A. K. Patnaik, J.
1. In these two writ petitions under Article 226 of the Constitution, the petitioners have prayed for a direction restraining Neelachal Inspat Nigam Limited (for short, 'NINL') from encashing the bank guarantees furnished by the State Bank of India, Frankfurt Branch, and Deutsche Bank, New Delhi.
2. The facts relevant for the purpose of disposal of these two writ petitions are that on 29th December, 1998, three contracts were executed by Mannesmann Demang AG Metallurgy (for short, 'MDM AG'), a company incorporated under the laws of Germany having its registered office in Germany and by NINL, a company incorporated under the Companies Act, 1956 and having its registered office at Bhubaneswar. Under the said three contracts, MDM AG was to supply imported equipment and provide Foreign Services and undertake overall responsibility for basic Oxygen furnace, gas cleaning plant and continuous casting plant for the factory of NINL at Duburi, Jaipur. On the 29th December, 1998 three contracts were also executed by Indomang Steel Technology Limited, New Delhi and NINL for supply of indigenous equipment and for providing indigenous services and for erection services for the basic Oxygen furnace, gas cleaning plant and continuous casting plant for the factory of NINL at Duburi, Jaipur. All the aforesaid six contracts were signed at Bhubaneswar and are said to have identical provisions. A copy of the contract for supply of imported equipment has been annexed as Annexure-2 to the writ petition in W.P. (C) NO. 2685 of 2003. In the said contract NINL has been described as the 'purchaser' and MGM AG has been described as the 'Principal Contractor.' Article 5 of the said contract which is relevant for deciding these two cases reads as follows :
'Article 5 : EFFECTIVE DATE OF CONTRACT
5.1 The Effective Date of Contract shall be the date of issue of Letter of Award (LOA) i.e. 5th December, 1998. Following activities to be completed within 60 days :
i) Signing of contracts within 15 days of LOA.
ii) PRINCIPAL CONTRACTOR shall submit invoice and bank guarantees towards Security Deposit and Advance as per Format(s) enclosed, within 15 days from the date of signing of contract.
iii) PURCHASER will remit advance payment not later than 30 days from receipt of invoices and bank guarantees for advance payment for equal amount and 10% Security Deposit.
iv) HERMES approval by the PRINCIPAL CONTRACTOR within 45 days of LOA.
v) Establishment of revolving letter of credit within 60 days from date of LOA. The PRINCIPAL CONTRACTOR shall bear evidenced L/C charges from the date of opening of Letter of Credit till 90 days before the date of shipment up to DM 80,000.
Should there be any delay in completing all the activities within 60 days, the delivery and completion period of contract shall be extended by the period of delay in completion of all activities, without altering the effective date of contract.
In the event of delay in completion of any of the above activities, the PURCHASER and PRINCIPAL CONTRACTOR shall also discuss further course of action.'
Clauses (ii) and (iii) of Article 5.1 of the contract quoted above thus provide that MDM AG as the principal contractor was to submit invoices and bank guarantees for advance as per format enclosed within fifteen days from the date of signing of the contract and NINL as the purchaser was to remit advance payment not later than thirty days from the date of receipt of invoices and bank guarantees for advance payment for equal amount. A copy of the contract for supply of indigenous equipment has been annexed to the writ petition in W.P. (C) No. 2686 of 2003 as Annexure 2. In the said contract Indomag Steel Technology Limited has been described as 'Contractor' and NINL has been described as the 'Purchaser.' Article 8 of this contract provides that Indomag Steel Technology Limited as contractor shall submit invoices and bank guarantees towards advance as per Format enclosed and NINL as purchaser will remit advance payment not later than thirty days from the date of receipt of invoices and bank guarantees for advance payment for equal amount. In terms of the said provisions of the contracts MDM AG submitted invoices and furnished bank guarantee No. 99/9 dated 12th January, 1999 of the State Bank of India, Frankfurt Branch, Germany, for DEM 585,700,00 (Deutsche Marc Five Hundred Eighty Five Thousand Seven Hundred only) to NINL. Similarly, in terms of the provisions of the contracts, Indomag Steel Technology Limited submitted invoices and furnished three bank guarantees of Deutsche Bank, New Delhi No. 9900051 dated 14-1-1999 for Rs. 11,174,023/0, No. 9900052 dated 14-1-1999 for Rs. 3,165,600)/- and No. 9900054 dated 14-1-1999 for Rs. 86,180,800/-. In terms of the contracts, the NINL gave advances for the bank guarantee amounts to MDM AG and Indomag Steel Technology Limited. Thereafter, some disputes arose between the parties and NINL issued a notice dated 13th of March, 2003 to the State Bank of India, Frankfurt Branch, Germany invoking the bank guarantees for Deutsche Marc 585,700.00 and requesting to transfer the amount to the account of NINL with the State Bank of India, Bhubaneswar immediately. The petitioner in W.P. (C) No. 2685 of 2003 who claims to have acquired MDM AG and who claims to be the successor-in-interest of MDM AG has filed the said writ petition praying for a writ, direction or order restraining NINL from seeking encashment of the said bank guarantee furnished by State Bank of India, Frankfurt Branch. The name of Indomag Steel Technology Limited has been changed to S.M.S. Demag Private Limited, New Delhi and S.M.S. Demag Private Limited has filed W.P. (C) No. 2686 of 2003 praying for a writ, direction or order restraining NINL from seeking encashment of the three bank guarantees furnished by the Deutsche Bank, New Delhi.
