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PETITIONER: NATIONAL THERMAL POWERCORPORATION LTD.

       Vs.

RESPONDENT: M/S FLOWMORE PRIVATE LTD.AND ANR.

DATE OF JUDGMENT08/05/1995

BENCH: MANOHAR SUJATA V. (J) BENCH: MANOHAR SUJATA V. (J) VERMA, JAGDISH SARAN (J)

CITATION:  1996 AIR  445            1995 SCC  (4) 515  JT 1995 (5)   591        1995 SCALE  (3)545

ACT:

HEADNOTE:

JUDGMENT:           J U D G M E N T      Mrs. Sujata V. Manohar, J.      Leave granted.      The  appellant   had  entered   into  a  contract  with respondent No.1  on 18.1.80  under which respondent No.1 had agreed to  supply  to  the  appellant  pumps  together  with butterfly valves, motors etc. The terms of the contract also contained an arbitration clause.      In connection  with various payments made or to be made under this  contract, the  first-respondent furnished to the appellant, inter alia, five bank guarantees in favour of the appellant issued  by the  Canara Bank which are the subject- matter of dispute before us. These are: (1) a bank guarantee dated 27.2.80 for Rs.11,54,290/-, (2) a bank guarantee dated 26.7.86 for Rs.85,000/-, (3) a bank guarantee dated 26.7.86 for Rs.2,53,250/-, (4) a bank guarantee dated 26.7.86 for Rs.63,411.42  and (5) a bank guarantee dated 26.7.86 for Rs.3,79,875/-. While  the   first  two   bank  guarantees  are  performance guarantees, the  other three  bank guarantees  are to secure the advances  given by the appellant to the first-respondent to be  adjusted  against  payments  to  be  made  under  the contract. All  these bank  guarantees are payable on demand. Clause 1 of the bank guarantee dated 26.7.86 for Rs.85,000/- is as follows:-                "In consideration  of the Owner having agreed      to accept from the contractor First Pump with Cast Iron      Impeller  temporarily   in  lieu   of  Stainless  Steel      Impeller  (to   be  replaced  by  the  Contractor  with      Stainless Steel  Impeller by 31.12.86. We, Canara Bank,      having our  Head Office at Bangalore-560 002 and Branch      at  f-19,  Connaught  Circus,  New  Delhi  (hereinafter      referred to as the "Bank" which expression shall unless      repugnant to  the context  or meaning  thereof (include      its successors,  administrators, executors and assigns)

