IMPORTANT POINT
The existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees as there must be a fraud in connection with the bank guarantee.

Headnote:BANK GUARANTEE-Invocation of-Law relating to-Rule against granting of injunctions when bank guarantees are sought to be realised-Existence of any dispute between parties to the contract is not a ground for issuing an injunction to restrain enforcement of bank guarantees-There must be a fraud in connection with the bank guarantee-Mere fact that a reference under Sick Industrial Companies (Special Provisions) Act, 1985 is pending before the Board is not sufficient to bring the case in the ambit of irretrievable injustice exception.
Held : The 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 override 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 co-exist in some cases. (Para 11)

Judgement Key Points

The legal principle established by the Supreme Court emphasizes that courts should exercise restraint in staying the invocation of an unconditional bank guarantee, recognizing the importance of honoring such guarantees to maintain trust in commercial transactions. The Court clarified that the primary exceptions to this rule are cases involving clear fraud or situations of irretrievable injustice that would cause irreparable harm to one of the parties involved (!) .

In the context of your argument, the contention that "expiry" is merely a technicality does not meet the high threshold of "irretrievable injustice" as defined by the Court. The Court has consistently held that mere procedural or technical issues, such as the expiration of a guarantee, do not automatically constitute irretrievable injustice unless there are exceptional circumstances demonstrating that enforcement would cause unavoidable and substantial harm that cannot be remedied through other legal avenues (!) .

Therefore, unless the Railways can demonstrate a compelling and exceptional circumstance that would result in irreparable harm—beyond mere technicalities—the courts are unlikely to find that the invocation of the bank guarantee should be stayed on the ground of irretrievable injustice. The high threshold set by the Court underscores the importance of maintaining the integrity of unconditional guarantees and discourages courts from intervening unless clear and exceptional circumstances are established.

JUDGMENT

Mrs. Sujata V. Manohar, J.-Leave granted.

2. The appellant, U.P. State Sugar Corporation entered into an agreement dated 2nd of August, 1989 with the respondent, M/s. Sumac International Pvt. Ltd. under which the respondent agreed to design, to prepare an engineering lay-out and to manufacture or procure and supply to the appellant the machinery and equipment for a complete sugar plant for extension and modernisation of the appellant s existing sugar plant at Rohana Kalan, District Muzaffarnagar, U.P. The respondent was required to set up a new plant of 2500 TCD at a new site or an adjoining site close to the existing sugar plant of the appellant. The total contract price was fixed under Clause 2.1 of the contract at Rs. 1780 lacs.

3. Under the terms of the agreement the respondent was required to set up the plant and mark it ready for commercial production by 30th of November, 1990. The agreement stated that in this regard time was of the essence of the contract and if the respondent failed to do so the consequences were also spelt out in the contract. Under Clause 3 of the contract a month-wise progressive delivery report was to be submitted by the respondent and a PERT/CPM chart had to be submitted and adhered to. Clause 4 which dealt with delivery required the respondent to complete all supplies by 15th of November, 1990 so that the plant could be commissioned by 30.11.1990. Under Clause 11.1 the respondent-seller was entitled to a reasonable extension of time as decided by the purchaser if the purchase order was expressly suspended for no fault of the seller.

4. Under Clause 15 the respondent-seller was required to furnish to the appellant five bank guarantees as specified therein. These were :

1. A bank guarantee for timely delivery of plant and machinery as provided in Clause 14.1 representing five percent of the contract price referred to in Clause 2.1. This was required to be furnished within 3-1/2 months of the signing of the agreement.

2. The seller was required to furnish a bank guarantee in respect of guaranteed performance of the plant and machinery for an amount representing 5% of the contract price. This guarantee was required to be furnished eight months before the scheduled date of commissioning mentioned in Clause 4.1 or within six months from the date of the signing of the agreement or after 2-1/2 months of the opening of the Letter of Credit whichever of these dates was earlier.

3. Three bank guarantees in respect of advance payments to be made by the appellant to the respondent under Clauses 13.2(a) to 13.2(c) were required to be for Rs. 89 lacs, Rs. 178 lacs and Rs. 89 lacs respectively, representing 5%, 10% and 5% of the contract price respectively.

5. Under Clause 13.2 on receipt of the first of these bank guarantees for Rs. 89 lacs the first instalment of advance would be paid within a week from the date of signing of the agreement. On receipt of the second bank guarantee for Rs. 178 lacs the second advance would be paid by the appellant to the respondent within 2½ months of the signing of the agreement subject to the respondent furnishing various statements, certificates etc. as set out in that clause. The third bank guarantee for Rs. 89 lacs was to be furnished against the advance to be paid by the appellant to the respondent within 3½ months from the date of the signing of the agreement. These three bank guarantees are thus in respect of the advance payments required to be made by the appellant to the respondent.

Under Clause 15.5 all these bank guarantees are payable on demand. It is expressly provided that it shall not be open to the guarantor to know the reasons of or to investigate or to go into the merits of the demand invoking the bank guarantee or to question or challenge the demand or to require the proof of the liability of the seller before paying the amount demanded. It is further provided that the invocation of the ba

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1996 Supreme(SC) 2079

IMPORTANT POINTThe existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees as there must be a fraud in connection with the bank guarantee.

Cases Referred (7)

IMPORTANT POINT
The existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees as there must be a fraud in connection with the bank guarantee.