opinion that the learned Single Judge has not committed any error while not accepting the request of the learned advocate for the petitioner.

8. No other submissions are advanced on behalf of learned advocate for the parties on merit of the case and therefore it is not necessary for us to go into the merit of the case. Accordingly, the present appeal is dismissed. Since the appeal is dismissed, civil application does not survive and accordingly stands disposed of.”

11. It can be seen from the order dated 04.10.2016 passed in SCA No.13640/16 that respondent no.1 contended that petition under Article 226 may not be maintainable in light of the provisions of section 9 of the Arbitration Act as well as in light of the Arbitration and Conciliation (Amendment) Act. It is specifically contended by respondent no.1 that a writ petition under article 226 may not be entertained particularly when a specific remedy by way of section 9 application under Arbitration Act is available and on that basis, the petition came to be dismissed on the basis of the observations made in para 9 and 10 in particular.

12. Considering the aforesaid set of facts therefore, it cannot be said that the present petition is barred by principles of res judicata.

13. It deserves to be noted that though in prayer clause 4(c) in this petition, prayer is prayed for in relation to the bank guarantee No.1609FBG130018 dated 29.01.2013 given for Rs.7.5 crores, as pointed out by the learned counsel for the petitioner itself, the same is already evoked and therefore, the contentions raised in this petition are only limited to the performance of bank guarantee no.1609FBG130009 dated 11.01.2013 valid upto 31.12.2018 for Rs.27,29,69,140/­. It also deserves to be noted that the petitioner has only argued and harped upon the prayer 4(c).

14. It is an admitted position that the Bank Guarantee in question has been given by the petitioner for the very contract and as admitted by the petitioner itself, the said Bank Guarantee is unconditional Bank Guarantee. Clause 9 of the Conditions of Contract reads thus ­ “9.0 Securities (GCC Clause 13) GCC 13.3.1­The amount of Performance Security as a percentage of the Contract Price (As amended from time to time due to change orders and/or variations) for the Facility or for the part of the Facility for which a separate time for Completion is provided, shall be 10(Ten) percent during the period up to the Operational (or Provisional) Acceptance Certificate. From the period of thereafter till the completion of the Defects Liability Period it shall be 10(ten) percent of the Contract Price.

GCC 13.3.2­ The Performance Security shall be in the form of Unconditional Bank Guarantee from a Scheduled Bank attached hereto in the section on Sample Forms and Procedures and shall be valid for a period as specified in the Clause 13.3 of the Bid Document.

The Performance Security shall be replenished to its original level within 7 (seven) days of any drawal made on it and shall be utilized for payment towards any payment due from the Contractor to the Owner or for compensating the Owner for any loss or damage.

The performance security shall be in the form of a bank guarantee from a bank in India as mentioned below:

(a) All Nationalized Banks

(b) IDBI Bank

(c) AXIS Bank

(d) HDFC Bank

(e) ICICI Bank

(f) Kotak Mahindra Bank

(g) Yes Bank There shall be no cap on the total liability of the Contractor for remedying any defects in the Facilities or compensating the Owner for any damages suffered due to negligence or misconduct of the Contractor.

15. What is prescribed in the said clause as per GCC 13.3.1, is the quantification of the amount of performance security and therefore, the contention that there is a cap of 10% deserves to be outrightly negatived. The other limb of argument put forward by the petitioner that the Performance Guarantee can be encashed or evoked only on adjudicated claim when the Bank Guarantee is unconditional, is not permissible. The Honble Apex Court in Gangotri Enterprises Ltd. (supra) has considered that the Bank Guarantee in question had been furnished in relation to the earlier contract which was finished successfully and the sum claimed by the respondents therein did not relate to the contract for which the Bank Guarantee was given. The Hon’ble Apex Court in paras 42 to 45, has observed thus –

“42. On perusal of the record of the case, we find that firstly, arbitration proceedings in relation to the contract dated 22.08.2005 are still pending. Secondly, the sum claimed by the respondents from the appellant does not relate to the contract for which the Bank Guarantee had been furnished but it relates to another contract dated 22.08.2005 for which no bank guarantee had been furnished. Thirdly, the sum claimed by the respondents from the appellant is in the nature of damages, which is not yet adjudicated upon in arbitration proceedings. Fourthly, the sum claimed is neither a sum due in praesenti nor a sum payable. In other words, the sum claimed by the respondents is neither an admitted sum and nor a sum which stood adjudicated by any Court of law in any judicial proceedings but it is a disputed sum and lastly, the Bank Guarantee in question being in the nature of a performance guarantee furnished for execution work of contract dated 14.07.2006 (Anand Vihar works) and the work having been completed to the satisfaction of the respondents, they had no right to encash the Bank Guarantee.