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    do hereby  guarantee and  undertake to  pay  the  Owner      immediately on demand any or, all moneys payable by the      Contractor to  the extent of Rs.85,000/- (Rupees Eighty      five thousand only) at any time upto 31.12.1986 without      any reference  to the Contractors. Any such demand made      by  the   owner  shall   be  conclusive   and   binding      notwithstanding any  difference between  the owner  and      the Contractor or any dispute pending before any Court,      Tribunal, Arbitrator or any other Authority.           The Bank  agrees that  the  Guarantee  hereinafter      contained shall continue to be enforceable till the sum      due to  the Owner  or till  the Owner  discharges  this      Guarantee." (Underlining Ours)      The other  four bank  guarantees do not contain such an express clause  to the  effect that  the demand  made by the beneficiary shall  be binding.  They all,  however,  provide that the  Canara Bank  "do hereby guarantee and undertake to pay the  owner on  demand any  and all monies payable by the contractor by  reason of  any breach"  of the  terms of  the contract.      There were  disputes between  the parties in respect of the supply of pumps under the contract. The appellant by its letter dated  15th of  March, 1990  addressed to  the first- respondent demanded  from the  first-respondent payment of a sum of  Rs.13,22,466.80, being  the net  recovery which  the appellant was  entitled to make from the first-respondent as per the  particulars set  out in  that letter. The appellant called upon  the first-respondent  to pay the said amount on or before  25.3.90 failing which they would invoke the above bank guarantees without any further notice.      On 11.6.90 the first-respondent invoked the arbitration clause under  the contract and appointed his Arbitrator. The appellant thereafter  also  appointed  its  Arbitrator.  The Institute of  Engineers, India appointed a third Arbitrator. The  disputes   between  the   parties  were   referred   to arbitration. In  view of  the  arbitration  proceedings  the appellant did  not realise  the bank  guarantees  while  the first-respondent kept  the bank guarantees alive by renewing them from  time to  time. The  time  for  making  the  award expired in January 1992. As the appellant declined to extend the time  for making the award, an application under Section 28 of  the Arbitration Act for extending the time for making the award  is filed  by the  first-respondent and is pending before the Delhi High Court.      The bank guarantees were about to expire on 31st March, 1993. Hence  the appellant  by its letters all dated 22.3.93 addressed to the Canara Bank invoked the bank guarantees for Rs.11,54,290/- and Rs.85,000/-. The appellant also partially invoked the  bank guarantee  for Rs.3,79,875/-  by demanding from the Canara Bank payment of a sum of Rs.2,30,910/- under the said  bank guarantee.  In respect  of the  remaining two bank guarantees  and the  balance amount under the partially invoked bank  guarantee the appellant called upon the Canara Bank to extend the validity period of the bank guarantees by a further  period of  six months  failing which  its letters should  be  treated  as  invocation  of  the  guarantees  in question and  it demanded payment of those guarantee amounts also. As  the Canara  Bank objected to partial invocation of the bank  guarantee for  Rs.3,79,875/-, the appellant by its letter dated  26th of March, 1993 invoked the bank guarantee for Rs.3,79,875/- also in full.      On  26th  March,  1993  the  first-respondent  filed  a petition before the Delhi High Court under Section 41 of the Arbitration  Act  seeking  an  injunction  to  restrain  the

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present appellant  from  invoking  the  guarantees  and  the Canara Bank  from  remitting  the  amounts  under  the  bank guarantees to the appellant. A Learned Single Judge of Delhi High Court by his order dated 20.10.94 granted an injunction restraining  the   appellant   from   encashing   the   bank guarantees. An  appeal filed  by the first-respondent before the Division  Bench of the Delhi High Court was dismissed by the Delhi  High Court  on the  ground that an appeal was not maintainable against  an order  passed in  exercise of power under Section 41 of the Arbitration Act read with the second Schedule.      The present  appeals are filed from these judgments and orders of the Delhi High Court. The question of jurisdiction of the  Division Bench  of the Delhi High Court to entertain an appeal  from an order of a Single Judge of the High Court granting an  injunction under  Section 41 of the Arbitration Act, need  not detain  us when we are examining the order of the  learned   Single  Judge   under  Article   136  of  the Constitution of India, an appeal from that order having been dismissed. On  merit, the  order of  injunction issued  by a learned Single  Judge of  the Delhi  High  Court  cannot  be sustained. In  the case  of  Svenska  Handelsbanken  v.  M/s Indian Charge Chrome and Ors. (1994 (1) SCC 502), a Bench of three  Judges   of  this   Court  has,  while  dealing  with performance  guarantees  and  guarantees  against  advances, observed that  looking to the obligation assumed by the bank under such  guarantees or letters of credit, the bank cannot be prevented by the Party at whose instance the guarantee or letter of  credit, was  issued, from  honouring  the  credit guaranteed. Since  the bank pledges its own credit involving its reputation,  it has  no defence  except in  the case  of fraud or  irretrievable  injustice.  Fraud  must  be  of  an "egregious nature"  so as  to vitiate  the entire underlying transaction. While irretrievable injustice. Fraud must be of an "egregious nature" so as to vitiate the entire underlying transaction. While  irretrievable injustice should be of the kind arising  in  an  irretrievable    situation  which  was referred to  in the  U.S. case  of Itek  Corporation v.  The First National  Bank of  Boston etc.  (566 Fed. Supp. 1210). The irreparable harm should not be speculative. It should be genuine and  immediate as  well as  irreversible - a kind of situation which  existed in  the case  of  Itek  Corporation (supra) where,  on account  of the  revolution in  Iran  the American Government  had cancelled  all export  contracts to Iran  and   had  blocked   all  Iranian  assets  within  the jurisdiction of  the United  States. Fifty two Americans had been taken  hostages in  Iran. In  this situation  the Court felt that the plaintiff had no remedy at all and the harm to him would  be irreparable. This kind of a situation is not a likely  situation.   This  Court  in  the  case  of  Svenska Handelsbanken  (supra)   has   cited   with   approval   the observations of  this Court  in the case of U.P. Cooperative Federation Ltd.  v. Singh  Consultants & Engineers Pvt. Ltd. (1988 (1)  SCR 1124) to the effect that the Court should not lightly interfere  with  a  performance  bond  or  guarantee unless there  is fraud  of the  beneficiary and not somebody else.      In the  present case  Mr. Nariman,  learned counsel for the first-respondent  has attempted  to justify the order of injunction issued  by the  Delhi High  Court on two grounds; (1) that  the bank  guarantees were  not invoked in terms of the  bank  guarantees  in  question,  except  for  the  bank guarantee of  Rs.85,000/- which, he conceded, was invoked in terms of  that bank  guarantee. (2)  After  the  arbitration clause was invoked on 11th of June, 1990 and the Arbitrators

