A.K. Sikri, J.
1. Some disputes have arisen between the parties concerning the contract dated 8th August, 2002 entered into between them. Pending resolution of those disputes in terms of clause 10.48 of the contract which provides resolution of disputes by means of arbitration, present petition is filed under Section 9 of the Arbitration and Conciliation Act, 1996 for stay. The petitioner wants restraint order against the respondent from invoking and/or encashing the bank guarantees issued by the Standard Chartered Bank at the request of the petitioner in which the respondent is the beneficiary. Particulars of these bank guarantees are as under:
----------------------------------------------------------Bank Guarantee No. Amount (Rs.)---------------------------------------------------------529020107226-AS 40,590,769529020107217-AS 77,799,023529020171352-AP 50,738,482---------------------------------------------------------Total 169,128,274---------------------------------------------------------
2. Ex-parte order dated 22nd November, 2005 was passed restraining the respondent from invoking/encasing the bank guarantees.
3. The respondent has filed a short affidavit opposing the prayer contained in this petition to which the petitioner has filed the rejoinder.
4. Since it is a case of bank guarantee, before taking note of the detailed submissions made by both the parties, it would be apposite to scan through the available case law on the subject. This discussion, hereinafter, is on the basis of arguments addressed by the learned counsel on either side.
5. The principles relating to such bank guarantees in such cases have almost been settled through a series of judgments rendered by the Supreme Court from time to time. The position was summarized by the Supreme Court in paras 21 and 22 of its earlier judgment in the case of Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Anr. reported as : AIR1997SC2477 , after taking stock of its earlier judgments. These paras are to the following effect:
Para 21: Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncement on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v.Indian Charge Chrome : AIR1994SC626 , Larsen and Toubro Ltd. v. Maharashtra SEB : AIR1996SC334 , Hindustan Steel Workers Construction Ltd. v. G.S.Atwal and Co. (Engineers) (P) Ltd. : AIR1996SC131 , and U.P.State Sugar Corporation v. Sumac International Ltd. : AIR1997SC1644 . The general principle which has been laid down by this Court has been summarized in the case of U.P.State Sugar Corporation : AIR1997SC1644 as follows: (SCC p.574, para 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, thereforee, 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 the 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.
Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank (1984) 1 All ER 351 are apposite:
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 nor 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 aforesaid passage was approved and followed by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. : [1988]1SCR1124 .
Para 22: The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.
6. It is a matter of common knowledge that in contracts of this nature, as in the instant case, the contractor normally gives performance guarantee to the employer for due fulfillment of its obligation. It is also a matter of common knowledge that normally such bank guarantees are couched in a language which are unconditional bank guarantees whereby the bank undertakes to give money to the beneficiary on demand, without demur or protest. When such a demand is made the bank is not even permitted to probe into the disputes between the parties.
7. In State of Maharashtra v. National Construction Co. reported as : [1996]1SCR293 , the Supreme Court clarified the position on this aspect in the following words:
The rule is well settled 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. But that does not mean that the parties to the underlying contract cannot settle the disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause of action for the same is independent of enforcement of the guarantee.
8. If the bank guarantee is unconditional and if there is a stipulation in the bank guarantee that the bank should pay, on demand, without demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but with respect to the amount of loss of damage, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank guarantees. [See: Hindustan Steelworks Construction Ltd. v. Tarapore and Co. and Anr. : AIR1996SC2268 .
9. The Supreme Court, in these circumstances, on the basis of aforesaid principles, has given words of caution that injunction restraining the encashment of bank guarantees should not be duly granted. The grant of injunction is a discretionary power in equity jurisdiction. In a matter of bank guarantee, where the bank has undertaken and to unconditionally and unequivocally abide by the terms of the contract (that is the terms of bank guarantees), it is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. If creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the court justified on that basis to issue an injunction from enforcing the contract, i.e. bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the party's favor the said party is entitled to damages or other consequential reliefs. The court at this stage, cannot even go into the question as to whether the beneficiary has suffered any damage or loss. In Hindustan Steel Works Construction Ltd.(supra), the Supreme Court felt that the High Court committed a grave error in restraining the appellant from invoking bank guarantees on the ground that in India only a reasonable amount can be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a term in a bank guarantee making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till an adjudication in that behalf is made either by a court or arbitrator, as the case may be. The court further opined that in taking such a view, the High Court had overlooked the correct position that a bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary.
10. The principles which may be distilled from the aforesaid judgments and the observations made therein, would be the following:
(a) The bank guarantee is an independent contract between the bank and the beneficiary.