43. We have, therefore, no hesitation in holding that both the courts below erred in dismissing the appellant’s application for grant of injunction. We are indeed constrained to observe that both the courts committed jurisdictional error when they failed to take note of the law laid down by this Court in Union of India (DGS&D) (supra) which governed the controversy and instead placed reliance on

# Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company, AIR 2007 SC 2798

and

# U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568

which laid down general principle relating to Bank Guarantee. There can be no quarrel to the proposition laid down in those cases. However, every case has to be decided with reference to the facts of the case involved therein. The case at hand was similar on facts with that of the case of Union of India (DGS&D) (supra) and hence the law laid down in that case was applicable to this case. Even in this Court, both the learned counsel did not bring to our notice the law laid down in Union of India (DGS&D) case (supra).

44. We are also of the view that the District Judge having decided the injunction application in the first instance in appellant’s favour vide order dated 04.01.2012 erred in rejecting the application made by the appellant second time vide order dated 12.07.2012. It is not in dispute that the respondents despite having suffered the injunction order dated 04.01.2012 did not file any appeal against this order. Such order thus attained finality and was, therefore, binding on the parties.

45. In the light of foregoing discussion, we hold that the appellants have made out a prima facie case in their favour for grant of injunction against the respondents so also they have made out a case of balance of convenience and irreparable loss in their favour as was held by this Court in the case of Union of India (DGS&D) (supra). They are, therefore, entitled to claim injunction against the respondent in relation to encashment of Bank Guarantee no. 12/2006 dated 04.08.2006. “

16. In the case on hand, as observed hereinabove, it is an admitted position that the Performance Bank Guarantee is unconditional and the same is given for the very contract. As such there is one contract between the petitioner and respondent no.1 and therefore, with respect, the ratio laid down by the Apex Cort in the case of Gangotri Enterprises Ltd. (supra) in opinion of this Court is not applicable to the facts of the present case.

17. Having come to the aforesaid conclusion, it would profitable to refer to the judgments which are relied upon by the respondent no.1 which lays down law on bank guarantee, its evocation and injunction.

18. The Hon’ble Apex Court has observed thus in the following judgments ­U.P. State Sugar Corporation vs M/S. Sumac International Ltd. (Paras 11­12, 14­15)

“11. 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 on commercial dealings in the country. The two grounds are not necessarily connected, though both may co­exist in some cases. In the case of

# U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC 174

which was the case of 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; nor with the question whether the suppler 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 agregious 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

# Bolivinter Oil SA v. Chase Manhattan Bank NA, 1984 [1] AER 351

at 352): “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.

12. The same question came up for consideration before this Court in

# Svenska Handelsbanken v. M/s Indian Charge Chrome & Ors., (1994) 1 SCC 502

The 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 Corporation v. The First National Bank of Boston etc., 566 Fed Supp. 1210

On the question of fraud this Court confirmed the observations made in the case of U.P. Cooperative Federation Ltd. (supra) and stated that the fraud must be that of the beneficiary, and not the fraud of anyone else.

