Full Judgment Text
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PETITIONER:
HINDUSTAN STEELWORKS CONSTRUCTION LTD.
Vs.
RESPONDENT:
TARAPORE & CO. & ANR.
DATE OF JUDGMENT: 09/07/1996
BENCH:
NANAVATI G.T. (J)
BENCH:
NANAVATI G.T. (J)
AGRAWAL, S.C. (J)
CITATION:
1996 SCC (5) 34 JT 1996 (6) 295
1996 SCALE (5)186
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
NANAVATI, J.
These two appeals, by special leave, are directed
against the Judgment and Order passed by the Andhra Pradesh
High Court in Civil Revision Petition No.3865 and 3866 of
1989. The High Court allowed the revision petitions, set
aside the common order passed by the Subordinate Judge,
Visakhapatnam in O.P. No.456 and 457 of 1988 an passed an
order of injunction restraining Hindustan Steelwork
Construction Ltd. (the appellant and fox short referred to
as HSCL) from encashing the bank guarantees given by Bank of
India in its favour at the instance of M/S. Tarapore & Co.
(Respondent No.1 and hereinafter referred to as the
contractor).
The HSCL awarded a contract to the contractor for
construction of civil works in its Visakhapatnam Steel
Plant. On 16.3.84 a letter of intent was issued and the
formal contract was signed on 25.10.84. It was a lumpsum
contract for Rs. 19,21,36,804 and was to be completed on or
before 15.11.1985. The contractor was not able to complete
the work within the stipulated time and at its request the
time for completion of the work was extended till 31.3.87.
Even during this extended period the contractor could not
complete the work. It appears that some disputes arose
between the appellant and the contractor and on 28.8.1986
the contractor appointed an arbitrator and called upon the
appellant to appoint its arbitrator for deciding those
disputes. Now those disputes are pending before the two
arbitrators appointed by the parties. In August, 1988 by
mutual agreement the contract work was reduced and the
contract price was fixed at Rs.4.5 crores. This reduced work
also was not completed within the extended time and at the
request of the contractor the time for completing the work
was extended till 30.9.1988. As the contractor did not
complete the work by that time the HSCL rescinded the
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contract on 17.10.1988.
In between 30.1.84 and 8.12.87, Bank of India gave 14
guarantees in favour of HSCL at the instance of the
contractor. Bank guarantee No.3/21 was furnished on 28.1.84
and 3139 on 21.2.84 for Rs.10 lacs and 40 lacs respectively
towards mobilisation advances. Bank a guarantee No.3/58
dated 28.3.84 for Rs.17,04,580 was towards security
deposit. Bank guarantee No.6/175 given on 31.7.87, initially
for Rs.45 lacs and subsequently reduced to 36,25,000, was to
secure the working funds provided by HSCL to the contractor
and also for due performance of the contract. Rest of the
bank guarantees were furnished on different dates as and
when security deposits were released by HSCL. By these bank
guarantees, except bank guarantee No.6/175, bank has
undertaken to indemnify HSCL against any loss or damage
caused to or suffered by it by reason of any breach by the
contractor of any term and condition of the contract. It is
also stipulated in the bank guarantees that HSCL shall be
the sole Judge on the question as to whether the contractor
has committed any breach of the contrast and what is the
extent of loss or damage. It is further stipulated therein
that the decision of HSCL in this behalf shall be treated as
final and binding on the bank. By furnishing Bank guarantee
6/175 the bank has undertaken to pay HSCL on demand any
amount payable by the contractor without any demur and
protest, without any reference to the contractor and such
demand by HSCL has to be regarded as conclusive and binding
on the bank notwithstanding any difference between the HSCL
and the contractor.
On the very day on which the appellant rescinded the
contract, that is on 17.10.88, HSCL by three separate demand
letters informed the bank that the contractor has failed to
fulfil its obligations under the contract and has committed
breach of its terms and conditions and by reasons thereof it
has suffered loss/damage far exceeding the amount guaranted
by the bank, but for the purpose of invoking the bank
guarantees it has assessed such loss/damage at
Rs.1,49,76,580. By those letters it also called upon the
bank to pay to the appellant the said sum without any demur
or protest.
