IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 17.6.2010 CORAM THE HON'BLE MR. JUSTICE P.JYOTHIMANI Original Application No.66 of 2010 ORDER
This Original Application has been filed under Section 9 of the Arbitration and Conciliation Act, 1996 (for brevity, “the Act”) for an injunction against the respondent from invoking the bank guarantee provided by the Indian Overseas Bank, Dr.Radha Krishnan Salai, Chennai 600 004 under the Letter of Guarantee dated 6.4.2009 and extended to 31.3.2010 by the Deed of Extension dated 31.12.2009, which is stated to have been extended till 30.6.2010.
2.1. The applicant, who is carrying on business as Transporter in the name and style of M/s.Sree Balaji Transports, was awarded contract for providing Integrated Shot Hole Drilling (Manual) and Seismic Job Services (SJS) at Mayavaram Area of Cauvery Basin during Field Season 2008-2009, stated to be between February, 2009 to October 2009, as against the tender floated by the respondent and the contract was awarded by way of confirmation on 17.2.2009 and the respondent has issued work order on 16.4.2009 and contract was entered on 23.4.2009. It is stated that the estimated value of the contract was Rs.4,50,46,740.60 including the service tax of 10.3%. The applicant has provided a bank guarantee towards performance of contract to the extent of Rs.34,41,605.00, which was to be kept valid till 60 days from the date of completion.
2.2. It is the case of the applicant that the contract period is for the field season, viz., February, 2009 to October, 2009 and the exploration work was to commence from May/June, 2009 and for effecting the work due licences were obtained from the Labour Department. It is stated that the applicant was not permitted to proceed with the work without obtaining Character and Antecedent Certificate for all the workmen from the Police Officer concerned equivalent to the rank of Deputy Superintendent of Police and due to the General Elections at that time there was a delay in obtaining such certificate and ultimately, the work commenced only from 1.6.2009.
2.3. It is stated that the work could not be effectively proceeded with due to the fault of the respondent since the the ground electronics, cables and D units provided by the respondent corporation were defective and insufficient and the applicant has desired to provide shot holes at the rate of 150-200 holes per day so as to complete the entire work by August, 2009. It is because of various reasons which are attributable to the respondent, it is stated that the applicant has been requesting proper cooperation from the respondent by requiring them to supply ground electronics in good condition and the supply of electronics by the respondent were defective on various occasions. That apart, the respondent has not taken permission from the Railway authorities for laying cables across the railway tracks which resulted in hampering of work. It is stated that in spite of all these faults on the part of the respondent, the respondent has alleged that the applicant has not performed its obligation as per the terms of the contract. It is also stated that there has been water logging due to heavy rain and in such circumstances it was not possible to continue the work, even though the respondent by communication dated 19.10.2009 has directed to complete the work with additional 20%.
2.4. It is stated that in spite of passing of partial bill for the months of April, 2009 to September, 2009, the respondent is yet to pass the bills for the months of October and November, 2009. It is the case of the applicant that the electronics which were defective were sent back and as per the respondent the repair cost was to be deducted from the bill and in spite of the objection by the applicant, such amount has been deducted. It is stated that there was no negligence on the part of the workers of the applicant and in spite of the same such deduction has been made and objection has been raised as per the terms of the contract by the applicant and according to the applicant, its duty is only to maintain the physical condition of the equipment and it is not responsible for normal wear and tear, manufacturing defect, repairs due to intrinsic nature of the electronic equipment, repairs due to life expectancy of the equipment, etc.
2.5. It is stated that in spite of all impediments, the applicant has completed the job as per the contract and the respondent despite the start of heavy rains due to the north-east monsoon, which started on 27.10.2009, have insisted on the applicant to execute 20% of the extra work by extending the period up to 18.11.2009. It is stated that the respondent has found fault with the applicant that there was no progress in respect of the 20% extra work proposing to arbitrarily deduct a huge amount, including the cost of equipment, etc. It is the case of the applicant that the admitted 8700 shots were performed as per the contract and the request of 20% in addition was not possible even though the contract was extended up to 18.11.2009. It is stated that due to the ongoing rain, it was not possible to complete the work since there was water logging affecting the normal life span of the equipment.
