Case: BSES Ltd Vs. Fenner India Ltd. and Anr

if they were not extended, thus under petitioners threat of encashment of the bank guarantees, and in the hope of amicably settling the issue with the petitioner, the first respondent (sic) felt compelled to extend the bank guarantees. In our view, 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. 22. 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. Sorabjees 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: for 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. 23. 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 Respondents 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 the bank guarantees should be encashed. Further, it is no function of the Second Respondent-Bank, nor of this Court, to enquire as to whether due performance had actually happened when, under the terms of the guarantee, the Second Respondent-Bank was obliged to make payment when the guarantee was called in, irrespective of any contractual dispute between the Appellant and the First Respondent. Indeed, in similar circumstances, this Court in General Electric Technical Services Company Inc. v. Punj Sons (P) Ltd., held: the Bank must honour the bank guarantee free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice, the court should interfere. The nature of the fraud that the courts talk about is fraud of an egregious nature as to vitiate the entire underlying transaction. It is fraud of the beneficiary, not the fraud of somebody else. 24. This was also a case where, after having recovered certain amount from the running bills, a call was made on the bank guarantee in respect of the full guaranteed amount. In an observation with direct relevance for the present case, this Court pointed out that the bank was not concerned with the outstanding amount payable under the running bills: The right to recover the amount under the running bills has no relevance to the liability of the Bank under the guarantee. The liability of the Bank remained intact irrespective of the recovery of mobilisation advance or the non-payment under the running bills. The failure on the part of - (the Beneficiary) - to specify the remaining mobilisation advance in the letter for encashment of bank guarantee is of little consequence to the liability of the bank under the guarantee. 25. 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. 26. 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 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. 27. 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 with the bank guarantees and in granting injunction as sought for. In the result, the impugned judgment of the High Court is set aside and the judgment of the learned District Judge, Madurai is affirmed, except with regard to the maintenance of status quo directed on the encashment of guarantees. It is made clear that the Appellant is entitled to encash the bank guarantees and the Second Respondent-Bank shall be free to honour its guarantees, subject to adjustment in the arbitral proceedings. 28.

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

Explanation:
1[ds]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 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 guarantees27. 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 with the bank guarantees and in granting injunction as sought for. In the result, the impugned judgment of the High Court is set aside and the judgment of the learned District Judge, Madurai is affirmed, except with regard to the maintenance of status quo directed on the encashment of guarantees. It is made clear that the Appellant is entitled to encash the bank guarantees and the Second Respondent-Bank shall be free to honour its guarantees, subject to adjustment in the arbitral proceedings.