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were appointed  by the  parties in  September and  December, 1990, the  parties had  proceeded on the basis that the bank guarantees would  not be  invoked until  the arbitration was over and  award made. Hence by its own conduct the appellant had precluded itself from invoking the bank guarantees.      Both these  submissions cannot  be accepted. It is true that the  bank guarantee  of Rs.85,000/- contains an express term to  the effect  that any demand made by the owner shall be conclusive  and binding  on the  bank notwithstanding any difference between  the Owner  and  the  Contractor  or  any dispute pending  before any  Court, Tribunal,  Arbitrator or any other  Authority. Nevertheless, this express term merely reiterates the  nature of  a bank guarantee which is payable on  demand  being  made  by  the  beneficiary  of  the  bank guarantee. A  bank guarantee  which  is  payable  on  demand implies that  the bank is liable to pay as and when a demand is made  upon the  bank by  the beneficiary. The bank is not concerned with any inter se disputes between the beneficiary and the  person at  whose instance  the bank  had issued the bank guarantee.  All the  three bank  guarantees which  have been invoked  are payable on demand. There is, therefore, no merit in  the submission  that the  bank guarantees have not been properly invoked.      The  second   submission  relates  to  the  conduct  of parties. Learned counsel for the first-respondent has relied upon the  fact that  the first-respondent  kept all the bank guarantees alive  by renewing  them from time to time during the pendency  of  arbitration  and  on  the  fact  that  the appellant did  not invoke  the  bank  guarantees  while  the arbitration  was   in  progress.   Neither  of   these   two circumstances can  lead to  the  conclusion  that  the  bank guarantees  cannot  be  invoked  while  the  arbitration  is pending. The  bank guarantees  are unconditional and payable on demand.  The circumstances pointed out by learned counsel for the  first-respondent do  not constitute  a bar  on  the right of the appellant to encash the bank guarantees. In the present case there is also no circumstance pointed out which would result  in any  irretrievable injustice  to the first- respondent of  the kind  referred to  in the  case  of  Itek Corporation (supra) if the bank guarantees are realised.      In the premises, the Delhi High Court was not justified in  issuing   an  order   of  injunction   to  restrain  the realisation of  the bank  guarantees by  the appellant.  The appeals are, therefore, allowed. The order of the Delhi High Court  dated   20.10.94  is  set  aside  and  the  order  of injunction is vacated. The first-respondent shall pay to the appellant the costs of the appeals.