9911796707
TMI Blog2007 (7) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exceptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - CHATTERJEE, TARUN AND REDDY,B.SUDERSHAN, JJ JUDGEMENT REDDY,B.SUDERSHAN (J) 1. Leave granted. 2. The appellant herein is a Co-operative Society registered under the provisions of the Karnataka Co-operative Societies Act, 1959. It has established a sugar factory at Hunji, Balki Taluk, Bidar District, Karnataka with a capacity of 2500 TCD per day with a provision to expand the same upto 4000 TCD per day. The appellant had undertaken expansion of its sugar factory from 2500 TCD to 4000 TCD crushing capacity per day and accordingly invited tenders. The offer of the first respondent which is also a Co-operative Society registered under the Multi-State Co- operative Societies Act which is involved in supply, erection and commissioning of Sugar Plants was accepted in the meeting of the State Level Advisory Committee held on 10th August, 2000. The first respondent undertook to design, procure manufacture, supply transport and deliver at the site and to do the supervision of erection and commissioning of the Sug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent on notice of its failure to commission the plant by the scheduled date i.e. 11th February, 2001 and other revised dates, i.e., 26th January, 2002, 25th November, 2002, 28th February, 2003 and 25th April, 2003. Thereafter, a meeting was held between the parties at the intervention of the Government of Karnataka on 1st July, 2003 where both the parties had agreed as hereunder: i) 1st respondent shall furnish bank guarantee for ₹ 92.40 lakhs towards delivery and commissioning of the plant valid upto 28.02.2004.(Clause 1). ii) Simultaneously, with the receipt of the aforesaid bank guarantee, the petitioner shall release ₹ 140.41 lakhs to the 1st respondent (Clause 4) iii) 1st respondent will start trial run to crush 500-1000 tonnes of sugarcane within 20 days from the date of receipt of ₹ 140.41 lakhs as aforesaid (Clause 6). iv) The plant will be fully commissioned by November/December 2003 (Clause 7). 4. The first respondent in terms of the agreement reached between the parties furnished a bank guarantee for a sum of ₹ 92.40 lakhs dated 4th July, 2003. The appellant on its part released ₹ 140.41 lakhs on 5th July, 2003. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r timely delivery of civil drawings and clause 17.6 deals with bank guarantee for advance payments; for timely delivery and commissioning of plant is dealt with clauses 8, 16, 16.3, 17.4,17.9 and for ensuring performance of the plant is dealt with by clauses 9, 16.2, 17.3 and 17.9. 8. It is the case of the respondent that the trial run of plant and machinery was arranged during 25th July, 2003 and 2nd August, 2003 and the trial run was found satisfactory. The actual commissioning was to take place from 21st July, 2003 but has actually started on 27th November, 2003. According to the respondent after continuous crushing of the sugarcane for about a month all of a sudden there was a problem in the working of the machinery which was attended to on the spot. We do not propose to notice further details in this regard for each one of the parties is blaming the other. There is any amount of controversy between the parties in this regard and it would not be proper to make any comment at this stage since the parties are already before the Arbitrator who is required to decide the dispute on merits in accordance with law. The main contention of the respondent is that the appellant raised f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts to fraud. The Appellate Court also took the view that the letter invoking the bank guarantee should be counter signed by the Commissioner of Sugar, Bangalore, but the same has been signed by some other authority and not by the Commissioner of Sugar. 12. Being aggrieved by the orders passed by the High court restraining the appellant from invoking the bank guarantee the present appeal has been preferred. 13. Shri S.S. Javali, learned senior counsel, submitted that the bank guarantee executed by the respondent herein in favour of the appellant is an unconditional one. The bank giving such a guarantee is bound to own it irrespective of any dispute raised by the respondent. The appellant's right to invoke the bank guarantee cannot be questioned except on the ground of fraud or irreparable injury or on the ground that invoking the bank guarantee would cause irretrievable injury. The respondent failed miserably to make out any case for grant of injunction. The High Court's order suffers from incurable infirmities was the submission. 