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CASE NO.: Appeal (civil)  2952 of 2007

PETITIONER: Mahatma Gandhi Sahakra Sakkare Karkhane

RESPONDENT: National Heavy Engg. Coop. Ltd. And anr

DATE OF JUDGMENT: 11/07/2007

BENCH: Tarun Chatterjee & B. Sudershan Reddy

JUDGMENT: JUDGMENT

CIVIL APPEAL NO.      2952       OF 2007 (Arising out of Special Leave Petition (C)No.11821 of 2005)

B. Sudershan Reddy, J :

       Leave granted.

        The appellant herein is a Co-operative Society registered  under the provisions of the Karnataka Co-operative Societies Act,  1959.  It has established a sugar factory at Hunji, Balki Taluk,  Bidar District, Karnataka with a capacity of 2500 TCD per day  with a provision to expand the same upto 4000 TCD per day.  The  appellant had undertaken expansion of its sugar factory from  2500 TCD to 4000 TCD crushing capacity per day and accordingly  invited tenders.  The offer of the first respondent which is also a  Co-operative Society registered under the Multi-State Co- operative Societies Act which is involved in supply, erection and  commissioning of Sugar Plants was accepted in the meeting of  the State Level Advisory Committee held on 10th August, 2000.   The first respondent undertook to design, procure manufacture,  supply transport and deliver at the site and to do the supervision  of erection and commissioning of the Sugar Plant and Machinery  in conformity with the agreed specifications vide agreement dated  1st November, 2000.  The clauses of the agreement dated 1st  November, 2000 which are relevant to be noticed are reproduced  as under :

"Clause 5 :  Supply, Delivery and  Supervision of Erection and  Commissioning.

Clause 5.1 : The Seller agrees  to\005\005supply plant and machinery\005so  that the supply and erection of the plant  and machinery is completed in all  respects and to the satisfaction of the  Purchaser and the Sugar Plant and  Machinery is Commissioned and made  ready for commercial production and  use by 11th December, 2001.

8.0     TRIALS AND TAKE OVER :

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8.1     As soon as the Plant is ready for  commissioning after completion of the  supply of plant and machinery and  erection of the same to the satisfaction  of the purchasers, the sellers on getting  information from the erection contractor  shall notify in writing  to the purchasers  specifying the date and time, at least 30  days before the sellers intend to carry  out steam and water trials to enable the  purchasers to arrange for boiler feed  water, fuel, operational staff and  workmen and other facilities.  Unless  otherwise agreed by the purchasers and  the sellers, the sellers shall begin the  said trial on the date and time so  notified.

Provided that the water, steam and  vacuum trials shall be conducted by the  sellers for a period of one month before  the commissioning of the plant and  machinery after complete delivery and  erection to the entire satisfaction of the  purchasers.

8.2   After the said steam, water and  vacuum trials have been completed to  the entire satisfaction of the purchasers  and on their furnishing a certificate to  the effect that all the plant and  machinery mentioned in Annexure I to  III have been inspected and approved  by the Inspection Agency, delivered as  per detailed parts list of materials  referred to above, erected and  commissioned under the supervision of  the sellers according to the terms and  conditions of this agreement, the sellers  guarantees given in pursuance of clause  17.2 shall be deemed to have been  fulfilled."

       Bank guarantees were required to be furnished by the  respondent in terms of the agreement.  The case of the appellant  is that the first respondent failed to commission the plant in  terms of the agreement.  The appellant sent a notice dated 26th  April, 2003 duly putting the respondent on notice of its failure to  commission the plant by the scheduled date i.e. 11th February,  2001 and other  revised dates, i.e., 26th January, 2002, 25th  November, 2002, 28th February, 2003 and 25th April, 2003.   Thereafter, a meeting was held between the parties at the  intervention of the Government of Karnataka on 1st July, 2003  where both the parties had agreed  as hereunder:

i)      1st respondent shall furnish bank  guarantee for Rs.92.40 lakhs towards  delivery and commissioning of the plant  valid upto 28.02.2004.(Clause 1).

ii)     Simultaneously, with the receipt of  the aforesaid bank guarantee, the

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petitioner shall release Rs.140.41 lakhs  to the 1st respondent (Clause 4)

iii)    1st respondent will start trial run to  crush 500-1000 tonnes of sugarcane  within 20 days from the date of receipt  of Rs.140.41 lakhs as aforesaid (Clause  6).

iv)     The plant will be fully  commissioned by November/December  2003 (Clause 7).

