Andhra HC (Pre-Telangana)
Rashtriya Ispat Nigam Limited vs P. Jayantilal And Company Private Ltd. ... on 13 June, 2007
Equivalent citations: 2007(6)ALD36, AIR 2008 (NOC) 109 (A.P.), 2008 AIHC (NOC) 450 (A.P.), 2008 (1) AKAR (NOC) 92 (A. P.), 2008 (1) AKAR (NOC) 157 (A.P.)
ORDER P.S. Narayana, J.
1. This Court on 19.06.1998 made the following order:
Admit on substantial questions of law raised in ground Nos. 1 to 4.
The substantial questions of law raised in ground Nos. 1 to 4 are as hereunder:
1. Whether the courts below are correct in granting injunction from invoking the Bank guarantee till the disposal of the arbitration proceedings between the parties?
2. Whether the courts below can grant injunction from invoking the bank guarantees in the absence of any plea or proof relating to fraud or coercion by the appellantD2, as held by the Hon'ble Supreme Court in a catena of decisions?
3. In view of the specific clause in the contract empowering the Appellant/D2 to recover money due in one contract from any other contract between the same parties, whether the courts below are correct in giving weightage to the fact that the works relating to the bank guarantee Nos. 7282 and 7283 are completed as per the terms and conditions and hence the injunction against the said guarantees is granted till the completion of arbitration proceedings?
4. Whether the lower appellate Court is correct in disposing of the appeal without framing an appropriate point for consideration?
2. In CMP No. 6571 of 1998, on 19.6.1998, this Court made the following order:
There shall be interim direction as prayed for until further orders.
3. Sri Ravinder Rao, the learned Counsel representing appellant-first defendant would maintain that in the absence of a plea of fraud or a plea of coercion or the like, normally a decree for perpetual injunction cannot be granted, as against the invocation of the bank guarantee. The learned Counsel, in support of his contention, had placed reliance on several decisions. The learned Counsel also pointed out to the nature of the decree, which was made by the court of first instance, and also the findings recorded by the appellate Court in relation to bank guarantee No. 7281 and also in relation to bank guarantee Nos. 7282 and 7283 as well. The learned Counsel would submit that in the absence of any specific plea either relating to fraud or coercion or the like, the findings recorded by both the courts below cannot be sustained and the Second Appeal to be allowed.
4. None represents either of the respondents.
5. The first respondent in the Second Appeal, M/s PL. Jayalal and Company Private Company Limited represented by the Director authorised representative, instituted a suit O.S. No. 246 of 1991 on the file of Second Additional Subordinate Judge, Visakhapatnam praying for the relief of permanent injunction restraining the defendants 1 and 2 from invoking bank guarantee No. 7282, 7283 issued by the second defendant to the first defendant at the first instance of the plaintiff till the final disposal of the arbitration proceedings. It is brought to the notice of this Court that the arbitration proceedings as such were completed.
6. Be that as it may, before the court of first instance, no oral evidence was let in by either of the parties and Exs. A1 to A21 were marked.
7. The learned Judge decreed the suit in part restraining the defendants, by means of permanent injunction, from invoking bank guarantee relating to Nos. 7282 and 7283 till the final disposal of the arbitration proceedings, but, however, negatived the relief in respect of the bank guarantee No. 7281. The first defendant in the said suit aggrieved by the same, carried the matter by way of appeal A.S. No. 70 of 1993 on the file of IVth Additional District Judge, Visakhapatnam and the appellate Court at para 8 framed the following point for consideration. "Whether the lower court committed any material irregularity which warrants interference of this Court".
8. The appellate Court, having referred to several decisions on the point, recorded certain findings commencing from paras 9 to 20 and, ultimately, dismissed the appeal with costs. Aggrieved by the same, the first defendant carried the matter by way of Second Appeal. The second defendant is shown as second respondent in the present Second Appeal.