14. Shri Jayant Bhushan, learned senior counsel, appearing on behalf of the first respondent supported the judgment of the High Court a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e guarantee(s) without demur on first demand and without requiring the purchasers to invoke any legal remedy that may be available to them, that it shall not be open to the guarantee to know the reasons of or to investigate to go into the merits of the demand or to question or to challenge the demand or to know any facts affecting the demand or to require proof of the liability of the sellers before paying the amount demanded by the purchasers under the guarantee (s). In case of invocation of any bank guarantee by the purchasers, the same should be countersigned by the Commissioner for Cane Development and Director of Sugar of the concerned State Government. 17. The Bank/Insurance guarantee or guarantees required to be furnished by the sellers under the provisions hereof to secure timely delivery, erection, commissioning as well as for performance of the plant and machinery supplied by the sellers or for any other purpose under the provisions hereof shall be for such period as may cover the period of complete supply, erection and commissioning and performance respectively, as the case may be, as stipulated under the agreement. If however, the period of agreement is extended due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and LASTLY that it shall not be open to the guarantor to require the proof of the liability of the sellers to pay the amount, before paying the sum demanded under clause 1 above. 8. The invocation of this guarantee shall be by a letter as herein, signed by the purchasers and countersigned by the Commissioner of Sugar, Bangalore, Karnataka State. 19. A plain reading of Clauses (1) and (2) of the bank guarantee makes it abundantly clear that the guarantor had undertaken to pay to the appellant within 30 days of demand, without demur such an amount not exceeding ₹ 92.40 lakhs. The sole discretion is conferred on the purchasers as to whether the amount of bank guarantee has become recoverable from the sellers or whether the sellers have committed any breach of the terms and conditions of the said agreement. The right of the purchaser to recover from the guarantor the guaranteed amount shall not be affected or suspended by the reasons of the fact that any dispute or disputes have been raised by the sellers with regard to their liability or that the proceedings are pending before any tribunal or court with regard thereto or in connection therewith. 20. However, Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performance of the plant. The seller approached the civil court seeking injunction restraining the purchaser from invoking the bank guarantee. The High Court, proceeding on the basis that the injunction was sought not against the bank but against the appellant, restrained the appellant from invoking the bank guarantee. This court after elaborate consideration of the matter held : ..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 exception case that is to say in case of fraud or in case or irretrievable injustice be done, the could should interfere. 22. This court relied upon its own earlier decision in United Commercial Bank vs. Bank of India and others [ 1981 (2) SCC 766 ] in which it is observed that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the documents itself. In General Electric Technical Services Company Inc. vs. Punj sons (P) Ltd. And anr. [ 1991 (4) SCC 230 ] this court observed if the documentar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned . 25. We do not propose to burden this judgment of ours with various other authoritative pronouncements on this very subject. 26. In the present case the respondent in its application filed under Section 9 of the Arbitration and Conciliation Act, 1996 in the district court, Bidar 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 facilties 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 14.08.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before paying the sum demanded. In the process the High Court made the following observations which in our considered opinion are totally untenable and unsustainable being contrary to the terms and conditions incorporated in the bank guarantee. The High Court observed : From the facts and circumstances narrated by the petitioner, it is clear that the first respondent could not have invoked the bank guarantee when the setting up of the machinery and commissioning in accordance with the agreement and all these facts therefore show that the invocation of the bank guarantee was fraudulent. 28. It is further held that since the appellant failed to give any information to the bank as to the fact of any alleged breach of agreement in order to invoke the bank guarantee itself amounts to fraud. We must however hasten to add that the learned senior counsel appearing for the respondent did not support this part of the judgment of the High Court. 29. However, Shri Jayant Bhushan, learned senior counsel appearing for the respondents contended that invocation of the bank guarantee relating to delivery and commissioning of the plant was wholly illegal and the High Court was right i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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