The first respondent in terms of the agreement reached  between the parties furnished a bank guarantee  for a sum of Rs.  92.40 lakhs  dated 4th July, 2003.  The appellant on its part  released Rs.  140.41 lakhs on 5th July, 2003.

The case of the appellant is that the trial crushing did not  start even as on 28th / 29th July, 2003; no doubt, the trial  crushing commenced on 26th November, 2003 but the same had  to be stopped  on 22nd December, 2003 due to defects in the  turbo alternator.  The appellant addressed  letter dated 27th  December, 2003 to the respondent regarding non-supply,  defective erection and non-commissioning of the plant by the first  respondent.  It is not necessary to notice further details in this  regard as there is any amount of controversy between the parties  as regards non-compliance with the terms and conditions of the  agreement.  Each is accusing the other of breach of terms of  agreement. The appellant, however, relied upon the detailed  report dated 16th January, 2004 furnished by National Federation  of Co-operative Sugar Factories Ltd., the consultants to the  project, in support of the plea that the trial run was unsuccessful  and incomplete.  The appellant stated on account of the teething  problems the appellant could not undertake the crushing of  sugarcane leading to heavy losses.

Be it as it may, the Board of Directors of the appellant  Society resolved in its  meeting dated 13th March, 2004 to invoke  the bank guarantee of Rs. 92.40 furnished by the first  respondent.  The appellant accordingly sent a letter requesting  the Commissioner of Cane Development and Director of Sugar to  counter sign the invocation letter on the ground that the  respondent herein had failed to commission the plant as agreed.

The case of the respondent in  nut shell is that the project  fell into rough weather purely on account of the inability of the  appellant \026Society to arrange the requisite funds.  It is however  admitted that after exchange of several acrimonious letters and  notices, the parties finally agreed on a final course with a revised  time frame to erect and commission the plant in a meeting held  on 1st July, 2003.  It is pursuant to that agreement the  respondent furnished the bank guarantee in question and the  appellant released the amount of Rs.140.41 lakhs on 5th July,  2003 and required the respondent to implement the trial run by  25th July, 2003.  It is submitted that the contract between the  parties envisaged four different kinds of bank guarantees to  ensure particular set of obligations by the respondent.  Clauses  16.4 and 17.5 deal with the bank guarantees for timely delivery  of civil drawings and clause 17.6 deals with bank guarantee for  advance payments; for timely delivery and commissioning of  plant is dealt with clauses 8, 16, 16.3, 17.4,17.9 and for ensuring  performance of the plant is dealt with by clauses 9, 16.2, 17.3

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and 17.9.

It is the case of the respondent that the trial run of plant  and machinery was arranged during 25th July, 2003 and 2nd  August, 2003 and the trial run was found satisfactory.  The actual  commissioning was to take place from 21st July, 2003 but has  actually started on 27th November, 2003.  According to the  respondent after continuous crushing  of the sugarcane for about  a month all of a  sudden there was a problem in  the working of  the machinery which was attended to on the spot.  We do not  propose to notice further details in this regard for  each one of  the parties is blaming the other.  There is any amount of  controversy between the parties in this regard and it would not  be proper to make any comment at this stage since the parties    are already before the Arbitrator who is required to decide the  dispute on merits in accordance with law.  The main contention of  the respondent is that the appellant raised false and untenable  claims only with a view to avoid or postpone the payment of huge  amount of Rs. 327 lakhs due and payable to the respondent.  It is  under those circumstances the respondent got issued notice to  the appellant to refer the dispute for resolution through  arbitration.  The appellant instead of responding to the notice  resolved to invoke the bank guarantee with a malafide intention  of depriving the respondent of its legitimate right to receive  certain amounts.

