2007 (7) TMI 659 - SC - Indian Laws

Seeking injunction against the appellant restraining it from encashing the bank guarantee - Application filed u/s 9 of the Arbitration and Conciliation Act, 1996 - allegations of breach of terms and conditions of the agreement entered between the parties - Whether the bank guarantee in question is a conditional one or not - Invited tenders for undertaken expansion of sugar factory from 2500 TCD to 4000 TCD crushing capacity per day - Payment of huge amount due and payable to the respondent - HELD THAT - In the present case the respondent in its application filed u/s 9 of the Arbitration and Conciliation Act, 1996 in the district court, mostly highlighted as to how the very vital conditions of the agreement have been breached by the appellant herein by not arranging the funds at the proper time. It is alleged that the appellant did not even complete their obligation in respect of providing storage facilities for valuable goods etc. It is specifically alleged that required funds were not available with the appellant. On account of non availability of funds there were two halts of nine months and five months during the execution of the project from 03.12.2001 to 14.08.2002 and from 14.08.2002 to 10.01.2003. It is further alleged that the appellant failed to arrange for all the pre-requisites. It is not necessary for the purpose of disposal of this appeal to notice all the allegations and averments filed by the respondents except to note that the main thrust of the allegation relate to alleged breach of the conditions of the agreement by the appellant. It was further contended that the bank guarantees were conditional bank guarantees and not unconditional. We have referred to the substance of the allegations only to highlight that no factual foundation as such has been laid in the pleadings as regards the allegation of fraud. In fact there is no serious allegation of any fraud except using the word fraud . It is also not stated as to how irreparable loss would be caused in case the appellant is allowed to encash the bank guarantee. The only two exceptions, namely fraud and irretrievable injury based on which injunction could be granted restraining encashment of bank guarantee are singularly absent in the pleadings. Once it is held that the bank guarantee furnished by the banker is an unconditional one, the appellant in our considered opinion cannot be restrained from encashing the bank guarantee on the ground that a serious dispute had arisen between the parties and on the allegations of breach of terms and conditions of the agreement entered between the parties. The bank guarantee executed by the bank in the instant case in favour of the appellant herein does not contain any such clause. Mere fact that the bank guarantee refers to the principal agreement without referring to any specific clause in the preamble of the deed of guarantee does not make the guarantee furnished by the bank to be a conditional one. In the very said judgment this Court observed that 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. What is relevant, therefore, is the terms incorporated in the guarantee executed by the bank. On careful analysis of the terms and conditions of the guarantee, we find the guarantee to be an unconditional one. The respondent, therefore, cannot be allowed to raise any dispute and prevent the appellant from encashing the bank guarantee. Therefore, we hold that the respondent herein did not make out any case for grant of injunction restraining the appellant herein from encashing the bank guarantee. Thus, the impugned judgment of the Appellate Court is set aside and the appeal is allowed. Before parting with the judgment, it is made clear that the observations, if any made, in this order shall have no bearing whatsoever upon the dispute pending before the Arbitrator which is required to be disposed of on its own merits uninfluenced by the observations, if any, made in this order.

Summary

Issues Involved:
1. Whether the bank guarantee in question is conditional or unconditional.
2. Whether the appellant has the right to invoke the bank guarantee.
3. Whether the High Court was correct in restraining the appellant from encashing the bank guarantee.
4. Whether the respondent made out a case for injunction based on fraud or irretrievable injury.

Analysis of Judgment:

1. Whether the bank guarantee in question is conditional or unconditional:
The main question for consideration was the nature of the bank guarantee. The relevant clauses of the agreement and the bank guarantee were examined. Clause 1 of the bank guarantee stated that the guarantor undertook to pay the appellant within 30 days of demand, without demur, such a sum not exceeding Rs. 92.40 lakhs. Clause 2 emphasized that the purchasers alone shall be the sole judge in the matter of whether the amount of the bank guarantee has become recoverable or whether the sellers committed any breach of the terms and conditions of the agreement. The Court concluded that the bank guarantee was unconditional and irrevocable, as it did not allow the guarantor to question the demand or require proof of liability before payment.

2. Whether the appellant has the right to invoke the bank guarantee:
The appellant's right to invoke the bank guarantee was affirmed. The Court referenced several precedents, including U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd. and United Commercial Bank vs. Bank of India, which established that commitments of banks must be honored free from interference by courts, except in cases of fraud or irretrievable injustice. The Court reiterated that the appellant could invoke the bank guarantee despite any disputes between the parties, as the guarantee was unconditional.

3. Whether the High Court was correct in restraining the appellant from encashing the bank guarantee:
The High Court's decision to restrain the appellant from encashing the bank guarantee was found to be incorrect. The High Court had taken the view that the bank guarantee was conditional and that the invocation without informing the bank of the alleged breach amounted to fraud. The Supreme Court disagreed, stating that the High Court's interpretation was contrary to the terms of the bank guarantee. The Court emphasized that the bank guarantee explicitly stated that the guarantor must pay on demand without investigating the merits of the demand.

4. Whether the respondent made out a case for injunction based on fraud or irretrievable injury:
The Court found that the respondent did not make out a case for injunction based on fraud or irretrievable injury. The allegations made by the respondent mostly related to breaches of the agreement by the appellant, such as not arranging funds and not providing storage facilities. However, there were no serious allegations of fraud, nor was there a demonstration of how irreparable loss would be caused if the bank guarantee was encashed. The Court held that the only two exceptions for granting an injunction-fraud and irretrievable injury-were absent in the pleadings.

Conclusion:
The Supreme Court set aside the judgment of the High Court, allowing the appellant to invoke the bank guarantee. The Court clarified that the observations made in this judgment should not affect the dispute pending before the Arbitrator, which should be decided on its own merits. No costs were awarded.