Andhra HC (Pre-Telangana)
D.L.F. Cement Ltd. vs Inspector Of Police, Hyderabad And ... on 2 February, 1999
Equivalent citations: 1999(2)ALD45, 1999(1)ALT801, AIR 1999 ANDHRA PRADESH 359, (1999) 1 ARBILR 589, (1999) 1 BANKCLR 728, (1999) 2 ANDHLD 45, (1999) 1 ANDH LT 801
ORDER
1. The petitioner has filed the writ petition seeking writ of Mandamus or any other appropriate writ to grant the following reliefs:
(1) to declare FIR 15 of 1997 of Panjagutta Police Station as illegal and to restrain the first respondent to proceed with the investigation pursuant to the FIR after quashing the letters dated 9-1-1997 bearing No.15/Insn-PC/97 addressed by the first respondent to the petitioner's bankers and subsequent letters, (2) to direct the respondents 2 and 3 to honour the bank guarantee Nos. 18/47 dated 19-2-1996 and 3/94-95 dated 19-5-1994 furnished by the respondents 2 and 3 to the petitioner and to grant such other reliefs.
2. A few facts which are necessary to dispose of the writ petition as follows: The petitioner is a company incorporated under the Companies Act, 1956 (hereinafter referred to as the Act) having Head Office in New Delhi. It has an authorised capital of Rs.150 crores and paid up capital of Rs. 128.42 crores. It has more than 1.5 lakhs Indian citizens as its members/share-holders. The Company has set up a large cement plant at village Ras, Tehsil Jaitaran, Pali District, Rajasthan State involving a capital cost of over Rs.400 crores. The plant has been set up in technical collaboration with Messrs Nihon Cement Company Ltd., Japan with the financial participation by all leading Indian Financial Institutions as well as international Finance Corporation, Washington. The respondent No.1 is the Sub-Inspector of Police, Panjagutta. The respondents 2 and 3 are the nationalised banks. The fourth respondent is the company to whom the two contracts were entrusted by the petitioner company vide letter of award dated 18-2-1994. The first one to design, provide engineering, manufacture, supply and supervision services for the limestone crushing plant and the cement packing and loading systems and to do the civil and structural works at a firm price of Rs.871.50 lakhs. As per the terms of the contract the work had to be completed within 15 months from 14-4-1994 i.e., by 14-7-1995. But the said work was not completed. The second contract was for mechanical erection and commissioning of the plant and machinery for lime stone crushing plant and cement packing and loading systems at a value of Rs.94.50 lakhs which had to be completed within 19 months i.e., 14-11-1995 but the same was not completed.
3. The petitioner paid a mobilisation advance of Rs. 16,53,750/- to the fourth respondent in the second contract on submission of bank guarantee of Rs.14,17,500/-. The fourth respondent submitted two bank guarantees, one for the performance of the contract and the other advance bank guarantee for second contract. The petitioner had sought the encashment of the both bank guarantees vide letter dated 6-1-1997.
4. The fourth respondent had entered into contract and had agreed to complete the work within the stipulated time failed to perform inspite of several letters and reminders made by the petitioner company. The fourth respondent also failed to rectify the defects pointed out by the petitioner in the work that was carried out by the fourth respondent. The second respondent had issued a bank guarantee No.18/47 dated 19-2-1996 for an amount of Rs.25 lakhs in favour of the petitioner. The second respondent without any authority of law stopped payment of bank guarantee vide letter No.15/CR/INSPOPG/97 dated 9-1-1997. The third respondent had also issued an advance bank guarantee No.3/94-95 dated 19-05-1994 for Rs.14.175 lakhs. But the same was stopped at the instance of the first respondent vide letter dated 9-1-1997. Apart from stopping the encashment of bank guarantees the first respondent at the instance of the fourth respondent seized the original bank guarantees.