The case of the respondent is that the bank guarantee is a     conditional one and unless the condition precedent for  enforcement of the bank guarantee is satisfied the appellant  cannot be permitted to invoke the bank guarantee.  It is on that  ground the  respondent filed Misc. Petition Under Section 9 of the  Arbitration and Conciliation Act, 1996 seeking injunction against  the appellant restraining it from encashing the bank guarantee  No.56/03 dated 4th July, 2005.

The trial court after an elaborate consideration of the matter  dismissed the application filed by the respondent herein and  refused to grant any injunction restraining the appellant from  encashing the bank guarantee as prayed for by the respondent.   The trial court came to the conclusion that invocation of the bank  guarantee and its encashment by the appellant cannot be held to  be fraudulent or untenable and further held that the respondent  has failed to prove that there will be irretrievable injustice in case  bank guarantee is invoked.

Being aggrieved by the order passed by the trial court  rejecting the injunction application, the respondent herein filed  MFA No.6188/04 challenging the legality and the correctness of  the order passed by the trial court.  The High Court upon  reappreciation of the evidence and material available on record  reversed the order passed by the trial court and accordingly  granted injunction restraining the appellant herein from  encashing the bank guarantee.  The appellate court has taken the  view that the bank guarantee appears to be a conditional one and  "under the documents the guarantor is entitled to know that the  appellant has failed to conduct the trial test and the  commissioning of the project as agreed."  The appellate court  however also  took a strange view that the invocation of the bank  guarantee without informing to the bank as to the fact of alleged  breach of agreement itself amounts to fraud.  The Appellate Court  also took the view that the letter invoking the bank guarantee  should be counter signed by the Commissioner of Sugar,  Bangalore, but the same has been signed by some other  authority and not by the Commissioner of Sugar.

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Being aggrieved by the orders passed by the High court  restraining the appellant from invoking the bank guarantee the  present appeal has been preferred.      

Shri S.S. Javali, learned senior counsel, submitted that the  bank guarantee executed by the respondent herein in favour of  the appellant is an unconditional one.  The bank giving such a  guarantee is bound to own it irrespective of any dispute raised by  the respondent.  The appellant’s right to invoke the bank  guarantee cannot be questioned except on the ground of fraud or  irreparable injury or on the ground that invoking the bank  guarantee would cause irretrievable injury.  The respondent failed  miserably to make out any case for grant of injunction.  The High  Court’s order suffers from incurable infirmities was the  submission.   

Shri Jayant Bhushan, learned senior counsel, appearing on  behalf of the first respondent supported the judgment of the High  Court and submitted that the bank guarantee in question was a  conditional bank guarantee to ensure test trials and  commissioning within the specified time periods and since these  events have already been ensued the bank guarantees cannot be  encashed.

We have carefully considered the rival submissions made  during the course of the hearing of the appeal.  We have perused  the entire material available on record including the orders  passed by the trial court as well as the High Court.

The main question that arises for our consideration is  whether the bank guarantee in question is a conditional one or  not.  Before we proceed further it would be appropriate to have a  look at the relevant clauses of the agreement dated 1st  November, 2000 :

       "16.3.1 :       If the sellers fail to  commission the plant according to the  schedule of commissioning which is to  be worked out mutually to enable the  commissioning of the plant within the  schedule time, fixed or extension  allowed by the purchasers, if any,  thereof the sellers shall pay penalty by  an amount equal to =% (Half percent)  of the contract price for every  completed week of delay, but not  exceeding 3% of the total contract  price.     

16.3.2 : To secure the obligations under   clause 16.3.1, the sellers shall furnish to  the purchasers,bank/insurance  guarantees in the form set out by the  purchasers as provided in clause 17.4  hereinafter.

