{"id":5869,"date":"2007-07-11T00:00:00","date_gmt":"2007-07-10T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/mahatma-gandhi-sahakra-sakkare-vs-national-heavy-engg-coop-ltd-on-11-july-2007"},"modified":"2015-12-06T23:29:27","modified_gmt":"2015-12-06T17:59:27","slug":"mahatma-gandhi-sahakra-sakkare-vs-national-heavy-engg-coop-ltd-on-11-july-2007","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/mahatma-gandhi-sahakra-sakkare-vs-national-heavy-engg-coop-ltd-on-11-july-2007","title":{"rendered":"Mahatma Gandhi Sahakra Sakkare … vs National Heavy Engg. Coop. Ltd. … on 11 July, 2007"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Mahatma Gandhi Sahakra Sakkare … vs National Heavy Engg. Coop. Ltd. … on 11 July, 2007<\/div>\n
Author: B. Sudershan Reddy<\/div>\n
Bench: Tarun Chatterjee, B. Sudershan Reddy<\/div>\n
           CASE NO.:\nAppeal (civil)  2952 of 2007\n\nPETITIONER:\nMahatma Gandhi Sahakra Sakkare Karkhane\n\nRESPONDENT:\nNational Heavy Engg. Coop. Ltd. And anr\n\nDATE OF JUDGMENT: 11\/07\/2007\n\nBENCH:\nTarun Chatterjee & B. Sudershan Reddy\n\nJUDGMENT:\n<\/pre>\n
JUDGMENT<\/p>\n
CIVIL APPEAL NO.      2952       OF 2007
\n(Arising out of Special Leave Petition (C)No.11821 of 2005)<\/p>\n
B. Sudershan Reddy, J :\n<\/p>\n
\tLeave granted.\n<\/p>\n
The appellant herein is a Co-operative Society registered
\nunder the provisions of the Karnataka Co-operative Societies Act,
\n1959.  It has established a sugar factory at Hunji, Balki Taluk,
\nBidar District, Karnataka with a capacity of 2500 TCD per day
\nwith a provision to expand the same upto 4000 TCD per day.  The
\nappellant had undertaken expansion of its sugar factory from
\n2500 TCD to 4000 TCD crushing capacity per day and accordingly
\ninvited tenders.  The offer of the first respondent which is also a
\nCo-operative Society registered under the Multi-State Co-
\noperative Societies Act which is involved in supply, erection and
\ncommissioning of Sugar Plants was accepted in the meeting of
\nthe State Level Advisory Committee held on 10th August, 2000.
\nThe first respondent undertook to design, procure manufacture,
\nsupply transport and deliver at the site and to do the supervision
\nof erection and commissioning of the Sugar Plant and Machinery
\nin conformity with the agreed specifications vide agreement dated
\n1st November, 2000.  The clauses of the agreement dated 1st
\nNovember, 2000 which are relevant to be noticed are reproduced
\nas under :\n<\/p>\n
“Clause 5 :  Supply, Delivery and
\nSupervision of Erection and
\nCommissioning.\n<\/p>\n
Clause 5.1 : The Seller agrees
\ntosupply plant and machineryso
\nthat the supply and erection of the plant
\nand machinery is completed in all
\nrespects and to the satisfaction of the
\nPurchaser and the Sugar Plant and
\nMachinery is Commissioned and made
\nready for commercial production and
\nuse by 11th December, 2001.\n<\/p>\n
8.0\tTRIALS AND TAKE OVER :\n<\/p>\n
8.1\tAs soon as the Plant is ready for
\ncommissioning after completion of the
\nsupply of plant and machinery and
\nerection of the same to the satisfaction
\nof the purchasers, the sellers on getting
\ninformation from the erection contractor
\nshall notify in writing  to the purchasers
\nspecifying the date and time, at least 30
\ndays before the sellers intend to carry
\nout steam and water trials to enable the
\npurchasers to arrange for boiler feed
\nwater, fuel, operational staff and
\nworkmen and other facilities.  Unless
\notherwise agreed by the purchasers and
\nthe sellers, the sellers shall begin the
\nsaid trial on the date and time so
\nnotified.\n<\/p>\n
Provided that the water, steam and
\nvacuum trials shall be conducted by the
\nsellers for a period of one month before
\nthe commissioning of the plant and
\nmachinery after complete delivery and
\nerection to the entire satisfaction of the
\npurchasers.\n<\/p>\n
8.2   After the said steam, water and
\nvacuum trials have been completed to
\nthe entire satisfaction of the purchasers
\nand on their furnishing a certificate to
\nthe effect that all the plant and
\nmachinery mentioned in Annexure I to
\nIII have been inspected and approved
\nby the Inspection Agency, delivered as
\nper detailed parts list of materials
\nreferred to above, erected and
\ncommissioned under the supervision of
\nthe sellers according to the terms and
\nconditions of this agreement, the sellers
\nguarantees given in pursuance of clause
\n17.2 shall be deemed to have been
\nfulfilled.”\n<\/p>\n
\tBank guarantees were required to be furnished by the
\nrespondent in terms of the agreement.  The case of the appellant
\nis that the first respondent failed to commission the plant in
\nterms of the agreement.  The appellant sent a notice dated 26th
\nApril, 2003 duly putting the respondent on notice of its failure to
\ncommission the plant by the scheduled date i.e. 11th February,
\n2001 and other  revised dates, i.e., 26th January, 2002, 25th
\nNovember, 2002, 28th February, 2003 and 25th April, 2003.