5. Further the case of the petitioner is that when the petitioner had made demand to the respondents bank, the said banks suggested it to surrender the original bank guarantee if it wants to encash the bank guarantees. The same was complied with, but the said guarantees were allowed to be stopped and seized by the police. Tin's is the result of connivance on the part of the respondents. According to the petitioner, the bank guarantees offered were unconditional, irrevocable and payable on demand by the petitioner. The undertaking given by the second respondent bank is as under:
"We bank of Baroda, Maredpalli branch, Secunderabad branch hereby irrevocably and unconditionally undertake to pay the purchaser on demand without of demur and without recourse to the Supplier upto an amount of Rs.25,00,000/- (Rupees Twenty Five lakhs only) within 2 days from the date of receipt of the first written demand from the purchaser, stating that the equipment supplied under the contract has failed to perform and/or the performance of the equipment is not in accordance with the stipulation of the contract and/or deficiency. This performance guarantee expires on the expiry of the warranty period and issue of final acceptance certificate by the purchaser."
"Notwithstanding anything contained hereinabove, our liability under this guarantee is restricted to Rs.25,00,000/-(Rupees Twenty Five lakhs only) and/or such extended period and a demand can be made on us upto six months from the date of expiry of such extended period after which date the purchaser's rights under this guarantee shall be forfeited and the bank shall be relieved and discharged under the guarantee."
Like the third respondent bank had also given similar undertaking. The same is extracted as under:
"We hereby irrevocably and unconditionally undertake to pay the purchaser on demand without demur and without recourse to the contractor upto an amount of Rs.14.175 lakhs (Rupees Fourteen lakhs seventeen thousand five hundred only) within 2 days from the date of receipt of the first written demand from the purchaser."
As the fourth respondent did not perform the contract the petitioner invoked the bank guarantees by its letter dated 6-1-1997 by handing over the same to the bank. The second and third respondents though they were under legal obligation to pay the amount covered under the bank guarantees namely Rs.25 lakhs and Rs.14.175 lakhs within two days on demand but the same was not complied with. On the request made by the respondents 2 and 3 the petitioner even came to Hyderabad on 9-1-1997 in the morning and submitted authorisation letter along with bank guarantees duly attested by the respondents 2 and 3. The same were acknowledged. The respondents 2 and 3 were expected to hand over the demand drafts for Rs.25 lakhs and Rs.14,17,500/- respectively atleast when the petitioner appeared before them. But the same was not complied with. When the company again approached the banks they informed them that the demand drafts will be sent directly to the Head Office. Instead of honouring the bank guarantees the second respondent sent fax message dated 10-1-1997 stating that the first respondent served notices on the bank and as such the guarantees cannot be honoured. Meanwhile the fourth respondent filed a private complaint in the Court of the V Metropolitan Magistrate Court on 9-1-1997 which was referred to the first respondent and numbered as Crime No. 15 of 1997 for offences under Sections 406 and 511 IPC against the petitioner. It goes to show that all the respondents conniving together to deceive the petitioner contrary to the fourth respondent's promise made in his letter dated 8-1-1997 confirming unequivocally to the following effect:
"we confirm that we shall not approach Court for any stay with regard to the bank guarantees which have been invoked by you on date."
The police, who are not supposed to interfere in the contractual obligations between the petitioner and the respondents 2 to 4, took the complaint and started seizing the documents whereas the respondents 2 and 3 though legally obligated to honour the guarantees played fraud and stopped payment of amount covered under the bank guarantee. Hence the writ petition for the reliefs stated supra.
6. After service of notice the first respondent filed counter denying any conspiracy or connivance between the first respondent and the other respondents. He has also taken a stand that whatever acts that have been done by them are purely pursuant to the registering of the above said crime He also took a stand that the first respondent has nothing to do with the internal quarrels between the petitioner and the other respondents. It is also stated that whatever documents that were taken from the respondents 2 and 3 were returned to them on 11-3-1997 under acknowledgment and they were not required for investigation. It is also stated that pursuant to the interim order passed by this Court in the above writ petition, they stopped arresting the petitioner or any official of the company in connection with the investigation of the above crime registered under Sections 406 and 511 IPC. It is further stated that they are not precluded from taking further investigation pursuant to the crime No. 15 of 1997.