14. Our attention was invited to a number of decisions on this issue ­­ among them, to

# Larsen & Turbro Ltd. v. Maharashtra State Electricity Board & Ors., (1995) 6 SCC 58

and

# Hindustan Steel Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers) Pvt. Ltd., (1995) 6 SCC 76

as also to

# National Thermal Power Corporation Ltd. v. Flowmore Pvt. Ltd. & Anr., (1995) 4 SCC 515

The latest decision is in the case of

# State of Maharashtra & Anr. v. M/s National Construction Company, Bombay & Anr., JT 1996 [1] SC 156

where this Court has summed up the position by stating,

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

The other recent decision is in

# Hindustan Steelworks Construction Ltd. v. Tarapore & Co. & Anr., JT 1996 [6] SC 295

15. Clearly, therefore, 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. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the appellant and his claim that the time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is a fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the bank guarantees fraudulent. The High Court has also refereed to the conduct of the appellant in invoking the bank guarantees on an earlier occasion on 12th of April, 1992 and subsequently withdrawing such invocation. The court has used this circumstance in aid of its view that the time was not of the essence of the contract. We fail to see how an earlier invocation of the bank guarantees and subsequent withdrawal of this invocation make the bank guarantees or their invocation tainted with fraud in any manner. Under the terms of the contract it is stipulated that the respondent is required to give unconditional bank guarantees against advance payments as also a similar bank guarantee for due delivery of the contracted plant within the stipulated period. In the absence of any fraud the appellant is entitled to realise the bank guarantees.”

Mahatma Gandhi Sahakra Sakkare … vs National Heavy Engg. Coop. Ltd. (paras 18­21, 23­24, 26­ 28)

“18. In

# U.P.Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1998) 1 SCC 174

the respondent therein 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 completion of the plant. The Bank of India executed two bank guarantees in favour of the appellant. Under the terms of guarantee the bank undertook 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. Disputes arose between the parties as to the erection and performance of the plant. The seller approached the civil court seeking injunction restraining the purchaser from invoking the bank guarantee. The High Court, proceeding on the basis that the injunction was sought not against the bank but against the appellant, restrained the appellant from invoking the bank guarantee. This court after elaborate consideration of the matter held :

“..commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exception case that is to say in case of fraud or in case or irretrievable injustice be done, the could should interfere.”

19. This court relied upon its own earlier decision in

# United Commercial Bank v. Bank of India and others, (1981) 2 SCC 766

in which it is observed “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 documents itself.”

In

# General Electric Technical Services Company Inc. v. Punjsons (P) Ltd. And anr., (1991) 4 SCC 230

this court observed “if the documentary credits are irrevocable and independent, the Bank must pay when demand is made. Since the bank pledges its own credit in involving its reputation, it has no defence except in the case of fraud. The Bank’s obligation of course should not be extended to protect the unscrupulous party, that is, the party 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 courts talk about is fraud of a “erregious nature as to vitiate the entire underlying transaction.” It is the fraud of the beneficiary not the fraud of somebody else. The bank cannot be interdicted by the court at the instance of purchaser in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties.

20. In our considered opinion if the bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee. The person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction in enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.

21. In

# U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568

this court had laid down the principle as to the enforcement of the bank guarantees as under :

“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 in terms is given or accepted, the beneficiary is entitled to realise such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the 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 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”.

23. In the present case the respondent in its application filed under Section 9 of the Arbitration and Conciliation Act, 1996 in the district court, Bidar mostly highlighted as to how the very vital conditions of the agreement have been breached by the appellant herein by not arranging the funds at the proper time. It is alleged that the appellant did not even complete their obligation in respect of providing storage facilties for valuable goods etc. It is specifically alleged that required funds were not available with the appellant. On account of non availability of funds there were two halts of nine months and five months during the execution of the project from 03.12.2001 to 14.08.2002 and from 14.08.2002 to 10.01.2003. It is further alleged that the appellant failed to arrange for all the pre­requisites. It is not necessary for the purpose of disposal of this appeal to notice all the allegations and averments filed by the respondents except to note that the main thrust of the allegation relate to alleged breach of the conditions of the agreement by the appellant. It was further contended that the bank guarantees were conditional bank guarantees and not unconditional. We have referred to the substance of the allegations only to highlight that no factual foundation as such has been laid in the pleadings as regards the allegation of fraud. In fact there is no serious allegation of any fraud except using the word “fraud”. It is also not stated as to how irreparable loss would be caused in case the appellant is allowed to encash the bank guarantee. The only two exceptions, namely fraud and irretrievable injury based on which injunction could be granted restraining encashment of bank guarantee are singularly absent in the pleadings. Once it is held that the bank guarantee furnished by the banker is an unconditional one, the appellant in our considered opinion cannot be restrained from encashing the bank guarantee on the ground that a serious dispute had arisen between the parties and on the allegations of breach of terms and conditions of the agreement entered between the parties.