2.6. According to the applicant, the conduct of the respondent in deducting an amount of Rs.26,28,440/- towards the cost of repair charges of the equipment from the bills up to September, 2009 is not legal. The performance guarantee given by the applicant to the extent of Rs.34,41,605/- up to 31.12.2009 was extended up to 31.3.2010, which is stated to be extended, as submitted by the learned counsel for the applicant, up to 30.6.2010 and it is the case of the applicant that it has concluded its obligation under the contract, however the additional work was not taken up. It is stated that the deduction of Rs.26,28,440/- by the respondent towards the repair charges of the equipment and Rs.16,06,000/- towards penalty for the shortfall in work is not in accordance with the contract and according to the applicant, the respondent is to pay an amount of Rs.14,03,855.67 towards wrongly rejected shot holes. It is the case of the applicant that it is entitled to a loss to the extent of Rs.3.50 Crores and are taking appropriate steps to refer the dispute for arbitration as provided under the contract. In these circumstances, it is the case of the applicant that there is no need for the respondent/Corporation to invoke the bank guarantee as threatened by them.
3.1. In the counter affidavit filed by the respondent/Corporation, it is stated that the contract was entered on 23.4.2009 and as per the contract the work relates to providing seismic job services, including seismic field operations, topographic survey, short hole drilling and also experimental work consisting of laying cables, geophones of variable spread lengths, shooting and staking and all materials were provided as per the terms of the contract. It is stated that as per Clause 13.0, it is for the applicant to provide the Character and Antecedent Certificate of workmen and the responsibility therein cannot be relegated to the respondent. It is stated that the applicant has not properly performed its obligation as per the contract and there has been lethargic attitude from the beginning.
3.2. It is also denied that the ground electronics supplied to the applicant were defective and it is stated that it was never admitted by the respondent anywhere and it was due to the negligent handling by the workmen of the applicant such defect has occurred. It is stated that Railway permission was obtained by the respondent much before the process of snaking. It is further stated that the normal practice in seismic survey operations was not practiced by the claimant due to engagement of inexperienced workmen by the applicant. It is stated that even as on 31.10.2009, only 4250 shots were yet to be completed and at that present rate it was not possible to complete the assigned work in time.
3.3. It is stated that as per the Clause 2.0 of the contract, speaking about the volume of work, the respondent/Corporation reserves its right to change the area of work during the contract period due to technical reasons or circumstantial compulsion and the work volume may increase or decrease by 20% and the applicant has been informed 15 days in advance before completion of the field season. It is stated that the rejection of many of the holes was due to the poor quality of the data. The respondent has identified faulty ground electronics equipment during regular operations and it is stated that the applicant has never raised objection regarding quality of the electronics supplied and it is the sole responsibility of the applicant to take care of the materials as per the terms of contract. It is the case of the respondent that in spite of cooperation from the respondent, the applicant has not performed its function and the quality of the electronics and the complaints made with regard to the same are for the first time. It is stated that even as per the original contract, out of 8700 shots to be completed, the applicant has completed only 7437 shots, excluding the required 20% additional shots, about which the communication was made in advance.
3.4. It is stated that the applicant having accepted the terms and conditions of the contract has gone back from the terms of the contract. While it is true that the amount of Rs.26,28,440/- was deducted on 30.9.2009 towards the cost of the repair charges of the equipment, it is stated that such liability is on the part of the applicant as per the terms of the contract and in spite of knowing that the amount has been deducted as per the terms of the contract injunction is sought for, which is not valid. It is stated that the performance guarantee given for Rs.34,41,605.00 issued by the Indian Overseas Bank is valid up to 31.12.2009, which is stated to have been extended up to 30.6.2010 is unconditional performance guarantee and the respondent is entitled to invoke the bank guarantee as per the terms of the contract and it is stated that there is no fraud alleged against the respondent or irretrievable loss which has been caused by the invocation of bank guarantee by the respondent. It is also stated that in the absence of any allegation of fraud against the respondent in respect of the bank guarantee, it is not open to the applicant to file the present application for injunction under Section 9 of the Act.