9. The substantial questions of law, which had been raised, already had been specified supra. As can be seen from the record, no oral evidence as such had been let in by the parties and only documents Exs. A1 to A21 were marked. Before taking up the further discussions, it may be appropriate to have a look at the respective pleadings of the parties. It was pleaded in the plaint as hereunder:
The plaintiffs are the manufacturers and suppliers of tubes, pipes and fittings having its registered office at Bombay. The defendant accepted the tender of the plaintiff for the supply of pipes, tubes and fittings. In pursuance of the acceptance of tender, the first defendant entered into three separate contracts with the plaintiff for the supply of pipes, pipe-fittings for the first defendant viz., 1) PUR 2.65088 (c) /257 dated 14.4.1984, (2) PUR 4.65.612/4 423 dated 25.5.1985 and (3) PUR 6.65.00/0522 dated 16.12.1985. As per the terms and conditions of these contracts the plaintiffs executed three bank guarantees separately towards the performance of these different agreements. The bank guarantees Nos. 7282 and 7283 are pertain to two contracts or purchase orders dated 25.5.1985 and 16.12.1985 respectively. These two contracts are completed in the stipulated period and there is nothing else to be done. So far as the third bank guarantee No. 7231 pertains to the contract dated 14.4.1984. The contract could not be performed fully by the plaintiff due to the unforeseen changes in the import and export policy by the Central Government. This contract has been frustrated and hence the plaintiff could not supply the material. The first defendant is pressing for damages as per the terms of the contract as the contract could not be fulfilled within the time or thereafter. Hence as per the agreement the plaintiff requested the first defendant to refer the matter to the arbitration and the matter has been referred to the Arbitration and is pending before the Arbitrator. While things stood so, the first defendant though the contracts dated 25.5.1985 and 16.12.1985 have been performed instead of returning the bank guarantee numbers 7282 and 7283, he is insisting upon for renewal of bank guarantees from time to time. The plaintiff has contracts with the first defendant and on account of business relationship between them and as the first defendant is in dominating position, coerced the plaintiff to renew the Bank guarantee from time to time.
While things stood so, the first defendant even though arbitration proceedings are pending, wanted to enforce the bank guarantees within the given validity period i.e., up to 30.5.1991 and informed the plaintiff bankers about the same. The plaintiff is sending replies for all the matters bringing it to the notice of the first defendant that there is no necessity to renew the two bank guarantees in respect of the two contracts which are fuly performed and so far as the third contract is concerned, it cannot be invoked since the damages have not yet been ascertained by the Arbitrator.
On 11.5.1990 the first defendant gave a registered notice to the second defendant expressing his intention to enforce the three bank guarantees. The plaintiff learnt it from the second defendant. The plaintiff sent a lawyer's notice on 8.4.1991 informing the said fact and requesting the second defendant not to make payment under any of the three bank guarantees as their invocation is invalid, illegal and not binding on the bank and also on the plaintiff. Inspite of it, the second defendant is expressing his inability to withhold the invocations of the bank guarantees beyond 30.6.1991.
10. The first defendant filed written statement with the following averments;
It may be true that the bank guarantees with Nos. 7282 and 7283 relate to purchase order dated 25.5.1985 and 16.12.1985. It may be stated that the two contracts were completed. It is not true to say that 3rd purchase order dated 14.4.1984 could not be executed due to unforeseen circumstances and the said order became frustrated on account of Prohibitive changes made by the Government. The plaintiff is expected to visualise and take into account all the circumstances while submitting the tender and cannot take shelter under any subsequent changes as frustrating the contract and is bound by the terms of the same. As the plaintiff failed to supply the same inspite of several notices including a risk and cost notice, the defendant had no alternative in view of the urgency and magnitude of the work, to make a risk purchase from other sources and claim the damages suffered by the defendant from the plaintiff as the plaintiff is liable for the same under the contract. The plaintiff performed two of the contracts out of the three, but the allegations that the defendant insisted of renewing the same and that the plaintiff has to comply with the same as the first defendant is in a dominating position, is false and untenable. The pendency of the arbitration proceedings is nothing to do with the invocation of bank guarantee which is purely a matter between the first defendant and the second defendant and the plaintiff is not entitled to question the same. The statement of the plaintiff that the damages have not been ascertained by the Arbitrator and that pending enquiry before the Arbitrator, the first defendant cannot enforce the bank guarantee without determining the bank guarantees, is misconceived and untenable. It was decided not to accept any further renewal and hence notice dated 11.5.1990 was sent to the second defendant invoking guarantees by making a demand as per the terms of the guarantee and requiring the second defendant to pay the amounts mentioned therein. The invocation of bank guarantees is purely a matter between the first defendant and the bank. The pendency of the Arbitration proceedings or ascertainment of damages are nothing to do with the same. The bank guarantees have already been enforced by invoking the same and therefore granting of an injunction against the first defendant from enforcing the guarantees does not arise. The plaintiff has not alleged any fraud in obtaining the guarantees and hence can seek injunction. The relief of injunction cannot be valued notionally and the plaintiff has to value the same on the total amount of the three guarantees i.e., advantage derived seeking the injunction or disadvantage sought to be avoided. Hence the relief is not properly valued and the court fee is not properly paid. The suit is not maintainable under law as it is filed for permanent injunction.
