Original Application Nos.653 & 657 of 2010 P.Jyothimani,J.
These applications are filed under section 9 of the Arbitration and Conciliation Act,1996 praying for an order of injunction against the respondents from invoking the bank guarantees issued by the second respondent for a sum of Rs.6 lakhs and Rs.2,77,200/- respectively.
2. The first respondent, Southern Railway invited tenders for erection of 3 LED screens in the Chennai Central and Egmore Railway Stations for a period of three years, by identifying the places for installation. The notification was issued on 4.12.2007. The applicant participated in the tenders in both the cases. After opening the technical bids on 4.1.2008 and opening the financial bids subsequently on 3.3.2008, the applicant was declared as a successful bidder and the applicant was awarded the contract for a period of three years on payment of licence fees of Rs.1,20,00,000/-.
a) As per the terms and conditions, a sum of Rs.40 lakhs was required to be paid each year and bank guarantee for a sum of Rs.6 lakhs was required to be drawn towards security deposit, in respect of the tender which is the subject matter of O.A.No.653 of 2010 and in respect of the tender which is the subject matter of O.A.No.657 of 2010, as per tender conditions, a sum of Rs.18,48,000/- per year was required to be remitted and a sum of Rs.2,72,200/- as security deposit by way of bank guarantee respectively. The first respondent by communications dated 11.4.2008 and 1.2.2008 accepted the offers and informed that the contract would commence from the date of display of advertisement or 30 days from the date of acceptance of the contract, whichever is earlier.
b) It is stated that the original agreement is with the first respondent and in spite of the applicant requesting for a copy of the agreement, the same has not been given to the applicant. It is stated that the applicant remitted the licence fees in both the cases and furnished bank guarantees of Rs.6 lakhs in respect of O.A. No.653 of 2010 and Rs.2,77,200/- in respect of O.A.No.657 of 2010, both drawn on the second respondent bank. It is stated that subsequently the first respondent suspended the awarding of contract on the basis of an order in the writ petition banning installation of LED display in the railway station premises since the same was declared as heritage building.
c) It is stated that on 30.7.2008, the first respondent gave a change of location and the permission to execute the contract was given on 29.9.2008 to the applicant which according to the applicant, is with an inordinate delay affecting the terms of contract. The applicant was able to complete the installation thereafter by 7.1.2010. The applicant in this regard is stated to have made representations bringing out the inordinate delay on the part of the first respondent. However, it is stated that the first respondent fixed the date of commencement of the contract as 27.8.2008 for Central Railway Station and 27.10.2008 for Egmore Railway Station in respect of tenders concerned in O.A.Nos.653 and 657 of 2010.
d) It is the case of the applicant that the first respondent failed to issue any letter to the effect that the tenure of the contract would commence from 29.12.2008 and according to the applicant, the date was unilaterally fixed by the first respondent Railways. Further, the first respondent demanded service connection charges for the period from 27.8.2008 to 29.12.2008 in respect of Central Railway Station concerned in O.A.No.653 of 2010 and from 27.10.2008 to 29.12.2008 in respect of Egmore Railway Station concerned in O.A.No.657 of 2010.
e) Without resolving the date of commencement of contract, the first respondent issued a show-cause notice for terminating the agreement for the failure to remit licence fees for the second year commencing from 28.8.2009 in respect of Central Railway Station and from 28.10.2009 in respect of Egmore Railway Station and a reply was sent to the said notice. Thereafter, the first respondent terminated the contract on 17.3.2010 in both the cases. The applicant by letter dated 10.5.2010, requested the first respondent to withdraw the termination notice and for renewal and also for the waiver of service connection charges from 17.3.2010 till resumption of operation.
f) Having terminated the contract, the first respondent threatened to invoke the bank guarantee and according to the applicant, there is a dispute bona fide between the parties which is subject to arbitration and the applicant is in fact, requesting for invoking the arbitration clause. It is the case of the applicant that it was the right of the applicant to rescind the contract and to ask for damages, but, on the other hand, without any liability on the part of the applicant, the first respondent is taking steps to invoke the bank guarantee which will be detrimental to the interest of the applicant. Therefore, the present applications are filed as stated above. The applicant has also given an undertaking that till the disposal of the arbitration proceedings the applicant would keep the bank guarantee subsisting.
