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CASE NO.: Appeal (civil)  5121 of 2007

PETITIONER: Vinitec Electronics Private limited

RESPONDENT: HCL Infosystems Limited

DATE OF JUDGMENT: 02/11/2007

BENCH: ALTAMAS KABIR & B.SUDERSHAN REDDY

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO. 5121 OF 2007 [ARISING OUT OF SPECIAL LEAVE PETITION ( c ) NO.16098/2006]  

B.Sudershan Reddy, J.

       Leave granted.

2.      The dispute between the parties relates to invocation  of the bank guarantee furnished by the appellant to the  respondent.  

3. The appellant M/s. Vinitec Electronics Private Limited  entered into agreement dated 10th May, 2000 with the  respondent HCL Infosystem Limited under which the  respondent agreed to buy UPS systems from the appellant for  a consideration value of Rs.1,68,12,400/-.  The method of  payment and terms thereof are provided for in clause 15(a)  and (d) in  the said agreement. \023Clause 15:  The payment terms will be : (a)     30% Advance against a Bank  guarantee from a Scheduled  Bank of equivalent value.   The BG shall be valid till  the date of final delivery  at the Company location(s). (b)     . . . . .  

( c )   . . . . .

(d)    10% after one year from the  date of receipt of material at the  customer site(s).\024  

                          4.      The case of the appellant was that it had supplied all  the equipments to the respondent by 2nd August, 2000 but the  respondent committed default in making the stipulated  payment amounting to Rs.49,99,338/-.  The said sum  according to the appellant remained unpaid. The respondent  agreed to pay the sum provided the performance bank  guarantee of 10% value was furnished.  That is how bank  guarantee as required by the respondent was furnished which  was amended on 20th August, 2001.  The case of the appellant  

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was that even after furnishing the bank guarantee the  respondent made a payment of only Rs. 30 lakhs on 22nd  August, 2001 and false assertion of payment of  Rs.11,99,335/- was made.  It was also alleged that a sum of  Rs. 8 lakhs still remained unpaid.        5.      The appellant\022s case before the trial court was that  the respondent under no circumstances is entitled to invoke  the bank guarantee without paying the balance amount of  Rs.11,99,335/- or at least 8 lakhs which is admittedly  liable to be paid.  The bank guarantee had become  inoperative as the condition precedent for its invocation  was not complied with.        6.      The case of the respondent was that the original  contract value was Rs.1,68,12,400/- out of which  Rs.1,60,12,400/- , i.e., 95% of the contract value stood  paid and all the obligations pursuant to clause 15(a) to  (c) of the contract have been fulfilled and it is only then  the bank guarantee in question was furnished to the  respondent upon payment of 30% of the contract value to the  appellant.  It was asserted that the bank guarantee  furnished  as it stands is an unconditional one.        7.      The learned Single Judge after elaborate consideration  of the matter found no merit in the injunction application  filed by the appellant and accordingly dismissed the same.   The Division Bench of the Delhi High Court affirmed the  order of the learned Single Judge.        8.      The learned senior counsel Sh.Kailash Vasdev             mainly submitted that the High Court committed an error in  interpreting Paragraph 4 of the amended bank guarantee in  isolation and divorced from the terms and conditions of the  contract dated May 10, 2000 entered between the parties.   It was submitted that the High Court instead of relying  upon the operative portion of the bank guarantee ought to  have taken all the clauses which are material to arrive at  a real intention of the parties.  The submission was that  the  respondent did not make full payment of Rs.49,99,335/-  to the appellant and therefore the pre-condition embodied  in the performance bank guarantee dated 10th August, 2001 as  amended on 20th August, 2001 was never satisfied and as such  the performance guarantee did not come into being at all,  remained ineffective and unenforceable and therefore could  not be invoked.        9.      The learned counsel for the respondent submitted that  after the amendment of the bank guarantee substituting  clause 4 on 20th August, 2001, the conditional bank  guarantee furnished by the appellant became an  unconditional one.        10.     We have carefully considered the rival submissions  made during the course of hearing of the appeal.        11.     The law relating to invocation of bank guarantees is  by now well settled by a catena of decisions of this court.   The bank guarantees which provided that they are payable by  the guarantor on demand is considered to be an un- conditional bank guarantee.  When in the course of  commercial dealings, unconditional guarantees have been  given or accepted  the beneficiary is entitled to realize  such a bank guarantee in terms thereof irrespective of any  pending disputes.  In U.P. State Sugar Corporation      vs.