11. The second defendant filed written statement with the following averments:
The second defendant is unaware of the disputes between the plaintiff and the first defendant. It is true that bank guarantees were originally executed by the second defendant in favour of the first defendant on the advise of the plaintiff and they were extended from time to time on the request of the plaintiff. The last extension was valid up to 30.6.1991. On the orders of this Court dated 2.7.1991 fresh guarantees are executed valid for a period of two years i.e., up to 26.9.1993. No relief is claimed against this defendant and is only added as a proforma party. This defendant is willing to abide by any of the conditions and directions issued by the court. Since this defendant is not a party to the dispute.
12. The following issues were settled before the court of first instance:
1. Whether the plaintiff is entitled to an injunction restraining the defendant from invoking all or any of the bank guarantees B.G. Nos. 7281, 7282 and 7283 issued by D2 in favour of D1?
2. Whether the suit for mere injunction without any declaration is not maintainable?
3. Whether the relief of injunction is not properly valued?
4. To what relief?
13. Several facts appear to be not in serious controversy. As already referred to supra, at present, arbitration proceedings had been completed. The facts as reflected from the respective pleadings of the parties and also the documentary evidence placed before the court are as hereunder.
14. The first defendant accepted the tenders of the plaintiff for supply of pipes, fittings etc., and entered into three agreements and in pursuance of the terms and conditions of the three contracts in the agreements at the instance of the plaintiff ie., the first respondent in the Second Appeal, second respondent-second defendant in the suit, the bank executed three bank guarantees 7281, 7282 and 7283 respectively as performance bank guarantees which were being renewed from time to time. Exs. A5, A6 and A7 are the copies of bank guarantees renewed and guaranteed till 31.12.1990 respectively and, finally, in pursuance of the interim orders made by the court of first instance in I.A. No. 379 of 1991 till 29.6.1993. The copies of the bank guarantees are Exs. A16, A17 and A18 respectively for the amounts specified therein. It is also not in controversy that the first defendant wrote letters invoking the bank guarantee and finally got issued a lawyer's notice dated 11.5.1990 marked as Ex. A2 invoking three bank guarantees and demanding the second respondent-second defendant bank to pay the total amount of Rs. 6,42,273/-. The stand taken by the first respondent-plaintiff is that he had executed the contracts relating to the agreements dated 25.5.1985 and 16.12.1985 fully and there is nothing to be paid and there is nothing further to be done by the first respondent-plaintiff. The appellant herein, the first defendant, in the court of first instance, had taken a stand that it may be true that the two contracts dated 25.5.1985 and 16.12.1985 relating to the bank guarantees 7282 and 7283 were completed, but the contract dated 14.5.1985 relating to the bank guarantee 7281 is not performed due to some enforcing changes in the import policy of the Government of India and several other factual details also had been narrated.
15. On a careful reading of the respective stands taken by the parties nowhere any specific plea relating to either plea of fraud or coercion had been taken. It is needless to say that normally the courts are expected to be slow in interfering by granting the decree for perpetual injunction as against the invocation of bank guarantee.
1. In Federal Bank Ltd. v. V.M. JOG Engineering Ltd. the Apex Court at para 56 observed thus:
In several judgments of this Court, it has been held that Courts ought not to grant injunction to restrain encashment of Bank guarantees or Letters of Credit. Two exceptions have been mentioned - (i) fraud and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the case comes within these two exceptions, temporary injunction under Order 39, Rule 1, C.P.C. can be issued. It has also been held that the contract of the Bank guarantee or the Letter of Credit is independent of the main contract between the seller and the buyer. This is also clear from Article 3 of the UCP (1983 Revision). In case of an irrevocable Bank guarantee or Letter of Credit the buyer cannot obtain injunction against the Banker on the ground that there was a breach of the contract by the seller. The Bank is to honour the demand for encashment if the seller prima facie complies with the terms of the Bank Guarantee or Letter of Credit, namely, if the seller produces the documents enumerated in the Bank Guarantee or Letter of Credit. If the Bank is satisfied on the face of the documents that they are in conformity with the list of documents mentioned in the Bank Guarantee or Letter of Credit and there is no discrepancy, it is bound to honour the demand of the seller for encashment. While doing so it must take reasonable care. It is not permissible for the Bank to refuse payment on the ground that the buyer is claiming that there is no breach of contract. Nor can the Bank try to decide this question of breach at that stage and refuse payment to the seller. Its obligation under the document having nothing to do with any dispute as to breach of contract between the seller and the buyer. As to its knowledge of fraud or forgery, we shall presently deal with it. Knowledge of fraud.