(b) When there is an unconditional bank guarantee and the bank has agreed to make payment without demur or protest, on beneficiary invoking the said bank guarantee, the bank is under obligation to honour the said demand. It is based on the rationale that otherwise trust in commerce, national and international, would be irreparably damaged.
(c) The bank, or for that matter, the person at whose instance the bank guarantee is given [ and as a squatter even the court ] will not go into the pending disputes or nature thereof between the contractor and the employer/beneficiary. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are found to be in order, the bank has to honour the same.
(d) The courts, at this stage, cannot even go into the question as to whether the beneficiary has suffered any damages or not. thereforee, the ground that in India only a reasonable amount can be awarded by way of damages even when the parties to the contract have provided for liquidated damages, is not available in such proceedings.
(e) The court is also precluded from embarking on the enquiry in encashment of bank guarantee the beneficiary is trying to take undue enrichment.
(f) In so far as dispute between the parties to the underlying contract is concerned, that has to be settled by resorting to litigation or arbitration, as the case may be.
(g) The courts should, thereforee, be slow in granting the injunction to restrain the realization of such a bank guarantee.
(h) However, there are two well recognized exceptions to this rule which are:
(1) A fraud of egregious nature.
(2) The invocation/encashment of bank guarantee would result in irretrievable harm or injustice to one of the parties.
(i) In some cases third exception is also carved out viz. when there are special equities in favor of the person seeking injunction.
(j) In case the bank guarantee is not invoked in terms thereof, the bank can refused to honour the bank guarantee as in that case it would not be in accordance with the agreed stipulation and invocation would be improper. This can be treated as the fourth exception as in such a case injunction can be granted.
11. Fraud is made an exception as a fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. thereforee, if there is such a fraud of which the beneficiary seeks to take the advantage, he can be restrained from doing so. However, very stringent conditions to accept such a ground are laid down, viz. (a) fraud has to be of egregious nature.(b) Further, while dealing with the question of fraud it is to be satisfied that it is an established fraud. The evidence relating to this fraud must be clear, both as to the fact of fraud and to the bank's knowledge.
12. Test to be applied in case of fraud is contained in the following passage of the Court of Appeal judgment in the case of Bolivinter Oil SA v. Chase Manhattan Bank reported (1984) 1 All ER 351 which has been approved by the Supreme Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. reported : [1988]1SCR1124
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 nor 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.
13. While examining the allegation of fraud, the court is precluded from embarking on the enquiry that in encashment of bank guarantee the beneficiary is trying to take enrichment as principle of undue enrichment has no application. [ See Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Anr. : AIR1997SC2477 ]
14. The second exception i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. thereforee, while examining this exception, if pleaded, the Supreme Court has laid down that the party seeking injunction will have to decisively establish/prove to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution.
RE: SPECIAL EQUITIES
15. The question, in a given case, as to whether the bank guarantee is invoked in terms thereof or not, would depend on the language of the bank guarantee. It normally relates to the interpretation of the language contained in the bank guarantee and when the court is to examine as to whether the bank guarantee is unconditional or in absolute terms or whether the bank guarantee can be invoked on happening of a particular contingency as stated in the language of the bank guarantee. It is normally seen that many times controversy is raised that the language of the bank guarantee states that the beneficiary can invoke only if there is loss or damage caused or suffered by the beneficiary by reason of non-fulfillment of the contractual terms. thereforee, in such circumstances, the contention of the party at whose instance the bank guarantee is given is normally that unless loss or damage caused or suffered is proved the bank guarantee cannot be invoked. As mentioned above, this would depend upon language of the bank guarantee and the approach of the Supreme Court in different cases would be noted at the time of dealing with the arguments in the present case. One of the arguments in the instant case of the petitioner also is that language of the bank guarantee suggests that loss or damage is to be stated by the beneficiary/respondent which has not happened in the instant case. However, one case which needs to be noted at this stage itself is Hindustan Construction Co. Ltd. v. State of Bihar and Ors. : AIR1999SC3710 on which great reliance was placed by the petitioner and the court laid down the following principle touching this aspect:
What is important, thereforee, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person no whose behalf the guarantee was furnished. The terms of the bank guarantee are, thereforee, extremely material. Since the bank guarantee represents an independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, thereforee, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.
16. While aforesaid principles are not in dispute, it is the application thereof in a given case which becomes a matter of argument between the parties. That is precisely the case here as well.
17. The case set up by the petitioner is that invocation is fraudulent; that there are special equities in its favor; and that the bank guarantee is not invoked in terms thereof and on this trilogy, as the grounds are interdependent, restraint order is prayed for. I shall, thereforee, deal with the submissions of both the parties on these aspects in detail.