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Sumac International Ltd.  , this court observed that :         \023The law relating to invocation of such bank  guarantees is by now well settled.  When in the  course of commercial dealings an unconditional  bank guarantee is given or accepted, the  beneficiary is entitled to realize such a bank  guarantee in terms thereof irrespective of any  pending  disputes.  The bank giving such a  guarantee is bound to honour it as per its terms  irrespective of any dispute raised by its  customer. The very purpose of giving such a bank  guarantee would otherwise be defeated.  The  courts should, 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 such 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.  Since in most cases payment  of money under such a bank guarantee would  adversely affect the bank and its customer at  whose instance the guarantee is given, the harm  or injustice contemplated under this head must be  of such an exceptional and irretrievable nature  as would over ride the terms of the guarantee and  the adverse effect of such an injunction on  commercial dealings in the country.  The two  grounds are not necessarily connected, though  both may coexist in some cases.\024         12.     It is equally well settled in law that bank guarantee  is an independent contract between bank and the beneficiary  thereof.  The bank is always obliged to honour its  guarantee as long as it is an unconditional and irrevocable  one.  The dispute between the beneficiary and the party at  whose instance the bank has given the guarantee is  immaterial and of no consequence.  In BSES Limited (Now  Reliance Energy Ltd.) vs. Fenner India Ltd. And anr.   this  court held :        \023 10.  There are, however, two exceptions to this  Rule.  The first is when there is a clear fraud  of which the Bank has notice and a  fraud of the  beneficiary from which it seeks to benefit.  The  fraud must be of an egregious nature as to  vitiate the entire underlying transaction.  The  second exception to the general rule of non- intervention is when there are \023special equities\024  in favour of injunction, such as when  \023irretrievable injury\024 or \023irretrievable  injustice\024  would occur if such an injunction  were not granted.  The general rule and its  exceptions has been reiterated in so many  judgments of this court, that in U.P. State Sugar  Corpn. V. Sumac International Ltd. (1997) 1 SCC  568 (hereinafter \023U.P. State Sugar Corpn\024) this  Court, correctly declare that the law was  \023settled\024.

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        13.     In Himadri  Chemicals Industries Ltd. V.  Coal Tar  Refining Company , this court summarized the principles for  grant of refusal to grant of injunction to restrain the  enforcement of a bank guarantee or a letter of credit in  the following manner :              \023 14.. . . . . (i)     While dealing with an application for  injunction      in the course of commercial  dealings, and when an   unconditional bank  guarantee or letter of credit is given or  accepted, the Beneficiary is entitled to  realize such a Bank Guarantee or a Letter of  Credit in terms thereof irrespective of any  pending disputes relating to the terms of the  contract.        (ii)    The Bank giving such guarantee is bound to  honour it as per its terms irrespective of any  dispute raised by its customer.

(iii)   The courts should be slow in granting an order  of  injunction to restrain the realization of  a bank guarantee or a Letter of Credit.

(iv)    Since a Bank Guarantee or a Letter of Credit  is an independent and a separate contract and  is absolute in nature, the existence of any  dispute between the parties to the contract is  not a ground for issuing an order of  injunction to restrain enforcement of Bank  Guarantees or Letters of Credit.  

(v)     Fraud of an egregious nature which would  vitiate the very foundation of such a Bank  Guarantee or Letter of Credit and the  beneficiary seeks to take advantage of the  situation.   

(vi)    Allowing encashment of an unconditional Bank  Guarantee or a Letter of Credit would result  in irretrievable harm or injustice to one of  the parties concerned.\024         14.     In Mahatama Gandhi Sahakra Sakkare Karkhane vs.  National Heavy Engg. Coop. Ltd and anr. ,   this court  observed :        \023 Para 22.  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  from 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.

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Para 28.        What is relevant are the terms  incorporated in the guarantee executed by the  bank.  On careful analysis of the terms and  conditions of the guarantee in the present case,  it is found that the guarantee is an  unconditional one.  The respondent, therefore,  cannot be allowed to raise any dispute and  prevent the appellant from encashing the bank  guarantee.  The mere fact that the bank guarantee  refers to the principle 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.\024                                                   [Emphasis supplied]

      15.     Keeping these principles in mind we shall now proceed  to apply the same to the facts of this case.        16.     Shorn of all the embellishments the question that  really arises for our consideration is as to whether bank  guarantee furnished is an unconditional and irrevocable one  or a conditional one?  It may not be necessary to refer in  detail  the terms and conditions of the contract except to  analyse the original clause of the bank guarantee dated  August 10, 2001 and as well as the subsequent amendment of  the relevant clause in the said bank guarantee on 20th  August, 2001.          17.     The relevant clause in the bank guarantee dated 10th  August, 2001 furnished by the appellant is to the following  effect : \023Whereas M/s Vinitec Electronics Pvt.  Ltd. H-33, Bali Nagar, New  Delhi(hereinafter called the  \021Supplier\022) supplied their Vinitec on- line UPS systems of various capacities  pursuant to their Agreement dated 10th  May, 2000 & P.O.No.4500011730 dated  30.05.00 (hereinafter called the  \021Company\022)  for the final Purchaser  President of India through the  Director, National Crime Records  Bureau, Ministry of Home Affairs,  Government of India, New  Delhi(hereinafter called the  \021Purchaser\022).