3. In the counter affidavit filed by the first respondent Southern Railway in O.A.No.653 of 2010 adopted in O.A.No.657 of 2010 since they are similar, the fact of tender of the applicant having been accepted is admitted. It is also stated that the applicant licensee paid the licence fees belatedly that is, 5 months after the letter of acceptance and the security deposit was also paid with delay. It is stated that a specimen copy of the agreement was sent to the applicant along with tender documents and it was stated in the letter of acceptance that the signed copy of the agreement in all respects must be submitted within 15 days of the issuance of the letter of acceptance.
a) It is denied that the original copy of agreement is with the first respondent and in fact, the first respondent repeatedly requested the applicant to sign the copy of agreement and send the same at the earliest. It is stated that after the letter of acceptance was given, the applicant sought for permission for new locations and in the meantime, the first respondent received a notice in W.P.No.7143 of 2006 on 22.4.2008, directing to remove all hoardings covering the fagade of historic buildings in Chennai including Chennai Central and Egmore Railway Stations and therefore, the acceptance was kept in abeyance. b) It is stated that the suspension was only in respect of one location and in respect of other location which is covered in O.A.No.653 of 2010, the first respondent directed the applicant to pay the licence fees. It is stated that in respect of one location only steps were taken for the purpose of providing alternate place at the entry point to Platform No.6 of Chennai Central Railway Station which was one of the choices of the applicant and therefore, a fresh letter of acceptance for new location was issued on 30.7.2008 with advice to pay the licence fees in time and therefore, there is no loss caused to the applicant and the applicant should have commenced the work immediately.
c) It is stated that by virtue of change of one location due to the order of the High Court, the commencement of contract in respect of other two locations were not affected and as per the terms of tender conditions only 30 days time was granted for the purpose of execution of the contract and therefore, contract period was fixed from 29.8.2008 to 28.8.2011 and there is no error in fixing the same. It is stated that due to non-payment of licence fees for the second year and non-signing of the copy of agreement, the administration issued the show-cause notice and a reply was also received which was not acceptable and therefore, the contract was terminated on 17.3.2010 and a final notice was sent to clear the dues at once.
d) It is also stated that after the contract was terminated, the administration took steps to enforce the bank guarantee by writing to the second respondent, IDBI Bank on 12.4.2010, however, the applicant requested 14 days time for making payment and in view of the same, the first respondent requested the second respondent on 23.4.2010 to wait until further advice. It is stated that subsequently the applicant requested 15 days time stating various reasons and since it was a dilatory tactics, the subsequent requests were rejected and the first respondent gave the demand in writing to the second respondent bank to enforce the bank guarantee and to credit the same in the railways account, however the bank has not paid the amount and in the meantime, a notice was received in these applications.
e) It is stated that the applicant has not given proper notice of arbitration proceedings. It is stated that even after enforcement of bank guarantee, there is enormous amount of Rs.22,39,427/- outstanding and in respect of the contract in O.A.No.653 of 2010 for having displayed the advertisement in the railway premises until termination, the applicant is liable to pay charges. It is also stated that the applicant having given undertaking to pay licence fees cannot go back saying that if the bank guarantee is invoked, loss will be caused and on the other hand, it is the railways which is the sufferer.