18. Dr. A.M. Singhvi and Mr. A.S. Chandhiok, learned senior counsel appearing for the petitioner submitted that the respondent had committed various breaches of the contract and there was as many as six breaches duly established from the record and these were:
(a) failure to provide mobilisation advance. It was submitted that clause 10.43 of the contract between the petitioner and the respondent inter alia, stipulates that the respondent would make advance payment to the petitioner for the amount of 10% of the contract price for mobilisation and 5% of the contract price as equipment advance. This clause is to be read together with clause 11.14 and a conjoint reading of both the clauses would make it clear that there is a mandatory obligation upon the respondent to provide an advance payment to the petitioner as `mobilisation advance' for an amount of 10% of the contract price which comes to approximately Rs.16.92 crores. At the inception of the work under the contract, the respondent in compliance with its obligations, paid an advance of Rs.5 crore to the petitioner.
The petitioner also complied with its obligations and furnished an unconditional bank guarantee to the respondent. The petitioner had also given a statement dated 28th August, 2003 showing utilization of advances in the period October, 2002 to March, 2003. There was no response to this letter till 24th October, 2004 when the Engineer wrote a letter asking the petitioner ti give details of the expenditure and for this purpose relied upon `audit report' to contend that the petitioner's statement was incorrect. Though no copy of the audit report was supplied, the petitioner in any event, replied on 29th October, 2004 explaining its expenditure fully and also commenting on the `summary' of the purported report given by the Engineer. To this there was no response from the Engineer. On 10th January, 2005, the petitioner requested for mobilisation advance of Rs.11.25 crores. Instead of doing so, the Engineer again wrote letter on 18th January, 2005 asking for details of expenditure on the first advance of Rs.5 crore. The petitioner replied to this letter also on 25th January, 2005 giving the details all over again. On 5th February, 2005, however, the Engineer asked for `segregated' details of payment. Even this was replied. Eventually on 29th April, 2005 the Engineer wrote a letter confirming that the petitioner was entitled to the advance and even after this certification/recommendation no payment was made. It was, thus, submitted that this breach on the part of the respondent in not releasing the balance amount stood established by the Engineer of the respondent himself.
(b) It was also submitted that the respondent was in breach of clause 10.37.2 for failure to certify payments due for upgradation of manual toll collection system. It was submitted that the petitioner had submitted various bills from time to time and payments could be made only on certification. However, the respondent was intentionally not certifying the bills so that it could withhold the payment legitimately due to the petitioner and a sum of Rs.65,940,637/- is due under this head.
(c) It is also the case of the petitioner that one of the obligations is to undertake periodic maintenance of the highways as contained in clause 7.2.10A of the contract. Although the petitioner has been discharging its obligation, the respondent has not made payment. It may be mentioned that the petitioner is not claiming the maintenance charges on lane kilometer bases. Whereas the respondent in its letter dated 12th June, 2004 has taken the view that the rate agreed was for `one side of carriageway including paved shoulder'
(d) As per Section 8.1 of the contract the respondent is to provide certain fixed assets for Advanced Traffic Management System to be installed and the respondent has failed to discharge this obligation.
(e) It is also alleged that the respondent has failed to certify payment for rejuvenation of the pavement and a sum of Rs.1,95,33,635/- is due on this account. It is breach clause 10.37.2 of the contract.
(f) According to the petitioner, the respondent has also failed to certify payments for manuals which constitute breach of clause 10.37.2 of the contract. It is alleged that as per various clauses the petitioner has to submit to the respondent certain manuals and procedures, details whereof are given in para 79 of the petition. Total payment payable against these manuals/procedures is Rs.42,67,811/-. However, vide letter dated 4th December, 2004 the Engineer has disallowed the payments for the manuals.
19. Learned counsel submitted that in the short reply by the respondent there is no reply to the aforementioned allegations pointing out breaches on the part of the respondent. thereforee, according to the learned counsel, it is clear that the respondent owes substantial amounts to the petitioner and these amounts are much more than the amount of bank guarantees which are invoked. It would be, thereforee, a clear and established case of fraud whereby the respondent wanted the petitioner to continue to do the work and not to pay for the same and when the petitioner asked for the payment, it invoked the bank guarantees. On this basis, it was submitted that it could be gathered that there was no intention on the part of the respondent to make payment for the work executed.