24. The High Court in its judgment went to the extent of recording a finding that it cannot be said that there was no delivery, erection and commissioning of plant. The High Court also took the view that the appellant has agreed to invoke the bank guarantee only in case of default on the part of the respondent in delivery, erection, commissioning of the plant. This view of the High Court is totally contrary to the terms and conditions of the bank guarantee executed by the bank in favour of the appellant. It has been specifically agreed by the banker to pay the guaranteed amount to the appellant on demand and ” it shall not be open to the guarantor to know the reasons of or to investigate or to go into the merits of the demands or the question or challenge the demand or to know any facts affecting the demand.” The bank guarantee further makes it clear that it shall not be open to the guarantor to require the proof of the liability of the seller to pay the amount, before paying the sum demanded. In the process the High Court made the following observations which in our considered opinion are totally untenable and unsustainable being contrary to the terms and conditions incorporated in the bank guarantee. The High Court observed:

“From the facts and circumstances narrated by the petitioner, it is clear that the first respondent could not have invoked the bank guarantee when the setting up of the machinery and commissioning in accordance with the agreement and all these facts therefore show that the invocation of the bank guarantee was fraudulent.”

26. However, Shri Jayant Bhushan, learned senior counsel appearing for the respondents contended that invocation of the bank guarantee relating to “delivery and commissioning of the plant” was wholly illegal and the High Court was right in granting the injunction order relating to that guarantee. It was submitted that the said bank guarantee could be invoked only on the failure of the respondent to commission the plant according to the schedule of commissioning in terms of the relevant clauses of the principal agreement entered into between the parties and since the conditions contemplated under those clauses did not exist, the invocation of the guarantee by the appellant itself is bad.

27. The learned counsel in support of his submission relied upon the decision of this Court in

# Hindustan Construction Co. Ltd. v.  State of Bihar & Ors., (1999) 8 SCC 436

This Court in Hindustan Construction Co. (supra) having referred to the terms of clause (9) of principal contract between the parties therein came to the conclusion that the bank guarantee specifically refers to the original contract and postulates that the obligations expressed in the contract, are not fulfilled by HCCL, the right to claim recovery of the whole or part of the “advance mobilisation” then alone the bank was liable to pay the amount due under the guarantee to the Executive Engineer. The court found that the bank guarantee specifically refers to clause (9) of the principal agreement and it is under those circumstances came to the conclusion that the amount covered by the bank guarantee becomes payable and the same could be invoked only in the circumstances referred to in clause (9) of the principal agreement. The bank guarantee executed by the bank in the instant case in favour of the appellant herein does not contain any such clause. Mere fact that the bank guarantee refers to the principal agreement without referring to any specific clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one. In the very said judgment this Court observed that “what is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might 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 of 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 of the bank guarantee, or else, the invocation itself would be bad.” What is relevant, therefore, is the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee, we find the guarantee to be an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent the appellant from encashing the bank guarantee.

28. For all the aforesaid reasons, we hold that the respondent herein did not make out any case for grant of injunction restraining the appellant herein from encashing the bank guarantee.”

Himadri Chemicals Industries Ltd vs Coal Tar Refining Company (Paras 10­14, 18­19)

“10. The law relating to grant or refusal to grant injunction in the matter of invocation of a Bank Guarantee or a Letter of Credit is now well settled by a plethora of decisions not only of this court but also of the different High Courts in India. In

# U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568

this court considered its various earlier decisions. In this decision, the principle that has been laid down clearly on the enforcement of a Bank guarantee or a Letter of Credit is that in respect of a Bank Guarantee or a Letter of Credit which is sought to be encashed by a beneficiary, the bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. Accordingly this Court held that the courts should be slow in granting an order of injunction to restrain the realization of such a Bank Guarantee. It has also been held by this court in that decision that the existence of any dispute between the parties to the contract is not a ground to restrain the enforcement of Bank guarantees or Letters of Credit. However this court made two exceptions for grant of an order of injunction to restrain the enforcement of a Bank Guarantee or a Letter of Credit. (i) Fraud committed in the notice of the bank which would vitiate the very foundation of guarantee; (ii) injustice of the kind which would make it impossible for the guarantor to reimburse himself.