17.9    :  The bank/insurance guarantee  (s) required to be furnished by the  sellers under the provisions hereof to  secure the timely delivery, erection,  commissioning, as well as for  performance of the plant and machinery  supplied by the sellers or for any other  purpose under the provisions hereof

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shall be in the form of purchasers after  mutual discussions between the  purchasers and sellers which form(s)  shall invariably include the provisions  that the decision of the purchasers as to  whether there has been any loss or  damage  or default and or negligence on  the part of the sellers will be final and  binding on the sellers, that the right of  the purchasers shall not be affected or  suspended by reasons of the fact that  any dispute or disputes have been  raised by the sellers with regard to their  liability or that proceedings are pending   before any Tribunal, Arbitrator(s) or  court with regard thereto or in  connection therewith, that the  Guarantee shall pay to the purchasers   the sum under the guarantee(s) without  demur on first demand and without  requiring the purchasers to invoke any  legal remedy that may be available to  them, that it shall not be open to the  guarantee to know the reasons of or to  investigate to go into the merits of the  demand or to question or to challenge  the demand or to know any facts  affecting the demand or to require proof  of the liability of the sellers before  paying the amount demanded by the  purchasers under the guarantee (s).  In  case of invocation of any bank  guarantee by the purchasers, the same  should be countersigned by the  Commissioner for Cane Development  and Director of Sugar of the concerned  State Government.

The Bank/Insurance guarantee or  guarantees required to be furnished by  the sellers under the provisions hereof  to secure timely delivery, erection,  commissioning as well as for  performance of the plant and machinery  supplied by the sellers or for any other  purpose under the provisions hereof  shall be for such period as may cover  the period of complete supply, erection  and commissioning and performance  respectively, as the case may be, as  stipulated under the agreement.  If  however, the period of agreement is  extended due to Force Majeure or  sellers not fulfilling their obligations  under the agreement or for any other  reasons whatsoever, sellers shall have  such guarantees extended upto the  corresponding extended period and  failure of the sellers to do so will  amount to a breach of the contract and  in no case the extension of the period of  the contract shall be construed as  waiver of the right of the purchasers to  enforce the guarantee.

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       The relevant portion of the bank guarantee is  extracted herein below :

" Clause 1 : In consideration of the  above premises, the Guarantor hereby  undertakes to pay to the purchasers  within 30 days of demand, without  demur such a sum not exceeding Rs.  92,40,000/- (Rupees Ninety two lakhs  forty thousand only), representing 3%  of the contract price as the purchasers  may demand upon the failure of the  supplier to conduct the trial test of the  sugar plant by 24th July, 2003 and also  upon the failure of the sellers to  commission the Project (Plant and  Machinery) before December 2003.

2.      The Guarantor shall pay to the  purchasers on demand the sum without  demur and without requiring the  purchasers to invoke any legal remedy  that may be available to them, it being  understood and agreed FIRSTLY that the  purchasers shall be the sole judge of  and as to whether the amount of bank  guarantee has become recoverable from  the sellers or whether the sellers have  committed any breach(es) of the terms  and conditions of the said agreement  and the extent of losses, damages,  costs, charges and expenses caused to  or suffered by or that may be caused to  or suffered by purchaser’s from time to  time shall be final and binding to the  Guarantor and SECONDLY that the right  of the purchasers to recover from the  guarantor any amount due to the  purchasers under this guarantee shall  not be affected or suspended by reasons  of the fact that any dispute or disputes  have been raised by the sellers with  regard to their liability or that  proceedings are pending before any  tribunal Arbitrator(s)  or court with  regard thereto or in connection  therewith and THIRDLY that the  guarantor  shall immediately pay the  aforesaid guaranteed amount to the  purchasers on demand and it shall not  be open to the Guarantor to know the  reasons of or to investigate or to go into  the merits of the demands or to  question or challenge the demand or to  know any facts affecting the demand,  and LASTLY that it shall not be open to  the guarantor to require the proof of the  liability of the sellers to pay the amount,  before paying the sum demanded under  clause 1 above.

8.      The invocation of this guarantee  shall be by a letter as herein, signed by  the purchasers and countersigned by

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the Commissioner of Sugar, Bangalore,  Karnataka State."   