7. The fourth respondent filed counter sworn in by one Balu, Company Secretary. This respondent has admitted the entrustment of the work and execution of the bank guarantees. According to them, the said bank guarantees shall be valid upto 30-6-1997 and the validity can be extended for a further period upto 31-12-1997. According to him the bank guarantees can be invoked only during the warranty period i.e., after the supply, erection and commissioning of the entire plant is completed and the basic infrastructure provided by the petitioner. After completion of seventy five percent of the work by 20-9-1996 the fourth respondent requested the petitioner to reduce the bank guarantee to Rs.3,54,000.00/-. In the meeting of the petitioner and the fourth respondent it was agreed to reduce the bank guarantee to Rs.3,54,000/-. Contrary to the decision taken in the said meeting a letter dated 6-1-1997 addressed by the petitioner was received by the respondents 2 and 3. Non-compliance of the work within the stipulated time was at the instance of the petitioner due to non-cooperation of the petitioner. The amount covered under the guarantee was reduced from time to time and ultimately it was reduced to Rs. 12.40 lakhs and the said amount was adjusted on 21-9-1996 against the supply of the control pannels which has been despatched by the respondents and acknowledged by Sri Mohanty. According to the fourth respondent, the petitioner played fraud and fraudulently invoked bank guarantees. As such the fourth respondent was constrained to file a private complaint before the V Metropolitan Magistrate Court for the offences under Sections 406 and 511 IPC and a notice was ordered to the first respondent to take up investigation as this respondent doubted about the bona fides on the part of the petitioner. The respondents 2 and 3 being aware of the fraud played by the petitioner they are bent upon honouring the bank guarantees. Therefore the fourth respondent was constrained to file civil suit OS 76 of 1997 on the file of the IV Additional Judge, City Civil Court, Hyderabad for permanent injunction restraining the respondents 2 and 3 from paying the amount covered under the bank guarantees and also restraining the petitioner and the said Mohanty from receiving the same. This respondent had also filed IA 73 of 1997 in the said suit to grant ex parte ad-interim injunction. The petitioner filed caveat. The petitioner appeared before the Court and sought for filing counter in the said interlocutory application. Instead of filing counter the petitioner filed two applications, one for stay of all further proceedings and the other for a direction to the parties to refer the dispute to the arbitration. This respondent filed its counter in the said two applications. It is the further case of this respondents that if there is any delay in erection or completion of the work it is because of unreasonable attitude on the part of the petitioner. According to the fourth respondent the petitioner is not entitled to invoke the bank guarantee. It maintained that as the petitioner played fraud the banks are right in not honouring the petitioner's request to pay the amount covered under the bank guarantee. The respondent denied any conspiracy between the respondents. It is also stated that writ petition is vexatious and is filed with a view to harass the respondents. Further the writ petition is not maintainable as the dispute between the petitioner and this respondent arose due to the alleged contractual obligation. Thus Article 226 of the Constitution is not remedy.
8. On the request made by both sides this writ petition and CRP 2666 of 1997 which are between the same parties including the Contempt Cases 44 of 1998 and 97 of 1998 which are filed for violation of the orders passed in the revision petition referred to above are clubbed together, and
9. The CRP 2666 of 1997 is filed challenging the order passed by the fourth Additional Judge, City Civil Court, Hyderabad in IA 126 of 1997 in IA 73 of 1997 in OS 76 of 1997 dated 28-3-1997 filed by M/s. D.L.F. Cements Limited. The suit is filed by M/s. Kitty Steels Limited which is the fourth respondent in the writ petition. The respondents 2 and 3 in the writ petition are the defendants 3 and 4 in the said suit. The petitioner in the writ petition is the defendant No. 1 in the suit and one Mohanty, the Deputy General Manager of the DLF Cements Ltd., is the second defendant in the suit. The suit is one for injunction against the writ petitioner the first defendant and the banks the defendants 3 and 4, from claiming or paying the amount covered under the bank guarantees referred to in the writ petition. IA 73 of 1997 was filed by the writ petitioner namely the first defendant under Section 8 of the Arbitration and Conciliation Act. The case of the petitioner in IA 73 of 1997 is that the fourth respondent was awarded contracts by it vide letter of award dated 18-2-1994 and it was subsequently converted into contracts dated 6-1-1995. The first contract was for Rs.871.50 lakhs which had to be completed within 15 months from 14-4-1994 and the second contract was for Rs.94.50 lakhs which had to be completed in 19 months from 