4.1. Mr.A.Prabhakar Reddy, learned counsel for the applicant while fairly admitting that as per the terms of the bank guarantee it is unconditional and law is well settled that there cannot be an injunction from invoking the bank guarantee except in case of fraud or proof of irretrievable injury, would submit that on the facts and circumstances of the case, by applying the principles of equity, when it the case of the applicant that the electronics supplied and various instruments supplied as per the terms of the contract were defective and a substantial claim of the applicant is to be made out before the arbitrator as per the terms of the contract, it will not be fair on the part of the respondent to invoke the bank guarantee.
4.2. He would submit that as far as the invocation of bank guarantee is concerned, on the facts of the present case, even if there is inability on the part of the applicant, the same should be termed as “Act of God”. He would rely upon the judgment of the Supreme Court in Hindustan Construction Co. Ltd. v. State of Bihar and others, [1999] 8 SCC 436 to substantiate his contention that the special equities are to be made applicable in favour of the applicant. He would also submit that the applicant is prepared to keep the bank guarantee alive till the conclusion of the arbitration proceedings.
5.1. On the other hand, it is the contention of the learned counsel for the respondent by referring to various terms of contract that when once amount has been deducted as per the terms of the contract, the dispute has to be decided by arbitration. It is his contention that the applicant is an experienced contractor and they are aware that in respect of character and antecedents regarding the workmen, certificate has to be obtained before employing them and unless such certificate is obtained, the work cannot be commenced.
5.2. It is his contention that even in respect of the original agreed terms of contract, admittedly, the applicant has not completed 8700 shots and according to him, in any event it is for the arbitrator to decide and in the meantime, inasmuch as admittedly the performance guarantee given by the applicant by way of bank guarantee is unconditional, it has nothing to do with the conditions of contract, since the obligation under the bank guarantee by the bank towards the beneficiary is independent, unless it is shown that certain fraud has been played in that regard or by invoking bank guarantee irretrievable injury would be caused. In the absence of either of these requirements, it is his submission by relying upon the judgment of Oil and Natural Gas Corporation Ltd. v. SBI, Overseas Branch, Bombay, [2000] 6 SCC 385, which relates to Oil and Natural Gas Corporation Ltd., which is the respondent herein, that the injunction application is not maintainable. He would also rely upon the judgment of the Supreme Court in Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd., [1997] 6 SCC 450 to substantiate his contention that except in case of above two contingencies, viz., fraud and irretrievable injury, courts should not normally grant injunction. He would rely upon the judgment of this Court in Larsen & Toubro Limited v. Tamil Nadu Minerals Ltd., 1998 (I) CTC 524 to substantiate his contention.
6.1. It is not in dispute that as per the terms of the contract, especially Clause 10.0, which is as follows, the bank guarantee to be furnished by the applicant contractor towards performance shall be unconditional, with absolute right to the beneficiary, namely the respondent to invoke the same.
“10.0. Performance Bond:-
Contractor has furnished performance bank guarantee bearing No.291/002/2009, dt.06.04.2009, for Rs.34,41,605.00 issued by Indian Overseas Bank, Chennai-4 valid upto 31.12.2009 for successful performance of the contract.
In the event CONTRACTOR fails to honour any of the commitments entered into under this agreement or in the event of termination of the contract under provisions of integrity Pact and/or in respect of any amount due from the CONTRACTOR to the CORPORATION, the CORPORATION shall have unconditional option under the guarantee to invoke the above bank guarantee and claim the amount from the bank. The bank shall be obliged to pay the amount to the CORPORATION on demand.”