Whereas in terms of Clause No.15 of the  Agreement for receiving the entire  balance payments of Rs.49,99,335/- from  the company, the supplier have agreed  to provide a Performance Bank Guarantee  equivalent to Rs.16,81,238.50 as 10% of  the value of the contract to be kept  valid till the warranty period during  which times the Supplier is required to  perform their warranty obligations to  the Purchaser; and

Whereas pursuant to the application  made by the supplier, we Oriental Bank  of Commerce, Kirti Nagar, New Delhi

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(hereinafter called the \023Bank\024) have  accordingly agreed to give the supplier  a bank guarantee for the aforesaid  purpose.   Therefore, we, the bank, hereby affirm  that we are guarantors and responsible  on behalf of the supplier upto a total  of Rs.16,81,238.50(Rupees sixteen lacs  eighty one thousand two hundred thirty  eight and paise fifty only) and we  undertake to pay any sum or sums within  the limit of Rs.16,81,238.50(Rupees  sixteen lacs eighty one thousand two  hundred thirty eight and paise fifty  only) as aforesaid upon receipt of  written demand from the purchaser and  Company within the validity of this  Bank Guarantee establishing the  supplier to be in default for the  performance of their warranty  obligations under the contract.

We, the bank, affirm that our liability  under this guarantee is limited to the  total amount of  Rs.16,81,238.50(Rupees  sixteen lacs eighty one thousand two  hundred thirty eight and paise fifty  only) and it shall remain in full force  upto and including 31st August,2003 and  shall be extended from time to time for  such further period(s) as desired by  the purchaser, Company and supplier on  whose behalf this Guarantee has been  given."                     18.     Thereafter by  a letter dated 20th August, 2001,  the bank guarantee was amended and Paragraph 4 of the bank  guarantee dated 10th August, 2001 was substituted and the  same reads as under : \023Therefore, we, the Bank, hereby affirm that  we are Guarantors and responsible on behalf  of the supplier upto a total of  Rs.16,81,238.50         (Rupees sixteen lacs  eighty one thousand two hundred thirty eight  and paise fifty only) and we undertake to  pay any sum or sums within the limit of  Rs.16,81,238.50 (Rupees sixteen lacs eighty  one thousand two hundred thirty eight and  paise fifty only) as aforesaid upon receipt  of written demand from the Company within  the validity of this Bank Guarantee.\024               19.      In the unamended bank guarantee the bank affirmed  that they are guarantors and responsible on behalf of the  supplier upto a total of Rs. 16,81,238.50 (Rupees sixteen  lakhs eighty one thousand two hundred thirty eight and  fifty paise only) and had undertaken to pay any sum or sums  within that limit upon receipt of written demand from the  purchaser within the validity of bank guarantee provided it  is established the supplier to be indefault  for the  performance of their warranty obligations under the  contract.  This makes it abundantly clear that what was  furnished was a conditional bank guarantee and the bankers

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were liable to pay the amounts only upon establishing the  fact that the supplier was in default for the performance  of their warranty obligations under the contract. But by  the subsequent letter dated 20th August, 2001, the relevant  clause in bank guarantee was amended whereunder the banks  stood as guarantor and responsible on behalf of the  supplier upto a total of Rs.16,81,238.50 (Rupees sixteen  lakhs eighty one thousand two hundred thirty eight and  fifty paise only) and had undertaken to pay any sum or sums  within that limit \023upon receipt of written demand from the  Company within the validity of this bank guarantee\024.  This  amended clause makes it abundantly clear that the bank had  undertaken to pay amounts upto a total of Rs.16,81,238.50.   The condition that the amounts shall be paid only upon  establishing the supplier to be indefault for the  performance of their warranty obligation under the contract  has been specifically  deleted.  In our considered opinion,  the bank guarantee as amended replacing Paragrah 4 of the  original bank guarantee makes the bank guarantee furnished  as unconditional one.  The bankers are bound to honour and  pay the amounts at once upon receipt of written demand from  the respondent.        20.     The learned senior counsel however relying upon the  decision of this court in Hindustan Construction             Co. Ltd.and ors. vs. State of Bihar and ors  contended that  the bank guarantee could not said to be unconditional or  unequivocal in terms so that the respondent could  claim  any unfettered right to invoke the bank guarantee and  demand immediate payment thereof from the bank.  We find no  substance in the submission so made by the learned senior  counsel on behalf of the appellant.  In Hindustan  Construction (supra), the appellant Company was awarded a  contract by the State of Bihar for construction of a dam.   Clause 9 of the contract between the parties provided that  the State would make an advance loan to the Company for the  costs of mobilisation in respect of the works on furnishing  of a bank guarantee by the appellant for an amount equal to  the advance loan.  The advance loan was required to be used  exclusively for mobilisation expenditure.  In case of  misappropriation of the advance loan the loan at once shall  become due and payable immediately.  In terms of this  clause bank guarantee was furnished by the bank agreeing  unconditionally and irrevocably to guarantee payment on  demand without any objection but with the qualification  that such payment shall be only in the event the  obligations expressed in Clause 9 of the original contract  have not been fulfilled by the contractor giving the right  of claim to the employer for recovery of the whole or part  of the advance mobilisation loan. Clause 9 of the main  contract was thus incorporated and made part of the bank  guarantee furnished by the banker.  It is under those  circumstances this court took the view that the bank  guarantee furnished was not an unconditional one.  Clause 9  in the bank guarantee refers to the terms and conditions of  the contract between the parties.  The bank guarantee thus  could be invoked only in the circumstances referred to in  Clause 9 wherein the amount would become payable only if  the obligations are not fulfilled or there is  misappropriation.        21.     In the present case the amended clause does not refer  to any of the clauses specifically as such but on the other  hand the bank had undertaken responsibility to pay any sum  or sums within the guaranteed limit upon receipt of written

