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TMI Blog1996 (12) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... with the parties. The parties shall obtain appropriate directions from the learned arbitrator in connection with the filing of claims, replies, etc., in accor-dance with law. - CIVIL APPEAL NO. 15357 OF 1996 - - - Dated:- 4-12-1996 - M.M. PUNCHHI AND MRS. SUJATA V. MANOHAR, JJ. Dushyant Dave and Pradeep Misra for the Appellant. V.C. Mahajan and Anil Kumar Sangal for the Respondent. JUDGMENT Manohar, J. Leave granted. 2. The appellant, U.P. State Sugar Corporation, entered into an agreement dated 2-8-1989, with the respondent, Sumac International (P.) Ltd., under which the respondent agreed to design, to prepare an engineering lay-out and to manufacture or procure and supply to the appellant the machin- ery and equipment for a complete sugar plant for extension and modernisation of the appellant's existing sugar plant at Rohana Kalan, District Muzaffarnagar, U.P. The respondent was required to set up a new plant of 2500 TCD at a new site or an adjoining site close to the existing sugar plant of the appellant. The total contract price was fixed under clause 2.1 of the contract at ₹ 1,780 lakhs. 3. Under the terms of the agreement the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g various statements, certificates, etc., as set out in that clause. The third bank guarantee for ₹ 89 lakhs was to be furnished against the advance to be paid by the appellant to the respondent within 3 months from the date of the signing of the agreement. These three bank guarantees are thus in respect of the advance payments required to be made by the appellant to the respondent. 6. Under clause 15.5 all these bank guarantees are payable on demand. It is expressly provided that it shall not be open to the guarantor to know the reasons for or to investigate or to go into the merits of the demand invoking the bank guarantee or to question or challenge the demand or to require proof of the liability of the seller before paying the amount demanded. It is further provided that the invocation of the bank guaran- tee shall be binding on the respondent and that the invocation of the bank guarantee would not be affected in any manner by reason of the fact that any dispute or disputes had been raised by the respondent with regard to its liability. Nor would it be affected by the fact that proceedings were pending before any Tribunal, arbitrator or court with regard thereto. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent filed a petition under section 20 of the Arbitration Act for appointment of an arbitrator since the agreement between the parties provides for arbitration. The respondent also filed two applications for interim relief under section 41( b ) of the Arbitration Act seeking interim stay against encashment of the bank guarantees. The Civil Judge, Senior Division, Muzaffarnagar, before whom these applica- tions were filed, dismissed these applications. In revision, however, these applications have been allowed by the High Court and an injunction has been granted restraining the appellant from enforcing these bank guar-antees. Hence, the appellant has come by way of the present appeal. 11. These bank guarantees which are irrevocable in nature, in terms, provide that they are payable by the guarantor to the appellant on demand without demur. They further provide that the appellant shall be the sole judge of whether and to what extent the amount has become recoverable from the respondent or whether the respondent has com- mitted any breach of the terms and conditions of the agreement. The bank guarantees further provide that the right of the purchaser to recover from the guar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the bank has notice. The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honoring its guarantee, this court in the above case quoted with approval the observations of Sir John Donaldson, M.R. In Bolivinter Oil SA v. Chase Manhattan Bank NA [1984] 1 All ER 351 at 352: 'The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek Corpn.'s case, ( supra ) there was a certainty on this issue. Secondly, there was good reason, in that case, for the court to be prima facie satisfied that the guarantors, ie., the bank and its customer would be found entitled to receive the amount paid under the guarantee. 15. Our attention was invited to a number of decisions on this issue among them, to Larsen Toubro Ltd. v. Maharashtra State Electricity Board [1996] 85 Comp. Cas. 214 and Hindustan Steel Works Construction Ltd. v. G.S. Atwal Co. ( Engineers ) ( P. ) Ltd. [1996] 85 Comp. Cas. 270 (SC) as also to National Thermal Power Corpn. Ltd. v. Flowmore ( P. ) Ltd. [1995] 84 Comp. Cas. 97. The latest decision is in the case of State of Maharashtra v. National Construction Co. [1996] JT 1 SC 156, where this court has summed up the position by stating, 'The rule is well established that a bank issuing a guarantee is not concerned with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the absence of any fraud the appellant is entitled to realise the bank guarantees. 17. Before us, however, in the course of argument, learned advocate for the respondent urged for the first time that in this case there would be irretrievable injustice to the respondent if the bank guarantees are allowed to be realised because the appellant is a sick industrial company in respect of which a reference is pending before the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985. The respondent contends that even if it succeeds before the arbitrator it will not be able to realise its claim from the appellant. The mere fact that a reference under the Sick Industrial Companies (Special Provisions) Act, is pending before the Board, is, in our view, not sufficient to bring the case within the ambit of the irretrievable injustice exception. Under the scheme of the said Act, the Board is required to make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company. Under section 16(4) where the Board deems it fit to make an inquiry or to cause an inquiry to be made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra ) , where there was no possibility whatsoever of recovery of any amount from the purchaser. In the present case, there is a good possibility of such recovery. In any case, learned counsel for the appellant has, on instructions, very fairly stated that the appellant-company undertakes to earmark the amounts realised from the bank guarantees in question for the purpose of recovery of claims, if any, which the respondent may ultimately be found to be entitled to recover from the appellant. Any scheme which the Board may frame under the said Act will be subject to this undertaking given by the appellant to set apart the amounts realised under the bank guarantees in question for meeting any validly adjudi- cated claims of the respondent against the appellant under or arising from the said contract. If any scheme is required to be framed, the Board shall take into account this undertaking while framing the scheme. 19. Both sides are agreed that for a speedy resolution of their disputes they are willing to refer all their disputes under or arising from the said contract to the sole arbitration of Justice R.M. Sahai, a retired judge of this court. We accordingly refer all dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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