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TMI Blog1996 (7) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... re 15.11.1985. The contractor was not able to complete the work within the stipulated time and at its request the time for completion of the work was extended till 31.3.87. Even during this extended period the contractor could not complete the work. It appears that some disputes arose between the appellant and the contractor and on 28.8.1986 the contractor appointed an arbitrator and called upon the appellant to appoint its arbitrator for deciding those disputes. Now those disputes are pending before the two arbitrators appointed by the parties. In August, 1988 by mutual agreement the contract work was reduced and the contract price was fixed at ₹ 4.5 crores. This reduced work also was not completed within the extended time and at the request of the contractor the time for completing the work was extended till 30.9.1988. As the contractor did not complete the work by that time the HSCL rescinded the contract on 17.10.1988. In between 30.1.84 and 8.12.87, Bank of India gave 14 guarantees in favour of HSCL at the instance of the contractor. Bank guarantee No.3/21 was furnished on 28.1.84 and 3139 on 21.2.84 for ₹ 10 lacs and 40 lacs respectively towards mobilisation ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are genuine disputes between the parties and those disputes have been referred to the Arbitrators for adjudication. The court finding that the bank guarantees are unconditional refused, to grant injunction and dismissed both the petitions by a common judgment. The contractor thereupon filed two revision petitions before the Andhra Pradesh High Court. CRP No.3865/89 was filed against the judgment and order passed in O.P. 456/88 and CRP No. 3866/89 was filed against the judgment and order passed in O.P. No.457/88. It was contended on behalf of the contractor that the bank guarantees were given by way of security for due performance of the contract and for the purposes connected therewith and therefore they would be encashable only when the arbitrators decide that the contractor has committed a breach of the contract and the amount of loss or damage caused to or suffered by HSCL is quantified. It was submitted that as the disputes in this behalf are pending before the arbitrators the demand for encashment of the bank guarantees was premature. After referring to this contention the High Court observed as under :- It is now well established the, unless there is fraud or spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept the upper limit that can be fixed, in case of breach . Relying upon the decision of this Court in Union of India vs. Raman Iron Factory AIR 1974 SC 1265 the High Court held that any term in the agreement that one of the parties shall be the sole judge to quantify the same has to be held as invalid. According to the High Court liability to pay damages would arise only after it is established that there is a breach of the contract and it is for the court or the arbitrator to decide as to who has committed the breach. Till the liability is ascertained, it cannot be said that there is a debt due or debt owing . On these grounds the High Court rejected the contention raised on behalf of HSCL that it was the sole judge to decide as to whether the contractor has committed a breach of the contract and what is the extent of damage caused to it, It also held that in absence of any determination by the Court or the arbitrator no amount can be said to be payable by the contractor to HSCL by way of damages and, therefore, it will be just and proper to restrain HSCL from enforcing the bank guarantees. It also held that no irretrievable injustice would be caused to HSCL as it can recover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character and in my judgment, it would be wrong for this court in the present case to interfere with that established practice. In United Commercial Bank vs. Bank of India 1981 (3) SCR 300 this Court again emphasised that obligation of a Bank in such a case is absolute, as a letter of credit constitutes the sole contract with the banker and the bank issuing the letter of credit has no concern with any question that may arise between the seller and the purchaser of the goods. Therein the following passage from the judgment of Kerr. J. in R.D. Horbottle (Mercantile) Ltd. vs. National Westminster Bank Ltd. 1977 (3) W.L.R. 752 was quoted as a correct statement of law on the point: It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life-bloo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormance guarantee issued by a bank. In our opinion, the High Court was not right either in its attempt to distinguish that decision or to raise a doubt regarding the correct position of law. The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that on India only reasonable amount ca be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a term in a bank guarantees making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till and adjudication in that behalf is made either by a court on an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantees is a independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. What the High Court has observed would applicable only to the parties to the underlying transaction or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 and Hindustan Steel Workers Construction Ltd. Vs. G.S. Atwal Co (Engineers) Pvt. Ltd. 1995 (6) SCC 76 were also cases of work contracts wherein bank gurantees were given either towards advances or release of security deposits or for due, performance of the contract. In both those cases this Court held that the bank gurantees being irrevocable and unconditional and as the beneficiary was made the sole judge on the question of breach of perforamance of the contract and the extent of loss or damages an injunction restraining the beneficiary from invoking the bank guarantees could not have been granted. The above referred three subsequent decisions of this Court also go to show that the view taken by the High Court is clearly wrong. In view of the settled legal position and unsustainable view taken by the High Court, the learned counsel for the contractor has rightly not attempted to defend the judgment of the High Court except on the ground that in view of the exceptional circumstances and special equities of this case, it was justified in granting the injunction. He submitted that fraud is not the only ground requiring interference by courts and if it is made out that exceptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion as under: 21. .... An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. (Emphasis supplied) Mukherji, J. referred to the following paragraph from the judgment in R D,. Harbottle (Mercantile) Ltd. vs. National Westminster Bank Ltd. 1977 2 All ER 862 and then stated that in his view the said view represents the correct state of law: Only in exceptional cases would the courts interfere with the machinery of irrevocable obligations assumed by banks. In the case of a confirmed performance guarantee, just as in the case of a confirmed letter of credit, the bank was only concerned to ensure that the terms of its mandate and confirmation had been complied with and was in no way concerned with any contractual disputes which might have arisen between the buyers and sellers. Accordingly, since demands for payment had been made by the buyers under the guarantees and the Plaintiffs had not established that the demands were fraudulent no other special circumstances, there grounds for continuin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved the view that fraud and other exceptional circumstances leading to irretrievable injustice are exceptions to the rule. Lastly, the learned counsel for the appellant relied upon the following observations made in paragraph 60 of the 3-Judge decision of this Court in Svenska Handelsbanken vs. M/s Indian Charge Chrome 1994 (1) SCC 502: 60. We have referred to the observations of both Sabyasachi Mukherji as well as Shetty, JJ. in extenso to emphasise that in case of confirmed bank guarantee/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud. In that case the question which fell for consideration was whether the High Court was right in taking the view that while deciding an application for interim relief against enforcement of a bank guarantee general principles of injunction on lenders should be applicable and not the principles of injunction. in relation to bank guarantee. This Court was not called upon to decide whether apart from the case of fraud there can ba any other exceptional case wherein the court can interfere in the matter of encashmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that this judgment is based on peculiar facts has not disapproved the view taken in that case. We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that' is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere. In this case fraud has not been pleaded and. the relief for injunction was sought by the contractor/Respondent No.1 on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach of the contract, that the contractor has a counter claim against the appellant, that the disputes between the parties have been referred to the arbitrators and that no amount can be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors are not sufficient to make this case an exception ..... X X X X Extracts X X X X X X X X Extracts X X X X
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