3. On 17-3-2003, after hearing Mr. I. Mohanty, learned counsel for the petitioners, the Court issued notices in the two writ petitions as well as in the misc. cases for interim orders and in the meanwhile directed, as an interim measure, that encashment of the bank guarantees shall remain stayed. In response to the notices, NINL appeared through its counsel Mr. B.B. Ratho and after hearing Mr. I. Mohanty, learned counsel for the petitioners and Mr. B.B. Ratho, learned counsel for NINL and the learned counsel for the two Banks who had furnished the bank guarantees, the Court passed orders on 25-4-2003 that the amounts covered by the bank guarantees will be deposited by the Banks in terms of the bank guarantees in the shape of bank drafts in the name of the Registrar (Judicial) of the Court. Pursuant to the said orders, the bank drafts were deposited in the Court and on 9-5-2003, the Court directed that the bank drafts will be deposited in accounts to be opened in the name of the Registrar (Judicial) of the Court in the State Bank of India, Commercial Branch, Cuttack and the amounts will be kept by the State Bank of India. Commercial Branch, Cuttack in short term deposit accounts in the currency in which the bank drafts have been made till the matters were heard and finally disposed of. The two matters were finally heard and arguments concluded on 17-9-2003.
4. At the hearing, Mr. I. Mohanty, learned counsel for the petitioners, submitted that as per the terms of the contract MDM AG and Indomag Steel Technology Limited submitted invoices and furnished bank guarantees for the advances given by the NINL, but the NINL failed to establish revolving letter of credit within the stipulated time mentioned in the contract. He further submitted that even after the time stipulated in the contract for establishment of revolving letter of credit, NINL made several promises to open letter of credit but could not fulfil the said promises because NINL does not have the required funds for the project. He submitted that by not establishing the revolving letter of credit as stipulated in the contract, NINL has committed breach of the contract whereas the petitioners have complied with its obligations under the contract. Mr. Mohanty further submitted that in the mean while the petitioners had prepared the basic drawings and submitted a number of drawings to NINL and 125 more drawings were ready but could not be submitted to NINL on account of suspension of work. He explained that on account of the delay of more than four years by NINL in opening the letter of credit, there has been price escalation and suppliers were pressing for increase in price and although this subject was raised at various meetings, NINL did not give any positive response. In these circumstances, the petitioners served legal notice dated 28-2-2003 to NINL calling upon it to establish letter of credit within fifteen days and in the said notice the petitioners had also stated that in case the letter of credit is not established within fifteen days, the petitioners shall take it that NINL is not interested in the contract and the same shall stand terminated solely on account of breach of contract by NINL. He submitted that the petitioners did not reply to the said legal notice dated 28-2-2003 and instead invoked the bank guarantees by letter dated 13th of March, 2003 addressed to the State Bank of India, Frankfurt and Deutsche Bank, New Delhi.
