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TMI Blog1999 (2) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... ee from any lien and keep the same renewed until further orders of the court. The said fixed deposit account, it was directed, shall lie to the credit of the arbitration proceedings between the parties and the same shall abide by the result of the award. 3. The brief facts are that : The appellant issued a letter of intent for carrying out the works mentioned therein by the respondents. In terms thereof, the respondent furnished a bank guarantee for Rs. 1.38 crores in lieu of security deposit. The said guarantee being No. 49/252, dated 28-12-1994. On 14-1-1995, a contract in writing was entered into between the appellant and the respondent. By the said contract, the respondent agreed to carry out excavation and removal of 4 (four) million cubic metres rock works at the appellant s Malajkhand Copper Project at Balaghat in M.P. It contained an arbitration clause for referring the dispute to the chairman-cum-managing director of the appellant or his nominee. 4. On 4-1-1995, the respondent furnished the second bank guarantee for Rs. 1.93 crores, towards mobilisation advance being guarantee No. 49/263. 5. According to the appellant since inception, the respondent failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent upon the said order, the appellant by its letter dated 8-1-1998, called upon the bank to pay the amounts of the said two bank guarantees. In compliance therewith, the bank under cover of its letter dated 8-1-1998, forwarded demand drafts for Rs. 1.38 crores and Rs. 1.93 crores to the appellant. The appellant presented the said demand drafts to the bank for repayment but the same were not encashed as on 9-1-1998, the respondent moved an application under section 9 of the Arbitration and Conciliation Act, 1996, for restraining the appellant from encashing or receiving any monies under the said bank guarantees and an ex parte interim order of status quo was issued by the learned Single Judge of this court whereby it was directed that if any bank drafts or pay orders have been issued by the bank, the same should not be encashed until further orders. The said application, as noticed above, was finally disposed of by an order dated 4-5-1998. It is against this order that the present appeal has been filed by the appellant. Consequent upon the order under appeal, the appellant on 13-5-1998, returned the bank drafts to the bank which have been encashed and invested by the bank. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the HCL ) having agreed to exempt Rana Builders Limited [hereinafter called the said contractor(s) ] from the demand, under the terms and conditions of an agreement dated December 1, 1994, made between HCL and Rana Builders Limited for awarding contract for excavation and removal of 4.0 Mm 3 of rock at Malanikhand Copper Project (hereinafter called the said agreement ) of security deposit towards performance for the due fulfilment by the said contractor(s) of the terms and conditions contained in the said agreement, on production of a bank guarantee for Rs. 1,38,00,000 (Rupees one crore thirty-eight lakhs only), we, the Bank of Baroda, Sayajigunj Branch, Baroda (hereinafter referred to as the bank ) at the request of Rana Builders Limited, contractor(s) do hereby undertake to pay to HCL an amount not exceeding Rs. 1,38,00,000 against any loss or damage caused to or suffered by HCL by reason of any breach by the said contractor(s) of any of the terms and conditions contained in the said agreement. 2. We, Bank of Baroda, do hereby undertake to pay the amount due and payable under this guarantee without any demur, and without reference to the contractor, Rana Builders Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the manner aforesaid will not be affected or suspended by reason of the fact that any dispute or disputes have been raised by the said Rana Builders Limited and/or that any dispute or disputes are pending before any officer, Tribunal or court." 13. It is evident from a perusal of the relevant clauses of the respective guarantees that the bank has unconditionally and irrevocably agreed and undertaken to pay to the appellant on demand the sums respectively specified in the said guarantees. 14. In so far as the security guarantee is concerned, the amount is to be paid on demand and the undertaking by the bank is to pay the monies so demanded, notwithstanding any dispute raised by the respondent-contractor in any suit or proceeding pending before any court or Tribunal relating thereto. 15. In so far as the mobilisation advance guarantee is concerned, the bank has agreed and undertaken to pay the amount on demand and without demur and without reference to the respondent-contractor and by the appellant merely raising a claim. It is further specifically provided that the right to recover the said amount will not be affected or suspended by reason of the fact that any disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of the bank guarantee would be negatived and the fabric of trading operation will get jeopardised. ( b ) The Supreme Court has frowned upon the approach of the court that has proceeded on the basis that the injunction sought was not against the bank but was sought against the appellant. The Supreme Court has observed that the net effect of the injunction is to restrain the bank from performing the bank guarantee and that cannot be done. One cannot do indirectly what one is not free to do directly and further observed that the aggrieved party in such circumstances