IMPORTANT POINT
Bank guarantee/letters of credit is an independent contract between the bank and the beneficiary, not dependant on the result of the dispute between the person on whose behalf the bank guarantee was given and the beneficiary and the Court exercising its power cannot interfere with enforcement of bank guarantee/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as triable issue by strong evidence so as to prevent irretrievable injustice to the parties.

Headnote:BANK GUARANTEE-Arbitration Act, 1940-Section 41 r/w Schedule II-Injunction to restrain invoking of bank guarantee-Bank guarantee is an independent and distinct contract between bank and beneficiary -It is not qualified by validity of primary contract between person at whose instance bank guarantee was given and beneficiary-Court cannot interfere with enforcement of bank guarantee/letters of credit except where fraud or special equity is prima facie made out as triable issue.
       Held that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the Bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. The Bank unconditionally and irrevocably promised to pay, on demand , the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor. (Para 3)
       Further held : A conjoint reading of the bank guarantee and the letter of invocation demanding payment of amount due and payable by the petitioner would show that the first respondent had specified and quantified in terms of the bank guarantee a total sum with interest due thereon in a sum of Rs. 57,57,970/- as on April 5, 1995. A demand in terms of clause (i) of the bank guarantee was made. The bank had irrevocably promised and undertaken to pay to the Corporation without any demur or damage an amount not exceeding Rs. 57,57,970/- plus interest as per terms and conditions contained in the bank guarantee untrammelled by the bi-lateral agreement between the petitioner and the first respondent-Corporation stating the amount claimed was due and payable on account of loss or damage caused to or likely to be caused to or by the Corporation by reason of any breach by the said contract or any of the terms and conditions contained in the said agreement notwithstanding any dispute or disputes raised under the contract in any suit or proceedings pending before any court or tribunal relating thereto. The liability of the bank is absolute and unequivocal; it would thereby be clear that the bank is not concerned with the ultimate decision of a court and a tribunal in its finding after adjudication as to the amount due and payable by the petitioner to the first respondent. What would be material is the quantification of the liability in the letter of revocation. The bank should verify whether the amount claimed is within the terms of the bank guarantee or letter of credit. It is axiomatic that any payment by the bank, obviously be subject to the final decision of the court or the tribunal. At the stage of invocation of bank guarantee, the need for final adjudication and decision on the amount due and payable by the petitioner, would run contrary to the terms of the special contract in which the bank had undertaken to pay the amount due and payable by the contractor. Thus we hold that there is no question of making out any prima facie case much less strong evidence or special equity or exceptional circumstances for interference by way of injunction. (Para 5)

ORDER

This Special Leave Petition arises from the order of the learned Single Judge of the Delhi High Court dated January 17, 1996 made in Suit No. 990/95. The petitioner had sought for injunction under Section 41 read with Schedule II of the Arbitration Act, 1940 (for short, the Act ) to restrain the respondent from invoking the bank guarantee No. 33/1991 dated February 13, 1991 to encash Rs. 57,57,970/- pursuant to the letter of invocation dated April 5, 1995. The facts mentioned therein are that petitioner had entered into contract on March 30, 1991 pursuant to a tender submitted by him to construct 108 residential quarters at Katharia, Bhagirath Puram, Tehri. The construction was to be completed within stipulated period but was not completed. In terms of the contract, the first respondent had terminated it. The petitioner availed of the remedy under Section 20 of the Act for appointment of an arbitrator for reference of the dispute in terms of the contract. Pending consideration thereof, he filed an application to restrain the respondent to encash the bank guarantee. The respondent after termination of the contract had issued a letter of invocation dated April 5, 1995 calling upon the UCO Bank to pay the aforesaid amount in terms of the bank guarantee. It was contended in the High Court that the amount due and payable by the petitioner should be determined in the suit. The bank guarantee could not be invoked till then and the payment thereof could not be made. The respondent had played fraud on the petitioner in entering into the contract and seeking extension of the time. There are exceptional circumstances which necessitated the petitioner to seek relief of injunction pending determination of the amount due and payable by the petitioner. The High Court rejected the contentions and dismissed the petition. Thus, this special leave petition.

2. Admittedly, the bank guarantee given by the UCO Bank on behalf of the petitioner reads as under :

"On production of Bank Guarantee for the above principal amount and interest due thereon, we, UCO Bank, 5, Parliament Street, New Delhi (hereinafter referred to as "the Bank") at the request of Ansal Engineering Projects Limited Contractor (s) do hereby undertake to pay to the Corporation an amount not exceeding Rs. 57,57,970/- plus interest as aforesaid against any loss or damage caused to suffered or would be caused to or suffered by the Corporation by reason of any breach by the said Contractor (s) of any of the terms or conditions contained in the said Agreement.

We, UCO Bank, 5, Parliament Street, New Delhi do hereby undertake to pay the amount due and payable under this guarantee without any demur, merely on a demand from the Corporation stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Corporation by reason of breach by the said contractor (s) of any of the terms or conditions contained in the said Agreement or by reason of the Contractor (s) failure to perform the said Agreement. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs. 57,57,970/- plus interest due on the outstanding balance of mobilisation advance @ 18% p.a.

We undertake to pay to the Corporation money so demanded notwithstanding any dispute or disputes raised by the Contractor (s)/Supplier (s) in any suit or proceeding pending before any Court or Tribunal relating thereto. Our Liability under this present being absolute and unequivocal."

The letter of invocation of the respondent is thus :

"We hereby invoke subject Bank Guarantee and demand the amount detailed herein after as the amount claimed is due by way of loss and damage caused to or would be caused to or suffered by THDC/ourselves by reason of breach by Your customer of the terms and conditions contained in the said agreement and also b

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1996 Supreme(SC) 1146

Cases Referred (2)