       A plain reading of Clauses (1) and (2) of the bank  guarantee makes it abundantly clear that the  guarantor had  undertaken to pay to the appellant within 30 days of  demand, without demur such an amount not exceeding  Rs.92.40 lakhs.   The sole discretion is conferred on the  purchasers as to whether the amount of bank guarantee   has become recoverable from the sellers or whether the  sellers have committed any breach of the terms and  conditions of the said agreement.  The right of the purchaser  to recover from the guarantor the guaranteed amount shall  not be affected or suspended by the reasons of the fact that  any dispute or disputes have been raised by the sellers with  regard to their liability or that the proceedings are pending  before any tribunal or court with regard thereto or in  connection therewith.

       However, Shri Jayant Bhushan, learned senior counsel  submitted that the purchasers were entitled to invoke the  bank guarantee and demand the payment of money only  upon the failure of the supplier to conduct the trial test of  the sugar plant by 24th July, 2003 and also upon the failure  of the sellers to commission the project before December,  2003.  This condition forms an integral part of the bank  guarantee was the submission.  We find it difficult to accept  the submission.  The guarantee executed by the guarantor  (PNB) in favour of the purchaser (appellant) cannot be  dissected in the manner suggested by the learned senior  counsel for the respondent.  Clauses 1 and 2 of the  guarantee executed by the banker in favour of the purchaser  are required to be read together.  The respondent cannot be  allowed to contend that there is a dispute as to whether  it  had failed to conduct the trial test of the sugar plant by 24th  July, 2003 and therefore bank guarantee cannot be invoked.   The acceptance of the argument would make Clause 2 of the  bank guarantee totally meaningless and inoperative.  The  guarantor essentially agreed that the purchasers alone shall  be the sole judge in the matter as to whether the amount of  bank guarantee has become recoverable from the sellers or  whether the seller had committed any breach of the terms  and conditions of the agreement.  The dispute, if any,  between the parties with regard to the liability in any  proceedings  either before the  arbitral tribunal  or court in  no manner affects the right of the purchaser to invoke the  bank guarantee and realise the guaranteed sum from the  guarantor.

       In U.P.Cooperative Federation Ltd. Vs. Singh  Consultants and Engineers (P) Ltd. [ (1998) 1 SCC 174 ]      the respondent therein entered into an agreement with the  appellant for constructing a Vanaspati manufacturing plant  for the latter.  The contract required  the respondent to  furnish two bank guarantees for proper construction and  successful completion of the plant.  The Bank of India  executed two bank guarantees in favour of the appellant.   Under the terms of guarantee the bank undertook to make  unconditional payments on demand without reference to the  respondent.  The guarantees also provided that the  appellant would be the sole judge for deciding whether the  respondent had fulfilled the terms of the contract or not.   Disputes arose between the parties as to the erection and  performance of the plant.   The seller approached the civil  court seeking injunction restraining the purchaser from

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invoking the bank guarantee.  The High Court, proceeding  on the basis that the injunction was sought not against the  bank but against the appellant, restrained the appellant from  invoking the bank guarantee.  This court after elaborate  consideration of the matter held :

       "\005\005..commitments of banks must  be honoured free from interference by  the courts.  Otherwise, trust in  commerce internal and international  would be irreparably damaged.  It is  only in exception case that is to say in  case of fraud or in case or irretrievable  injustice be done, the could should  interfere."

               This court relied upon its own earlier decision in  United Commercial Bank vs. Bank of India and others [  1981 (2) SCC 766 ] in which it is observed " that a bank  issuing or confirming a letter of credit is not concerned with  the underlying contract between the buyer and seller.   Duties of a bank under a letter of credit are created by the  documents itself."  In General Electric Technical Services  Company Inc. vs. Punj sons (P) Ltd. And anr.  [ 1991  (4) SCC 230 ] this court observed " if the documentary  credits are irrevocable and independent, the Bank must pay  when demand is made. Since the bank pledges its own  credit in involving its reputation, it has no defence except in  the case of fraud.  The Bank’s obligation of course should  not be extended to protect the unscrupulous party, that is,  the party who is responsible for the fraud.  But the banker  must be sure of his ground before declining to pay.  The  nature of the fraud that courts talk about is fraud of a  "erregious nature as to vitiate the entire underlying  transaction."  It is the fraud of the beneficiary not the fraud  of somebody else.  The bank cannot be interdicted by the  court  at the instance of purchaser in the absence of fraud or  special equities in the form of preventing irretrievable  injustice between the parties.