4. It is the contention of the learned counsel for the applicant in both the cases is that on rescision of contract, the security deposit stands forfeited and the forfeiture is relatable to the performance guarantee. It is also his submission that as per the terms of tender, the licence fees is payable in three years and there can be no breach on the face of it and therefore, according to him, the termination is not valid. His submission is that there is no ground for invoking the bank guarantee at this stage. It is also not in dispute that in spite of the letter given by the first respondent to the second respondent on 7.5.2010 for payment of amount under the bank guarantee, the amount has not been paid. It is his submission that there is no loss of revenue to the railways and he relies upon the judgment in U.P.State Sugar Corporation vs. Sumac International Ltd., [(1997) 1 SCC 568] to drive home that there is no necessity for invoking the bank guarantee at this stage. He would also submit that the applicant is prepared to abide by any condition to keep the bank guarantee alive till the arbitration is completed and as per the original contract the contractual period was available till March, 2010. By referring to the judgment of the Bombay High Court in Dai-ichi Karkaria Pvt., Ltd., Bombay vs. Oil and Natural Gas Commission, Bombay [AIR 1992 Bombay 309], he would also contend that the conduct of the first respondent would amount to duress and the invocation of bank guarantee is made to threaten the applicant with a view to make the applicant to accede to the unjust request of the first respondent.
5. On the other hand, Mr.Vellaichamy, learned counsel for the first respondent would submit that the bank guarantee is independent of the performance and therefore, there is no necessity to interfere with the invocation of the bank guarantee. He would rely upon the judgments in Mahatma Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engineering Co.op Ltd., [(2007) 6 SCC 470] and Vinitec Electronics Private Ltd., vs. HCL Infosystems Ltd. [(2008) 1 SCC 544]. It is his submission that when the letter of acceptance was given in September, 2008 even after the change of location in respect of one place, there was no hindrance for the applicant to install and the identification of alternate place itself was made at the instance of the applicant. Learned counsel has also produced the file in respect of the above said contract.
6. The common issue involved in both the cases is about the invocation of bank guarantee by the first respondent in respect of two contracts, subject matter of these two applications for Rs.6 lakhs and Rs.2,77,200/- respectively. The admitted fact is that there was termination of contract by the first respondent on 17.3.2010. A reference to the termination notice issued by the first respondent dated 17.3.2010 makes it clear that the termination was issued based on the alleged violation of clause 11 which contemplates remittance of second year licence fees at the starting of the second year, which the applicant is alleged to have failed to pay and also on the basis of non-execution of agreement within 15 days from the date of letter of acceptance. It is based on the said two violations, the first respondent issued a show-cause notice to the applicant on 8.12.2009 and after receiving the reply, the first respondent passed the order terminating the contract. It is also not in dispute as stated above that by letter dated 7.5.2010, the first respondent made a request to the second respondent to make payment against the bank guarantee.
7. Even though elaborate submissions were made by the counsel for the respective parties on various terms of the tender conditions and agreement, apart from various communications, since as per the terms and conditions of the tender, there is an arbitration clause available for the parties as per clause 21 and the applicant itself states that it is taking steps to invoke the arbitration clause, I am of the considered view that at this stage, it is not necessary for this Court to refer to various factual aspects, which would be matters for arbitrator to decide. Therefore, the question as to whether the termination of contract is correct or not and valid in the eye of law, need not be elaborately gone into in these applications. The simple question which has to be decided is as to whether the bank guarantees furnished are independent of the obligation of the parties to perform the contract and for that, a reference to few clauses in the tender notification is necessary. Clause 10(b) of the tender notification which is as follows:
” 10(b). The successful tenderer should give a Performance Guarantee in the form of an irrevocable bank guarantee amounting to 5% of the total contract value worked out for three years. The bank guarantee should be valid up to 6 months in excess of the expiry of the contract period.”
says that the applicant being the successful tenderer shall give bank guarantee in the form of irrevocable bank guarantee.
8. Clause 10(e) which is as follows:
” 10(e). Whenever the contracts are rescinded, the Security Deposit will be forfeited and the Performance Guarantee shall be encashed.”
enables the employer viz., the first respondent to forfeit the security deposit and encash the performance guarantee when the contract is rescinded.
9. Of course, the first respondent administration heavily places reliance on clause 11 which is as follows:
” 11. The License fee quoted for three years shall be divided into three equal parts and the first part should be paid for the first year in full, in advance before the commencement of the contract. The second part of the License fee shall be paid in full at the start of the Second year and third part should be paid in full at the start of the third year. Any failure in this regard will be reckoned as breach of contract on the part of the licensee and Railway Administration shall have the right to take action deemed fit including imposition of fine, termination of contract duly forfeiting the amounts paid in advance without prejudice to its rights to claim ascertained liquidated damages.”
explains that the failure on the part of the contractor in paying yearly licence fees will be treated as breach of contract and the administration can either impose fine or terminate the contract forfeiting the amounts without prejudice to the claim of damages.