The contractor on coming to know of this demand filed
O.P. No.456/88 and 457/88 under Section 41(b) read with
Schedule II of the Arbitration Act in the Court of Principal
Subordinate Judge at Visakhapatnam and prayed for an
injunction restraining HSCL from encashing the bank
guarantees. O.P. No. 457/88 was in respect of bank
guarantees No. 3/21 and 3/39 and O.P. No. 456/88 for the
other bank guarantes. The ground urged for granting the
injunction was that there are genuine disputes between the
parties and those disputes have been referred to the
Arbitrators for adjudication. The court finding that the
bank guarantees are unconditional refused, to grant
injunction and dismissed both the petitions by a common
judgment.
The contractor thereupon filed two revision petitions
before the Andhra Pradesh High Court. CRP No.3865/89 was
filed against the judgment and order passed in O.P. 456/88
and CRP No. 3866/89 was filed against the judgment and
order passed in O.P. No.457/88. It was contended on behalf
of the contractor that the bank guarantees were given by way
of security for due performance of the contract and for the
purposes connected therewith and therefore they would be
encashable only when the arbitrators decide that the
contractor has committed a breach of the contract and the
amount of loss or damage caused to or suffered by HSCL is
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quantified. It was submitted that as the disputes in this
behalf are pending before the arbitrators the demand for
encashment of the bank guarantees was premature. After
referring to this contention the High Court observed as
under :-
"It is now well established the,
unless there is fraud or special
circumstances or equities exist,
the beneficiary cannot be
restrained from encashing the
letter of credit, even if there are
disputes between the beneficiary
and the person at whose instance
the latter of credit was given by
the Bank. The same principle is
extended in regard to the
performance guarantees or
performance bonds executed by the
banks in favour of the
beneficiaries. So injunctions have
to be refuses restraining the
beneficiary from encashing the
letter of credit or performance
guarantee or bond and the only
exceptions are in cases of fraud or
where special equities exist or
where special circumstances warrant
issued or injunction to prevent
irretrivable injustice being
caused."
The High Court after taking a note of the fact that
fraud is not pleaded in this case, went on the examine
whether there were special equities or special circumstances
justifying granting of an injunction. It then considered the
reasons why the courts refuse to grant injunction against
encashment of confirmed letter of credit and the case law on
the point. Thereafter it referred to Edward Own v. Barclays
Bank International, 1978 (1) A.E.R. 976 wherein it is held
that performance guarantee stands on the same footing as a
confirmed letter of credit and then observed that principles
underlying the letter of credit are made applicable in
England even in regard to performance guarantees or bonds.
It distinguished the decision of this Court in U.P.C.F.
Ltd.vs. Singh Consultants and Engineers (P) Ltd., 1988 (1)
SCC 174 on the ground that "it is not a case where it was
observed that in our country also the performance guarantee
should be treated which is like confirmed letter of credit
in order to consider whether injunction has to be refused or
granted." After noticing that bank guarantees in this case
except bank guarantee Nos. 3/21, 3/39 and 6/175 were given
towards security deposits only it observed that "Neither or
the learned counsels had drawn attention of this court to
any decision granting or refusing injunction in regard to a
bank guarantee given by way of security deposit to indemnify
against any loss or damage caused by breach of the terms and
conditions of the contract." It then considered the position
of law with respect to liquidated damages in our country and
observed that "Hence there cannot be any agreement in regard
to the amount that has to be allowed except the upper limit
that can be fixed, in case of breach". Relying upon the
decision of this Court in Union of India vs. Raman Iron
Factory AIR 1974 SC 1265 the High Court held that any term
in the agreement that one of the parties shall be the sole
judge to quantify the same has to be held as invalid."
According to the High Court liability to pay damages would
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arise only after it is established that there is a breach of
the contract and it is for the court or the arbitrator to
decide as to who has committed the breach. Till the
liability is ascertained, it cannot be said that there is a
"debt due or debt owing". On these grounds the High Court
rejected the contention raised on behalf of HSCL that it was
the sole judge to decide as to whether the contractor has
committed a breach of the contract and what is the extent of
damage caused to it, It also held that in absence of any
determination by the Court or the arbitrator no amount can
be said to be payable by the contractor to HSCL by way of
damages and, therefore, it will be just and proper to
restrain HSCL from enforcing the bank guarantees. It also
held that no irretrievable injustice would be caused to HSCL
as it can recover damages from the bank and the contractor
in case it succeeds in the case and that the interest of
HSCL can be safeguarded by directing the contractor to go on
extending the bank guarantees till the matter is settled by
the arbitrators. The High Court therefore allowed both the
revision petitions and by on order of injunction has
restrained HSCL from enforcing the bank guarantees, except
bank guarantee no. 6/175, till the arbitrators pass an award
in its favour. As regards bank guarantee no.6/175 also it
has restrained HSCL from encashing the said guarantee till
the balance of the amounts advanced together with interest
and the value of the material supplied is ascertained. For
ascertaining the amount due, the High Court has remanded
O.P. 456/88 to the lower court.
