Case: Hindustan Steelworks Construction Limited Vs. Tarapore and Company and Another

the observations of Mukharji J. in paragraph 28 and that of Shetty J. in paragraph 53 of the judgment in U. P. Co-operative Federation Ltd., this court in paragraph 9 of that judgment has observed that what is stated therein is the settled position of law. What is overlooked by learned counsel is that in that very paragraph the opinion of Mukherji J. that "it is only in exceptional cases that is to say in face of fraud or in case irretrievable injustice be done the courts should interfere" is also quoted. Moreover, while dealing with the facts of that case this court in paragraph 10 of the judgment has stated that "the bank cannot be interdicted by the court at the instance of respondent No. 1 in the absence of fraud or special equities in the form of irretrievable injustice between the parties." * 14. This observation would clearly go to show that the three-judge Bench has approved the view that fraud and other exceptional circumstances leading to irretrievable injustice are exceptions to the rule.Lastly, learned counsel for the appellant relied upon the following observations made in paragraph 60 of the three-judge Bench decision of this court in Svenska Handelsbanken v. Indian Charge Chrome: "We have referred to the observations of both Sabyasachi Mukharji as well as Shetty JJ. in extenso to emphasise that in cases of confirmed bank guarantees/irrevocable letters of credit, they cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud." * 15. 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 be any other exceptional case wherein the court can interfere in the matter of encashment of a bank guarantee. It is also significant to note that the said observation in paragraph 60 has been made after quoting the following observations made by Mukharji J., in paragraph 21 of his judgment in U. P. Co-operative Federation Ltd.s case. "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 a question of apprehension of irretrievable injustice has been made out. This is the well-settled principle of law in England. This is also a well-settled principle of law in India...No fraud and no question of irretrievable injustice was involved in the case." * 16. Therefore, we cannot attach much importance to the use of the word "and" in the observation that "it cannot be interferred with unless there is fraud and irretrievable injustice involved in the case...". It is also significant to note that in that case this court referred to the decision of the Court of Appeal in England in the case of Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyds List Law Reports 495 and distinguished it by stating that the facts of that case were peculiar but did not state that the view taken in that case is not correct. The decision in Handerson v. Canadian Imperial Bank of Commerce and Peat Marwick Ltd. (40 British Columbia LR 318) was also referred to and distinguished on the ground that the facts of that case were peculiar but with respect to the decision in that case also it has not been stated that it does not represent the correct position of law. That was not a case of that type of fraud which has been recognised as an exception to the rule though the request by the beneficiary for payment was considered fraudulent in the circumstances because there was no right to payment. This court also referred to the case of Itek Corporation v. First National Bank of Boston 566 (Fed Supp 1210). In that case the underlying contract had become impossible of performance, because of "force majeure". It was an event subsequent to the execution of the contract. Yet injunction was granted by the court on the ground that the plaintiff had no adequate remedy at law and the allegations of irreparable harm were not speculative but genuine and immediate and the plaintiff would have suffered irreparable harm if the request for relief was not granted. Though this court observed that "this judgment is based on peculiar facts" it 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 the bank guarantee is allowed to be encashed, that 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 exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, therefore, not right in restraining the appellant from enforcing the bank guarantees. 17.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]It is, therefore, difficult to appreciate the attempt of the High Court to distinguish that decision and to raise a doubt whether in India also the same principles apply in case of a performance 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 lawThe High Court also committed a grave error in restraining the appellant from invoking the bank guarantees on the ground that in India only a reasonable amount can 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 guarantee 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 an adjudication in that behalf is made either by a court or an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantee is an 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 be applicable only to the parties to the underlying transaction or the primary contract but can have no relevance to the bank guarantee given by the bank, as the transaction between the bank and the beneficiary is independent and of a different nature. In the case of an unconditional bank guarantee, the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary. The High Court thus failed to appreciate the real object and nature of a bank guarantee. The distinction which the High Court has drawn between a guarantee for due performance of a works contract and a guarantee given towards security deposit for that contract is also unwarranted. The said distinction appears to be the result of the same fallacy committed by the High Court of not appreciating the distinction between the primary contract between the parties and a bank guarantee and also the real object of a bank guarantee and the nature of the banks obligation thereunder. Whether the bank guarantee is towards security deposit or mobilisation advance or working funds or for due performance of the contract if the same is unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without a demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantee. In General Electric Technical Services Company Inc. v. Punj Sons (P.) Ltd. while dealing with a case of bank guarantee given for securing mobilisation advance it has been held that the right of a contractor to recover certain amounts under running bills would have no relevance to the liability of the bank under the guarantee given by it. In that case also the stipulations in the bank guarantee were that the bank had to pay on demand without a demur and that the beneficiary was to be the sole judge as regards the loss or damage caused to it. This court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to discharge its liability as per the terms of the bank guarantee. Larsen and Toubro Limited v. Maharashtra State Electricity Board and Hindustan Steel Workers Construction Ltd. v. G. S. Atwal and Co. (Engineers) Pvt. Ltd. were also cases of work contracts wherein bank guarantees 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 guarantees being irrevocable and unconditional and as the beneficiary was made the sole judge on the question of breach of performance 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 to three subsequent decisions of this court also go to show that the view taken by the High Court is clearly wrongThis observation would clearly go to show that the three-judge Bench has approved the view that fraud and other exceptional circumstances leading to irretrievable injustice are exceptions to the ruleIn 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 exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, therefore, not right in restraining the appellant from enforcing the bank guarantees.