5. Mr. Mohanty submitted that Clause 10.28.1 of the general terms and conditions of the contract in Schedule 10 of the contract between MDM AG and NINL provides that NINL may, at any time, on the breach of the contract by the MDM AG, give a written notice for such breach of the contract and if MDM AG does not take appropriate measures within a period of thirty days after receipt of such notice to remedy that breach, then, NINL may terminate the contract at any time stating therein the date of termination. Similarly provision is there in all the remaining five contracts. Mr. Mohanty submitted that no notice was given by NINL to the petitioners complaining of breach of the contract by the petitioners. He submitted that in a meeting held on the 27th of April, 2001, NINL agreed that before encashing the bank guarantees, notice will be given to the petitioners. In support of this submission, he referred to the copy of the minutes of the meeting held on 27-4-2001 annexed to both the writ petition as Annexure-3. He submitted that no notice was given to the petitioners by NINL in accordance with the said agreement recorded in the minutes of the meeting held on the 27th of April, 2001. Mr. Mohanty submitted that NINL has invoked the bank guarantees by falsely stating before the banks that the petitioners have committed breach of contract and default and such invocation of the bank guarantees by NINL without notice to the petitioners amounts to fraud by NINL and in a case of fraud by the beneficiary in invoking the bank guarantees, the Court can always restrain the encashment of the bank guarantees. In support of this submission, he cited the decisions of the Supreme Court in U.P. Co-operative Federation Ltd. v. Singh Consultants Engineers (P) Ltd. (1988) 1 SCC 174; Hindustan Steel Works Construction Ltd. v. Tarapore and Co. (1996) 5 SCC 34 : (AIR 1996 SC 2268); Hindustan Construction Co. Ltd. v. State of Bihar (1999) 8 SCC 436 : (AIR 1999 SC 3710) and Federal Bank Ltd. v. V. M. Jog Engineering Ltd. (2001) 1 SCC 663 : (AIR 2000 SC 3166). He also cited the decision of the Madras High Court in Arul Murugan Traders v. Rashtriya Chemicals and Fertilizers Ltd., AIR 1986 Mad 161, in which it has been held that if the element of fraud exists, then Courts step into prevent one of the parties to the contract from deriving unjust enrichment by invoking bank guarantee. For the meaning of expression 'Fraud,' Mr. Mohanty cited the decisions of the Supreme Court in Shrisht Dhawan (Smt.) v. Shaw Brothers (1992) 1 SCC 534 : (AIR 1992 SC 1555) and State Trading Corporation of India Ltd. v. Jainsons Clothing Corporation (1994) 6 SCC 597 : AIR 1994 SC 2778.
6. Mr. Mohanty next submitted that it has been held by the Supreme Court in a series of decisions that the Court can also grant injunction restraining encashment of bank guarantee for the purpose of preventing irretrievable injury. In support of this proposition, he cited the decisions of the Supreme Court in Larsen and Toubro Limited v. Maharashtra State Electricity Board (1995) 6 SCC 68 : (AIR 1996 SC 334); Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd. (1996) 5 SCC 450; U.P. State Sugar Corporation v. Sumac International Ltd. (1997) 1 SCC 568 : (AIR 1997 SC 1644) and Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. (1997) 6 SCC 450 : (AIR 1997 SC 2477) Mr. Mohanty vehemently argued that the financial condition of NINL is not good as would be clear from the Annual Report of NINL for 2001-2002 and in case the bank guarantees are encashed, NINL would not be able to refund to the petitioners the money received for the bank by encashment of bank guarantees even if the arbitrator to whom the dispute has been referred makes the award in favour of the petitioners. Mr. Mohanty submitted that Courts have also held that an injunction can also be issued restraining encashment of bank guarantees were special equity warrants such injunction. He submitted that in Hindustan Construction Co. Ltd. v. State of Bihar (supra), the Supreme Court found that the defendants were not possessed of sufficient funds for completion of the work and the allegation of the defendants that Hindustan Construction Company Limited had abandoned the work did not prima facie appear to be correct and in these circumstances the Court held that special equities were in favour of Hindustan Construction Company Limited. He submitted that in the present case also NINL has not been able to establish the revolving letter of credit for long four years because it does not have sufficient funds and special equities are prima facie in favour of the petitioners for an order restraining NINL from encashing the bank guarantees. Mr. Mohanty submitted that in case the bank guarantees are encashed, the two banks will insist on the petitioners to indemnify the bank on account of encashment of the bank guarantees and the financial condition of the petitioners is such that they will not be able to pay the funds to the banks and the petitioners will be financially crippled.