\nThereafter, a meeting was held between the parties at the
\nintervention of the Government of Karnataka on 1st July, 2003
\nwhere both the parties had agreed  as hereunder:\n<\/p>\n
i)\t1st respondent shall furnish bank
\nguarantee for Rs.92.40 lakhs towards
\ndelivery and commissioning of the plant
\nvalid upto 28.02.2004.(Clause 1).\n<\/p>\n
ii)\tSimultaneously, with the receipt of
\nthe aforesaid bank guarantee, the
\npetitioner shall release Rs.140.41 lakhs
\nto the 1st respondent (Clause 4)<\/p>\n
iii)\t1st respondent will start trial run to
\ncrush 500-1000 tonnes of sugarcane
\nwithin 20 days from the date of receipt
\nof Rs.140.41 lakhs as aforesaid (Clause\n<\/p>\n
6).\n<\/p>\n
iv)\tThe plant will be fully
\ncommissioned by November\/December
\n2003 (Clause 7).\n<\/p>\n
The first respondent in terms of the agreement reached
\nbetween the parties furnished a bank guarantee  for a sum of Rs.
\n92.40 lakhs  dated 4th July, 2003.  The appellant on its part
\nreleased Rs.  140.41 lakhs on 5th July, 2003.\n<\/p>\n
The case of the appellant is that the trial crushing did not
\nstart even as on 28th \/ 29th July, 2003; no doubt, the trial
\ncrushing commenced on 26th November, 2003 but the same had
\nto be stopped  on 22nd December, 2003 due to defects in the
\nturbo alternator.  The appellant addressed  letter dated 27th
\nDecember, 2003 to the respondent regarding non-supply,
\ndefective erection and non-commissioning of the plant by the first
\nrespondent.  It is not necessary to notice further details in this
\nregard as there is any amount of controversy between the parties
\nas regards non-compliance with the terms and conditions of the
\nagreement.  Each is accusing the other of breach of terms of
\nagreement. The appellant, however, relied upon the detailed
\nreport dated 16th January, 2004 furnished by National Federation
\nof Co-operative Sugar Factories Ltd., the consultants to the
\nproject, in support of the plea that the trial run was unsuccessful
\nand incomplete.  The appellant stated on account of the teething
\nproblems the appellant could not undertake the crushing of
\nsugarcane leading to heavy losses.\n<\/p>\n
Be it as it may, the Board of Directors of the appellant
\nSociety resolved in its  meeting dated 13th March, 2004 to invoke
\nthe bank guarantee of Rs. 92.40 furnished by the first
\nrespondent.  The appellant accordingly sent a letter requesting
\nthe Commissioner of Cane Development and Director of Sugar to
\ncounter sign the invocation letter on the ground that the
\nrespondent herein had failed to commission the plant as agreed.\n<\/p>\n
The case of the respondent in  nut shell is that the project
\nfell into rough weather purely on account of the inability of the
\nappellant Society to arrange the requisite funds.  It is however
\nadmitted that after exchange of several acrimonious letters and
\nnotices, the parties finally agreed on a final course with a revised
\ntime frame to erect and commission the plant in a meeting held
\non 1st July, 2003.  It is pursuant to that agreement the
\nrespondent furnished the bank guarantee in question and the
\nappellant released the amount of Rs.140.41 lakhs on 5th July,
\n2003 and required the respondent to implement the trial run by
\n25th July, 2003.  It is submitted that the contract between the
\nparties envisaged four different kinds of bank guarantees to
\nensure particular set of obligations by the respondent.  Clauses
\n16.4 and 17.5 deal with the bank guarantees for timely delivery
\nof civil drawings and clause 17.6 deals with bank guarantee for
\nadvance payments; for timely delivery and commissioning of
\nplant is dealt with clauses 8, 16, 16.3, 17.4,17.9 and for ensuring
\nperformance of the plant is dealt with by clauses 9, 16.2, 17.3
\nand 17.9.\n<\/p>\n
It is the case of the respondent that the trial run of plant
\nand machinery was arranged during 25th July, 2003 and 2nd
\nAugust, 2003 and the trial run was found satisfactory.  The actual
\ncommissioning was to take place from 21st July, 2003 but has
\nactually started on 27th November, 2003.  According to the
\nrespondent after continuous crushing  of the sugarcane for about
\na month all of a  sudden there was a problem in  the working of
