TMI Blog2006 (2) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent ). In connection with this, the Appellant issued to the First Respondent, four work orders/ purchase orders, as follows: (i) Work Order No. 2245 dated 15.3.2000/ 4.5.2000 for a sum of ₹ 70,00,000/-\005 (ii) Work Order No. 2246 dated 15.3.2000/ 4.5.2000 for a sum of ₹ 5,57,00,000/-\005 (iii) Work Order No. 2247 dated 15.3.2000/ 4.5.2000 for a sum of ₹ 90,00,000/- \005 (iv) Work Order No. 2248 dated 15.3.2000/ 4.5.2000 for a sum of ₹ 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 ₹ 7,00,000/-, ₹ 9,00,000/-, ₹ 55,70,000/- and ₹ 38,35,000 respectively. They were unconditional irrevocable bank guarantees, under which the Second Respondent-Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of one month (from the date of the order), within which the arbitral proceedings were to be disposed of. The parties were directed to seek their remedies before the arbitrator. Sometime in April 2004, an application was made under Section 17 of the Arbitration Act before the Arbitral Tribunal. The First Respondent preferred an appeal before the High Court of Madras challenging the order and judgment dated 22.3.2004 of the learned District Judge. On 24.5.2004, even while the arbitral proceedings were pending, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence even for the purposes of interim relief. A breach of faith can arise in such situations as: a failure by the beneficiary to provide an essential element of the underlying contract on which the bond depends; a misuse by the beneficiary of the guarantee by failing to act in accordance with the purpose for which it was given; a total failure of consideration in the underlying contract; a threatened call by the beneficiary for an unconscionable ulterior motive; or a lack of an honest or bona fide belief by the beneficiary that 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contended that the bank guarantees were for different purposes, either to: (i) secure the payment of advances or (ii) secure performance. As far as the bank guarantees to secure advance payments were concerned, he contends that there is a provision in the contract that the amount of advance was to be recovered by deduction from the gross accepted amount of any running bill. The contract stipulates two modes of recoveries: (i) By deduction from the gross amount from the running bill, and (ii) By invocation of the bank guarantee. Mr. Sorabjee 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 guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract . Clause (3) of the agreement declares: CONTRACTOR agrees that if liquidated damages for delay and/or performance guarantees, claim on warranty/workmanship, punch lists and any breach of contract by CONTRACTOR are applied under the provisions of any of the four Contracts , it automatically shall be construed that the same provision can be applied on all the four contracts as read together. BSES shall have the right to treat the contracts jointly as turnkey contract and money can be recovered by BSES including but not limited to liquidated 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 discharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew, this is an unsatisfactory explanation in the circumstances of the case and in any event, this explanation neither establishes egregious fraud by the Appellant nor creates a situation of irretrievable injury . The Fourth Bank Guarantee Finally, Mr. Sorabjee tried to intervene in the fourth bank guarantee (No.291/99 dated 23.3.2000) and contended that this was the only bank guarantee intended to secure due and faithful performance of the contract . He further urged that the performance had been duly satisfied and, therefore, there was no warrant for calling 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 perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of the bank under the guarantee. Irretrievable Injury As we have stated repeatedly, the First Respondent can succeed only if the case can be brought under the two accepted exceptions to the general rule against intervention. Evidently, there is no egregious fraud so as to fall within the first exception. Hence, only one more point remains: whether encashment of the guarantees will create special equities (in particular, irretrievable injury ) in favour of the First Respondent? We are not satisfied on facts that such is the present situation. There is no dispute that 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 inj ..... X X X X Extracts X X X X X X X X Extracts X X X X
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