What was contended by Dr. Shankar Ghosh, learned senior
counsel for the appellant, was that the High Court has not
stated nor applied the law correctly. He submitted that in
the matter of encashment of a bank guarantee the Court
should not as a rule interfere unless it is a clear case
of
fraud and is likely to result in irretrievable injustice.
The law is so declared, according to him, by the decisions
of this Court in United Commercial Bank vs. Bank of India
1981 SCR 300, Centax (India) Ltd. vs. Vinmar Impex Inc 1986
(4) SCC 136, U. P. Cooperative Federation Ltd. vs. Singh
Consultants and Engineers (P) Ltd. 1959 CC 174. The learned
counsel for the respondents, on the other hand, contended
that though fraud is an established exception to the general
rule regarding interference with the autonomy of irrevocable
letter of credit or a bank guarantee that is not the only
exception and the Court can and should interfere where
special circumstances or special equities exist and they are
likely to result in irretrievable injustice.
With respect to an irrevocable letter of credit this
Court in the case of Tarapore & Co. vs. Tractors Export,
Moscow 1969 (2) SCR 920 pointed out that such a contract
between the banker and the beneficiary is independent of and
unqualified by the contract of sale or other underlying
transaction and quoted with approval the following
observations made by Jenkins L.J. in Hamzeh Malas and Sons
vs. British Imex Industries Ltd. 1958 (2) Q.B. 127:
"We have been referred to a number
of authorities, and it seems to be
plain enough that the opening of a
confirmed letter of credit
constitutes a bargain between the
banker and the vendor of the goods,
which imposes upon the banker an
absolute obligation to pay,
irrespective of any dispute there
may be between the parties as to
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whether the goods are up to
contract or not. An elaborate
commercial system has been built up
on the footing that bankers’
confirmed credits are of that
character and in my judgment, it
would be wrong for this court in
the present case to interfere with
that established practice."
In United Commercial Bank vs. Bank of India 1981 (3)
SCR 300 this Court again emphasised that obligation of a
Bank in such a case is absolute, as a letter of credit
constitutes the sole contract with the banker and the bank
issuing the letter of credit has no concern with any
question that may arise between the seller and the purchaser
of the goods. Therein the following passage from the
judgment of Kerr. J. in R.D. Horbottle (Mercantile) Ltd. vs.
National Westminster Bank Ltd. 1977 (3) W.L.R. 752 was
quoted as a correct statement of law on the point:
"It is only in exceptional cases
that the courts will interfere
with the machinery of irrevocable
obligations assumed by banks. They
are the life-blood of international
commerce. Such obligations are
regarded as collateral to the
underlying rights and obligations
between the merchants at either end
of the banking chain. Expect
possible 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 as available to them or
stipulated in the contracts. The
courts are not concerned with their
difficulties to enforce such
claims; these are risks which these
merchants take. In this case the
plaintiffs took the risk of the
unconditional wording of the
guarantees. The machinery and
commitments of banks are on
different level. They must be
allowed to be honoured free from
interference by the courts.
Otherwise, trust in international
commerce could be irreparable
damaged."
In United commercial Bank’s case (supra) the High Court
had granted a temporary injunction restraining the United
Commercial Bank from making a recall of the amount paid by
it under reserve against the relative bills of exchange
drawn against the letter of credit issued by it from the
Bank of India an in terms of the letter of guarantee or
indemnity executed by that Bank. While allowing the appeal
this court observed that the courts usually refrain from
granting injunction to restrain the performance of the
contractual obligations arising out of letter of credit or
bank gurantee between one bank and another.
In Centax (India ) Ltd (supra) it has been held in
clear terms that a bank gurantee resembles and is analogous
to a letter of credit and the same considerations which
apply to a letter of credit in the matter of interference
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by
the court should apply to a bank guarantee.
In U.P. Cooperative Federation Ltd. (supra) also
Mukherji, J. n paragraph 21 of his judgment has observed as
under:
"...An irrevocable commitment
either in the form of confirmed
bank gurantee or irrevocable letter
of credit cannot be interfered with
expect in case of fraud or in case
of question of apprehension of
irretrievable injustice has been
made out. This is the well settled
principle of the law in England.
