http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 11  

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  As  the  contractor  did  not complete the  work by  that  time  the  HSCL  rescinded  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 11  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 11  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 11  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 11  

    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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 11  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 11  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 11  

    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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 11  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 11  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 11  

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.