1996 (7) TMI 593 - SC - Indian Laws

Summary

Issues Involved:

1. Encashment of Bank Guarantees.
2. Grounds for Granting Injunction.
3. Applicability of Principles to Bank Guarantees.
4. Exceptional Circumstances and Special Equities.

Summary:

1. Encashment of Bank Guarantees:
The appeals were directed against the Andhra Pradesh High Court's decision which restrained Hindustan Steelwork Construction Ltd. (HSCL) from encashing bank guarantees provided by Bank of India on behalf of the contractor. The contractor failed to complete the work within the stipulated time, leading to disputes and the rescission of the contract by HSCL. HSCL demanded payment under the bank guarantees, claiming losses due to the contractor's breach.

2. Grounds for Granting Injunction:
The contractor sought an injunction u/s 41(b) read with Schedule II of the Arbitration Act to prevent HSCL from encashing the bank guarantees, arguing that the disputes were pending arbitration and the demand for encashment was premature. The Subordinate Judge dismissed the petitions, finding the guarantees unconditional. The High Court, however, granted the injunction, noting that fraud was not pleaded but considered special equities and circumstances.

3. Applicability of Principles to Bank Guarantees:
The High Court distinguished between bank guarantees given towards security deposits and those for performance, suggesting that only reasonable amounts could be awarded as damages. The Supreme Court, however, emphasized that a bank guarantee is an independent contract, and the bank's obligation is absolute and not dependent on disputes between the contractor and HSCL. The Court cited precedents establishing that interference is permissible only in cases of fraud or irretrievable injustice.

4. Exceptional Circumstances and Special Equities:
The Supreme Court concluded that special circumstances or equities justifying an injunction were not present in this case. The factors such as pending arbitration, counterclaims, and disputes over breach did not constitute exceptional circumstances. The Court reiterated that commitments of banks must be honored free from court interference unless fraud or irretrievable injustice is proven.

Conclusion:
The Supreme Court allowed the appeals, setting aside the High Court's judgment. The Court directed that HSCL should not call upon the bank to discharge its obligations under the guarantees until 31st July 1996, considering the imminent arbitration award. The contractor was ordered to bear the costs of the appeals.