14-11-1995. As per the terms of the contract the fourth respondent was required to submit two bank guarantees, one for the purpose of the first contract for a sum of Rs.25 lakhs and the second one towards advance bank guarantees for Rs.14,17,500/-. The fourth respondent furnished bank guarantees executed by two banks. In both the contracts there is arbitration clause. The venue of the arbitration proceedings shall be at New Delhi. The fourth respondent (first respondent in revision petition) failed to erect and commission the equipment and complete the work entrusted, and thus committed breach of contract which necessitated the petitioner company to invoke bank guarantees vide letter dated 6-1-1997 addressed to the bank. Then the fourth respondent filed a criminal complaint against the petitioner and also filed writ petition No.1017 of 1997 directing the concerned banks to stop payment covered under the bank guarantees. As per the writ petitioner, as per the arbitration clause in the event of any dispute between the parties to the arbitration the same shall be referred to the arbitrator. The fourth respondent in the writ petition, instead of taking steps to refer the matter to the arbitration filed a suit in OS 76 of 1997. Hence the first respondent (fourth respondent in writ petition) took a stand that he did not commit any breach of contract. The respondent No.1 further stated that there is a clause in the agreement that in case any dispute arises between the parties the same shall be first settled between the purchaser and the seller and if the dispute is not resolved in the settlement it shall be referred to the arbitrator. The petitioner instead of settling the matter mutually sought for reference of the dispute to the arbitration. According to the first respondent it was the petitioner who committed breach of contract and not by the respondent. Seeking to invoke bank guarantees without first settling the dispute mutually is illegal. Thus contending the first respondent in the revision sought for dismissal of the application filed under Section 8 of the Arbitration and Conciliation Act for reference of dispute to arbitration. According to sub-section (2) of Section 8 of the Arbitration Act the application for referring the parties to the arbitration should be accompanied by the original arbitration agreement or a duly certified copy thereof. The same was not filed at the time of the application but it was filed later. However, the learned City Civil Judge in the circumstances filing the said agreement subsequent to the filing of the application under Section 8 of the Act has not caused prejudice to the case of the respondent. He found that before filing written statement a party to the agreement in the event of dispute can seek stay of proceedings before the Civil Court and can request them to make reference to the arbitrator. Ultimately by observing in paras 14, 15 and 16 of the order the lower Court allowed the application with a direction to the respondents bank to maintain status quo pending arbitration proceedings in respect of release of the bank guarantee.
10. Aggrieved by the later portion of the order namely directing the bank to maintain status regarding release of bank guarantees, the company has filed this revision petition. The contention of the petitioner is that the Court below should not have directed the banks to stop payment of the amounts covered under the bank guarantees. The Court below committed a mistake in not first considering whether the suit filed is maintainable or not when the petitioner always maintained that the suit was not maintainable. While directing the respondents banks to stop payment of guarantee amount, the Court below should have appreciated the hardship and injury that may cause to the revision petitioner if the amounts covered under the bank guarantees are not ordered to be released.
11. During the pendency of the proceedings CC 44 of 1998 was initiated suo motu by the Court by its order dated 22-1-1998 passed in CMP Nos.227 and 723 of 1998 which reads as follows:
"Inspite of the specific order of this Court dated 2-1-1998 which was made on the submission made by Sri C.V. Mohan Reddy learned Counsel appearing for Rl-Kitti Steels Limited- (respondent No. 1 in CRP) he now submits that the bank has informed his client that it is not in a position to take a decision to extend the bank guarantee unless the effect of earlier order of status-quo passed in the case is clarified. The attitude is nothing but a stand taken to circumvent the earlier order passed by this Court. In fact while passing the order on 2-1-1998 it was specifically made clear that the R1 shall get the bank guarantee extended by 6-1-1998. However, today, the submission is otherwise. The above conduct of R1 is very evasive in nature apart from its amounting to disobedience of the order of this Court or deviating from the undertaking given to this Court. It is the duty of the Rl to get the bank guarantee extended as assured earlier, instead of throwing blame on the bank. If the bank has failed to understand its obligation to R1 it alone has to be blamed. It is not for the Court to advise as to what the bank should do.