\nthe machinery which was attended to on the spot.  We do not
\npropose to notice further details in this regard for  each one of
\nthe parties is blaming the other.  There is any amount of
\ncontroversy between the parties in this regard and it would not
\nbe proper to make any comment at this stage since the parties
\nare already before the Arbitrator who is required to decide the
\ndispute on merits in accordance with law.  The main contention of
\nthe respondent is that the appellant raised false and untenable
\nclaims only with a view to avoid or postpone the payment of huge
\namount of Rs. 327 lakhs due and payable to the respondent.  It is
\nunder those circumstances the respondent got issued notice to
\nthe appellant to refer the dispute for resolution through
\narbitration.  The appellant instead of responding to the notice
\nresolved to invoke the bank guarantee with a malafide intention
\nof depriving the respondent of its legitimate right to receive
\ncertain amounts.\n<\/p>\n
The case of the respondent is that the bank guarantee is a
\nconditional one and unless the condition precedent for
\nenforcement of the bank guarantee is satisfied the appellant
\ncannot be permitted to invoke the bank guarantee.  It is on that
\nground the  respondent filed Misc. Petition Under Section 9 of the
\nArbitration and Conciliation Act, 1996 seeking injunction against
\nthe appellant restraining it from encashing the bank guarantee
\nNo.56\/03 dated 4th July, 2005.\n<\/p>\n
The trial court after an elaborate consideration of the matter
\ndismissed the application filed by the respondent herein and
\nrefused to grant any injunction restraining the appellant from
\nencashing the bank guarantee as prayed for by the respondent.
\nThe trial court came to the conclusion that invocation of the bank
\nguarantee and its encashment by the appellant cannot be held to
\nbe fraudulent or untenable and further held that the respondent
\nhas failed to prove that there will be irretrievable injustice in case
\nbank guarantee is invoked.\n<\/p>\n
Being aggrieved by the order passed by the trial court
\nrejecting the injunction application, the respondent herein filed
\nMFA No.6188\/04 challenging the legality and the correctness of
\nthe order passed by the trial court.  The High Court upon
\nreappreciation of the evidence and material available on record
\nreversed the order passed by the trial court and accordingly
\ngranted injunction restraining the appellant herein from
\nencashing the bank guarantee.  The appellate court has taken the
\nview that the bank guarantee appears to be a conditional one and
\n“under the documents the guarantor is entitled to know that the
\nappellant has failed to conduct the trial test and the
\ncommissioning of the project as agreed.”  The appellate court
\nhowever also  took a strange view that the invocation of the bank
\nguarantee without informing to the bank as to the fact of alleged
\nbreach of agreement itself amounts to fraud.  The Appellate Court
\nalso took the view that the letter invoking the bank guarantee
\nshould be counter signed by the Commissioner of Sugar,
\nBangalore, but the same has been signed by some other
\nauthority and not by the Commissioner of Sugar.\n<\/p>\n
Being aggrieved by the orders passed by the High court
\nrestraining the appellant from invoking the bank guarantee the
\npresent appeal has been preferred.\n<\/p>\n
Shri S.S. Javali, learned senior counsel, submitted that the
\nbank guarantee executed by the respondent herein in favour of
\nthe appellant is an unconditional one.  The bank giving such a
\nguarantee is bound to own it irrespective of any dispute raised by
\nthe respondent.  The appellant’s right to invoke the bank
\nguarantee cannot be questioned except on the ground of fraud or
\nirreparable injury or on the ground that invoking the bank
\nguarantee would cause irretrievable injury.  The respondent failed
\nmiserably to make out any case for grant of injunction.  The High
\nCourt’s order suffers from incurable infirmities was the
\nsubmission.\n<\/p>\n
Shri Jayant Bhushan, learned senior counsel, appearing on
\nbehalf of the first respondent supported the judgment of the High
\nCourt and submitted that the bank guarantee in question was a