11. Except under these circumstances, the courts should not readily issue injunction to restrain the realization of a Bank Guarantee or a Letter of Credit. So far as the first exception is concerned, i.e. of fraud, one has to satisfy the court that the fraud in connection with the Bank Guarantee or Letter of Credit would vitiate the very foundation of such a Bank Guarantee or Letter of Credit. So far as the second exception is concerned, this court has held in that decision that it relates to cases where allowing encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. While dealing with the case of fraud, this court in the case of

# U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC 174

held as follows:

The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. While coming to a conclusion as to what constitutes fraud, this court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in

# Bolivinter Oil SA V/s. Chase Manhattan Bank (1984) 1 All ER 351

at p. 352 which is as follows, 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 banks 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 banks 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.

(Emphasis supplied)

12. In

# Svenska Handelsbanken v. Indian Charge Chrome, (1994) 1 SCC 502

it has also been held 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. In fact, on the question of fraud, this decision approved the observations made by this court in the case of

# U.P. Coop. Federation Ltd v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174

13. So far as the second exception is concerned, this court in

# U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568

as considered herein earlier, at para 14 on page 575 observed as follows :

On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realized the court said in the above case that the irretrievable injury must be of the kind which was the subject matter of the decision in the

# Itek Corpn. Case, 566 Fed Supp 1210

In that case an exporter in USA entered into an agreement with the Imperial government of Iran and sought an order terminating its liability on stand by letter of credit issued by an American Bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of 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 jurisdiction of United States and had cancelled the export contract. The court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American courts would not be executable in Iran under these circumstances and realization of the bank guarantee/letters of credit would cause irreparable harm to the Plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself it he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek case, there was 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. (Emphasis supplied)

14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a Bank Guarantee or a Letter of Credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a Bank Guarantee or a Letter of Credit :­

(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional Bank Guarantee or Letter of Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.

(ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

(iii) The Courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or a Letter of Credit.

(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.

(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.

18. Let us now consider the other exception, namely, case where allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in an irretrievable harm or injustice to one of the parties concerned. In our view, irretrievable injury was not caused to the appellant by a refusal to grant an order of injunction restraining the encashment of the Letter of Credit for two reasons :­

(i) Exceptional circumstances have not been made out by the appellant which would make it impossible for the Guarantor to reimburse himself if he ultimately succeeds. Only a case of apprehension has been shown in the application for injunction to the extent that if ultimately, the application for injunction is allowed, it would be impossible to recover the amount encashed on the basis of the Letter of Credit because the respondent is a Foreign Company in Iran which has no assets in India. In our view, this cannot come within the second exception indicated above.

(ii) Admittedly in this case, the appellant has already filed an Admiralty Suit No. 14 of 2006 in the original side of the Calcutta High Court claiming damages in respect of the same set of goods. In the said suit filed in the month of November 2006, the respondent was given liberty to furnish a Bank Guarantee for a sum of Rs. 21,86,68,540/­ being the sum claimed by the appellant on account of damages to the credit of the said suit and a Bank Guarantee to the extent of this amount has already been furnished by the respondent. Such being the position, the question of irretrievable injury even prima facie which would lead to injustice and harm the appellant cannot at all be conceived of since the appellant has been duly protected by the furnishing of Bank Guarantee. In our view, only because the respondent has no assets in India would not lead us to hold that the appellant was entitled to an injunction on the ground that he would suffer an irretrievable injury. In this view of the matter, we echo the finding of the High Court in refusing to grant an order of injunction in favour of the appellant and hold that the High Court was fully justified in doing so.

19. For the reasons aforesaid, we do not find any merit in this appeal. The appeal is thus dismissed. We may, however, make it clear that whatever findings have been arrived at by us in this appeal or by the High Court while dealing with the prayer for grant of an interim order of injunction, shall not be taken to be final as to the disposal of the application for injunction by the High Court. There will be no order as to costs.”

Vinitec Electronics Private vs HCL Infosystems Limited (paras 11­14, 19­20, 26­28)

11. The law relating to invocation of bank guarantees is by now well settled by a catena of decisions of this court. The bank guarantees which provided that they are payable by the guarantor on demand is considered to be an un­ conditional bank guarantee. When in the course of commercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. In U.P. State Sugar Corporation v. Sumac International Ltd., this court observed that :

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 over ride the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases.

