2010 (9) TMI 1288 - HC - Indian Laws

Summary

Issues Involved:
1. Legality of the Order dated 4.8.2010 passed by the learned Single Judge under Section 9 of the Arbitration & Conciliation Act, 1996.
2. Invocation and encashment of Bank Guarantees.
3. Applicability of the principles of fraud and irretrievable harm in restraining the encashment of Bank Guarantees.

Issue-wise Detailed Analysis:

1. Legality of the Order dated 4.8.2010:
The appellant challenged the order dated 4.8.2010, which directed the appellant to provide an additional bank guarantee of Rs. 7,60,80,000 within four weeks and kept the existing bank guarantee of Rs. 9 crores alive until further orders by the arbitral tribunal. The appellant argued that the earlier order dated 24.9.2009, which allowed substitution of the two bank guarantees with a fresh bank guarantee of Rs. 9 crores and restrained the respondent from encashing it, should not have been varied. The court rejected this argument, stating that the earlier order was not final and could be varied. The court directed the appellant to furnish a bank guarantee of Rs. 7.60 crores and ensure it remains current for ninety days post the arbitral award, maintaining the balance of equities between the parties.

2. Invocation and Encashment of Bank Guarantees:
The court discussed the law regarding the invocation and encashment of bank guarantees, emphasizing that courts should not interfere with the performance of contractual obligations under a bank guarantee unless there is established fraud or irretrievable harm. The court cited several precedents, including Tarapore and Co., Madras v. V.O Tractors Export Moscow, United Commercial Bank v. Bank of India, and U.P. Coop. Federation v. Singh Consultants & Engineers (P) Ltd., which reiterated that a bank guarantee is an independent contract, and the beneficiary is entitled to realize it as per its terms, irrespective of any disputes between the buyer and the seller.

3. Applicability of Fraud and Irretrievable Harm:
The court examined whether the appellant had established fraud or irretrievable harm to justify restraining the encashment of the bank guarantee. It was noted that fraud must be of an egregious nature, vitiating the entire underlying transaction, and should be evident to the bank. The court found that the respondent's statement to its banker that the appellant had not fulfilled its contractual obligations was prima facie incorrect and fraudulent. The court concluded that the learned Single Judge erred in not recognizing the fraud of an egregious nature disclosed by the appellant, warranting the injunction prayed for.

Conclusion:
The appeal was disposed of with directions for the appellant to furnish a bank guarantee of Rs. 7.60 crores, ensuring it remains current for ninety days after the arbitral award. The arbitral tribunal was given the liberty to pass directions regarding the bank guarantee as deemed expedient, lawful, and just. The court maintained the balance of equities between the parties and clarified that the bank guarantee should await the orders of the arbitral tribunal. No order as to costs was made.