10. The railway administration also relies upon clause 16 of the tender for terminating the contract, which is as follows:
” 16. In the event of the successful Tenderer not complying with any of the conditions stipulated to the satisfaction of the Railway Administration, the Railway administration shall have the right to terminate the contract and take any action deemed fit including forfeiture of all amount paid in advance without prejudice to its right to claim damages from the successful Tenderer.”
11. A reference to the terms of bank guarantee shows that it is irrevocable and unconditional as it is evident in paragraph-1 which is as follows:
” 1. In consideration of the president of India acting through the divisional Railway Manager (commercial), Southern Railway, Chennai 600 003 (Herein after referred to as the Government) having accepted vide letter No.M/C.37/Pub/tender/LED/MS/II/07 dated 01.02.2008 the tender submitted by M/s.OMNI AGATE SYSTEMS PVT.LTD a Company registered under Companies Act 1956 having its registered office at No.99, Greams Road, II Floor, M.N.Complex, Chennai 600 006 (Herein after referred to as “the contractor(s), and agreed to grant a contract for installation and display of 2 nos. LED Screens (video-walls) at specified location at Chennai Egmore (hereinafter called the contract) and whereas one of the terms agreed by the said contractor, is that he should give a Performance Guarantee in the form of an irrevocable Bank Guarantee amounting to 5% of the contract value i.e., Rs.2,77,200/- (Rupees Two Lakhs Seventy Seven Thousand Two Hundred only) valid upto expiry of the maintenance period, i.e., upto 07.02.2011 by way of security for the due observance of the terms and conditions, performance and fulfillment of the said contract, we the Industrial Development Bank of India Ltd., (IDBI Ltd.,) a Company incorporated under the Companies Act 1956 (1 of 1956) and a Banking Company with in the meaning of the Banking Regulation Act 1949 (10 of 1949), having its registered office at IDBI tower, WTC Complex, Cuffee Parade, Mumbai 400 005, and having its branch office at 115, Annasalai, Saidapet, Chennai 600 015 (herein after referred to as the bank) at the request of the contractors do hereby irrevocably and unconditionally guarantee to the government that the contractor shall duly perform and discharge their obligations under the said contract to the full satisfaction of the Government and render all necessary and efficient services which may be required to be rendered by the contractor in connection with and / or for the performance of the works as per the specifications stipulated in the tender No. M/C.37/pub/tender/LED/MS/II/07 dated 30.10.2007 and letter of acceptance No. M/C.37/Pub/tender/LED/MS/II/07 dated 01.02.2008 within the time of 15 days reckoned from the date as per the letter of acceptance, and further guarantees that the works, which shall be done by the contractor under the said contract, shall be actually performed in accordance with terms and conditions of the contract to the full satisfaction of the government.”
The bank guarantee also contains a clause to the effect that the amount shall be payable without any demur merely on demand from the company. It also states that the company is required to incur loss because of the breach of contract by the contractor in respect of the terms and the demand shall be conclusive regarding amount due under the contract. It also categorically states in paragraphs 3 and 4 which are as follows:
” 3.We, IDBI Ltd., do hereby undertake to pay the amounts due and payable under this guarantee without any demur, merely on a demand from the government stating that the amount claimed in due by way of loss and / or damage caused to or would be caused to or suffered by the government by reason of any breach by the said contractor (s) of any of the terms of conditions contained in the said agreement or by reason of the Contractor’s (s) failure to perform the said Agreement. Any such demand made on the Bank shall be conclusive as regarding and amount due and payable by the Bank under this Guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs.2,77,200/- (Rupees Two Lakhs Seventy Seven Thousand Two Hundred only).