7. Mr. Mohanty finally submitted that the petitioners instead of moving the Court of the Civil Judge (Senior Division), Bhubaneswar, moved this Court on 17th of March, 2003 under Article 226 of the Constitution for immediate relief because of the fact that the Civil Courts were closed from 14th of March, 2003 to 22nd of March, 2003 and had the petitioners waited for the Civil Courts to open, the bank guarantees would have been encashed by the NINL pursuant to its notices dated 13th of March, 2003 to the two banks. He submitted that in any case NINL is a Government company in which M.M.T.C. Limited (a Central Government Undertaking), IPICOL (a State Government Undertaking) and MACON (a Central Government Undertaking) hold 38.45 per cent., 22.59 per cent, and 1.56 per cent respectively, more than 51 per cent share. He argued that since NINL is an instrumentality of the State under Article 12 of the Constitution, it is amenable to the writ jurisdiction of this Court under Article 226 of the Constitution. He cited the decisions of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370; Kumari Shrilekha Vidyarthi v. State of U.P. (1991) 1 SCC 212 : (AIR 1991 SC 537); A.P. State Financial Corporation v. Gar Re-rolling Mills (1994) 2 SCC 647 : (AIR 1994 SC 2151); Chairman, Railway Board v. Chandrima Das (Mrs.), 2000 (2) SCC 465 : (AIR 2000 SC 988) and United India Insurance Co. Ltd. v. Rajendra Singh, 2000 (3) SCC 581 : (AIR 2000 SC 1165) and Verigamto Naveen v. Govt. of A.P.. 2001 (8) SCC 344 : (AIR 2000 SC 3609) for the proposition that the High Court under Article 226 of the Constitution can issue writ/directions to prevent fraud and to ensure equity even in contractual matters. Finally, Mr. Mohanty submitted that the two banks have already deposited the amounts covered by the bank guarantees in this Court pursuant to interim orders passed by the Court and the interest of both the parties is fully protected when the money is at the disposal of the Court. He submitted that since arbitrations on the disputes between the petitioners and NINL have commenced, the money should remain in Court and should be given to the party in whose favour the award is made. He submitted that in case the Court directs that the money deposited in Court be given to the NINL, then the NINL should be asked to furnish bank guarantees in the same currency in which the bank guarantee amounts were deposited and the said bank guarantees should be dealt with in accordance with the award passed by the Court.
8, M. B.B. Ratho, learned counsel for the NINL, on the other hand, submitted that the contracts were between MDM AG and NINL and the bank guarantees were furnished by the Bank pursuant to the said contracts between MDM AG and NINL and that the petitioner in W.P. (C) No. 2685 of 2003 not being a party to the contracts had no locus standi to file the writ petition praying for a writ or direction restraining the encashment of the bank guarantee. In this context, he submitted that the letter dated 21-1-2000 in Annexure-K/1 to the writ petition in W.P. (C) No. 2685 of 2003 would show that all contractual relations of the Metallurgy Division of MDM Krauss -- Maffel AG have been transferred to the petitioner in the said writ petition with rights and obligations as a result of the merger stated to have taken place, but the entire company MDM AF does not appear to have merged with the petitioner company. He argued that the contracts being governed by the laws of India, the merger of one division of a company with another division of another company so as to form a new company does not make the new company so formed a successor-in-interest of the former company under the Indian Law. Mr. Ratho next submitted that the averment made in the two writ petitions that the Civil Court at Bhubaneswar was closed from 14th of March, 2003 to 22nd of March, 2003 is false and misleading. Mr. Ratho produced before the Court certified copies of four order sheets of the learned Civil Judge (Senior Division), Bhubaneswar dated 14th, 20th, 21st and 22nd of March, 2003 and one certified copy of the order sheet dated 15th of March, 2003 of the Civil Judge (Junior Division), Bhubaneswar to show that the Civil Courts at Bhubaneswar were not closed and were functioning on 14th, 15th, 20th, 21st and 22nd of March, 2003, Mr. Ratho vehemently argued that since the petitioners have filed a false affidavit in the Court saying that the Civil Courts at Bhubaneswar were closed on 14th, 15th, 20th, 21st and 22nd of March, 2003, the writ petitions are liable to be dismissed in limine with exemplary costs on this ground alone. He further submitted that since the disputes between the parties arise out of a contract and raise disputed questions of fact, the remedy of the petitioners was to move the Civil Court at Bhubaneswar and not this Court under Article 226 of the Constitution. In support of this submission, Mr. Ratho relied on the decisions of the Supreme Court in Kerala State Electricity Board v. Kurien E. Kalathil, 2000 (5) Supreme 158 : (AIR 2000 SC 2573), State of Bihar v. Jain Plastics & Chemicals Ltd., (2001) 8 Supreme 334 : (AIR 2002 SC 206), Har Shankar v. The Dy. Excise and Taxation Commr., AIR 1975 SC 1121 : (1975 Tax LR 1569), Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370, State of M.P. v. M. V. Vyavsaya & Co., AIR 1997 SC 993, Tin Plate Co. of India Ltd. v. State of Bihar, AIR 1999 SC 74 and Asgar S. Patel v. Union of India, AIR 2000 SC 2222 : 2000 Tax LR 715.
