2007 (11) TMI 588 - SC - Indian Laws

Whether bank guarantee furnished is an unconditional and irrevocable one or a conditional one? Whether invocation of the bank guarantee furnished by the appellant to the respondent valid?

Summary

Issues Involved:
1. Invocation of the bank guarantee.
2. Nature of the bank guarantee (conditional vs. unconditional).
3. Allegations of fraud.
4. Claims of irretrievable injury or injustice.

Detailed Analysis:

1. Invocation of the Bank Guarantee:
The core dispute revolves around the invocation of the bank guarantee furnished by the appellant to the respondent. The appellant entered into an agreement with the respondent to supply UPS systems, and the payment terms included a performance bank guarantee. The appellant contended that the respondent defaulted on payments, while the respondent claimed that the bank guarantee was unconditional and could be invoked.

2. Nature of the Bank Guarantee:
The appellant argued that the bank guarantee was conditional and could not be invoked without meeting specific preconditions. Initially, the bank guarantee required establishing the supplier's default in warranty obligations for the amounts to be payable. However, an amendment on 20th August 2001 changed this to an unconditional guarantee. The court emphasized that an unconditional bank guarantee must be honored by the bank upon demand, irrespective of any disputes between the parties. The court cited precedents to underline that such guarantees are independent contracts and must be fulfilled as per their terms.

3. Allegations of Fraud:
The appellant alleged fraud by the respondent in invoking the bank guarantee. The court noted that for fraud to be a valid ground to restrain the invocation of a bank guarantee, it must be of an egregious nature that vitiates the entire transaction. The appellant's allegations were found to be vague and unsupported by specific evidence. The court concluded that the appellant failed to establish a prima facie case of fraud.

4. Claims of Irretrievable Injury or Injustice:
The appellant claimed that encashment of the bank guarantee would cause irretrievable injury and injustice. The court highlighted that such claims must be supported by concrete evidence and specific allegations. In this case, the appellant's claims were deemed vague and unsubstantiated. The court further noted that the appellant could seek relief through the ongoing arbitral proceedings and there was no indication that the respondent would be unable to repay if the appellant succeeded in arbitration.

Conclusion:
The court dismissed the appeal, affirming that the bank guarantee, as amended, was unconditional and must be honored by the bank upon demand. The allegations of fraud and claims of irretrievable injury were found to be insufficiently supported. The court's decision emphasized the principles governing the invocation of bank guarantees and the limited grounds on which their enforcement can be restrained. The order was stated to have no bearing on the merits of the case pending before the Arbitral Tribunal. No order as to costs was made.