\nconditional bank guarantee to ensure test trials and
\ncommissioning within the specified time periods and since these
\nevents have already been ensued the bank guarantees cannot be
\nencashed.\n<\/p>\n
We have carefully considered the rival submissions made
\nduring the course of the hearing of the appeal.  We have perused
\nthe entire material available on record including the orders
\npassed by the trial court as well as the High Court.\n<\/p>\n
The main question that arises for our consideration is
\nwhether the bank guarantee in question is a conditional one or
\nnot.  Before we proceed further it would be appropriate to have a
\nlook at the relevant clauses of the agreement dated 1st
\nNovember, 2000 :\n<\/p>\n
\t“16.3.1 :\tIf the sellers fail to
\ncommission the plant according to the
\nschedule of commissioning which is to
\nbe worked out mutually to enable the
\ncommissioning of the plant within the
\nschedule time, fixed or extension
\nallowed by the purchasers, if any,
\nthereof the sellers shall pay penalty by
\nan amount equal to =% (Half percent)
\nof the contract price for every
\ncompleted week of delay, but not
\nexceeding 3% of the total contract
\nprice.\n<\/p>\n
16.3.2 : To secure the obligations under
\nclause 16.3.1, the sellers shall furnish to
\nthe purchasers,bank\/insurance
\nguarantees in the form set out by the
\npurchasers as provided in clause 17.4
\nhereinafter.\n<\/p>\n
17.9\t:  The bank\/insurance guarantee\n<\/p>\n
(s) required to be furnished by the
\nsellers under the provisions hereof to
\nsecure the timely delivery, erection,
\ncommissioning, as well as for
\nperformance of the plant and machinery
\nsupplied by the sellers or for any other
\npurpose under the provisions hereof
\nshall be in the form of purchasers after
\nmutual discussions between the
\npurchasers and sellers which form(s)
\nshall invariably include the provisions
\nthat the decision of the purchasers as to
\nwhether there has been any loss or
\ndamage  or default and or negligence on
\nthe part of the sellers will be final and
\nbinding on the sellers, that the right of
\nthe purchasers shall not be affected or
\nsuspended by reasons of the fact that
\nany dispute or disputes have been
\nraised by the sellers with regard to their
\nliability or that proceedings are pending
\nbefore any Tribunal, Arbitrator(s) or
\ncourt with regard thereto or in
\nconnection therewith, that the
\nGuarantee shall pay to the purchasers
\nthe sum under the guarantee(s) without
\ndemur on first demand and without
\nrequiring the purchasers to invoke any
\nlegal remedy that may be available to
\nthem, that it shall not be open to the
\nguarantee to know the reasons of or to
\ninvestigate to go into the merits of the
\ndemand or to question or to challenge
\nthe demand or to know any facts
\naffecting the demand or to require proof
\nof the liability of the sellers before
\npaying the amount demanded by the
\npurchasers under the guarantee (s).  In
\ncase of invocation of any bank
\nguarantee by the purchasers, the same
\nshould be countersigned by the
\nCommissioner for Cane Development
\nand Director of Sugar of the concerned
\nState Government.\n<\/p>\n
The Bank\/Insurance guarantee or
\nguarantees required to be furnished by
\nthe sellers under the provisions hereof
\nto secure timely delivery, erection,
\ncommissioning as well as for
\nperformance of the plant and machinery
\nsupplied by the sellers or for any other
\npurpose under the provisions hereof
\nshall be for such period as may cover
\nthe period of complete supply, erection
\nand commissioning and performance
\nrespectively, as the case may be, as
\nstipulated under the agreement.  If
\nhowever, the period of agreement is
\nextended due to Force Majeure or
\nsellers not fulfilling their obligations
\nunder the agreement or for any other
\nreasons whatsoever, sellers shall have
\nsuch guarantees extended upto the
\ncorresponding extended period and
\nfailure of the sellers to do so will
\namount to a breach of the contract and
\nin no case the extension of the period of
\nthe contract shall be construed as
\nwaiver of the right of the purchasers to
\nenforce the guarantee.\n<\/p>\n
\tThe relevant portion of the bank guarantee is
\nextracted herein below :\n<\/p>\n