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demand from the Company.  The operative portion of the bank  guarantee furnished by the bank does not refer to any of  the conditions for payment under the bank guarantee.  It is  true that the bank guarantee furnished makes a reference to  the principal agreement between the parties in its  preamble.  Mere fact that the bank guarantee refers to the  principal agreement in the preamble of the deed of  guarantee does not make the guarantee furnished by the bank  to be a conditional one unless any particular clause of the  agreement has been made part of the Deed of Guarantee.         22.       The recitals in the preamble in the deed of  guarantee do not control the operative part of the deed.   After careful analysis of the terms of the guarantee we  find the guarantee to be an unconditional one.  The  appellant, therefore, cannot be allowed to raise any  dispute and prevent the respondent from encashing the bank  guarantee.             23.     The next question that falls for our consideration is  as to whether the present case falls under any of or both  the exceptions namely whether there is a clear fraud of  which the bank has notice  and a fraud of the beneficiary  from which it seeks to benefit and another   exception  whether there are any \023special equities\024 in favour  of   granting injunction.  

24.     This Court in more than one decisions took the view  that fraud, if any, must be of an egregious nature as to  vitiate the underlying transaction.  We have meticulously  examined the pleadings in the present case in which no  factual foundation is laid in support of the allegation of  fraud.  There is not even a proper allegation of any fraud  as such  and in fact the whole case of the appellant  centers around the allegation with regard to the alleged  breach of contract by the respondent.  The plea of fraud in  appellant\022s own words is to the following effect:  

\023That despite the respondent, HCL being  in default of not making payment as  stipulated in the Bank Guarantee, in  perpetration of abject dishonesty and  fraud, the respondent, HCL fraudulently  invoked the Bank Guarantee furnished by  the applicant and sought remittance of  the sums under the conditional Bank  Guarantee from the Oriental Bank of  Commerce vide letter of invocation  dated 16.12.2003.\024

25.     In our considered opinion such vague and indefinite  allegations made do not satisfy the requirement in law  constituting  any fraud much less the fraud of an egregious  nature as to vitiate the entire transaction.  The case,  therefore does not fall within the first exception.         26.     Whether encashment of the bank guarantee would cause  any \023irretrievable injury\024 or \023irretrievable injustice\024.   There is no plea of any \023special equities\024 by the appellant  in its favour. So far as the plea of \023irretrievable  injustice\024 is concerned the appellant in its petition  merely stated:        \023That should the respondent be  successful in implementing its evil

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design, the same would not only amount  to fraud, cause irretrievable injustice  to the applicant, and render the  arbitration nugatory and infructuous  but would permit the respondent to take  an unfair advantage of their own wrong  at the cost and extreme prejudice of  the applicant.\024        27.     The plea taken as regards \023irretrievable injustice\024    is again vague and not supported by any evidence.         28.     There is no dispute that arbitral proceedings are  pending.  The appellant can always get the relief provided  he makes his case before the Arbitral Tribunal.  There is  no allegation that it would be difficult to realize the  amounts from the respondent in case the appellant succeeds  before the Arbitral Tribunal.  

29.     In this view of the matter, we see no merit in this  appeal.  

30.     We make it clear that this order and as well as the  order passed by the Delhi High Court shall have no bearing  on the merits of the case pending before the Arbitral  Tribunal.  

31.     The appeal is accordingly dismissed. We make no order  as to costs.