9. Mr. Ratho next submitted that under the contracts between the parties, MDM AG and Indomag Steel Technology Limited were -to submit bank guarantees for security deposit, and 5 Nos. of such security deposit bank guarantees were furnished which were valid upto 90 days though under the terms of the contracts they were to remain valid for 27 months. MDM AG was required to furnish such bank guarantees for DEM 728.60, but actually furnished bank guarantee for DEM 439.40, and similarly Indomag Steel Technology Limited was required to furnish such bank guarantee 10 per cent of the total cost, but instead it furnished bank guarantee for 5 per cent of total cost. He further submitted that under the contracts MDM AG and Indomag Steel Technology Limited were to prepare and furnish to NINL 1352 drawings and designs for which letters of credit were established, but the said two companies supplied 244 drawings and designs but did not supply the remaining designs numbering 1108. Mr. Ratho vehemently argued that since 1108 numbers of drawings and designs for which letter of credits had already been opened by NINL had not been submitted to NINL, no further letter of credit was opened by NINL. According to Mr. Ratho, there was no breach of the terms of the contract by the NINL and that the breach of the contract was committed by the two companies.
10. Mr. Ratho further vehemently argued that even if it is held that NINL did not serve any notice on the petitioners, as required under the contract and as agreed upon in the meeting held on 27-4-2001, as alleged by the petitioners, this cannot be a ground for the Court to restrain encashment of the bank guarantees by NINL as the contract between NINL and the two companies is different from the obligations undertaken by the Banks under the bank guarantees to unconditionally honour the bank guarantees and to pay the amounts to the NINL covered by the bank guarantees. He referred to different clauses of the bank guarantees annexed to the two writ petitions as Annexure-1 to show that the liability of the two Banks to pay the amounts covered by the bank guarantees was unconditional and was not dependant upon any dispute between NINL and the two companies on whose behalf the bank guarantees were furnished. Mr. Ratho cited the decision of the Supreme Court in Hindustan Steel Works Construction Ltd. v. Tarapore & Co. (supra) for the proposition that in case of an unconditional bank guarantee, the nature of obligation of the Bank is absolute and not dependant upon any dispute or proceedings between the party at whose instance the bank guarantee is given and the beneficiary. Mr. Ratho submitted that even if the disputes between the parties have been referred to arbitration, the amounts of bank guarantees have to be paid to NINL who is the beneficiary under the bank guarantees as the reference of such dispute to arbitration is immaterial and had no relevance at all to the question of demand and encashment of bank guarantees by the beneficiary.
11. Mr. Ratho next submitted that the only exceptions laid down by Court where orders of injunction can be passed restraining encashment of bank guarantees are cases in which fraud on the part of the beneficiary and knowledge of the bank of such fraud by the beneficiary are established or where the injunction is necessary to prevent irretrievable injustice. He argued that the averments in the writ petition do not make out a case of fraud on the part of NINL and in any case there is no evidence of fraud by NINL. Regarding irretrievable injustice, Mr. Ratho submitted that Courts have held that irretrievable injustice has to be of the kind in Itek Corporation v. First National Bank of Boston, 566 Fed Supp 1210, in which there was no possibility at all for the party on whose behalf the bank guarantee was given to realize the decree obtained against the beneficiary after settlement of the dispute between the parties by the Court. But in this case, Mr. Ratho stated, the fixed assets of NINL are over Rupees One Thousand Crores and the production capacity of the plant of NINL is 1.1 Million Tons of Molten Iron per year and the amounts involved in the bank guarantees in question are less than one per cent of the fixed assets of NINL. He further submitted that the major shareholders of NINL admittedly are M.M.T.C. --a Central Government Undertaking and IPICOL -- a State Government Undertaking. Mr. Ratho submitted that even in cases where an industry has been referred to the B.I.F.R., the Court has refused to interfere with encashment of bank guarantees by such sick industry on the ground of irretrievable injustice. Finally Mr. Ratho submitted that since the bank guarantees in question had already been encashed and are lying in fixed deposits and no case of fraud or irretrievable injustice has been made out by the petitioner in both the writ petitions, the amounts lying in fixed deposits be directed to be paid to NINL. He submitted that in case the Court insists, NINL is also ready and willing to furnish corporate guarantees or even bank guarantee to secure the amounts paid to NINL. In support of his submissions, Mr. Ratho cited several decisions of the Apex Court right from United Commercial Bank v. Bank of India, AIR 1981 SC 1426, to show that the Court will not restrain encashment of bank guarantees except in case of established fraud to the knowledge of the Bank and irretrievable injustice.