” Clause 1 : In consideration of the
\nabove premises, the Guarantor hereby
\nundertakes to pay to the purchasers
\nwithin 30 days of demand, without
\ndemur such a sum not exceeding Rs.\n<\/p>\n
92,40,000\/- (Rupees Ninety two lakhs
\nforty thousand only), representing 3%
\nof the contract price as the purchasers
\nmay demand upon the failure of the
\nsupplier to conduct the trial test of the
\nsugar plant by 24th July, 2003 and also
\nupon the failure of the sellers to
\ncommission the Project (Plant and
\nMachinery) before December 2003.\n<\/p>\n
2.\tThe Guarantor shall pay to the
\npurchasers on demand the sum without
\ndemur and without requiring the
\npurchasers to invoke any legal remedy
\nthat may be available to them, it being
\nunderstood and agreed FIRSTLY that the
\npurchasers shall be the sole judge of
\nand as to whether the amount of bank
\nguarantee has become recoverable from
\nthe sellers or whether the sellers have
\ncommitted any breach(es) of the terms
\nand conditions of the said agreement
\nand the extent of losses, damages,
\ncosts, charges and expenses caused to
\nor suffered by or that may be caused to
\nor suffered by purchaser’s from time to
\ntime shall be final and binding to the
\nGuarantor and SECONDLY that the right
\nof the purchasers to recover from the
\nguarantor any amount due to the
\npurchasers under this guarantee shall
\nnot be affected or suspended by reasons
\nof the fact that any dispute or disputes
\nhave been raised by the sellers with
\nregard to their liability or that
\nproceedings are pending before any
\ntribunal Arbitrator(s)  or court with
\nregard thereto or in connection
\ntherewith and THIRDLY that the
\nguarantor  shall immediately pay the
\naforesaid guaranteed amount to the
\npurchasers on demand and it shall not
\nbe open to the Guarantor to know the
\nreasons of or to investigate or to go into
\nthe merits of the demands or to
\nquestion or challenge the demand or to
\nknow any facts affecting the demand,
\nand LASTLY that it shall not be open to
\nthe guarantor to require the proof of the
\nliability of the sellers to pay the amount,
\nbefore paying the sum demanded under
\nclause 1 above.\n<\/p>\n
8.\tThe invocation of this guarantee
\nshall be by a letter as herein, signed by
\nthe purchasers and countersigned by
\nthe Commissioner of Sugar, Bangalore,
\nKarnataka State.”\n<\/p>\n
\tA plain reading of Clauses (1) and (2) of the bank
\nguarantee makes it abundantly clear that the  guarantor had
\nundertaken to pay to the appellant within 30 days of
\ndemand, without demur such an amount not exceeding
\nRs.92.40 lakhs.   The sole discretion is conferred on the
\npurchasers as to whether the amount of bank guarantee
\nhas become recoverable from the sellers or whether the
\nsellers have committed any breach of the terms and
\nconditions of the said agreement.  The right of the purchaser
\nto recover from the guarantor the guaranteed amount shall
\nnot be affected or suspended by the reasons of the fact that
\nany dispute or disputes have been raised by the sellers with
\nregard to their liability or that the proceedings are pending
\nbefore any tribunal or court with regard thereto or in
\nconnection therewith.\n<\/p>\n
\tHowever, Shri Jayant Bhushan, learned senior counsel
\nsubmitted that the purchasers were entitled to invoke the
\nbank guarantee and demand the payment of money only
\nupon the failure of the supplier to conduct the trial test of
\nthe sugar plant by 24th July, 2003 and also upon the failure
\nof the sellers to commission the project before December,
\n2003.  This condition forms an integral part of the bank
\nguarantee was the submission.  We find it difficult to accept
\nthe submission.  The guarantee executed by the guarantor
\n(PNB) in favour of the purchaser (appellant) cannot be
\ndissected in the manner suggested by the learned senior
\ncounsel for the respondent.  Clauses 1 and 2 of the
\nguarantee executed by the banker in favour of the purchaser
\nare required to be read together.  The respondent cannot be
\nallowed to contend that there is a dispute as to whether  it
\nhad failed to conduct the trial test of the sugar plant by 24th
\nJuly, 2003 and therefore bank guarantee cannot be invoked.