20. Learned counsel relied upon the judgment of the Supreme Court in the case of HPA International v. Bhagwandas Fateh Chand Daswani and Ors. reported as : AIR2004SC3858 in support of his contention that it was not only a case of fundamental or repudiator breach but even the breach was deliberate. Learned counsel also referred to the judgment in the case of Deutsche Ruckversicherung AG v. Walbrook Insurance Co.Ltd. and Ors. reported as (1994) 4 All ER 181 and submitted that the test laid down therein justifying the grant of injunction had been established by the petitioner in the instant case. Following passage from the said judgment was relied upon: In order to justify the grant of an injunction, the reinsures must prove that if the reinusred drawn on the letters of credit, they will do so fraudulently in the knowledge that they have no right to payment under them. The reinsures contend that the reinsured have no right to payment under the letters of credit because the underlying contracts which gave rise to those rights have been validly avoided. In so far as there is an issue as to that, the reinsures have sought to persuade me that that issue will clearly fall to be resolved in the reinsures' favor at trial-so clearly indeed that my judgment to that effect will suffice to preclude the reinsured from drawing bona fide on the letters of credit and, in consequence, justify the grant of an injunction restraining them from doing so.
21. Dr.Singhvi further submitted that once the terms of the bank guarantee are examined in the aforesaid perspective, it would be clear that the respondent was invoking the bank guarantee against terms. He submitted that reading of the bank guarantee would make it clear that the petitioner had undertaken to execute the operation and maintenance of four lined national highway at NH-8 and as the petitioner had to furnish the respondent with a bank guarantee `as security for compliance of obligation in accordance with the contract', the bank had agreed to give `such' a bank guarantee. thereforee, argued the learned senior counsel, the bank guarantee could be invoked only if the petitioner failed to fulfilll its contractual terms. However, the ground realities were just the reverse as breaches on the part of the respondent had been established. The learned senior counsel, thereforee, submitted that the fact situation as prevailing in Hindustan Construction Co. Ltd.(supra) clearly applied and the petitioner was entitled to the injunction. He also referred to the following observations of the Division Bench of this court in the case of Harparshad and Co. Ltd. v. Sudarshan Steel Mills reported as : AIR1980Delhi174
The first rule of the construction of a contract or a document is to ascertain the intention of the parties to it (Chitty on Contracts Vo.1.24th Edn., para 698). What was the intention of the parties conveyed by the language of the bank guarantee If the argument of the appellant that the liability there under is absolute is to be accepted, then the appellant was entitled to recover the amount of the bank guarantee from the bank without complying with the terms of the bank guarantee. If that had been the intention of the parties the bank guarantee would not have said that the liability would arise on failure of respondent No.1 in the judgment of the appellant to fulfilll the terms of the contract. There is a distinction between the absolute liability, as contended by the appellant, and the absolute liability which arises after the terms of the bank guarantee are fulfilled. The intention of the parties according to the language of the bank guarantee was that the absolute liability should arise only after the terms of the bank guarantee are fulfilled. It was necessary for the appellant to show that it had become entitled to recover the amount under the bank guarantee because in its judgment respondent No.1 had failed to perform any of the obligations under the contract. The appellant has made no attempt to show that it has complied with the conditions of the bank guarantee.
Further, the bank has to see that the judgment is exercised in respect of some definite obligation to be performed by respondent under the contract. It is not sufficient for the appellant merely to reiterate parrot-like words of the bank guarantee. The statement by the appellant in the notice in writing that respondent No.1 has failed `to carry out and fulfill any of the obligations assumed under the said contract' would simply be unintelligible `Any of the obligations' are meaningless words unless and until a reference is made to some particular obligation to which respondent No.1 has failed to carry out in the judgment of the appellant. The duty of the appellant in making the demand on the bank is like the duty of the plaintiff to disclose the cause of action in the plaint. Just as a plaint is liable to be rejected for non-disclosure of the cause of action, a demand by the beneficiary of the bank guarantee is liable to be rejected by the bank if it does not state the facts showing that the conditions of the bank guarantee have been fulfilled.
This is in all that is meant by the words in the judgment of M/s Harparshad and Co.Ltd. While these words give the right to the appellant to decide if respondent No.1 has failed to carry out the obligation under the contract, they do not dispense with the necessity of the appellant stating in the demand which particular obligation under the contract respondent No.1 has failed to carry out in the judgment of the appellant. The statement of the facts referring to some definite obligations under the contract is necessary just as the statement of the cause of action is necessary in the plaint.