       In our considered opinion if the bank guarantee  furnished is an unconditional and irrevocable one, it is not  open to the bank to raise any objection whatsoever to pay  the amounts under the guarantee.  The person in whose  favour the guarantee is furnished by the bank cannot be  prevented by way of an injunction in enforcing the  guarantee on the pretext that the condition for enforcing the  bank guarantee in terms of the agreement entered between  the parties has not been fulfilled.  Such a course is  impermissible.  The seller cannot raise the dispute of  whatsoever nature and prevent the purchaser from   enforcing the bank guarantee by way of injunction except on  the ground of fraud and irretrievable injury.   

       In  U.P. State Sugar Corporation vs. Sumac  International Ltd. [ 1997 (1) SCC 568 ] this court had laid  down the principle as to the enforcement of the bank  guarantees  as under :

       "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 in terms is given or

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accepted, the beneficiary is entitled to  realise such a bank guarantee in terms  thereof irrespective of any pending  disputes.  The bank giving such a  guarantee is bound to honour it as per  its terms irrespective of any dispute  raised by its customer.  The very  purpose of giving such a bank  guarantee would otherwise be defeated.   The courts should, therefore, be slow in  granting an injunction to restrain the  realization of such a bank guarantee.   The courts have carved out only two  exceptions.  A fraud in connection with  such a bank guarantee would vitiate the  very foundation of such a bank  guarantee.  Hence if there is a fraud of  which the beneficiary seeks to take  advantage, he can be restrained from  doing so.  The second exception relates  to cases where allowing the encashment  of an unconditional bank guarantee  would result in irretrievable harm or  injustice to one of the parties  concerned\005".

       We do not propose to burden this judgment of ours  with various other authoritative pronouncements on this  very subject.

       In the present case the respondent in its application  filed under Section 9 of the Arbitration and Conciliation Act,  1996 in the  district court, Bidar mostly highlighted as to  how the very vital conditions of the agreement  have been  breached by the appellant herein by not arranging the funds  at the proper time.  It is alleged that the appellant did not  even complete their obligation in  respect of providing  storage facilties for valuable goods etc.  It is specifically  alleged that required funds were not available with the  appellant.  On account of non availability of funds there were  two halts of nine months and five months during the  execution of the project from 03.12.2001 to 14.08.2002 and  from 14.08.2002 to 10.01.2003.  It is further alleged that  the appellant failed to arrange for all the pre-requisites. It is  not necessary for the purpose  of disposal of  this appeal to  notice all the allegations and averments filed by the  respondents except to note that the main thrust of the  allegation relate to alleged breach of the conditions of the  agreement by the appellant.  It was further contended that  the bank guarantees were conditional bank guarantees and  not unconditional.  We have referred to the substance of the  allegations only to highlight that no factual foundation as  such has been laid in the pleadings as regards the allegation  of fraud.  In fact there is no serious allegation of any fraud  except using the word "fraud".  It is also not stated as to  how irreparable loss would be caused in case the appellant is  allowed to encash the bank guarantee.  The only two  exceptions, namely fraud and irretrievable injury based on  which injunction could be granted restraining encashment of  bank guarantee are singularly absent in the pleadings.  Once  it is held that the bank guarantee furnished by the banker is  an unconditional one, the appellant in our considered opinion  cannot be restrained from encashing the bank guarantee on  the ground that a serious dispute had arisen between the

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parties and on the allegations of breach of terms and  conditions of the agreement entered between the parties.