This is also a will settled
principle of law in India....."
In is, therefore, difficult to appreciate the attempt
of the High Court to distinguish that decision and to raise
a doubt whether in India also the same principles apply in
case of a performance guarantee issued by a bank. In our
opinion, the High Court was not right either in its attempt
to distinguish that decision or to raise a doubt regarding
the correct position of law.
The High Court also committed a grave error in
restraining the appellant from invoking bank guarantees on
the ground that on India only reasonable amount ca 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 guarantees 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 and adjudication in that behalf is
made either by a court on an arbitrator, as the case may be.
In taking that view the High Court has overlooked the
correct position that a bank guarantees is a 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. What the High
Court has observed would applicable only to the parties to
the underlying transaction or the primary contract but can
have no relevance to the bank guarantee given by the bank,
as the transaction between the bank and the beneficiary is
independent and of a different nature. In case of an
unconditional bank guarantee the nature of obligation of the
bank is absolute and not dependent upon any dispute or
proceeding between the party at whose instance the bank
guarantee is given and the beneficiary. The High Court thus
called to appreciate the real object and nature of a bank
guarantee. The distinction which the High Court has drawn
between a guarantee for due performance of a works contract
and guarantee given towards security deposit for that
contract is also unwarranted. The said distinction appears
to be the result of the same fallacy committed by the High
Court of not appreciating the distinction between the
primary contract between contract between the parties and a
bank guarantee and also the real object of a bank guarantee
and the nature of bank’s obligation thereunder. Whether the
bank guarantee is towards security deposit or mobilisation
advance or working funds or for due performance of the
contract if the same is unconditional and if there is a
stipulation in the bank guarantee that the bank should pay
on demand without a demur and that the beneficiary shall be
the sole judge not only on the question of breach of
contract but also with respect to the amount of loss or
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damages, the obligation of the bank would remain the same
and that obligation has to be discharged in the manner
provided in the bank gurantee. In General Electric Technical
Services Company Inc. vs. Punj Sons (p) Ltd. (1991 (4) SCC
230) while dealing with a case of bank guarantee given for
securing mobilisation advance it has been held that the
right of a contractor to recover certain amounts under
running bills would have no relevance to the liability of
the bank under the guarantee given by In that case also the
stipulations in the bank guarantee were that the bank had to
pay on demand without a demur and that the beneficiary was
to be the sole judge as regards the loss or damage caused to
it. This Court held that notwithstanding the dispute between
the contractor and the party giving the contract, the bank
was under an obligation to discharge its liability as per
the terms of the bank guarantee. Larsen and Toubro Limited
vs. Maharashtra State Electricity Board (6) SCC 68 and
Hindustan Steel Workers Construction Ltd. Vs. G.S. Atwal &
Co (Engineers) Pvt. Ltd. 1995 (6) SCC 76 were also cases of
work contracts wherein bank gurantees were given either
towards advances or release of security deposits or for due,
performance of the contract. In both those cases this Court
held that the bank gurantees being irrevocable and
unconditional and as the beneficiary was made the sole judge
on the question of breach of perforamance of the contract
and the extent of loss or damages an injunction restraining
the beneficiary from invoking the bank guarantees could not
have been granted. The above referred three subsequent
decisions of this Court also go to show that the view taken
by the High Court is clearly wrong.
In view of the settled legal position and
unsustainable view taken by the High Court, the learned
counsel for the contractor has rightly not attempted to
defend the judgment of the High Court except on the ground
that in view of the exceptional circumstances and special
equities of this case, it was justified in granting the
injunction. He submitted that fraud is not the only ground
requiring interference by courts and if it is made out that
exceptional circumstances creating special equities exist
then the court can and should restrain the beneficiary from
encashing the bank guarantee. On the other hand the learned
counsel for the appellant contended that interference by
courts is permissible only when fraud is pleaded and Prima
facie established and it is further shown that irretrievable
injustice would otherwise be caused. In support of his
contention, the learned counsel for the appellant has
heavily relied upon the following Observations, made by
Mukharji, J. in paragraph 28 and by Shetty, 3. in paragraph
53 of the judgment in U.P. Cooperative Federation, Ltd
(supra):
"28. In order to restrain the
operation either of irrevocable
letter of credit or of confirmed
letter of credit or of bank
guarantee, there should be serious
dispute and there should be good
prima facie case of fraud and
special equities in the form of
preventing irretrievable injustice
between the parties. ...."