12. It is equally well settled in law that bank guarantee is an independent contract between bank and the beneficiary thereof. The bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and of no consequence. In BSES Limited (Now Reliance Energy Ltd.) v. Fenner India Ltd. And anr. this court held :

10. There are, however, two exceptions to this Rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non­ intervention is when there are special equities in favour of injunction, such as when irretrievable injury or irretrievable injustice would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated in so many judgments of this court, that in

# U.P. State Sugar Corpn. v. Sumac International Ltd. (1997) 1 SCC 568

(hereinafter U.P. State Sugar Corpn) this Court, correctly declare that the law was settled.

 13. In Himadri Chemicals Industries Ltd. V. Coal Tar Refining Company, this court summarized the principles for grant of refusal to grant of injunction to restrain the enforcement of a bank guarantee or a letter of credit in the following manner :

 14.. . . . .

(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.

(ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

(iii) The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a Letter of Credit.

(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.

(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.

14. In Mahatama Gandhi Sahakra Sakkare Karkhane v. National Heavy Engg. Coop. Ltd and anr., this court observed :

Para 22. If the bank guarantee furnished is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee.

The person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction from enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered between the parties has not been fulfilled. Such a course is impermissible. The seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.

Para 28. What is relevant are the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee in the present case, it is found that the guarantee is an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent the appellant from encashing the bank guarantee. The mere fact that the bank guarantee refers to the principle agreement without referring to any specific clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one. [Emphasis supplied]

19. In the unamended bank guarantee the bank affirmed that they are guarantors and responsible on behalf of the supplier upto a total of Rs. 16,81,238.50 (Rupees sixteen lakhs eighty one thousand two hundred thirty eight and fifty paise only) and had undertaken to pay any sum or sums within that limit upon receipt of written demand from the purchaser within the validity of bank guarantee provided it is established the supplier to be indefault for the performance of their warranty obligations under the contract. This makes it abundantly clear that what was furnished was a conditional bank guarantee and the bankers were liable to pay the amounts only upon establishing the fact that the supplier was in default for the performance of their warranty obligations under the contract. But by the subsequent letter dated 20th August, 2001, the relevant clause in bank guarantee was amended whereunder the banks stood as guarantor and responsible on behalf of the supplier upto a total of Rs.16,81,238.50 (Rupees sixteen lakhs eighty one thousand two hundred thirty eight and fifty paise only) and had undertaken to pay any sum or sums within that limit upon receipt of written demand from the Company within the validity of this bank guarantee. This amended clause makes it abundantly clear that the bank had undertaken to pay amounts upto a total of Rs.16,81,238.50. The condition that the amounts shall be paid only upon establishing the supplier to be indefault for the performance of their warranty obligation under the contract has been specifically deleted. In our considered opinion, the bank guarantee as amended replacing Paragrah 4 of the original bank guarantee makes the bank guarantee furnished as unconditional one. The bankers are bound to honour and pay the amounts at once upon receipt of written demand from the respondent.

20. The learned senior counsel however relying upon the decision of this court in Hindustan Construction Co. Ltd.and ors. v. State of Bihar and ors contended that the bank guarantee could not said to be unconditional or unequivocal in terms so that the respondent could claim any unfettered right to invoke the bank guarantee and demand immediate payment thereof from the bank. We find no substance in the submission so made by the learned senior counsel on behalf of the appellant. In Hindustan Construction (supra), the appellant Company was awarded a contract by the State of Bihar for construction of a dam. Clause 9 of the contract between the parties provided that the State would make an advance loan to the Company for the costs of mobilisation in respect of the works on furnishing of a bank guarantee by the appellant for an amount equal to the advance loan. The advance loan was required to be used exclusively for mobilisation expenditure. In case of misappropriation of the advance loan the loan at once shall become due and payable immediately. In terms of this clause bank guarantee was furnished by the bank agreeing unconditionally and irrevocably to guarantee payment on demand without any objection but with the qualification that such payment shall be only in the event the obligations expressed in Clause 9 of the original contract have not been fulfilled by the contractor giving the right of claim to the employer for recovery of the whole or part of the advance mobilisation loan. Clause 9 of the main contract was thus incorporated and made part of the bank guarantee furnished by the banker. It is under those circumstances this court took the view that the bank guarantee furnished was not an unconditional one. Clause 9 in the bank guarantee refers to the terms and conditions of the contract between the parties. The bank guarantee thus could be invoked only in the circumstances referred to in Clause 9 wherein the amount would become payable only if the obligations are not fulfilled or there is misappropriation.