4. We, IDBI Ltd., do hereby undertake to pay to the government any money so demanded notwithstanding any dispute or disputes raised by the Contractor(s) in any suit or proceedings pending before any court, Tribunal or Arbitrator(s) relating thereto our liability under this present being absolute and unequivocal. The payment so made by us under this bond shall be valid discharge of our liability for payment there under and the contractor(s) shall have no claim against us for making such payment.”
that the undertaking by the bank to pay to the company on demand is notwithstanding any dispute raised in the contract or suit, etc. and the liability is absolute and unequivocal.
12. It is relevant to point out at this stage that it is not the case of the applicant anywhere in the affidavit that in the event of applicant succeeding before arbitration it would not be in a position to recover the amount from the first respondent, railway administration so as to substantiate a prima facie case and to establish the balance of convenience in granting injunction against invoking the bank guarantee.
13. It is also relevant to point out that the applicant has not alleged any fraud against the first respondent in obtaining the bank guarantee or any irretrievable injury that may be caused to the applicant by invoking the bank guarantee.
14. In the letter of the first respondent dated 7.5.2010 addressed to the second respondent bank, it is stated as follows:
“SOUTHERN RAILWAY
Office of the Sr.DFM,
Chennai Division
No.W.55/MAS/X-1/BG/11200054&55 Date:7.5.2010
The Manager
IDBI Bank
No.37, P.M.Tower, Greams Road
Thousand Lights, Chennai 600 006.
Sub: Registering of claim against Bank guarantee
issued at the request of M/s.Omni Agate Systems
Pvt. Ltd.,
Ref: BG No.20080051BGP0321 dated 22.9.2008 for
Rs.6,00,000/- valid upto 19.9.2011
BG No.2008129IBG0002 dated 7.2.2008 for
Rs.2,77,200/- valid upto 7.8.2011.
Kindly refer to this office letter of even no.dated 23.4.2010, wherein it was intimated not to invoke the two BGs cited under reference, submitted by M/s. Omni Agate Pvt. Ltd., until further communications.
Since the party has not fulfilled the conditions as per the agreement, the subject Bank Guarantees may be encashed in full immediately and cheque may be drawn in favour of Sr.Divisional Financial Manager, Chennai Division, Southern Railway, Chennai 600 003 and forwarded to the address mentioned under Registered post.
Sr.Divisional Financial Manager
O/o Senior Divisional Financial Manager
4th Floor, NGO Annexe
Chennai Division, Southern Railway
Parktown, Chennai 600 003.
Sd/-xxxxxx (K.S. Illaya Raja) Additional Divisional Finance Manager/Works"
15. The law is well settled that in such circumstances where the bank guarantee given is independent and unconditional and irrevocable, there is no necessity on the part of the bank to investigate about the correctness or otherwise of the demand made by the beneficiary. When the bank guarantee is independent and unconditional and in the absence of any allegation regarding the fraud having been played for the purpose of obtaining the unconditional bank guarantee, there is no question of duress involved in this case and therefore, the judgment of Queen’s Bench Division in Vantage Navigation Corporation vs. Suhail and Saud Bahwan Building Materials LLC [ (1989) Vol-I, Lloyd’s Law Reports 138], on which the reliance was placed by the learned counsel for the applicant is of no assistance to substantiate the case of the applicant.
16. The further submission by the learned counsel for the applicant that the economic duress and commercial pressure are to be taken as exception to the general rule of refusing to grant injunction as held by the Bombay High Court in Dai-ichi Karkaria Pvt., Ltd., Bombay vs. Oil and Natural Gas Commission, Commission [AIR 1992 Bombay 309], is also of no use to substantiate the case of the applicant for the purpose of granting an order of injunction against the first respondent from invoking the bank guarantee.
17. Further, whether there is economic duress or not is ultimately for the applicant to raise as a dispute in the arbitration wherein even the issues in respect of alleged conduct of the first respondent in invoking the bank guarantee can be raised, and therefore, it is not as if the applicant is left with no right to raise the same before the arbitrator.