2. In National Thermal Power Corporation Ltd. v. Flowmore Private Ltd. and Anr. ,the Apex Court observed at paras 10 and 11:
Both these submissions cannot be accepted. It is true that the bank guarantee of Rs. 85,000/- contains an express term to the effect that any demand made by the owner shall be conclusive and binding on the Bank notwithstanding any difference between the Owner and the Contractor or any dispute pending before any Court, Tribunal, Arbitrator or any other Authority. Nevertheless, this express term merely reiterates the nature of a bank guarantee which is payable on demand being made by the beneficiary of the bank guarantee. 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. The bank is not concerned with any inter se disputes between the beneficiary and the person at whose instance the bank had issued the bank guarantee. All the three bank guarantees which have been invoked are payable on demand. There is, therefore, no merit in the submission that the bank guarantees have not been properly invoked. The second submission relates to the conduct of parties. Learned Counsel for the first-respondent has relied upon the fact that the first-respondent kept all the bank guarantees alive by renewing them from time to time during the pendency of arbitration and on the fact that the appellant did not invoke the bank guarantees while the arbitration was in progress. Neither of these two circumstances can lead to the conclusion that the bank guarantees cannot be invoked while the arbitration is pending. The bank guarantees are unconditional and, payable on demand. The circumstances pointed out by learned Counsel for the first-respondent do not constitute a bar on the right of the appellant to encash the bank guarantees. In the present case there is also no circumstance pointed out which would result in any irretrievable injustice to the first- respondent of the kind referred to in the case of Itek Corporation (566 Fed Supp 1210) (supra) if the bank guarantees are realized.
3. In U.P. State Sugar Corporation v. Sumac International Ltd. , the Apex Court at paras 12, 14 and 16 observed thus:
The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The Courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may co-exist in some cases. In the case of U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. , which was the case of a works contract where the performance guarantee given under the contract was sought to be invoked this Court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the bank has notice. The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honouring its guarantee, this Court in the above case quoted with approval the observations of Sir John Donaldson. M.R. in Bolivinter Oil SA v. Chase Manhattan Bank NA. (1984) I All ER 351 at 352. "The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it charged". This Court set aside an injunction granted by the High Court to restrain the realization of the bank guarantee. On the question of irretrievable injury which is the second exception to the rule against grating of injunctions when unconditional bank guarantees are sought to be realized the Court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corporation case 566 Fed Supp 1210 (supra). In that case an exporter in the USA entered into an agreement with the Imperial Government of iran and sought an order terminating its liability on stand by letters of credit issued by an American Bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The U.S. Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The Court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in iran under these circumstances and realization of the bank guarantee/letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which made it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will into be able to pay, is not enough. In the Itek case (supra) there was a certainty on this issue. Secondly, there was good reason, in that case of the Court to be prima facie satisfied that the guarantors i.e., the bank and its customer would be found entitled to receive the amount paid under the guarantee. Clearly, therefore, the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be a fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the appellant and his claim that the time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is a fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the bank guarantees fraudulent. The High Court has also referred to the conduct of the appellant in invoking the bank guarantees on an earlier occasion on 12th of April, 1992 and subsequently withdrawing such invocation. The Court has used this circumstance in aid of its view that the time was not of the essence of the contract. We fail to see how an earlier invocation of the bank guarantee and subsequent withdrawal of this invocation make the bank guarantees or their invocation tainted with fraud in any manner. Under the terms of the contract it is stipulated that the respondent is required to give unconditional bank guarantees against advance payments as also a similar bank guarantee for due delivery of the contracted plant within the stipulated period. In the absence of any fraud the appellant is entitled to realize the bank guarantees.
4. In Hindustan Steel Works Construction Ltd. v. Tarapore And Co. and Anr., at paras 15 and 23, the Apex Court observed thus:
In view of the settled legal position and unsustainable view taken by the High Court, the learned Counsel for the contractor has rightly not attempted to defend the judgment of the High Court except on the ground that in view of the exceptional circumstances and special equities of this case, it was justified in granting the injunction. He submitted that fraud is not the only ground requiring interference by Courts and if it is made out that exceptional circumstances creating special equities exist then the Court can and should restrain the beneficiary from encashing the bank guarantee. On the other hand the learned Counsel for the appellant contended that interference by Courts is permissible only when fraud is pleaded and prima facie established and it is further shown that irretrievable injustice would otherwise be caused. In support of his contention, the learned Counsel for the appellant has heavily relied upon the following observations, made by Mukharji, J. in paragraph 28 and by Shetty, J. in paragraph 53 of the judgment in U.P. Co-operative Federation Ltd. 1988 (1) SCC 174 (Supra):
28. ...In order to restrain the operation either of irrecovable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties....
53. ...Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank's obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud.... 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....