       The High Court in its judgment went to the extent of  recording a finding that it cannot be said that there was no  delivery, erection and commissioning of plant.  The High  Court also took the view that the appellant has agreed to  invoke the bank guarantee only in case of default on the  part of the respondent in delivery, erection, commissioning  of the plant. This view of the High Court is totally contrary to  the terms and conditions of the bank guarantee executed by  the bank in favour of the appellant.  It has been specifically  agreed by the banker to pay the guaranteed amount to the  appellant on demand and " it shall not be open to the  guarantor to know the reasons of or to investigate or to go  into the merits of the demands or the question or challenge  the demand or to know any facts affecting the demand."   The bank guarantee further makes it clear that it shall not  be open to the guarantor to require the proof of the liability  of the seller to pay the amount, before paying the sum  demanded.  In the process the High Court made the  following observations which in our considered opinion are  totally untenable and unsustainable being contrary to the  terms and conditions incorporated in the bank guarantee.    The High Court observed : "From the facts and circumstances  narrated by the petitioner, it is clear  that the first respondent could not have  invoked the bank guarantee when the  setting up of the machinery and  commissioning in accordance with the  agreement and all these facts therefore  show that the invocation of the bank  guarantee was fraudulent."               It is further held that since the appellant failed to give  any information to the bank as to the fact of any alleged  breach of agreement in order to invoke the bank guarantee  itself amounts to fraud.  We must however hasten to add  that the learned senior counsel appearing for the respondent  did not support this part of the judgment of the High Court.

       However, Shri Jayant Bhushan, learned senior counsel  appearing for the respondents contended that invocation of  the bank guarantee  relating to "delivery and commissioning  of the plant" was wholly illegal  and the High Court was right  in granting the injunction order relating to that guarantee.   It was submitted that the said bank guarantee could be  invoked only on the failure of the respondent to commission  the plant according to the schedule  of commissioning  in  terms of the relevant clauses of the principal agreement  entered into between the parties and since the conditions  contemplated under those clauses did not exist, the  invocation of the guarantee by the appellant  itself is bad.  

The learned counsel in support of his submission relied  upon the decision of this Court in Hindustan Construction  Co. Ltd. Vs. State of Bihar & Ors. [ (1999) 8 SCC 436].  This Court  in Hindustan Construction Co. (supra) having  referred to the terms of clause (9) of principal contract  between the parties therein came to the conclusion that the  bank guarantee specifically refers to the original contract   and postulates that the obligations expressed in the  contract, are not fulfilled by HCCL, the right to claim  recovery of the whole or part of the "advance mobilisation"

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then alone the bank was liable to pay the amount due under  the guarantee to the Executive Engineer. The court found  that the bank guarantee specifically refers to clause (9) of  the principal agreement and it  is under those circumstances  came to the conclusion that the amount covered by the bank  guarantee becomes payable and the same could be invoked  only in the circumstances referred to in clause (9) of the  principal agreement.  The bank guarantee executed by the  bank in the instant case in favour of the appellant herein  does not contain any such clause. Mere fact that the bank  guarantee refers to the principal agreement without  referring to any specific clause in the preamble of the deed  of guarantee does not make the guarantee furnished by the  bank to be a conditional one.  In the very said judgment this  Court observed that "what is important, therefore, 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 on whose behalf the guarantee  was furnished. The  terms of the bank guarantee are, therefore, 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, therefore, will have to be in accordance with the  terms of the bank guarantee, or else, the invocation itself  would be bad." What is relevant, therefore, is the terms  incorporated in the guarantee executed by the bank. On  careful analysis of the terms and conditions of the  guarantee, we find the guarantee to be an unconditional  one.  The respondent, therefore, cannot be allowed to raise  any dispute and prevent the appellant from encashing the  bank guarantee.          For all the aforesaid reasons, we hold that the  respondent herein did not make out any case for grant of  injunction restraining the appellant herein from encashing  the bank guarantee.                  For the reasons stated above, the impugned  judgment of the Appellate Court is set aside and the appeal  is allowed.              Before parting with the judgment, it is made clear that  the observations, if any made, in this order shall have no  bearing whatsoever upon the dispute pending before the  Arbitrator which is required to be disposed of on its own  merits uninfluenced by the observations, if any, made in this  order.          No costs.