26. Whether encashment of the bank guarantee would cause any irretrievable injury or irretrievable injustice. There is no plea of any special equities by the appellant in its favour. So far as the plea of irretrievable injustice is concerned the appellant in its petition merely stated:

That should the respondent be successful in implementing its evil design, the same would not only amount to fraud, cause irretrievable injustice to the applicant, and render the arbitration nugatory and infructuous but would permit the respondent to take an unfair advantage of their own wrong at the cost and extreme prejudice of the applicant.

27. The plea taken as regards irretrievable injustice is again vague and not supported by any evidence.

28. There is no dispute that arbitral proceedings are pending. The appellant can always get the relief provided he makes his case before the Arbitral Tribunal. There is no allegation that it would be difficult to realize the amounts from the respondent in case the appellant succeeds before the Arbitral Tribunal.”

Gujarat Maritime Board vs L&T; Infrastructure Development (paras 12 ­ 14)

“12. An injunction against the invocation of an absolute and an unconditional bank guarantee cannot be granted except in situations of egregious fraud or irretrievable injury to one of the parties concerned. This position also is no more res integra. In Himadri Chemicals Industries Limited v. Coal Tar Refining Company, at paragraph ­14:

“14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit:

(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.

(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.

(iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit.

(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.

(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.

(vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.”

13. Guarantee given by the bank to the appellant contains only the condition that in case of breach by the lead promoter, viz., the first respondent of the conditions of LoI, the appellant is free to invoke the bank guarantee and the bank should honour it “without any demur, merely on a demand from GMB (appellant) stating that the said lead promoter failed to perform the covenants”. It has also been undertaken by the bank that such written demand from the appellant on the bank shall be… “conclusive, absolute and unequivocal as regards the amount due and payable by the bank under this guarantee”. Between the appellant and the first respondent, in the event of failure to perform the obligations under the LoI dated 06.02.2008, the appellant was entitled to cancel the LoI and invoke the bank guarantee. On being satisfied that the first respondent has failed to perform its obligations as covenanted, the appellant cancelled the LoI and resultantly invoked the bank guarantee. Whether the cancellation is legal and proper, and whether on such cancellation, the bank guarantee could have been invoked on the extreme situation of the first respondent justifying its inability to perform its obligations under the LoI, etc., are not within the purview of an inquiry under Article 226 of the Constitution of India. Between the bank and the appellant, the moment there is a written demand for invoking the bank guarantee pursuant to breach of the covenants between the appellant and the first respondent, as satisfied by the appellant, the bank is bound to honour the payment under the guarantee.

14. Therefore, the appeal is allowed and the impugned judgment is set aside. However, we make it clear that this judgment will not stand in the way of the first respondent working out its grievances in appropriate proceedings as permitted under law.”

19. As held by the Apex Court in the case of UP State Sugar Corporation (supra), it is not the case of the petitioner that there is any fraud or any irretrievable injury. On the contrary, as rightly contended by the learned counsel for the respondent no.1 that respondent no.1 is an organisation established by the State of Gujarat whereas the petitioner is a company registered in Turkey with no assets in India. Considering the ratio laid down by the Apex Court in the aforesaid judgments therefore, any existence of dispute between the parties to the contract cannot be a ground to restrain the respondent from evoking the bank guarantee and the said issue can well be considered in case of arbitration and as held by the Apex Court in the case of Gujarat Maritime Board (supra) and the decisions referred to above, the respondent no.1 cannot be restrained from evoking the bank guarantee.

20. In light of the aforesaid discussion therefore, the petition is meritless and the same deserves to be dismissed and is hereby rejected in limine. However, in facts of this case, there shall be no order as to costs.

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