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TMI Blog2006 (2) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... .2000/ 4.5.2000 for a sum of Rs. 5,57,00,000/-\005 (iii) Work Order No. 2247 dated 15.3.2000/ 4.5.2000 for a sum of Rs. 90,00,000/- \005 (iv) Work Order No. 2248 dated 15.3.2000/ 4.5.2000 for a sum of Rs. 50,00,000/-\005" As required by the terms and conditions of the said work/ purchase orders, the First Respondent submitted four bank guarantees from the State Bank of India (hereinafter "the Second Respondent-Bank"), dated 23.3.2000 bearing Nos. 288/99, 289/99, 290/99 and 291/99 in sums of Rs. 7,00,000/-, Rs. 9,00,000/-, Rs. 55,70,000/- and Rs. 38,35,000 respectively. They were unconditional irrevocable bank guarantees, under which the Second Respondent-Bank agreed to pay to the Appellant the amount claimed or demanded by the Appellant. The amounts guaranteed thereunder were payable with or without any reason in writing from the Appellant, without protest or demur or proof of satisfaction, and without reference to the First Respondent, upon being called by the Appellant, irrespective of any dispute between the Appellant and the First Respondent with regard to or touching any of the contractual terms between them. They were, of course, subject to the aggregate lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court made an interim order. Further, by the impugned judgment dated 30.7.2004, the High Court allowed the appeal preferred by the First Respondent and granted the injunction as prayed for, and set aside the order of the learned District Judge. The Rule and its Exceptions Mr. Rohtagi, learned Senior Counsel for the Appellant, urged that the settled law in this country is that a bank guarantee is an independent contract between the bank and the beneficiary thereof. Accordingly, irrespective of any dispute between the beneficiary and the party at whose instance the bank has given the guarantee, the bank is obliged to honour its guarantee, as long as the guarantee is unconditional and irrevocable. Our attention was drawn to the judgment of this Court in U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (hereinafter "U.P. Cooperative Federation"). It was pointed out in that case that a bank guarantee must be honoured in accordance with its terms as the bank, which gives the guarantee, is not concerned with the relations between the supplier and the customer. Neither is the bank concerned with the question whether any of them have failed in their contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the circumstances, such as poor performance, against which a performance bond had been provided, actually exist. (4) In addition, where it appears that the call would be a nullity, a court will intervene to restrain that invalid call. Examples are where a condition precedent to a call has not yet been fulfilled; where the bond is a 'see to it' bond necessitating prior proof of loss by the beneficiary or poor performance by the third party which has not yet been established; or where the demand or the supporting documents show that the demand does not conform to the requirements imposed by the bond for a valid demand. (5) Otherwise, a threatened call will not be restrained. In particular an allegedly incorrect calling of a performance bond will not be restrained merely because the factual basis of the call arising out of the underlying contract is disputed. Thus disputes as to whether a breach of contract, a determination of a contract for cause, a repudiation of a contract or the incurring of loss have occurred, where these are events covered by the performance guarantee, will not be allowed to found an application to restrain a call unless these disputes reveal a breach of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjee further urged that it had been found by the District Court and the High Court concurrently that the entire amount of the bank guarantee had been recovered from the running bills of the First Respondent. Accordingly, he argued that, encashing the bank guarantee after having recovered the full amount of advances from the running bills was an "egregious fraud" or at any rate, created a situation of "special equities" in favour of the First Respondent. The High Court, he submits, was fully justified in granting an injunction since these facts were prima facie established as triable issues. Further, Mr. Sorabjee submitted that the fourth bank guarantee (No. 291/99 dated 23.3.2000) was further qualified by "due and faithful performance of the contract", and that the contract had been admittedly performed. In the circumstances, he submits that, the encashment of this guarantee was fraudulent or created a situation of special equities, which was covered by U.P. Cooperative Federation Ltd. (supra). Mr. Sorabjee's assertions, however, need closer scrutiny through examining the contractual clauses, as well as through examining the conduct of the First Respondent. The Contractual Clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed damages, fines or penalties of whatever nature as per the "Contract" and any excess costs and expenses associated with the completion of the job by BSES for the "BAGASSE HANDLING SYSTEM PACKAGE"." Clauses (4) and (5) in express terms respectively state: "In case of any material breach of any or all the Contracts, BSES shall have the right to embark upon the retentions and encashment of Bank Guarantees of all the contracts." "Notwithstanding the works undertaken by the designated subcontractor( s) of the Contractor subject to provisions of the contract, the Contractor shall remain wholly liable to perform, fulfill and discharge all the obligations and responsibilities under this contract on a turnkey basis and the same shall in no way be reduced or diminished for any reasons whatsoever." Upon a careful reading of this agreement, we are satisfied that the contract though, for the sake of convenience, was split up into four subcontracts (viz. the four work/ purchase orders), was a composite contract executable on a turnkey basis. The terms of this turnkey contract were reduced into writing by the "wrap-around agreement" of 10.5.2000. We are of the definite view that under the "w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g this bank guarantee. Mr. Sorabjee turned to a certificate issued by M/s Godavari Sugar Mills Ltd. (dated 18.3.2003) to contend that there had been due and satisfactory performance of the contract. We are, however, not impressed with Mr. Sorabjee's argument because the evidence on record is precisely to the contrary. In fact, the certificate, in terms, says that there was a technical defect found: "\005for which correction will be done by Fenner representative (sic) as assured by him. After completion of all those points further tests can be carried out." Accordingly, we are prima facie not satisfied that performance had been duly and satisfactorily certified. Under the terms of the "wrap-around agreement", the Appellant was entitled to encash all or any of the bank guarantees for breach of the First Respondent's obligations under any one of the contracts. In our view, it is the case of the Appellant that there was no satisfactory performance of the contract, as a result of which, the Appellant was justified in encashing the concerned bank guarantee. Indeed, as per the terms of the bank guarantee itself, the Appellant is the best judge to decide as to when and for what reason th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat arbitral proceedings are pending. In fact, we were shown that one of the disputes referred to arbitration is whether the bank guarantees are null and void. Further, one of the substantive prayers in the arbitration made on behalf of the First Respondent, is to make an award declaring the four bank guarantees unenforceable, illegal, void and liable to be discharged. Further, there is also a prayer for permanent injunction to restrain the Appellant from encashing the bank guarantees. Therefore, since this prayer is already pending before the Arbitral Tribunal, we see no situation of "irretrievable injustice" if, at the present moment, the Appellant is allowed to encash the bank guarantees. For justice can always be rendered to the First Respondent, if he succeeds before the Arbitrators. Nor do we see any special equity in favour of the First Respondent, when there is in fact a dispute that performance was prima facie not satisfactory, which enabled the Appellant to encash all or any of the four bank guarantees. The Final Findings In this view of the matter, we see no merit in the stand taken by the First Respondent. In our judgment, the Madras High Court erred in interfering wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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