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 had 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.
5. In Daewoo Motors India Ltd. v. Union of India and Ors. , the Apex Court observed thus in paras 11, 12, 13 and 14:
He has emphasised on the words "by reason of non-fulfilment of the export obligation under the above said Notification" and argued that as there is no case of default or non-fulfilment of the export obligation as there is ample time, at any rate till 2004, so the first respondent is not entitled to invoke the bank guarantee. We are afraid, we cannot accede to the contention of the learned senior counsel. The words, quoted above, cannot be read in isolation by dissociating them from the context in which they have been used. A reading of the bank guarantee as a whole and the above extracted paragraphs in particular leaves us in no speck of doubt that those words only qualify the preceding words, "loss or damage caused or suffered by the President of India", and do not constitute a condition precedent for the first respondent to invoke the bank guarantee, much less they give any cause of action to the bank to contest the encashment of the bank guarantee on the ground of there being no non-fulfilment of the export obligation.
Further, it would be appropriate to read here the following clauses of the bank guarantee:
We Times Bank Ltd., PTI Building, Parliament Street, New Delhi, 110 001 further agree that the demand made by the President of India any money so demanded notwithstanding any dispute raised by M/s. Daewoo Motors India Ltd. in any proceeding before any Court or Tribunal;
We Times Bank Ltd., PTI Building, Parliament Street, New Delhi - 110 001 further agree that the demand made by the President of India shall be conclusive as regards the amount due and payable by us under these presents as out of liability under these presents are absolute and unequivocal;
From a perusal of the above clauses, it is abundantly clear that the bank guarantee furnished by the bank is an unconditional and absolute bank guarantee. The bank has rendered itself liable to pay the cash on demand by the President of India "notwithstanding any dispute raised by M/s. Daewoo Motors India Limited in any proceeding before any Court or Tribunal". It is worth noticing that the clause in the bank guarantee specifically provides that the demand made by the President of India shall be conclusive as regards the amount due and payable by the bank under this guarantee and the liability under the guarantee is absolute and unequivocal. In the face of the clear averments, it is trite to contend that the bank guarantee is a conditional bank guarantee.
Therefore, the bank has no @page-SC1789 case to resist the encashment of the bank guarantee. Inasmuch as we have held that the bank guarantee is an unconditional bank guarantee, the case of Hindustan Construction Co. Limited v. State of Bihar and Ors. , is of no avail to the appellant.: It is true that the bank guarantee has to be read in conjunction with the terms of the contract but when the bank guarantee itself is in absolute terms, the agreement between the company and the first respondent would be of no avail to the bank.
6. In National Highway Authority of India v. Ganga Enterprises and Anr. , the Apex Court observed thus at para 9:
There is another reason why the impugned judgment cannot be sustained. It is settled law that a contract of guarantee is a complete and separate contract by itself. The law regarding enforcement of an "on demand Bank guarantee" is very clear. If the enforcement is in terms of the guarantee, then Courts must not interfere with the enforcement of Bank guarantee. The Court can only interfere if the invocation is against terms of the guarantee or if there is any fraud. Courts cannot restrain invocation of an "on demand guarantee" in accordance with its terms by looking at terms of the underlying contract. The existence or non-existence of an underlying contract become irrelevant when the invocation is in terms of the Bank guarantee. The Bank guarantee stipulated that if the bid was withdrawn within 120 days or if the performance security was not given or if an agreement was not signed, the guarantee could be enforced. The Bank guarantee was enforced before the bid was withdrawn within 120 days. Therefore, it could not be said that the invocation of the Bank guarantee was against the terms of the Bank guarantee. If it was in terms of the Bank guarantee, one fails to understand as to how the High Court could say that the guarantee could not have been invoked. If the guarantee was rightly invoked, there was no question of directing refund as has been done by the High Court.
16. It is pertinent to note that it is not as though these decisions are not brought to the notice either court of first instance or the appellate Court.
In fact, the appellate Court had referred to a couple of decisions which had been placed before this Court, but, however, recorded certain reasons and ultimately came to the conclusion that the decree and judgment of the Court of first instance cannot be disturbed.
17. In the light of the clear legal position inasmuch as in the absence of either the plea of fraud or the plea of coercion or the like as against the invocation of bank guarantee, the courts normally not to interfere by issuing the relief of perpetual injunction, this Court is of the considered opinion that the findings recorded by both the court of first instance and also the appellate Court cannot be sustained and the appellant is bound to succeed in this Second Appeal.
18. Accordingly, the Second Appeal is hereby allowed. However, since it is stated that the arbitration proceedings had already been completed, the parties to bear their own costs.