(Emphasis supplied)
"53. ... Since the bank
pledges its own credit involving
its reputation, it has no defence
except in the case of fraud. The
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bank’s obligations of course could
bot be that is, the unscrupulous
seller, that is, the seller who is
responsible for the fraud.. ... The
nature of the fraud that the courts
talk about is fraud of an
"egregious nature as to vitiate the
entire underlying. transaction". It
is fraud of the beneficiary, not
the fraud of somebody else. "
(Emphasis supplied)
On the basis of these observations the learned counsel
submitted that the law laid down by this Court is that
except in case of fraud and that too when it creates special
equities in the form of irretrievable injustice, the courts
should not interfere by restraining the beneficiary from
encashing the bank guarantee. We have carefully gone through
the judgments delivered by Mukherji and Shetty, JJ. and in
our opinion that is not the ratio of the judgment. In that
case the court was not called upon to decide whether apart
from fraud there can by any other valid ground for
interference. Morevover, the said observations cannot be
read like a text of a statute or out of context.
Observations made by Mukherji, J. in other parts of his
judgment (See paragraphs 24 and 34) and his opinion stated
in paragraph 21, with which Shetty, J. also agreed, do not
support that submission. Mukherji, J. in paragraph has
stated his opinion as under:
"21. .... An irrevocable
commitment either in the form of
confirmed bank guarantee or
irrevocable letter of credit cannot
be interfered with except in case
of fraud or in case of question of
apprehension of irretrievable
injustice has been made out."
(Emphasis supplied)
Mukherji, J. referred to the following paragraph from
the judgment in R D,. Harbottle (Mercantile) Ltd. vs.
National Westminster Bank Ltd. 1977 2 All ER 862 and then
stated that in his view the said view represents the correct
state of law:
"Only in exceptional cases
would the courts interfere with the
machinery of irrevocable
obligations assumed by banks. In
the case of a confirmed performance
guarantee, just as in the case of a
confirmed letter of credit, the
bank was only concerned to ensure
that the terms of its mandate and
confirmation had been complied with
and was in no way concerned with
any contractual disputes which
might have arisen between the
buyers and sellers. Accordingly,
since demands for payment had been
made by the buyers under the
guarantees and the Plaintiffs had
not established that the demands
were fraudulent no other special
circumstances, there grounds for
continuing the injunction...."
(Emphasis supplied)
What Mukherji, J. has stated in paragraph 34 of his
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judgment, namely, that "It is only in exceptional cases that
is to say in case of fraud or in case, irretrievable
injustice be done the courts should interfere" is really the
ratio of the decision of this Court in U.P. Cooperative
Federation Ltd. (supra) Therefore, fraud cannot to be said
to be the only exception. In a case, where the party
approaching the court is able to establish that in view of
special equities in his favour if injunction as requested is
not granted then he would suffer irretrievable injustice,
the court can and would interfere. It may be pointed out
that fraud which is recognised as an exception is the fraud
by one of the parties to the underlying contract and which
has the effect of vitiating the entire underlying
transaction. A demand by the beneficiary under the bank
gurantee may become fraudulent not because of any fraud
committed by the beneficiary while executing the underlying
contract but it may become so because of subsequent events
or circumstances. We see no good reason why the courts
should not restrain a person making such a fraudulent demand
from enforcing a bank guarantee.
The learned counsel for the appellant also drewour
attention to a 3-Judge bench decision of this Courtin
General Electric Technical Services Company Inc.(supra) to
which Shetty, J. was also a party. The learned counsel
submitted that after referring to the observations of
Mukherji, J. in paragraph 28 and that of Shetty, J. in
paragraph 53 of the judgment in U.P. Cooperative Federation
Ltd. (supra) this Court in para 9 of that judgment has
observed that what is stated therein is the settled position
of law. What is overlooked by the learned counsel is that in
that very paragraph the opinion of Mukherji, J. that "It is
only in exceptional cases that is to say in face of fraud or
case irretrievable injustice be done the courts should
interfere" is also quoted. (Emphasis supplied) Moreover,
while dealing with the facts of that case this Court in
paragraph 10-of the judgment has stated that "The bank
cannot be interdicted by the court at the instance of
Respondent 1 in the absence of fraud or special equities in
the form of irretrievable injustice between the parties".
(Emphasis supplied) This observation would clearly go to
show that the 3-Judge Bench has approved the view that fraud
and other exceptional circumstances leading to irretrievable
injustice are exceptions to the rule.