22. The learned senior counsel also sought to deduce the ground of special equities from these very submissions. Mr.A.S.Chandhiok, in addition, gave another dimension to the case by referring to the provisions of Section 126 of the Contract Act. I may first take note of this provision before stating his submission :
126. Contract of guarantee, surety, principal debtor and `creditor'-. A `contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the `surety'; the person in respect of whose default the guarantee is given is called the `principal debtor', and the person to whom the guarantee is given is called the `creditor'. A guarantee may be either oral or written'.
23. Argument of Mr.Chandhiok by virtue of this provision is that the main agreement between the parties i.e. agreement dated 8th August, 2002 between the petitioner and the respondent itself gets incorporated in the bank guarantee and, thereforee, the court was to look not only into the provisions of the bank guarantee but main agreement between the petitioner and the respondent as well and once the matter is examined from this perspective, the petitioner had right to refer and rely upon the provisions of the contract and argue that there was a breach on the part of the respondent and, thereforee, the respondent was not justified in invoking the bank guarantee. In support, he relied upon the following observations in the case of Sahibabad Steels Pvt. Ltd. v. Engineering Projects (India) Ltd. and Ors. reported as : 33(1987)DLT237
A `contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. (See Section 126 of the Indian Contract Act). The contract of guarantee, as is clear from the above definition, involves three parties-a principal debtor, whose liability may be actual or prospective; a creditor, and a third party called surety who promises to discharge the debtor's liability if debtor failed to do so. Surety's liability is collateral. The guarantee, thus envisages two contracts-one between the principal debtor and the credit and the second between the creditor and the surety. The first is called primary contract and the second the collateral contract. The guarantee, though, has its genesis in the primary contract between the principal debtor and the creditor, yet it is an autonomous and independent contract as held, and in our view, rightly, by the learned single Judge.
24. He also placed reliance upon another judgment of this court in the case of Nangia Construction India (P) Ltd. v. National Buildings Construction Corporation Ltd. and Ors. reported as : 41(1990)DLT359 wherein this court relied upon the provisions of Section 126 of the Contract Act and held that every bank guarantee is a tri-partite contract between the banker, the beneficiary and the person at whose instance the bank issues the bank guarantee and further that law in India on this aspect which had statutory flavour was different from the law in England where the law as developed by various pronouncements of English Courts which was based upon common law. He submitted that while coming to this conclusion the learned Single Judge had taken note of various pronouncements of the Supreme Court as well as other High Courts and concluded that the Supreme Court had nowhere held otherwise.
25. I may first deal with the contentions raised by Mr.Chandhiok since pure question of law is raised by him.
26. The question as to whether the bank guarantee is a bilateral or tri-partite agreement is not free from doubt of controversy. No doubt this court in Nangia Construction India (supra) held that it is a tri-partite agreement in view of the provisions of Section 126 of the Contract Act. It is also to be noted that in case of State Trading Corporation of India Ltd. (supra), the two Judge Bench of the Supreme Court has made an observation that the contract of guarantee is a trilateral contract. However, on the other hand, in several other cases, the Supreme Court has held otherwise and categorical observations are that the contract is a bilateral contract.[See: Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Anr. : AIR1997SC2477 , State of Maharashtra v. National Construction Co. : [1996]1SCR293 , Hindustan Steelworks Construction Ltd. v. Tarapore and Co. and Anr. , : AIR1996SC2268 and Hindustan Construction Co. Ltd. v. State of Bihar and Ors. : AIR1999SC3710 ]. It is not necessary for me to be deterred by this controversy. The guiding principle laid down by the Supreme Court in a series of judgments noted above, which are binding precedents, is that the if the bank guarantee is unconditional and in absolute terms, the bank is under obligation to honour its commitments under the said bank guarantee. It is, thereforee, this aspect which would have been examined by me in the instant case.
27. While dealing with this aspect, it is essential to take note of the terms in which the bank guarantees are given. The bank guarantee dated 31st July, 2004, which is a performance guarantee, is in the following terms:
The National Highways Authority of India G-5and6, Sector 10, Dwarka, New Delhi-110045
OUT PERFORMANCE GUARANTEE NUMBER:529020107226-AS dt.06/08/2002
WHEREAS INTERTOLL ICS CECONSOandM COMPANY (P) LIMITED
(hereinafter called The Operator ) has undertaken to execute the Operation and Maintenance of four lined National Highways on NH-8 (Gurgaon-Amer Section km.36.63 to km.248.00) (hereinafter called the contract )
AND WHEREAS it has been stipulated by you in the said contract that the Operator shall furnish you with a Bank Guarantee by a recognized bank for the sum specified therein as Security for compliance with his obligations in accordance with the Contract. AND WHEREAS we, STANDARD CHARTERED BANK, have agreed to give the Operator such a Bnk Guarantee.