12. While hearing the two writ petitions, at a certain stage we were thinking of directing the petitioners to move the Civil Courts at Bhubaneswar for injunction against the encashment of the bank guarantees, but considering the fact that the two writ petitions have been heard at length by this Court and also the fact that the Court of Civil Judge (Senior Division), Bhubaneswar already has a burden of large pendency of cases and may not be in a position to decide this matter expeditiously, we took a view that we should decide the two writ petitions under Article 226 of the Constitution on merits, particularly when NINL against whom relief is sought in the two writ petitions is a Government company and the Court can entertain a writ petition under Article 226 of the Constitution against a Government company and grant relief in deserving cases.
13. Under the terms of the two bank guarantees as annexed to the two writ petitions the two Banks have undertaken that they will immediately pay to NINL the amounts mentioned therein if in the opinion of the NINL any default is made by MDM AG or Indomag Steel Technology Limited in performing in terms of the contract and the two Banks have further undertaken that the opinion of NINL that the two companies have committed breach of contract will not be questioned by the Banks. Clauses 1 and 2 of the bank guarantees which are identically worded in all the bank guarantees are quoted herein below ;
'1. We hereby agree and undertake and guarantee to pay you the sum of (Figures have been omitted) and if in your opinion any default is made by the Contractor in performing any of the terms and conditions of the Contract or if in your opinion the Contractor commits any breach of the Contract then on your demand made in writing on us stating the reasons thereof which will not be questioned by us State Bank of India, Frankfurt Branch, we shall immediately pay to you in any manner which you may direct the said sum of (Figures have been omitted) or such portion thereof as may be demanded by you not exceeding the said sum, without any protest or demur and without reference to the Contractor. Our liability to pay is not dependent or conditional on your proceeding against the Contractor and we shall be liable to pay the aforesaid amount as and when demanded by you merely on a claim being raised by you on us and even before any legal proceedings are taken against the Contractor.
2. Notwithstanding anything contained in the contrary, your decision as to whether the Contractor has made any such default or defaults under the Contract and the amount or amounts to which you are entitled by the reason thereof will be binding on us and we shall not be entitled to ask you to establish your claim or claims under this guarantee but will pay the sum on demand without any protest or demur.
The amount of this guarantee towards advance payment shall stand reduced automatically on pro-rata basis in proportion to the amount of advance adjusted against the invoice value of progressive payment of supply and services.'
It is thus clear from the aforesaid Clauses 1 and 2 of the bank guarantees that the obligations of the Bank to pay the amounts covered by the bank guarantee are unconditional and are irrespective of the disputes between NINL and the two companies and the reference of the disputes between NINL and the two companies to arbitration. It is now well settled that in case of such unconditional bank guarantees, the disputes between the parties to the underlying contract pursuant to which the unconditional bank guarantees have been given do not in any way affect the obligations of the Banks to honour the bank guarantees and thus the Court cannot grant injunction in such cases except in case of fraud and irretrievable injustice. This position of law has been summed up by the Supreme Court in U.P.. State Sugar Corporation v. Sumac International Ltd. (supra) as follows :
'12. 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...........'
14. Thus the first question to be decided in these two writ petitions is whether the petitioners have been able to make out a case of fraud on the part of NINL warranting an order from this Court restraining encashment of bank guarantees by NINL. In U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (supra), Sabyasachi Mukherji, J. (as he then was) took note of the law on this point in England that a Bank was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default and the only exception that ruled was where fraud by one of the parties to the underlying contract had been established and the Bank had notice of the fraud. In the said decision of U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (supra), K. Jagannatha Shetty, J. in a separate judgment concurring with Sabyasachi Mukherji, J. observed :
'..............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. But, the banker must be sure of his ground before declining to pay. The nature of as to vitiate the entire underlying transaction'. It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the Court for an injunction.'
In the said judgment, K. Jagannatha Shetty, J. cited the following statement of Sir John Donaldson, M. R. in Bolivinter Oil S.A. v. Chase Manhattan Bank, (1984) 1 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 discharged. 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 discharged.'