6.2. The terms of the bank guarantee which has been issued by the bank pursuant to the agreement and at the instance of the applicant, which is as follows, makes it abundantly clear that the bank guarantee issued in favour of the respondent beneficiary is unconditional:
“2. We Indian Overseas Bank, registered under the Companies Act, 1956 and having Branch Office at No.32, Dr.Radha Krishnan Salai, Mylapore, Chennai 600 004, having head/registered office at 763, Anna Salai, Chennai 600 002 (hereinafter referred to as “the Bank”, which expression shall, unless repugnant to the context or meaning thereof include all its successors, administrators, executors and permitted assignees) do hereby guarantee and undertake to pay immediately on first demand in writing all / any moneys to the extent of Indian Rs.34,41,605/- (Rupees Thirty Four Lakhs and Forty One Thousand and Six Hundred Five Only) without any demur, reservation, contest or protest and / or without any reference to the CONTRACTOR. Any such demand made by ONGC on the Bank by serving a written notice shall be conclusive and binding, without any proof, on the bank as regards the amount due and payable, notwithstanding any dispute(s) pending before any Court, Tribunal, Arbitrator or any other authority and/or any other matter of thing whatsoever, as liability under these presents being absolute and unequivocal. We agree that the guarantee herein contained shall be irrevocable and shall continue to be enforceable until it is discharged by ONGC in writing. This guarantee shall not be determined, discharged or affected by the liquidation, winding up, dissolution or insolvency of the CONTRACTOR and shall remain valid, binding and operative against the Bank.”
6.3. It is no doubt true while it is the case of the applicant that there is delay caused due to the conduct of the respondent in performance of the contract relating to the Character and Antecedent of contractual manpower and supply of defective electronics, apart from the increase of quantity by 20% and due to various natural events like rain, etc., the respondent’s case is that the applicant is an experienced contractor and the terms of the contract itself provide for such certificate from Police Department in respect of contractual manpower for the purpose of starting the work; that the electronics supplied were of good quality and the applicant has never raised any objection regarding the quality of such equipment when they were supplied; that it was due to the mishandling of equipment by the workmen employed by the applicant, the work was not done properly; that as per the terms of contract 20% increase or decrease is always acceptable provided 15 days notice is given and it is stated that in this case, 15 days notice has in fact been given; and that there is a dispute regarding the seasonal rain, etc., and all these are the matters to be decided in the arbitration proceedings.
7. Law is well settled that the contents of the contract or failure of performance and responsibilities of the parties under the contract have nothing to do with the bank guarantee and invocation of the same, which is an independent contract, except, of course, in cases where the bank guarantee is subject to certain conditions which may be relating to the performance of various terms of the contract underlining the bank guarantee or otherwise, is independent.
8. As stated above, on the facts of this case, it is not even disputed by the parties that the bank guarantee given by the applicant through its bank in favour of the respondent is unconditional and it has nothing to do with the terms of the contract and the obligations of the parties thereunder and the invocation of the bank guarantee by the bank is outstanding when once the same is invoked by the respondent, being the beneficiary under the bank guarantee.
9. It is no doubt true as vehemently submitted by Mr.A.Prabhakar Reddy, learned counsel for the applicant that there may be some natural events like incessant rain resulting in water logging thereby creating an impediment on the part of the applicant to perform its obligation under the contract which may be even termed as force majeure, but as long as such condition is not subject to bank guarantee, the applicant is not entitled to raise any objection insofar as it relates to the bank guarantee. While so, it is not as if the applicant is left in lurch or remediless, especially when the agreement provides for arbitration which is an effective remedy, which would certainly compensate any loss that would have been caused to the applicant or vice versa in performance of obligation by the parties to the contract.
10.1. It is no doubt true that the Hon’ble Apex Court in Hindustan Construction Co. Ltd. v. State of Bihar and others, [1999] 8 SCC 436 has held that in respect of the bank guarantee given therein, special equities are in favour of the contractor, since it was held that the contractor therein, viz., Hindustan Construction Company Limited was found not to have prima facie abandoned the work. Therefore, on the facts of that case, the Apex Court has held in paragraph [22], relied upon by the learned counsel for the applicant, as follows:
“22. We have scrutinised the facts pleaded by the parties in respect of both the bank guarantees as also the documents filed before us and we are, prima facie, of the opinion that the lapse was on the part of the defendants who were not possessed of sufficient funds for completion of the work. The allegation of the defendants that HCCL itself had abandoned the work does not, prima facie, appear to be correct and it is for this reason that we are of the positive view that the special equities are wholly in favour of HCCL.”