NOW THEREOF We, STANDARD CHARTRRED BANK having our registered at 1, Aldermanbury Square, London and a branch office at 90, M.G.Road, Fort, Mumbai 400 001 hereby affirm that We, STANDARD CHARTERED BANK are the Guarantor and responsible to you, on behalf of the Operator up to a total of Rs.40,590,769/- (Rupees Forty million five hundred ninety thousand seven hundred sixty nine only) such sum being payable in the types and proportions of currencies in which the Contract Price is payable, being Rupees and we STANDARD CHARTERED BANK undertaken to pay you, upon first written demand and without cavil and argument any sum or sums within the limit of Rs.40,590,759 (Rupees Forty million five hundred ninety thousand seven hundred sixty nine only) as aforesaid without your needing to prove grounds or reasons for your demand for the sum specified there.
We, STANDARD CHARTERED BANK further agree that no change or addition to other modification of terms of the Contract or of the Works to be performed there under or any of the Contract Documents which may be made between you and the Operator shall in any way release us from the liability under this guarantee and We, STANDARD CHARTERED BANK hereby waive notice of any such change, addition or modification.
This Bank Guarantee, which is neither negotiable nor transferable, and restricted to the payment of money only, is to be produced for endorsement if any part payment be made and surrendered against final payment of the Guarantor's aggregate liability or on 31/07/2004 whichever event occurs first.
Payment under this Bank Guarantee will only be made against surrender of the original guarantee by you to the Guarantor.
The cancellation of, or any change to the terms and conditions of this Bank Guarantee, must first be agreed to in writing by you, the Operator and the Guarantor.
This Guarantee shall be valid up to and including 31st July, 2004
Trade Services-Mumbai
90, Mahatma Gandhi Road
Fort, Mumbai-400 001
India
To the National Highways
Authority of India, 1A,
Eastern Avenue, Maharani
Bagh, New Delhi 110045
Letter of Guarantee
Our reference No. 529020107226-As
dated 06Aug02
Amount INR 40,590,769.00
Notwithstanding anything contained herein above:
(I) Our liability under this bank guarantee shall not exceed INR 40,590,769.00
(Rupees Forty million five hundred ninety thousand seven hundred and sixty nine only).
II) This bank guarantee shall be valid up to 31.07.2004
III) We are liable to pay the guaranteed amount or any part thereof under this bank guarantee only if you serve upon us a written claim or demand (and which should be received by us), on or before 31.07.2004 before 12.30 hours (Indian Standard time) where after it ceases to be in effect in all respects whether or not the original bank guarantee is returned to us.
28. As per this bank guarantee, the bank has clearly stated that :
(a) the bank is the guarantor and responsible to the respondent herein up to a total of Rs.40,590,769/-.
(b) the bank undertakes to pay to the beneficiary any sum or sums within the aforesaid limit of payment by the beneficiary.
(c) The amount would be payable `upon first written demand' and without cavil or argument.
(d) Payment would be made without respondent needing to prove grounds or reasons for the demand. (e) Necessity of demanding the said debt from the operator, i.e. petitioner herein, is also waived by the bank.
We are not concerned with other terms in this case.
29. The reading of this bank guarantee would clearly demonstrate that it is an unconditional and unequivocal bank guarantee furnished by the bankers and the money up to to the amount mentioned in the bank guarantee has to be paid by the bank without any protest. The bank is not concerned with any dispute between the petitioner and the respondent. The respondent herein is not required to prove the grounds or reasons for the demand. In a contract of guarantee of this nature, the petitioner cannot even plead that there are any breaches of contract on the part of the respondent.
30. In the case of Daewoo Motors India Ltd. v. Union of India and Ors. reported as : 2003(153)ELT32(SC) the bank guarantee furnished by the banker to the beneficiary stipulated that the banker `hereby unconditionally and irrevocably agree to pay the President of India on demand without any demur or protest the amount due and payable under the above said bond not exceeding Rs.4,80,00,000 (Rupees four crores eighty lakhs only) by way of loss or damage caused or suffered by the President of India by reason of non-fulfilment of the export obligation... by M/s Daewoo Motors India Limited at whose behest the bank guarantee was given. The argument of the appellant was that the words by reason of non-fulfilment of the export obligation under the above said notification mean that a bank guarantee could be invoked only if there was a non-fulfilment of export obligation and no case of default or non-fulfilment of the export obligation was made out by the respondent. This contention was negatived by the court observing that these words could not be read in isolation and reading of the bank guarantee as a whole clearly meant that it was an unconditional bank guarantee. The relevant observations of the court as found in para 11 which reads as under:
He has emphasised on the words by reason of non-fulfilment of the export obligation under the above 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.