18. It was, in the earliest judgment of English Court in Hamzeh Malas and Sons vs. British Imex Industries Ltd., [1958 (1) All ER 262], Lord Jenkins,L.J. held that in respect of letter of credit or bank guarantee, the principle is that the commercial trading must go on the solemn guarantee either by the bank guarantee or by letter of credit irrespective of any dispute between the contracting parties.
19. That was also the view of Lord Denning, MR. in the Court of Appeal in Elian and Rabbath vs. Matsas and Matsas [1966(2) Lloyds Report 495], as reiterated by Justice Kerr in R.D.Harbottle (Mercantile) Ltd., vs. National Westminster Bank Ltd., [1977 (2) All ER 862].
20. By referring to the said English judgments which are applicable in respect of bank guarantee and letter of credit in India, in U.P.Cooperative Federation Ltd., vs. Singh Consultants and Engineers [(1988) 1 SCC 174], the Supreme Court held 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.
21. That was followed in Dwarikesh Sugar Industries Ltd., vs. Prem Heavy Engineering Works (P) Ltd., [(1997) 6 SCC 450] discussing in detail the entire English law on the subject and the relevant portion of the judgment is as follows:
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 encashmnt 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 vs. Indian Charge Chrome (1994) 1 SCC 502, Larsen & Toubro Ltd., vs. 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. as follows:(SCC p.574, para 12)
The law relating to invocation of such bank guaranttees 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 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 otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realisation of such a bank guarantee. The courts have carved out only two exceptions. Afraud 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.
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) I All ER 351 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 bank’s knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank’s credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged.
(Emphasis supplied)
The aforesaid passage was approved and followed by this Court in U.P.Coop.Federation Ltd., vs. 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.
22. Again, it was, in Oil & Natural Gas Corporation Ltd., vs. SBI, Overseas Branch, Bombay [(2000) 6 SCC 385], the Supreme Court held that encashment of unconditional bank guarantee is not depending upon the adjudication proceedings between the parties and if any fraud is alleged in obtaining the bank guarantee, it must be pleaded and proved.
23. Again in Mahatma Gandhi Sahakra Sakkare Karkharne vs. National Heavy Engineering Co.op. Ltd., [(2007) 6 SCC 470], the Supreme Court reiterated that two exceptional cases for granting injunction against invocation of bank guarantee are fraud and irretrievable injury.
24. That was also the view of the Supreme Court in Himadri Chemicals Industries Ltd., vs. Coal Tar Refining Co., [(2007) 8 SCC 110], wherein it was held that existence or pendency of dispute between the parties to the underlying contract is irrelevant for the bank.
25. In a recent judgment, the Supreme Court held that unless the bank guarantee incorporates any particular clause of the agreement, the guarantee furnished should be considered as unconditional guarantee. It was also held that a mere reference of principal agreement in any of the portions of bank guarantee does not make the bank guarantee as conditional. That was in Vinitec Electronics Private Ltd., vs. HCL Infosystems Ltd., [(2008) 1 SCC 544]. The Supreme Court held as follows:
” 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 unconditional bank guarantee. When in the course of commercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realise such a bank guarantee in terms thereof irrespective of any pending disputes. In U.P. State Sugar Corpn. v. Sumac International Ltd.((1997) 1 SCC 568) this Court observed that: (SCC p. 574, para 12)
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 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 realisation 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.
26. On the facts of the present case, in the absence of any specific plea by the applicant about any irretrievable injury that may be caused by invoking the bank guarantee or in the absence of any plea of fraud in obtaining the bank guarantee and as elicited above, when the terms of bank guarantee are independent, by following the settled principles of law held both by English Courts as well as Indian Courts as affirmed by the Honble Apex Court holding that the Courts should be slow in granting injunction in respect of invocation of bank guarantee except in exceptional cases as stated above, I am of the view that looking in any angle, the applicant is not entitled for any relief claimed in these applications.
In such view of the matter, the applications stand dismissed. No costs.
Index:Yes/No Internet:Yes/No kh 15.11.2010. P.JYOTHIMANI,J. P.D. Common Order in O.A.Nos.653 & 657 of 2010 Dated:15.11.2010