It is thus clear that before the Court passes order restraining encashment of bank guarantee, the evidence must be clear that a fraud had been committed by the beneficiary of the bank guarantee and that the Bank had knowledge of such fraud after minimal investigation and it will also not be sufficient if the Bank's knowledge rests merely on the uncorroborated statement of the customer. This position of law with regard to the nature of fraud and the evidence of not only the fact of fraud but also the knowledge of the Bank about the fraud as discussed in the judgment of K. Jagannatha Shetty, J. in U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (supra) and in the statement of Sir John Donaldson, M. R. in Bolivinter Oil S.A. v. Chase Manhattan Bank (supra) has also been discussed and approved by the Supreme Court in U. P. State Sugar Corporation v. Sumac International Ltd. (supra). The law that not only evidence of the fact of fraud but also of the knowledge of the Bank about the fraud must be adduced before the Court to obtain an injunction against encashment of bank guarantee has also been dealt with in a recent decision of the Supreme Court in Federal Bank Ltd. v. V. M. Jog Engineering Ltd. (supra). Paragraphs 56 and 57 of the said judgment of the Supreme Court in Federal Bank Ltd. v. V. M. Jog Engineering Ltd. (supra) are quoted herein below (at page 3179) :
'56. Decided cases hold that in order to obtain an injunction against the issuing bank, it is necessary to prove that the bank had knowledge of the fraud.
57. Kerr, J. said in R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., (1978 QB 146) (QB at p. 155) that irrevocable Letters of Credit are 'the lifeblood of international commerce'. He said :
'Except possibly in clear cases of fraud of which the banks have notice, the Courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration...... Otherwise, trust in international commerce could be irreparably damaged.'
Denning M. R. stated in Edward and Owen Engg. Ltd. v. Barclays Bank International Ltd., 1978 (1) All ER 976 that 'the only exception is where there is a clear fraud of which the bank had notice'. Browne, L. J. said in the same case : 'but it is certainly not enough to allege fraud, it must be established and in such circumstances, I should say, very clearly established'. In Bolivinter Oil S.A. v. Chase Manhattan Bank, All ER at p. 352, it was said :
'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 before the injunction is vacated'.
Thus, not only must 'fraud' be clearly proved but so far as the bank is concerned, it must prove that it had knowledge of the fraud. In United Trading Corporation S.A. v. Allied Arab Bank, 1985 (2) Lloyds Rep 554 it was stated that there must be proof of knowledge of fraud on the part of the bank at any time before payment. It was also observed that it:
'would be sufficient if the corroborated evidence of the plaintiff usually in the form of contemporary documents and the unexplained failure of a beneficiary to respond to the attack, lead to the conclusion that the only realistic inference to draw was 'fraud''.In Guaranty Trust Co. of New York v. Hannay, (1918) 2 QB 623 the banker accepted the documents without any knowledge of fraud or falsification and it was held that the defendants could not counterclaim from the bank. However, it would be the banker's duty to refuse the documents which on their face bear signs of having been altered (See Saloman and Naudus, Re. That was a C.I.F. contract. This Court in I.T.C. Ltd. v. Debts Recovery Appellate Tribunal, (AIR 1998 SC 634) also held that knowledge of the bank as to the fraud or forgery had to be prima facie established.'
15. Hence, it has to be seen in these two writ petitions whether the petitioners have established fraud on the part of NINL and knowledge of the two Banks of the fraud by NINL. The allegations of fraud, if any, made by the petitioners are in paragraphs 19 and 20 of the writ petitions which are similarly worded in both the writ petitions. The said paragraphs 19 and 20 of the writ petitions are quoted herein below :
'19. The invocation of the Bank Guarantee on a certificate that the petitioner has defaulted in performing the terms and conditions of the Contracts and has committed breach of the Contract is not only false but a fraud because the petitioner was always and is willing to perform its obligations under the Contracts but the Defendant No. 1 committed breach of the Contracts by failing to establish L/C by February 3, 1999.
20. In the absence of L/C, the petitioner and its subsidiary company could not complete the engineering, continue to place orders on sub-suppliers and consequently continue manufacturing and/or procurement for manufacturing of the equipments. Besides, the Defendant No. 1 under Clause 10.28.1 of the Contract has to give written notice if there is any breach of the Contract committed by the Petitioner and then can terminate the Contract if the breach is not rectified within 30 days. No such notice has been issued by the defendant No. 1 and that establishes that the petitioner has not defaulted in its obligations. It may be added the Indian subsidiary has placed sub-contracts with BHEL, L & T etc., and paid them advances also.'