The conduct of R1 prima facie amounts to contempt. Hence, he shall be notified to answer that why action for contempt not to be initiated against him."
Hence suo motu contempt proceedings were initiated by order dated 22-1-1998 as CC 44 of 1998. Again CC 97 of 1998 was initiated for wilful and deliberate violation of the order dated 2-1-1998 which reads as follows:
"On 27-12-1997 the learned Counsel for the respondent has submitted that his client would not revoke the bank guarantee. But in the order the word 'invoke' was written instead ofthe word 'revoke'. The learned Counsel for the respondent also submitted that all the papers were submitted to the bank and the bank had already extended the time by six months and produce the order by tomorrow. Accordingly the case is taken up for orders today. Today the learned Counsel for the respondent submits that though the respondent as submitted earlier furnished papers to the bank and the bank already passed order, but thinking whether to issue the order, since the matter is subjudiced. Since the advocate is not in a position to contact his client, he wants time. But the fact remains that the Counsel for the respondent was in touch with his client and his client had instructed him that they are going to get the bank guarantee extended. If the same is not extended and an order to that effect is not handed over to the petitioner's Counsel on or before 6-1-1998 it shall be presumed that the Counsel for the respondent had given instructions to his client with a view to make submission so as to obtain an order in its favour indirectly to mislead the Court. In such an event, the petitioner will be at liberty to move for contempt and also to encash the bank guarantee."
12. Both sides addressed their arguments. The case of the writ petitioner is that the acts of the respondents is illegal and contrary to the terms of the contract. The banks once agreed to abide by the terms of the contract and agreed to honour the bank guarantees on demand they should not have been influenced by the fourth respondent. The act of the first respondent in directing the banks to stop payment of the bank guarantees amount and later seizing the original records is not proper. The trial Court when accepted the contentions raised by the respondent and when there is dispute the same shall be referred to the arbitrator and any proceedings initiated by the civil Court without resorting to arbitration proceedings are liable to be stayed. The fourth respondent made banks as party defendants in the suit with ulterior motive though they are not concerned with the internal dispute between the petitioner and the fourth respondent. When once the bank guarantees were agreed to be honoured by the banks, in law, they are bound to honour it on demand. It can be withheld only when fraud is played by the person for whom the bank guarantees are made. As far as the scope of the bank guarantees and the liability ofthe banks is concerned, the law is well-settled that when once there is demand it is the duty of the bank to honour it. But it cannot ask the person in whose favour the bank guarantees are issued to first go and settle the dispute with the person who executed the bank guarantees at whose instance the bank guarantees were issued. The scope of Section 126 of the Indian Contract Act has been explained by the Division Bench ofthe Calcutta High Court in National Thermal Power Corporation Ltd. v. Hind Galvanizing and Engineering Company Limited, , wherein it was held as follows:
"As long as the demand is made in terms of the bank guarantee, it is not a defence that under the parent contract beneficiary of the guarantee is not entitled to the amount from the bank. The importance of the transactions like bank guarantee letter of credit and documents of the similar nature has been stressed on from time to time by the Supreme Court and our High Court. The importance of the internal trade and commerce is as important as international trade and commerce. Accordingly, even if no foreign parties are involved and even if it is not a letter of credit, the same principle would be applicable. The notable exception to the same is the fraud exercised by the beneficiary. Thus, when the bank guarantee is sought to be enforced the only thing to be looked into whether the demand is in terms of the bank guarantee. The question of fraud may be relevant when a clear case to that effect has been made out. In this connection, the mere fact that certain amounts may have been received by the beneficiary under the guarantee as and by way of adjustments made in the advance bills, cannot and does not amount to fraud which may deprive the beneficiary from enforcing the bank guarantee as such So far as enforcement of bank guarantee for performance is concerned, when the demand is made in terms of the bank guarantee, it is not for the bank to consider as to whether there has been breach of the original contract or whether there has been a repudiation of the original contract or whether there has been anticipatory breach of contract or whether there has been an acceptance of any repudiation, so far as the parent contract is concerned particularly when the demand is to be treated as conclusive as provided in the guarantee."
