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National Thermal … vs M/S Flowmore Private Ltd.And Anr on 8 May, 1995

Supreme Court of India
National Thermal … vs M/S Flowmore Private Ltd.And Anr on 8 May, 1995
Equivalent citations: 1996 AIR 445, 1995 SCC (4) 515
Author: M S V.
Bench: Manohar Sujata (J)
           PETITIONER:
NATIONAL THERMAL POWERCORPORATION LTD.

	Vs.

RESPONDENT:
M/S FLOWMORE PRIVATE LTD.AND ANR.

DATE OF JUDGMENT08/05/1995

BENCH:
MANOHAR SUJATA V. (J)
BENCH:
MANOHAR SUJATA V. (J)
VERMA, JAGDISH SARAN (J)

CITATION:
 1996 AIR  445		  1995 SCC  (4) 515
 JT 1995 (5)   591	  1995 SCALE  (3)545


ACT:



HEADNOTE:



JUDGMENT:

J U D G M E N T
Mrs. Sujata V. Manohar, J.

Leave granted.

The appellant had entered into a contract with
respondent No.1 on 18.1.80 under which respondent No.1 had
agreed to supply to the appellant pumps together with
butterfly valves, motors etc. The terms of the contract also
contained an arbitration clause.

In connection with various payments made or to be made
under this contract, the first-respondent furnished to the
appellant, inter alia, five bank guarantees in favour of the
appellant issued by the Canara Bank which are the subject-
matter of dispute before us. These are:

(1) a bank guarantee dated 27.2.80 for Rs.11,54,290/-,
(2) a bank guarantee dated 26.7.86 for Rs.85,000/-,
(3) a bank guarantee dated 26.7.86 for Rs.2,53,250/-,
(4) a bank guarantee dated 26.7.86 for Rs.63,411.42 and
(5) a bank guarantee dated 26.7.86 for Rs.3,79,875/-.
While the first two bank guarantees are performance
guarantees, the other three bank guarantees are to secure
the advances given by the appellant to the first-respondent
to be adjusted against payments to be made under the
contract. All these bank guarantees are payable on demand.
Clause 1 of the bank guarantee dated 26.7.86 for Rs.85,000/-
is as follows:-

“In consideration of the Owner having agreed
to accept from the contractor First Pump with Cast Iron
Impeller temporarily in lieu of Stainless Steel
Impeller (to be replaced by the Contractor with
Stainless Steel Impeller by 31.12.86. We, Canara Bank,
having our Head Office at Bangalore-560 002 and Branch
at f-19, Connaught Circus, New Delhi (hereinafter
referred to as the “Bank” which expression shall unless
repugnant to the context or meaning thereof (include
its successors, administrators, executors and assigns)
do hereby guarantee and undertake to pay the Owner
immediately on demand any or, all moneys payable by the
Contractor to the extent of Rs.85,000/- (Rupees Eighty
five thousand only) at any time upto 31.12.1986 without
any reference to the Contractors. Any such demand made
by the owner shall be conclusive and binding
notwithstanding any difference between the owner and
the Contractor or any dispute pending before any Court,
Tribunal, Arbitrator or any other Authority.
The Bank agrees that the Guarantee hereinafter
contained shall continue to be enforceable till the sum
due to the Owner or till the Owner discharges this
Guarantee.”

(Underlining Ours)
The other four bank guarantees do not contain such an
express clause to the effect that the demand made by the
beneficiary shall be binding. They all, however, provide
that the Canara Bank “do hereby guarantee and undertake to
pay the owner on demand any and all monies payable by the
contractor by reason of any breach” of the terms of the
contract.

There were disputes between the parties in respect of
the supply of pumps under the contract. The appellant by its
letter dated 15th of March, 1990 addressed to the first-
respondent demanded from the first-respondent payment of a
sum of Rs.13,22,466.80, being the net recovery which the
appellant was entitled to make from the first-respondent as
per the particulars set out in that letter. The appellant
called upon the first-respondent to pay the said amount on
or before 25.3.90 failing which they would invoke the above
bank guarantees without any further notice.

On 11.6.90 the first-respondent invoked the arbitration
clause under the contract and appointed his Arbitrator. The
appellant thereafter also appointed its Arbitrator. The
Institute of Engineers, India appointed a third Arbitrator.
The disputes between the parties were referred to
arbitration. In view of the arbitration proceedings the
appellant did not realise the bank guarantees while the
first-respondent kept the bank guarantees alive by renewing
them from time to time. The time for making the award
expired in January 1992. As the appellant declined to extend
the time for making the award, an application under Section
28 of the Arbitration Act for extending the time for making
the award is filed by the first-respondent and is pending
before the Delhi High Court.

The bank guarantees were about to expire on 31st March,
1993. Hence the appellant by its letters all dated 22.3.93
addressed to the Canara Bank invoked the bank guarantees for
Rs.11,54,290/- and Rs.85,000/-. The appellant also partially
invoked the bank guarantee for Rs.3,79,875/- by demanding
from the Canara Bank payment of a sum of Rs.2,30,910/- under
the said bank guarantee. In respect of the remaining two
bank guarantees and the balance amount under the partially
invoked bank guarantee the appellant called upon the Canara
Bank to extend the validity period of the bank guarantees by
a further period of six months failing which its letters
should be treated as invocation of the guarantees in
question and it demanded payment of those guarantee amounts
also. As the Canara Bank objected to partial invocation of
the bank guarantee for Rs.3,79,875/-, the appellant by its
letter dated 26th of March, 1993 invoked the bank guarantee
for Rs.3,79,875/- also in full.