\nThe acceptance of the argument would make Clause 2 of the
\nbank guarantee totally meaningless and inoperative.  The
\nguarantor essentially agreed that the purchasers alone shall
\nbe the sole judge in the matter as to whether the amount of
\nbank guarantee has become recoverable from the sellers or
\nwhether the seller had committed any breach of the terms
\nand conditions of the agreement.  The dispute, if any,
\nbetween the parties with regard to the liability in any
\nproceedings  either before the  arbitral tribunal  or court in
\nno manner affects the right of the purchaser to invoke the
\nbank guarantee and realise the guaranteed sum from the
\nguarantor.\n<\/p>\n
\tIn U.P.Cooperative Federation Ltd. Vs. Singh
\nConsultants and Engineers (P) Ltd. [ (1998) 1 SCC 174 ]
\nthe respondent therein entered into an agreement with the
\nappellant for constructing a Vanaspati manufacturing plant
\nfor the latter.  The contract required  the respondent to
\nfurnish two bank guarantees for proper construction and
\nsuccessful completion of the plant.  The Bank of India
\nexecuted two bank guarantees in favour of the appellant.
\nUnder the terms of guarantee the bank undertook to make
\nunconditional payments on demand without reference to the
\nrespondent.  The guarantees also provided that the
\nappellant would be the sole judge for deciding whether the
\nrespondent had fulfilled the terms of the contract or not.
\nDisputes arose between the parties as to the erection and
\nperformance of the plant.   The seller approached the civil
\ncourt seeking injunction restraining the purchaser from
\ninvoking the bank guarantee.  The High Court, proceeding
\non the basis that the injunction was sought not against the
\nbank but against the appellant, restrained the appellant from
\ninvoking the bank guarantee.  This court after elaborate
\nconsideration of the matter held :\n<\/p>\n
\t“..commitments of banks must
\nbe honoured free from interference by
\nthe courts.  Otherwise, trust in
\ncommerce internal and international
\nwould be irreparably damaged.  It is
\nonly in exception case that is to say in
\ncase of fraud or in case or irretrievable
\ninjustice be done, the could should
\ninterfere.”\n<\/p>\n
\t\tThis court relied upon its own earlier decision in
\nUnited Commercial Bank vs. Bank of India and others<\/a> [
\n1981 (2) SCC 766 ] in which it is observed ” that a bank
\nissuing or confirming a letter of credit is not concerned with
\nthe underlying contract between the buyer and seller.
\nDuties of a bank under a letter of credit are created by the
\ndocuments itself.”  In General Electric Technical Services
\nCompany Inc. vs. Punj<\/a> sons (P) Ltd. And anr.  [ 1991
\n(4) SCC 230 ] this court observed ” if the documentary
\ncredits are irrevocable and independent, the Bank must pay
\nwhen demand is made. Since the bank pledges its own
\ncredit in involving its reputation, it has no defence except in
\nthe case of fraud.  The Bank’s obligation of course should
\nnot be extended to protect the unscrupulous party, that is,
\nthe party who is responsible for the fraud.  But the banker
\nmust be sure of his ground before declining to pay.  The
\nnature of the fraud that courts talk about is fraud of a
\n“erregious nature as to vitiate the entire underlying
\ntransaction.”  It is the fraud of the beneficiary not the fraud
\nof somebody else.  The bank cannot be interdicted by the
\ncourt  at the instance of purchaser in the absence of fraud or
\nspecial equities in the form of preventing irretrievable
\ninjustice between the parties.\n<\/p>\n
\tIn our considered opinion if the bank guarantee
\nfurnished is an unconditional and irrevocable one, it is not
\nopen to the bank to raise any objection whatsoever to pay
\nthe amounts under the guarantee.  The person in whose
\nfavour the guarantee is furnished by the bank cannot be
\nprevented by way of an injunction in enforcing the
\nguarantee on the pretext that the condition for enforcing the
\nbank guarantee in terms of the agreement entered between
\nthe parties has not been fulfilled.  Such a course is
\nimpermissible.  The seller cannot raise the dispute of
\nwhatsoever nature and prevent the purchaser from
\nenforcing the bank guarantee by way of injunction except on
\nthe ground of fraud and irretrievable injury.\n<\/p>\n
\tIn  U.P. State Sugar Corporation vs. Sumac
\nInternational Ltd.<\/a> [ 1997 (1) SCC 568 ] this court had laid
\ndown the principle as to the enforcement of the bank
\nguarantees  as under :\n<\/p>\n
\t“The law relating to invocation of
\nsuch Bank Guarantees is by now well
\nsettled.  When in the course of
\ncommercial dealings an unconditional
\nbank guarantee in terms is given or
\naccepted, the beneficiary is entitled to
\nrealise such a bank guarantee in terms
\nthereof irrespective of any pending
\ndisputes.  The bank giving such a
\nguarantee is bound to honour it as per
\nits terms irrespective of any dispute
\nraised by its customer.  The very
\npurpose of giving such a bank
\nguarantee would otherwise be defeated.