The Supreme Court in the case at National Thermal Power Corporation Ltd. v. Flowmore Private Ltd., 1995 (84) Co. Cases page 97, on the question of bank guarantee and its encashment, held that a bank guarantee which is payable on demand implies that the bank is liable to pay as and when a demand is made upon the bank by the beneficiary, and that the bank is not concerned with any inter-se disputes between the beneficiary and the person at whose instance the bank had issued bank guarantee, and that all the three bank guarantees which had been invoked are payable on demand and all the guarantees, therefore, had been properly invoked.
13. While interpreting the scope of Section 126 of the Contract Act the Division Bench of the Bombay High Court in the case of Messrs Dodsal Ltd. v. Krishak Bharati Coop. Ltd., , held as follows:
"the taw is well-settled by now in regard to invocation of bank guarantees and the limits of the powers of the Court to interfere with the same. In U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., , it was held by Sabyasachi Mukherjee, J-, (as he then was) that in order to restrain the operation of bank guarantee, there should be a serious dispute and a good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. It was observed that the commitments of the banks must be honoured free from interference by the Courts and it is only in exceptional cases, that is in case of fraud or in cases of irretrievable injustice that the Court should interfere as otherwise the very purpose of bank guarantee would be negatived and the fabric of trading operations would be jeopardised. The nature of the fraud that the Courts talk about said Jagannath Shetty, J., in the same decision, is a fraud of an "egregious nature as to vitiate the entire underlying transaction". It is a fraud of the beneficiary and not the fraud of somebody else.
Reference may also be made at this stage to the decision of the Supreme Court in Svenska Handelsbanken v. M/s. Indian Charge Chrome, where a three Judges Bench of the Supreme Court, while dealing with performance guarantees and guarantees against advances, observed that looking at the obligation assumed by the bank under such guarantees, the bank cannot be prevented by the party at whose instance the guarantee was issued from honouring the credit guaranteed. Since the bank pledges its own credit invoking its reputation, it was no defence except in case of fraud or irretrievable injustice. Dealing with the question as to how a case of fraud can be established, it was observed:
Merely pleadings do not make a strong case of prima facie fraud. The material and evidence has to show it.
In the above decision, the Supreme Court also quoted with approval the observations of the Privy Council in A.L.N. Narayanan Chettyar v. Official Assignee, AIR 1941 PC 93, to the effect that "fraud like any other charge of a criminal proceedings must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjecture. To the same effect are the decisions of the Supreme Court in N.T.P.C. Ltd. v. Flowmore Pvt. Ltd., reported in (1995) 5 JT (SC) 591 = 1995 AIR SCW 4306.
The Rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order, the bank giving the guarantee must honour the same and make payment. Ordinarily, unless there is an allegation of fraud or the like, the Courts will not interfere, directly or indirectly, to withhold payment, otherwise trust in commerce, internal and international, would be irreparably damaged."
The law on the subject was summed up by the learned Chief Justice of India in the following words at page 898 of AIR SC 1996 SCW 895 in State of Maharashtra v. National Construction Company:
The legal position, therefore, in that a bank guarantee is ordinarily a contract quite distinct and independent of the underlying contract, the performance of which it seeks to secure. To that extent it can be said to give rise to a cause of action separate from that of the underlying contract."