On 26th March, 1993 the first-respondent filed a
petition before the Delhi High Court under Section 41 of the
Arbitration Act seeking an injunction to restrain the
present appellant from invoking the guarantees and the
Canara Bank from remitting the amounts under the bank
guarantees to the appellant. A Learned Single Judge of Delhi
High Court by his order dated 20.10.94 granted an injunction
restraining the appellant from encashing the bank
guarantees. An appeal filed by the first-respondent before
the Division Bench of the Delhi High Court was dismissed by
the Delhi High Court on the ground that an appeal was not
maintainable against an order passed in exercise of power
under Section 41 of the Arbitration Act read with the second
Schedule.

The present appeals are filed from these judgments and
orders of the Delhi High Court. The question of jurisdiction
of the Division Bench of the Delhi High Court to entertain
an appeal from an order of a Single Judge of the High Court
granting an injunction under Section 41 of the Arbitration
Act, need not detain us when we are examining the order of
the learned Single Judge under Article 136 of the
Constitution of India, an appeal from that order having been
dismissed. On merit, the order of injunction issued by a
learned Single Judge of the Delhi High Court cannot be
sustained. In the case of Svenska Handelsbanken v. M/s
Indian Charge Chrome and Ors.
(1994 (1) SCC 502), a Bench of
three Judges of this Court has, while dealing with
performance guarantees and guarantees against advances,
observed that looking to the obligation assumed by the bank
under such guarantees or letters of credit, the bank cannot
be prevented by the Party at whose instance the guarantee or
letter of credit, was issued, from honouring the credit
guaranteed. Since the bank pledges its own credit involving
its reputation, it has no defence except in the case of
fraud or irretrievable injustice. Fraud must be of an
“egregious nature” so as to vitiate the entire underlying
transaction. While irretrievable injustice. Fraud must be of
an “egregious nature” so as to vitiate the entire underlying
transaction. While irretrievable injustice should be of the
kind arising in an irretrievable situation which was
referred to in the U.S. case of Itek Corporation v. The
First National Bank of Boston etc. (566 Fed. Supp. 1210).
The irreparable harm should not be speculative. It should be
genuine and immediate as well as irreversible – a kind of
situation which existed in the case of Itek Corporation
(supra) where, on account of the revolution in Iran the
American Government had cancelled all export contracts to
Iran and had blocked all Iranian assets within the
jurisdiction of the United States. Fifty two Americans had
been taken hostages in Iran. In this situation the Court
felt that the plaintiff had no remedy at all and the harm to
him would be irreparable. This kind of a situation is not a
likely situation. This Court in the case of Svenska
Handelsbanken (supra) has cited with approval the
observations of this Court in the case of U.P. Cooperative
Federation Ltd. v. Singh Consultants & Engineers Pvt. Ltd.

(1988 (1) SCR 1124) to the effect that the Court should not
lightly interfere with a performance bond or guarantee
unless there is fraud of the beneficiary and not somebody
else.

In the present case Mr. Nariman, learned counsel for
the first-respondent has attempted to justify the order of
injunction issued by the Delhi High Court on two grounds;
(1) that the bank guarantees were not invoked in terms of
the bank guarantees in question, except for the bank
guarantee of Rs.85,000/- which, he conceded, was invoked in
terms of that bank guarantee. (2) After the arbitration
clause was invoked on 11th of June, 1990 and the Arbitrators
were appointed by the parties in September and December,
1990, the parties had proceeded on the basis that the bank
guarantees would not be invoked until the arbitration was
over and award made. Hence by its own conduct the appellant
had precluded itself from invoking the bank guarantees.

Both these submissions cannot be accepted. It is true
that the bank guarantee of Rs.85,000/- contains an express
term to the effect that any demand made by the owner shall
be conclusive and binding on the bank notwithstanding any
difference between the Owner and the Contractor or any
dispute pending before any Court, Tribunal, Arbitrator or
any other Authority. Nevertheless, this express term merely
reiterates the nature of a bank guarantee which is payable
on demand being made by the beneficiary of the bank
guarantee. A bank guarantee which is payable on demand
implies that the bank is liable to pay as and when a demand
is made upon the bank by the beneficiary. The bank is not
concerned with any inter se disputes between the beneficiary
and the person at whose instance the bank had issued the
bank guarantee. All the three bank guarantees which have
been invoked are payable on demand. There is, therefore, no
merit in the submission that the bank guarantees have not
been properly invoked.

The second submission relates to the conduct of
parties. Learned counsel for the first-respondent has relied
upon the fact that the first-respondent kept all the bank
guarantees alive by renewing them from time to time during
the pendency of arbitration and on the fact that the
appellant did not invoke the bank guarantees while the
arbitration was in progress. Neither of these two
circumstances can lead to the conclusion that the bank
guarantees cannot be invoked while the arbitration is
pending. The bank guarantees are unconditional and payable
on demand. The circumstances pointed out by learned counsel
for the first-respondent do not constitute a bar on the
right of the appellant to encash the bank guarantees. In the
present case there is also no circumstance pointed out which
would result in any irretrievable injustice to the first-
respondent of the kind referred to in the case of Itek
Corporation (supra) if the bank guarantees are realised.

In the premises, the Delhi High Court was not justified
in issuing an order of injunction to restrain the
realisation of the bank guarantees by the appellant. The
appeals are, therefore, allowed. The order of the Delhi High
Court dated 20.10.94 is set aside and the order of
injunction is vacated. The first-respondent shall pay to the
appellant the costs of the appeals.

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