\nThe courts should, therefore, be slow in
\ngranting an injunction to restrain the
\nrealization of such a bank guarantee.
\nThe courts have carved out only two
\nexceptions.  A fraud in connection with
\nsuch a bank guarantee would vitiate the
\nvery foundation of such a bank
\nguarantee.  Hence if there is a fraud of
\nwhich the beneficiary seeks to take
\nadvantage, he can be restrained from
\ndoing so.  The second exception relates
\nto cases where allowing the encashment
\nof an unconditional bank guarantee
\nwould result in irretrievable harm or
\ninjustice to one of the parties
\nconcerned”.\n<\/p>\n
\tWe do not propose to burden this judgment of ours
\nwith various other authoritative pronouncements on this
\nvery subject.\n<\/p>\n
\tIn the present case the respondent in its application
\nfiled under Section 9 of the Arbitration and Conciliation Act,
\n1996 in the  district court, Bidar mostly highlighted as to
\nhow the very vital conditions of the agreement  have been
\nbreached by the appellant herein by not arranging the funds
\nat the proper time.  It is alleged that the appellant did not
\neven complete their obligation in  respect of providing
\nstorage facilties for valuable goods etc.  It is specifically
\nalleged that required funds were not available with the
\nappellant.  On account of non availability of funds there were
\ntwo halts of nine months and five months during the
\nexecution of the project from 03.12.2001 to 14.08.2002 and
\nfrom 14.08.2002 to 10.01.2003.  It is further alleged that
\nthe appellant failed to arrange for all the pre-requisites. It is
\nnot necessary for the purpose  of disposal of  this appeal to
\nnotice all the allegations and averments filed by the
\nrespondents except to note that the main thrust of the
\nallegation relate to alleged breach of the conditions of the
\nagreement by the appellant.  It was further contended that
\nthe bank guarantees were conditional bank guarantees and
\nnot unconditional.  We have referred to the substance of the
\nallegations only to highlight that no factual foundation as
\nsuch has been laid in the pleadings as regards the allegation
\nof fraud.  In fact there is no serious allegation of any fraud
\nexcept using the word “fraud”.  It is also not stated as to
\nhow irreparable loss would be caused in case the appellant is
\nallowed to encash the bank guarantee.  The only two
\nexceptions, namely fraud and irretrievable injury based on
\nwhich injunction could be granted restraining encashment of
\nbank guarantee are singularly absent in the pleadings.  Once
\nit is held that the bank guarantee furnished by the banker is
\nan unconditional one, the appellant in our considered opinion
\ncannot be restrained from encashing the bank guarantee on
\nthe ground that a serious dispute had arisen between the
\nparties and on the allegations of breach of terms and
\nconditions of the agreement entered between the parties.\n<\/p>\n
\tThe High Court in its judgment went to the extent of
\nrecording a finding that it cannot be said that there was no
\ndelivery, erection and commissioning of plant.  The High
\nCourt also took the view that the appellant has agreed to
\ninvoke the bank guarantee only in case of default on the
\npart of the respondent in delivery, erection, commissioning
\nof the plant. This view of the High Court is totally contrary to
\nthe terms and conditions of the bank guarantee executed by
\nthe bank in favour of the appellant.  It has been specifically
\nagreed by the banker to pay the guaranteed amount to the
\nappellant on demand and ” it shall not be open to the
\nguarantor to know the reasons of or to investigate or to go
\ninto the merits of the demands or the question or challenge
\nthe demand or to know any facts affecting the demand.”
\nThe bank guarantee further makes it clear that it shall not
\nbe open to the guarantor to require the proof of the liability
\nof the seller to pay the amount, before paying the sum
\ndemanded.  In the process the High Court made the
\nfollowing observations which in our considered opinion are
\ntotally untenable and unsustainable being contrary to the
\nterms and conditions incorporated in the bank guarantee.
\nThe High Court observed :\n<\/p>\n
“From the facts and circumstances
\nnarrated by the petitioner, it is clear
\nthat the first respondent could not have
\ninvoked the bank guarantee when the
\nsetting up of the machinery and
\ncommissioning in accordance with the
\nagreement and all these facts therefore
\nshow that the invocation of the bank
\nguarantee was fraudulent.”\n<\/p>\n
\tIt is further held that since the appellant failed to give
\nany information to the bank as to the fact of any alleged
\nbreach of agreement in order to invoke the bank guarantee
\nitself amounts to fraud.  We must however hasten to add
\nthat the learned senior counsel appearing for the respondent
\ndid not support this part of the judgment of the High Court.\n<\/p>\n
\tHowever, Shri Jayant Bhushan, learned senior counsel
\nappearing for the respondents contended that invocation of
\nthe bank guarantee  relating to “delivery and commissioning
\nof the plant” was wholly illegal  and the High Court was right
\nin granting the injunction order relating to that guarantee.