(Para 6) We are of the clear opinion that the learned single Judge was fully justified in refusing to grant injunction restraining respondent No. 1 from encashment of the bank guarantee and respondent No.2 bank from making payment in pursuance thereof. The appellants, in our opinion, have miserably failed to make out a case of a prima facie fraud. Nor there is anything to show that encashment of the bank guarantee will cause any irretrievable injustice to the appellanls. As earlier stated, in such cases, the bank is not concerned with the dispute between the appellants and respondent No.1 in regard to the amount which may be actually due to the respondent No.l from the appellants. Such dispute cannot be a ground for invoking the bank guarantee or the bank from discharging its obligation in terms thereof in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. By the bank guarantee, the bank having undertaken to idemnify the respondent No.l without demur or protest or without reference to the contractor (appellant) the amount set out therein being the amount of 100 percent of the claim balance amount of payment or such other unadjusted amount of the advance., it has to honour its commitment. It cannot be restrained from doing so on the ground that there is some dispute between the parties in regard to the actual amount payable, because the bank guarantee is a contract quite distinct and independent of the underlying contract the performance of which it seeks to secure. To that extent, it gives rise to a cause of action separate from that of the underlying contract. The bank has to honour the guarantee according to its terms and it is not concerned whether either party to the underlying contract was in default."
(Para 10) The Supreme Court took the similar view in the case of Hindustan Steelworks Construction Ltd. v. Tarapore & Co., , wherein it was held as follows:
"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 exceptional case justifying interference by restraining Ihe appellant from enforcing the bank guarantees. The High Court was therefore not right in restraining the appellant from enforcing the bank guarantees.
The Supreme Court in the case of Ansal Engineering Projects Ltd v. Tehri Hydro Development Corporation Ltd., , held as follows:
"The liability of the bank is absolute and unequivocal. It would thereby be clear that the bank is not concerned with the ultimate decision of a Court and a tribunal in its finding after adjudication as to the amount due and payable by the petitioner to the first respondent. What would be material is the quantification of the liability in the letter of revocation. The bank should verify whether the amount claimed is within the terms of the bank guarantee or letter of credit. It is axiomatic that any payment by the bank, obviously be subject to the final decision of the Court or the tribunal. At the stage of invocation of bank guarantee, the need for final adjudication and decision on the amount due and payable by the petitioner, would run contrary to the terms of the special contract in which the bank had undertaken to pay the amount due and payable by the contractor."
From the facts narrated above, it is clear that there is no dispute regarding the entrustment of the contract to the fourth respondent and the delay in execution of the contractual work. The banks in question are not also disputing the execution of the bank guarantees. As far as the relief sought for in the writ petition is concerned, proceedings under Article 226 of the Constitution is not the proper remedy to stall the investigalion proceedings. Normally no direction can be issued to the banks by this Court while exercising jurisdiction under Article 226 of the Constitution honour the bank guarantees as the same is purely a matter of contract which has to be agitated before the appropriate forum. Whether the writ petition is maintainable against the banks directing them to honour the bank guarantees to pay the amount covered under the guarantees is purely academic since the said issue is going to be decided in the order to be passed in CRP 2666 of 1997.
14. From the above discussion it is clear that in the event of any dispute between the parties namely the writ petitioner and the fourth respondent the same shall be referred to the arbitrator. The observations of the trial Court on the question of dispute is that there arises a dispute. Under such circumstance it is proper when request is made the Court shall make reference to the arbitrator. The banks which have issued bank guarantees are bound to honour the guarantees when demand is made unless fraud is made out. It is not the duty of the Court to investigate as to the internal dispute between the parties who are entering into agreement. The duty of the Court is well settled that there shall not be an injunction restraining the banks from honouring the bank guarantees. When the dispute has been made out and while referring the dispute to arbitration the Court should not have restrained the banks from making payment. As such a direction to the banks to stop payment is contrary to the settled law mentioned above. Thus the company is entitled to collect the amounts covered under the bank guarantees. If there is any dispute as to the quantum of the amount to be paid to the party it is for them to approach appropriate forum for adjudication.
15. Hence the revision petition deserves to be allowed and accordingly it is allowed and the order of the lower Court directing the banks to stop payment till the pendency of the proceedings before the arbitrator, is set aside. Both the writ petition and revision petition are disposed of in terms made above. No costs.
16. Regarding the contempt cases 44 and 97 of 1998, the same shall be dealt separately as the question to be decided therein is whether there was any disobedience on the part of the respondents in complying with the order passed by this Court on 2-1-1998.