is not remedyless. He can sue for damages. ( c ) The autonomy of bank guarantee/irrevocable letter of credit was entitled to protection and except in very exceptional circumstances, the court should not interfere with the autonomy. The reasons stated are that bank guarantees involve many of the trading transactions. The commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce, internal and international, would be irreparably damaged. It is only in exceptional cases, that is to say, in cases of fraud or in case of irretrievable injustice being done, the court should in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra , have to be rejected. The nature of fraud, as noted supra , that the courts consider in cases relating to bank guarantees is fraud of an egregious nature as to vitiate the underlying transaction; that is not the case pleaded in the instant case. 24. As to the contention of Mr. Anindya Mitra, the learned senior counsel appearing for the respondent, that the entire dispute is pending before the arbitration and until the same is adjudicated upon, no fault can be found with the order under appeal which has provided adequate safeguard to both the parties, the said contention has to be rejected in the light of the Supreme Court judgment in Hindustan Steel Works Construction Ltd. s case ( supra ). In that case, the High Court had proceeded on the basis that the amounts claimed were not or cannot be said to be due and that the entire dispute was pending before the arbitrator. Whether and if so what is the amount due was to be adjudicated in the arbitration proceedings. The Supreme Court found fault with that reasoning of the High Court and observed that the High Court had acted illegally and without jurisdiction in affirming the interim order of injunction restraining the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d owing from the appellant to the respondent. The bank guarantees if allowed to be invoked and encashed will result in total ruination of the respondent. There is no reason stated much less any pleading to the effect that even if the claim of the respondent as awarded in the arbitration proceedings, the same will not be recoverable from the appellant. The respondent has failed to demonstrate that it has no adequate remedy at law and the allegations of irreparable harm are genuine or immediate. 29. Mr. Anindya Mitra, the learned senior counsel appearing for the respondent next contended as held in various judgments of the Supreme Court of India that a bank guarantee is equated to a letter of credit and it has also been held that the terms and conditions of the letter of credit have to be complied with strictly to fasten the obligation on the bank to honour the credit. It was Mr. Mitra s contention that similar tests have to be applied to the letters of invocation in respect of bank guarantees and the appellant must strictly comply with the terms and conditions of the bank guarantee before he can legally enforce payment thereon. 30. A similar contention, as above, has been co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bank guarantees cannot be equated with documents that are required to be tendered under letters of credit for the reason that in a letter of credit, the documents to be tendered for honouring the bills have been specified thereunder and the documents should conform to the description given in the letters of credit. 32. While on this aspect, reference needs to be made to the judgments of the Calcutta High Court in Road Machines (India) (P.) Ltd. v. Projects Equipment Corpn. of India Ltd., AIR 1983 Cal. 91, wherein it was observed thus : "15. With great respect I am unable to accept the principles laid down by the Division Bench of the Delhi High Court in Harprasad Co. Ltd. v. Sudarshan Steel Rolling Mills [1980] 50 Comp. Cas. 709, to the effect that a bank guarantee should be invoked in an exact and punctilious manner setting out the entire case of the beneficiary under the guarantee in the same way as setting out a cause of action in a plaint. A bank guarantee is a commercial document and is neither a statutory notice nor a pleading in a legal proceeding. In my view, a bank guarantee may be invoked in a commercial manner. The invocation would be sufficient and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d contention is misconceived and untenable. The contention would have merited consideration if the appellant has taken the benefit of an order or decree of the court. In the instant case, the appellant has not taken any benefit. That apart, the appellant was bound to comply with the order of this court under appeal and we must state here that the appellant has acted quite properly in so complying with the said order - State of Haryana v. Rajendra Sareen AIR 1972 SC 1004. We accordingly overrule the contention of Mr. Mitra. 37. Now, reverting to the order under appeal, we are of the view that the learned Single Judge has not considered the matter applying the principles of injunction in relation to bank guarantees. The learned Single Judge has not found that any good prima facie case of fraud or special equities in the form of preventing irretrievable injustice to the respondent was made out to restrain the operation of the bank guarantee. As noticed above, the bank guarantee may be invoked in a commercial manner. The invocation will be sufficient and proper, if the bank concerned understood that the guarantee was being invoked in terms of the guarantee. The respondent fai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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