\nIt was submitted that the said bank guarantee could be
\ninvoked only on the failure of the respondent to commission
\nthe plant according to the schedule  of commissioning  in
\nterms of the relevant clauses of the principal agreement
\nentered into between the parties and since the conditions
\ncontemplated under those clauses did not exist, the
\ninvocation of the guarantee by the appellant  itself is bad.\n<\/p>\n
The learned counsel in support of his submission relied
\nupon the decision of this Court in Hindustan Construction
\nCo. Ltd. Vs. State of Bihar & Ors. [ (1999) 8 SCC 436].
\nThis Court  in Hindustan Construction Co. (supra) having
\nreferred to the terms of clause (9) of principal contract
\nbetween the parties therein came to the conclusion that the
\nbank guarantee specifically refers to the original contract
\nand postulates that the obligations expressed in the
\ncontract, are not fulfilled by HCCL, the right to claim
\nrecovery of the whole or part of the “advance mobilisation”
\nthen alone the bank was liable to pay the amount due under
\nthe guarantee to the Executive Engineer. The court found
\nthat the bank guarantee specifically refers to clause (9) of
\nthe principal agreement and it  is under those circumstances
\ncame to the conclusion that the amount covered by the bank
\nguarantee becomes payable and the same could be invoked
\nonly in the circumstances referred to in clause (9) of the
\nprincipal agreement.  The bank guarantee executed by the
\nbank in the instant case in favour of the appellant herein
\ndoes not contain any such clause. Mere fact that the bank
\nguarantee refers to the principal agreement without
\nreferring to any specific clause in the preamble of the deed
\nof guarantee does not make the guarantee furnished by the
\nbank to be a conditional one.  In the very said judgment this
\nCourt observed that “what is important, therefore, is that
\nthe bank guarantee should be in unequivocal terms,
\nunconditional and recite that the amount would be paid
\nwithout demur or objection and irrespective of any dispute
\nthat might have cropped up or might have been pending
\nbetween the beneficiary under the bank guarantee or the
\nperson on whose behalf the guarantee  was furnished. The
\nterms of the bank guarantee are, therefore, extremely
\nmaterial.  Since the bank guarantee represents an
\nindependent contract between the bank and the beneficiary,
\nboth the parties would be bound by the terms thereof.  The
\ninvocation, therefore, will have to be in accordance with the
\nterms of the bank guarantee, or else, the invocation itself
\nwould be bad.” What is relevant, therefore, is the terms
\nincorporated in the guarantee executed by the bank. On
\ncareful analysis of the terms and conditions of the
\nguarantee, we find the guarantee to be an unconditional
\none.  The respondent, therefore, cannot be allowed to raise
\nany dispute and prevent the appellant from encashing the
\nbank guarantee.\n<\/p>\n
\tFor all the aforesaid reasons, we hold that the
\nrespondent herein did not make out any case for grant of
\ninjunction restraining the appellant herein from encashing
\nthe bank guarantee.\n<\/p>\n
\t\tFor the reasons stated above, the impugned
\njudgment of the Appellate Court is set aside and the appeal
\nis allowed.\n<\/p>\n
\tBefore parting with the judgment, it is made clear that
\nthe observations, if any made, in this order shall have no
\nbearing whatsoever upon the dispute pending before the
\nArbitrator which is required to be disposed of on its own
\nmerits uninfluenced by the observations, if any, made in this
\norder.\n<\/p>\n
\tNo costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Mahatma Gandhi Sahakra Sakkare … vs National Heavy Engg. Coop. Ltd. … on 11 July, 2007 Author: B. Sudershan Reddy Bench: Tarun Chatterjee, B. Sudershan Reddy CASE NO.: Appeal (civil) 2952 of 2007 PETITIONER: Mahatma Gandhi Sahakra Sakkare Karkhane RESPONDENT: National Heavy Engg. Coop. Ltd. And anr DATE OF JUDGMENT: 11\/07\/2007 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-5869","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nMahatma Gandhi Sahakra Sakkare ... vs National Heavy Engg. Coop. 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