10.2. But, the Hon’ble Apex Court, in Hindustan Construction Co. Ltd. case, has in fact by referring to its earlier judgment in U.P.Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., [1988] 1 SCC 174 has crystallized the principle to the effect that in cases where the bank guarantee given is unconditional, it could be invoked by the beneficiary, in which event courts would not grant any injunction from invocation except in case of fraud or irretrievable injury. The Apex Court has also held that the terms of bank guarantee are extremely important to find out as to whether the bank guarantee represents an independent contract between the bank and beneficiary or it is depending upon certain conditions. That was elaborated in paragraphs [8] and [9] of the judgment, as follows:
“8. Now, a bank guarantee is the common mode of securing payment of money in commercial dealings as the beneficiary, under the guarantee, is entitled to realise the whole of the amount under that guarantee in terms thereof irrespective of any pending dispute between the person on whose behalf 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 of the Government to secure payments made to the contractor as advance from time to time during the course of the contract as also to secure performance of the work entrusted under the contract. Such guarantees are encashable in terms thereof on the lapse of the contractor either in the performance of the work or 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 of bank guarantee, except in the case of fraud, which should be an established fraud, or 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. Coop. Federation Ltd. v. Singh Consultants & Engineers (P) Ltd., [1988] 1 SCC 174 the law laid down in Bolivinter Oil SA v. Chase Manhattan Bank, [1984] 1 All ER 351 (CA) 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 of fraud or irretrievable injury. In 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 of Maharashtra v. National Construction Co., [1996] 1 SCC 735, Hindustan Steelworks Construction Ltd. v. Tarapore & Co., [1996] 5 SCC 34 as also in U.P. State Sugar Corpn. v. Sumac International Ltd., [1997] 1 SCC 568 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 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.”
10.3. Thereafter, by referring to the terms of the bank guarantee therein, which was subject to the condition namely “in the event that the obligations expressed in the said clause of the abovementioned 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 from the contractor under the contract”, the Supreme Court in Hindustan Construction Co. Ltd. case ultimately decided in favour of the contractor on the basis of special equities, since there was prima facie material that the contractor has not abandoned the work and therefore, applying the condition of bank guarantee, granted injunction against invocation of bank guarantee, as granted by the learned Single Judge of the High Court.
11.1. As stated above, it was in the landmark judgment in U.P.Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., [1988] 1 SCC 174, the Hon’ble Apex Court has in fact analysed the entire case law relating to the principles governing bank guarantees and the invocation and restraint in English law as well as by various High Courts and Supreme Court in this country. After eliciting clinching opinion of the English Court by Mr.Justice Kerr in R.D.Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., [1977] 2 All ER 862, which is as follows,
(i) 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….
(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,
and approving it as a correct state of law, Sabyasachi Mukharji,J., as His Lordship then was, has held as follows in paragraph [21]:
“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 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.”
11.2. The Hon’ble Apex Court in U.P.Cooperative Federation Ltd. case, after referring to the concept of prima facie case for injunction regarding the invocation of bank guarantee held by this Court in Arul Murugan Traders v. Rashtriya Chemicals and Fertilizers Ltd., AIR 1986 Madras 161, has elaborated the concept of prima facie case to fraud and special equity and irretrievable injustice when it relates to the invocation of bank guarantee. The operative portion of the judgment is as follows:
“27. Our attention was also drawn to the judgment of the learned Single Judge of the Madras High Court in Arul Murugan Traders v. Rashtriya Chemicals and Fertilizers Ltd., AIR 1986 Madras 161 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.
28. I am, however, of the opinion that these observations must be strictly considered in the light of the principle enunciated. It 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.”
12. The concept of fraud and irretrievable injury was in detail highlighted by the Apex Court in Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd., [1997] 6 SCC 450 to the extent that it should be an irreparable damage which would make it impossible for the guarantor to reimburse himself if ultimately he succeeds and that was held to be the minute criteria for deciding the irretrievable injury. The Apex Court held as follows in paragraphs [21] and [22]:
“21. Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are 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 and U.P. State Sugar Corpn. v. Sumac International Ltd., [1997] 1 SCC 568. The general principle which has been laid down by this Court has been summarised in the case of U.P. State Sugar Corpn. case as follows: (SCC p.574, para 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 the 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.
Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank, [1984] 1 All ER 351, CA are apposite:
… 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 discharged.
The aforesaid passage was approved and followed by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., [1988] 1 SCC 174.
22. The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution”,
and ultimately the Hon’ble Apex Court while heavily coming down against the attitude of granting injunction from invoking bank guarantees liberally has observed as follows:
“29. It is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be followed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decisions will not be of much importance was clearly a method adopted by it in avoiding to follow and apply the law as laid down by this Court. Yet another serious error which was committed by the High Court, in the present case, was not to examine the terms of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had taken the trouble of examining the documents on record, which had been referred to by the trial court, in its order refusing to grant injunction, the court would not have granted the interim injunction. We also do not find any justification for the High Court in invoking the alleged principle of unjust enrichment to the facts of the present case and then deny the appellant the right to encash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guarantee the applicability of the principle of undue enrichment has no application.
30. We are constrained to make these observations with regard to the manner in which the High Court had dealt with this case because this is not an isolated case where the courts, while disobeying or not complying with the law laid down by this Court, have at times been liberal in granting injunction restraining encashment of bank guarantees.
31. It is unfortunate, that notwithstanding the authoritative pronouncements of this Court, the High Courts and the courts subordinate thereto, still seem intent on affording to this Court innumerable opportunities for dealing with this area of law, thought by this Court to be well settled.
32. When a position, in law, is well settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety to say the least, for the subordinate courts including the High Courts to ignore the settled decisions and then to pass a judicial order which is clearly contrary to the settled legal position. Such judicial adventurism cannot be permitted and we strongly deprecate the tendency of the subordinate courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wrongful and unwarranted relief to one of the parties. It is time that this tendency stops.”
13. In Oil and Natural Gas Corporation Ltd. v. SBI, Overseas Branch, Bombay, [2000] 6 SCC 385, when a bank having given guarantee at the instance of guarantor declining to honour the guarantee on the ground that it was issued against the counter guarantee of a foreign bank which was restrained by foreign court from making payment and the foreign bank has directed the Indian bank by way of a restraint, while the Foreign Exchange Manual, 1999 does not create any impediment on the Indian bank in making payment under the bank guarantee, it was held that the beneficiary was the sole judge of the question of primary contract, as follows:
“7. The same is the principle stated by this Court in Hindustan Steelworks Construction Ltd. v. Tarapore & Co., [1996] 5 SCC 34. It is held therein that encashment of an unconditional bank guarantee does not depend upon the adjudication of disputes. No distinction can also be made between a bank guarantee for due performance of a work contract and a guarantee given towards security deposit for a contract or any other kind of guarantee. Where the beneficiary shall be the sole judge on the question of breach of primary contract the bank shall pay the amount covered by the guarantee on demand without a demur. In the absence of a plea of fraud, guarantee had to be given effect to.
8. Though these two decisions pertain to grant of injunction for enforcement of bank guarantee, the principle stated therein could be extended to understand the nature of defence raised by the respondent Bank in the present case. Whether the respondent Bank could at all raise such a defence which is totally untenable. In the light of what is stated above, in the absence of a plea relating to fraud, much less of a finding thereto, we find that the Court could not have stated that the defence raised by the respondent Bank on the grounds set forth earlier is sufficient to hold that unconditional leave should be granted to defend the suit. In the arbitration proceedings that were pending, it was certainly open to the parties concerned to adduce proper evidence and establish as to what are the liquidated damages that are payable and if any excess amount had been paid, the same would be recovered.