31. In para 13, the court took note of its earlier judgment in Hindustan Construction Co. Ltd (supra) and observed that the said judgment was of no avail to the appellant as the bank guarantee in the case before the Supreme Court was an unconditional bank guarantee. I may note that in the present case even the words `by way of loss or damage caused or suffered ' are missing. Merely because in the initial portion of the bank guarantee, it is stated that the bank guarantee is given at the instance of the operator (petitioner) for due fulfillment of the contract that does not mean that the respondent is required to prove non-fulfilment. Those words are stated in the recital of the bank guarantee and in the operative part of the bank guarantee, it is specifically provided that the respondent is discharged from any such burden. The words contained in the operative part of the bank guarantee are the identifying words and have to be taken into consideration.
32. In Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd. and Anr. reported as : (1996)5SCC450 , the bank guarantee was in similar terms as in Daewoo Motors India Ltd. (supra) and it was, inter alia, stated that the bank `undertake to pay the amount due and payable under this guarantee without any demur, merely on demand from the corporation stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the corporation by reason of breach by the said contractor (s) of any of the terms or conditions contained in the said agreement or by reason of the contractor (s) failure to perform the said agreement. The court held that this was an unconditional bank guarantee whereby the bank had irrevocably promised and undertaken to pay to the corporation the amount stated therein without any demur or damage and observed:
Untrammelled by the bilateral agreement between the petitioner and the first respondent-corporation-stating the amount claimed was due and payable on account of loss or damage caused to or likely to be caused or by the corporation by reason of any breach by the said contract or any of the terms and conditions contained in the aid agreement notwithstanding any dispute or disputes raised under the contract in any suit or proceedings pending before any court or tribunal relating thereto. 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.
33. Coming to the plea of fraud, as pointed out above, fraud has to be of egregious nature and it should be an established fraud. The Supreme Court has also laid down that when a demand is made by the beneficiary on the bank, at that stage, while honouring its commitment neither the bank nor the party at whose instance the bank guarantee is given, can go into the disputes between the parties. For this reason, normally enquiry into the various breaches imputed on the part of the respondent itself is barred. The matter, however, is to be examined from a limited angle, namely, whether it is a case of established breaches and further that if the breaches alleged are established, they in turn make out a case of `established fraud of egregious nature'. In so far as alleged breach of not providing the balance mobilisation advance is concerned, the dispute is on the utilization of initial advance of Rs. 5 crores. Whereas the petitioner states that it has given the detailed account of expenditure of the said amount, the respondent does not accept this. No doubt the Engineer of the respondent vide his letter dated 29th April, 2005 recommended the release of balance advance. However, according to the respondent the said recommendation by a particular officer is not binding on the respondent and it is appropriate authority in the respondent organization which has to take a final decision and it may not agree with this recommendation. In view of this nature of dispute, it cannot be said that merely because of the letter of the Engineer recommending advance and non-release of the advance by the respondent fraud on the part of the respondent is established. In so far as other breaches as alleged by the petitioner are concerned, the respondent has refuted those allegations. About non certification of payments, it is mentioned that the same was based on the grounds of non-fulfilment of the petitioner's contractual obligation such as to comply with the directions of the Engineer including taking of corrective measures to rectify the defects/defaults pointed out by the Engineer, the failure to complete the works in the specified time etc. It is also pointed out that if the petitioner was feeling aggrieved with non certification of the bills, it was open to it to take recourse to the provisions of clause 10.48.1 which provides for recourse to the parties even in case of non certification by the Engineer but the petitioner failed to take such a step. It is also mentioned that the respondent is in the process of issuing a separate letter in which the respondent has justified the reasons why the mobilisation advance was not released; the payments were withheld and the penalties and other recoveries were effected. It is thus clear that there are disputes about the other so-called breaches which are alleged by the petitioner and the examination thereof is not within the scope of the present petition.
34. I may note at this stage that relying upon the observations contained in para 4 of Ansal Engineering Projects (supra), the learned senior counsel for the petitioner contended that injunction could be granted in case of fraud or where special equities exist and, thereforee, apart from fraud this court could consider the issue of special equities. He submitted that in the instant case when the petitioner had to recover substantial amount special equities were in favor of the petitioner. It would be begging the question as it has to be an established case that such amounts are recoverable. Otherwise enquiry into such breaches is not even permissible. Further, in that very para, the Supreme Court also observed that fraud or special equity has to be pleaded and prima facie established by strong evidence as a triable issue. I do not see any special equity, in view of my aforesaid discussion, while dealing with the allegation of fraud.
