Important Point
If the Bank guarantee is unconditional and there is no material to show any fraud or likelihood of irreparable loss, the beneficiary cannot be restrained from encashing the same.

Headnote:a)Banking Laws – Bank Guarantee – Clauses 1 and 2 of the guarantee executed by the banker in favour of the purchaser are required to be read together – 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 – Therefore 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. (Para 8)
       b)Banking Laws – Bank Guarantee – Commitments of banks must be honoured free from interference by the courts. It is only in case of fraud or resulting in irretrievable injustice that the court should interfere. (Para 9)
       (1998) 1 SCC 174 – Relied upon.
       c)Banking Laws – Bank Guarantee – In case of an unconditional and irrevocable bank guarantee it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee – The beneficiary 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 except on the ground of fraud and irretrievable injury. (Para 11)
       (1981)2 SCC 766; (1991)4 SCC 230 – Relied upon.
       d)Banking Laws – Bank Guarantee – No factual foundation laid in the pleadings regarding the allegation of fraud except using the word “fraud” – There is no material to show that any irreparable loss likely to be caused in case the appellant is allowed to encash the bank guarantee – Thus, no case made out for grant of injunction restraining the appellant herein from encashing the bank guarantee. (Paras 14 and 18)
       (1997)1 SCC 568 – Relied upon.
       e)Banking Laws – Bank Guarantee – Once it is held that the bank guarantee furnished by the banker is an unconditional one, the appellant cannot be restrained from encashing the bank guarantee on the ground that a serious dispute had arisen between the parties and on the allegations of breach of terms and conditions of the agreement entered between the parties. (Para 14)
       f)Banking Laws – Bank Guarantee – Unless the Bank guarantee specifically refers to any specific clause of the contract between the parties to make it conditional, mere fact that the bank guarantee refers to the principal agreement does not make the guarantee furnished by the bank to be a conditional one. (Para 17)
       (1999) 8 SCC 436 - Distinguished.
       Facts of the case :
       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 up to 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.
       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. Thereafter, a meeting was held between the parties at the intervention of the Government of Karnataka on 1st July, 2003.
       Findings of the Court:
       The Bank guarantee being unconditional and there being no material to show any fraud or likelihood of irreparable loss, the appellant cannot be restrained from encashing the same.

JUDGMENT

B. Sudershan Reddy, J. —

1.Leave granted.

2.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––supply plant and machinery–so 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.

8.0TRIALS AND TAKE OVER :

8.1As 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.

8.2After 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.”

2.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 petitioner shall release Rs.140.41 lakhs to the 1st respondent

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2007 Supreme(SC) 954

Important PointIf the Bank guarantee is unconditional and there is no material to show any fraud or likelihood of irreparable loss, the beneficiary cannot be restrained from encashing the same.

Cases Referred (4)

Important Point
If the Bank guarantee is unconditional and there is no material to show any fraud or likelihood of irreparable loss, the beneficiary cannot be restrained from encashing the same.