14. Again in Hindustan Steel Workers Construction Ltd. v. G.S.Atwal & Co. (Engineers) (P) Ltd., [1995] 6 SCC 76, while taking the same stand, the Supreme Court has held that the fraud must be an established fraud and it is not a defence to a party against invoking of bank guarantee; that the contents of the bank guarantee are in a standard format, which is simply adhered to by the parties without consensus ad idem:
“5. It is common ground that at the request of the respondent the Bank has furnished bank guarantees to the appellant. The respondent is the beneficiary. In the dispute pending for adjudication in arbitration, between the appellant and the respondent, the Bank is not a party. The principles to be borne in mind by the Court in the matter of grant of injunction against enforcement of a bank guarantee irrevocable letter of credit have been laid down in a catena of decisions of this Court. We have referred to the said principles in Larsen & Toubro Ltd. v. Maharashtra SEB, [1995] 6 SCC 68 which was heard along with this appeal. It is unnecessary to restate the said principles. Suffice it to say that in the case of confirmed bank guarantees irrevocable letters of credit, the Court will not interfere with the same unless there is fraud and irretrievable damages are involved in the case and fraud has to be an established fraud.
6. On a perusal of the relevant clauses of the guarantees, it is evident that the Bank has unconditionally and irrevocably agreed and undertaken to pay to the appellant on demand the sums specified therein. It is further seen that the amount should be paid without demur and without requiring the creditor (the appellant) to invoke any legal remedy and it is further specifically provided that the appellant shall be the sole judge of and as to whether the respondent, a party to the contract, has committed any breach and the extent of the loss and damages etc. caused to the appellant. It is stated that the decision of the appellant as to the outstanding amount due will be final and binding. A look at the particulars contained at page 83 of the paper-book (Vol. I) shows that the appellant has put forward a plea that LD 36,986 is due to it on account of security deposit and LD 11,37,627 is the balance due, to be recovered by the appellant. One Libyan Dinar is equivalent to Rs.27 approximately and so the amount due will be approximately Rs.6.50 lakhs and Rs.32.50 lakhs respectively, which are covered by the guarantees. We are of the view that the guarantees furnished by the Bank to the appellant are unconditional and the appellant is the sole judge regarding the question as to whether any breach of contract has occurred and, if so, the amount of loss to be recovered by the appellant from the respondent. The entire dispute is pending before the Arbitrator. Whether and if so, what is the amount due to the appellant is to be adjudicated in the arbitration proceeding. The order of the learned Single Judge proceeds on the basis that the amounts claimed were not or cannot be said to be due and the Bank has violated the understanding between the respondent and the Bank in giving unconditional guarantees to the appellant. The reasoning of the learned Single Judge to hold that the Bank had issued a guarantee in a standard form, covering a wider spectrum than agreed to between the respondent and the Bank, cannot be a reason to hold that the appellant is in any way fettered in invoking the unconditional bank guarantee. Similarly, the reasoning of the learned Single Judge that before invoking the performance guarantee the appellant should assess the quantum of loss and damages and mention the ascertained figure, cannot be put forward to restrain the appellant from invoking the unconditional guarantee. As stated, the claim of the appellant, regarding the balance to be recovered on account of security deposit and other outstanding advances, is not less than the amount covered by the bank guarantees. In this view of the matter, we hold that the learned Judge acted illegally and without jurisdiction, in affirming the interim order of injunction against the appellant restraining it from enforcing the bank guarantees till disposal of the arbitration proceedings. The order dated 29-8-1988 passed by the learned Single Judge, is set aside and this appeal is allowed. There shall be no order as to costs.”
15. The categoric pronouncements on the legal issue by the Hon’ble Apex Court by following the settled law accepted by the English Courts, make it very clear that on the facts of the present case, especially in the absence of any plea of fraud, much less established fraud, and in the absence of any inference which can be drawn on the facts and circumstances that by allowing the respondent to invoke the bank guarantee any irretrievable injury would be caused either due to the reason that the applicant may not be compensated adequately in the event of his succeeding before the arbitration and in the absence of any impediment on the part of the applicant from raising all the issues raised in the pleadings herein before the arbitrator, which is an effective remedy, it is not possible to accept the contention of the learned counsel for the applicant that the respondent should be injuncted from invoking the bank guarantee. There is absolutely no prima facie case made out by the applicant, apart from the availability of any element of fraud on the part of the respondent.
In such circumstances, looking from any angle, I am of the considered view that the applicant is not entitled to any relief claimed in this application. This application stands dismissed.
sasi