A Bank Guarantee has to be honored in accordance with its terms, and a dispute in regard to the interpretation of the underlying contract cannot furnish a ground for restraining the invocation of a Bank Guarantee.

The Learned Single Judge has, by the order impugned in these proceedings, declined to grant an injunction on the invocation and encashment of certain Bank Guarantees. The application before the Learned Single Judge was made in a Petition under Section 9 of the Arbitration and Conciliation Act, 1996. The Appellant and the First Respondent entered into a General Sales Agency Agreement on 28th January 2004 in pursuance whereof, the Appellant agreed to facilitate, promote and expand the business of the First Respondent and for that purpose to act as a General Sales Agent of the First Respondent on the terms and conditions stipulated therein. A Bank Guarantee was issued by the Second Respondent on 21st March 2003. The guarantee contained a recital of the fact that the First Respondent had agreed to extend to the Appellant, credit for the freight collected by the Appellant on behalf of the First Respondent to the extent of an amount of Rs.1 crore pursuant to the GSA Agreement. By the Guarantee, the Bank irrevocably and absolutely guaranteed the due and punctual payment by the Appellant to the First Respondent of such sum or sums of money as may from time to time or at any time during the continuance of the agreement become due to the First Respondent from the Appellant. The Guarantee contained a stipulation that the total payment in terms thereof would not exceed in aggregate Rs.1 crore and that payment shall be made to the First Respondent on receipt of a written demand accompanied by a statement certifying the amount due and unpaid by the Appellant. The Guarantee also contained a stipulation that it shall cover all credits and any other sum, due and payable by the Appellant to the First Respondent under the GSA Agreement for a period of one year from 24th March 2003. The Guarantee was invoked on 3rd May 2007. The Appellant instituted proceedings under Section 9 of the Arbitration and Conciliation Act, 1996, seeking an order of restraint on the encashment of the Guarantee. An injunction was refused by the Learned Single Judge on 12th June 2007 which has led to the filing of this appeal.

2. A Bank Guarantee, it is well settled, has to be honoured in accordance with its terms. The law contemplates an exception to this principle when there is a clear fraud on the part of the beneficiary of which the Bank has notice. The fraud has to be of an egregious nature so as to vitiate the entire underlying transaction. The second exception is in a situation where the intervention of the Court is warranted on the ground that there are special equities in favour of the grant of injunction such as when an irretrievable injustice would occur if an injunction were not to be granted. These principles which emerge from the decided cases have been reiterated in recent judgments of the Supreme Court in BSES Ltd. vs. Fenner India Ltd.,1 and Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Company, a decision rendered on 7th August 2007 in Civil Appeal No.3522 of 2007.

3. In the present case, it has not been urged before us either that there was a fraud on the part of the beneficiary of the Guarantee or that there are special equities which would warrant the grant of an order of injunction. The submission urged is that the invocation of the guarantee is not in terms of the guarantee. While placing reliance on the letter of invocation, Counsel for the Appellant urged that the guarantee was invoked on account of service tax liability which under the terms of the underlying contract could not be fastened upon the Appellant. The duty to collect service tax was, according to the Appellant, not cast upon it under the GSA Agreement and consequently, the invocation was not proper.

4. In the affidavit in reply which was filed before the Learned Single Judge, the First Respondent set up the defence that the Appellant had failed in its duty and obligation as