Lastly, the learned counsel for the appellant relied
upon the following observations made in paragraph 60 of the
3-Judge decision of this Court in Svenska Handelsbanken vs.
M/s Indian Charge Chrome 1994 (1) SCC 502:
"60. We have referred to the
observations of both Sabyasachi
Mukherji as well as Shetty, JJ. in
extenso to emphasise that in case
of confirmed bank
guarantee/irrevocable letters of
credit, it cannot be interfered
with unless there is fraud and
irretrievable injustice involved in
the case and fraud has to be an
established fraud."
In that case the question which fell for consideration
was whether the High Court was right in taking the view that
while deciding an application for interim relief against
enforcement of a bank guarantee general principles of
injunction on lenders should be applicable and not the
principles of injunction. in relation to bank guarantee.
This Court was not called upon to decide whether apart from
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the case of fraud there can ba any other exceptional case
wherein the court can interfere in the matter of encashment
of a bank gurantee. It is also significant to note that the
said observation in paragraph 60 has been made after quoting
the following observation made by Mukherji, J. in paragraph
21 of his judgment in U.P. Cooperative Federation Ltd.
(supra):
"..... An irrevocable commitment
either in the form of confirmed
bank guarantee or irrevocable
letter of credit cannot be
interfered with except if a case of
fraud or a case of a question of
apprehension of irretrievable
injustice has been made out. This
is the well-settled principle of
law in England. This is also the
well-settled principle of law in
India. No fraud and no question of
irretrievable injustice was
involved in the case."
Therefore, we cannot attach much importance to the use
of the word "and" in the observation that "it cannot be
interfered with unless there is fraud and irretrievable
injustice involved in the case....". It is also significant
to note that in that case this Court referred to the
decision of Court of Appeal in England in the case of Elian
and Rabbath vs. Matsas and Matsas 1966 (2) Lloyd’s Rep 495
and distinguished it by stating that the facts of that case
were peculiar but did not state that the view taken in that
case is not correct. The decision in Handerson vs. Canadian
Imperial Bank of Commercie and Peat Marwick Ltd. 40 British
Columbia LR 318 was also referred to and distinguished on
the ground that the facts of that case were peculiar but
with respect to the decision in that case also it has not
been stated that it does not represent the correct position
of law. That was not a case of that type of fraud which has
been recognised as an exception to the rule though the
request by the beneficiary for payment was considered
fraudulent in the circumstances because there was no right
to payment. This Court also referred to the case of Itek
Corpn. vs. The First National Bank of Boston 566 Fed Supp
1210. In that case the underlying contract had become
impossible of performance, because of ’force majeure’. It
was an event subsequent to the execution of the contract.
Yet injunction was granted by the court on the ground that
the plaintiff had no adequate remedy at law and the
allegations of irreparable harm were not speculative but
genuine and immediate and the plaintiff would have Suffered
irreparable harm if the request for relief was not granted.
Though this Court observed that "this judgment is based on
peculiar facts" has not disapproved the view taken in that
case.
We are, therefore, of the opinion that the correct
position of law is that commitment of banks must be honoured
free from interference by the courts and it is only in
exceptional cases, that’ is to say, in case of fraud or in a
case where irretrievable injustice would be done if bank
guarantee is allowed to be encashed, the court should
interfere. In this case fraud has not been pleaded and. the
relief for injunction was sought by the
contractor/Respondent No.1 on the ground that special
equities or the special circumstances of the case required
it. The special circumstances and/or special equities which
have been pleaded in this case are that there is a serious
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dispute on the question as to who has committed breach of
the contract, that the contractor has a counter claim
against the appellant, that the disputes between the parties
have been referred to the arbitrators and that no amount can
be said to be due and payable by the contractor to the
appellant till the arbitrators declare their award. In our
opinion, these factors are not sufficient to make this case
an exceptional case justifying interference by restraining
the appellant from enforcing the bank guarantees.
These appeals are, therefore, allowed. The judgment and
order passed by the High Court are set aside. However, in
view of the fact that no stay was granted by this Court
during the pendency of these appeals and in view of the
statement made by learned counsel for Respondent No. 1 that
the arbitrators are likely to declare the award within a
short time, we direct that the appellant shall not call upon
the bank, Respondent No. 2 to discharge its obligations
under the bank guarantees till 31st July, 1996. If by that
time the arbitrators declare the award then obviously the
parties will have to reconsider there position in the light
of the correct legal position and the observations made in
this judgment. The Respondent No.1 shall pay the cost of
these appeals to the appellant.