35. Other pleas are in the nature of hair splitting and indirect attempt to canvass what is otherwise not permissible in a case of bank guarantee. The answer to the other pleas raised by learned counsel for the petitioner, on the basis of judgments of this court, can be found in paras 29 and 32 of the judgment in Dwarikesh Sugar Industries Ltd.(supra) which read as under:
It is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be followed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decisions will not be of much importance was clearly a method adopted by it in avoiding to follow and apply the law as laid down by this Court. Yet another serious error which was committed by the High Court, in the present case, was not to examine the terms of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had taken the trouble of examining the documents on record, which had been referred to by the trial court, in its order refusing to grant injunction, the court would not have granted the interim injunction. We also do not find any justification for the High Court invoking the alleged principle of unjust enrichment to the facts of the present case and then deny the appellant the right to encash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guarantee the applicability of the principle of undue enrichment has no application.
When a position, in law, is well settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety to say the least, for the subordinate courts including the High Court to ignore the settled decisions and then to pass a judicial order which is clearly contrary to the settled legal position. Such judicial adventurism cannot be permitted and we strongly deprecate the tendency of the subordinate courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wrongful and unwarranted relief to one of the parties. It is time that this tendency stops.
36. Let me now deal with the judgment in the case of Hindustan Construction Co. Ltd. (supra) strongly relied upon by the learned senior counsel for the petitioner. Two bank guarantees were involved in the said case. One bank guarantee related to `mobilisation advance' and other was respect of `performance guarantee'. A single Judge of the Bombay High Court had granted injunction respect of both the bank guarantees. In appeal, the Division Bench vacated the injunction order relating to mobilisation advance but maintained the injunction order in respect of performance guarantee. Both the parties challenged the order before the Supreme Court. In so far as bank guarantee relating to mobilization advance was concerned, the argument of the appellant was that the said bank guarantee could be invoked only if the amount loaned to it as mobilisation advance had become payable in terms of clause 9 of the principal contract which was specifically incorporated, by reference, in the bank guarantee itself and that since the condition contemplated by clause 9 did not exist the invocation itself was bad. In paras 8 and 9 the court took note of the law on the invocation of such bank guarantees and, inter alia, stated that the terms of the bank guarantees are extremely material and `since the bank guarantee represents an independent contract between the bank and the beneficiary, both the parties would be bound by the terms thereof.' The invocation, thereforee, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad. In para 10 of the judgment, the court specifically opined that in the said case, the whole matter could be disposed of purely on the basis of the terms of the bank guarantee. Thereafter, the court took into consideration the terms of the bank guarantee relating to mobilisation advance and on the basis of the following words appearing therein, `in the event the obligations expressed in said clause of the above mentioned contract have not been fulfilled by the contractor giving the right of claim to the employer for recovery of the whole or part of the advance mobilisation loan from the contractor under the contract' the court opined that the aforesaid expression/consideration clearly refers to the original contract between the parties and postulates that if the obligations, expressed in the contract, are not fulfilled by appellant giving to the defendant the right to claim recovery of the whole or part of `advance mobilisation loan' then the bank would pay the amount due under the guarantee. The court was of the opinion that by specifically referring to clause 9, the bank had qualified its liability to pay the amount only if the obligations under the contract were not fulfilled by the contractor or the contractor had misappropriated any portion of the 'advance mobilisation loan'. In so far as performance guarantee is concerned, what was noted that although the guarantee had been furnished to the Chief Engineer, it was invoked by the Executive Engineer and, thereforee, invocation was not by the proper authority. These were primarily the reasons for granting injunction by the Supreme Court in respect of both the bank guarantees. In para 22, the Supreme Court held that there were special equities also in favor of the appellant. However, as observed by me above, there are no special equities in the present case. This judgment, thereforee, would be no assistance to the petitioner. On the other hand, in the present case, it is more than apparent that the guarantee is unconditional and unqualified. It is needless to mention that the petitioner cannot plea irretrievable injustice inasmuch as if the petitioner ultimately succeeds in arbitration and the amount realized by invoking the bank guarantee is to be refunded by the respondent restitution is not an issue. thereforee, this aspect was not even argued by the learned senior counsel for the petitioner. It is also made clear that payment made under the bank guarantee would obviously be subject to the final decision of the arbitral tribunal or the court
37. In view of the aforesaid discussion, the petition is dismissed with cost quantified at Rs.25,000/-. Interim order dated 22nd November, 2005 is hereby vacated.