16. Thus, it is alleged that NINL has committed fraud by stating before the two Banks that the petitioners defaulted in performing as per the terms of the contract and have committed breach of the contract and that the NINL has not given written notice if there was any breach of contract committed by the petitioners although it was required to give such a notice under Clause 10.28.1 of the contract. The petitioners have further alleged that NINL has not given notice to the petitioners before invoking the bank guarantees. Failure on the part of NINL to give notice to the petitioners in terms of the contract before invoking the Bank guarantees may amount to breach of contract but does not amount to fraud. Fraud is established if it is proved that the party who made the statement alleged to be fraudulent did not honestly believe the statement to be true. The party must know that the statement he is making is false. There is no such pleading in paragraphs 19 and 20 of the writ petition that NINL honestly believed or knew that MDM AG or Indomag Steel Technology Limited had not committed any default or breach of the contract and yet furnished certificates to the two Banks that the said two companies had committed default. On the other hand, it is the specific case of NINL that the two companies have defaulted and committed breach of contract by not furnishing the bank guarantees for security deposits for the amounts and for the periods stipulated in the contracts and by not furnishing 1108 nos. of drawings and designs though NINL had established letters of credit for such drawings and designs. We cannot hold that NINL did not honestly believe or know that the two companies had not committed any such default or breach of contract. Hence, the petitioners have not been able to establish fraud on the part of NINL in invoking the bank guarantees. That apart, the petitioners have not established before the Court that the two banks had knowledge about the fraud committed by NINL.
17. The next question to be decided in these two writ petitions is whether the petitioners have been able to make out a case for an order restraining the bank guarantees for the purpose of preventing irretrievable injustice. In U. P. State Sugar Corporation Ltd. v. Sumac International Ltd. (supra), the Supreme Court after considering its earlier decision in Svenska Handelsbanken v. Indian Charge Chrone, (1994) 1 SCC 502 : (AIR 1994 SC 626) held that for granting an injunction restraining encashment of an unconditional bank guarantee, irretrievable injustice must be of the kind in Itek Corporation v. First National Bank of Boston (supra). Paragraph 14 of the said judgment of the Supreme Court in U. P. State Sugar Corporation v. Sumac International Ltd. (supra) (AIR 1997 SC 1644) is quoted herein below :
'14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised 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 Corpn. case. In that case an exporter in 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 US Government had blocked all Iranian assets under the jurisdiction of United States had and 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 realisation of the bank guarantees/letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make 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 not be able to pay, is not enough. In Itek case there was a certainty on this issue. Secondly, there was good reason, in that case for 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.'
It will thus be clear from the aforesaid judgment that to avail the exception of irretrievable injustice exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds will have to be decisively established and a mere apprehension that the other party will not be able to pay is not enough. The Supreme Court found in the aforesaid case of U. P. State Sugar Corporation Ltd. v. Sumac International Ltd. (supra) that even though the Corporation was a sick industrial company in respect of which a reference was pending before the B.I.F.R. under the Sick Industrial Companies (Special Provisions) Act, 1985, there could be no presumption that the Corporation would in no circumstances be able to discharge its obligations and held that this was not a situation of the kind envisaged in the case of Itek Corporation v. First National Bank of Boston (supra) where there was no possibility whatsoever of recovery of any amount from the purchaser.
18. In the present case, the contention of Mr. Mohanty, learned counsel for the petitioners, is that in case the bank guarantees are encashed, NINL would not be able to refund to the petitioners the money received from the Banks even if the arbitrator to whom the dispute has been referred makes an award in favour of the petitioners. But this is only an apprehension of the petitioners. NINL is a Government company in which M.M.T.C. and MACON (Central Government Undertakings) and IPICOL (a State Government Undertaking) have more than 50 per cent shares. NINL also owns a steel plant and had given advances to MDM AG and Indomag Steel Technology Ltd. equal to the amounts of the bank guarantees and there is no basis for the said apprehension of the petitioners. In any case, there is no material before the Court to come to the conclusion that in the event the arbitrator decides the dispute in favour of the petitioners and makes the award, there will be no possibility whatsoever of recovery of the amount awarded in favour of the petitioners. This is thus not a situation of the kind envisaged in the case of Itek Corporation v. First National Bank of Boston (supra) and not a case where the Court can restrain encashment of the bank guarantees on the ground of irretrievable injustice.
19. Since no case of fraud or irretrievable injustice has been made out by the petitioners, we hold that the Court cannot restrain NINL to encash the back guarantees and dismiss the writ petitions and direct that the bank guarantee amounts lying in fixed deposits in the State Bank of India, Commercial Branch, Cuttack with accrued interest will be paid to NINL -- opposite party No. 1 forthwith by the Registrar (Judicial) of this Court. But considering the facts and circumstances of the case, parties will bear their own costs.
M. Papanna. J.
20. I agree.