2006 Supreme(SC) 103

2006(2) Supreme 106
Supreme Court of India
(From Madras High Court)
H.K. Sema and B.N. Srikrishna, JJ.
M/s. BSES Ltd. (Now Reliance Energy Ltd.) —Appellant
versus
M/s. Fenner India Ltd. and Anr. —Respondents
Civil Appeal No. 955 of 2006
(Arising out of S.L.P. (C) No. 20062/2004)
Decided on 3-2-2006
Counsel for the Parties :
For the Appellant : Mukul Rohtagi, Sr. Advocate, K.R. Sasiprabhu, Ms. Manali Singhal, Mustafa Alam and Ardendu Thakur Advocates.
For the Respondent : Soli J. Sorabjee, Raju Ramachandran, Sr. Advocates, R. Veera Raghavan, Subramonium Prasad, Raghavendra S. Srivastava, P. Kapoor and V.G. Pragasam Advocates.

Important Point
The Bank must honour the bank guarantee free from interference by the Courts. It is only in a case of fraud of an ‘egregious nature’ or in case of irretrievable injustice, that the Court should interfere.

Headnote:Arbitration and Conciliation Act, 1996—Sections 9 and 17—Injunction sought against a beneficiary seeking to enforce his/her rights under a bank guarantee—Sustainability—Wrap-around agreement—Contract for a captive power plant—Award of contract in favour of appellant—Appellant awarded a part of that work to first respondent—Contract was split up into four sub-contracts, i.e. four work/purchase orders—It was a composite contract executable on a turnkey basis—As required by the terms and conditions of the said work/purchase orders, first respondent submitted four bank guarantees from second respondent bank—They were unconditional irrevocable bank guarantees, under which respondent Bank agreed to pay to appellant the amount claimed or demanded by appellant—Appellant had the right to encash any or all of the guarantees for any breach in any of the terms of the four contracts—Bank guarantees were intended for securing the advances paid to first respondent and also for securing due performance of the contract—Appellant having invoked the four bank guarantees—First respondent invoked the arbitration clause, as provided in the work/purchase orders—First respondent moved an application u/s 9 of the Arbitration Act seeking an interim injunction against appellant restraining them from encashing bank guarantees—Whether High Court was justified in granting the injunction as prayer for—(No)—High Court erred in interfering with the bank guarantees and in granting injunction as sought for.

       Held : Upon a careful reading of this agreement, we are satisfied that the contract though, for the sake of convenience, was split up into four sub-contracts (viz. the four work/purchase orders), was a composite contract executable on a turnkey basis. The terms of this turnkey contract were reduced into writing by the “wrap-around agreement” of 10.5.2000. We are of the definite view that under the “wrap-around agreement”, the Appellant had the right to encash any or all of the guarantees for any breach in any of the terms of the four contracts. Hence, we are unable to accept the submission of Mr. Sorabjee that the first three bank guarantees were only for securing the advances paid and that it was only the fourth bank guarantee (No. 291/99 dated 23.3.2000) that was liable to be called for failure to perform the contract. In fact, an appraisal of the terms of the contract leads us to the conclusion that the bank guarantees were intended for both purposes: for securing the advances paid to the First Respondent and also for securing due performance of the contract. (Para 19)

       We are prima facie not satisfied that performance had been duly and satisfactorily certified. Under the terms of the “wrap-around agreement”, the Appellant was entitled to encash all or any of the bank guarantees for breach of the First Respondent’s obligations under any one of the contracts. In our view, it is the case of the Appellant that there was no satisfactory performance of the contract, as a result of which, the Appellant was justified in encashing the concerned bank guarantee. Indeed, as per the terms of the bank guarantee itself, the Appellant is the best judge to decide as to when and for what reason the bank guarantees should be encashed. Further, it is no function of the Second Respondent-Bank, nor of this Court, to enquire as to whether due performance had actually happened when, under the terms of the guarantee, the Second Respondent-Bank was obliged to make payment when the guarantee was called in, irrespective of any contractual dispute between the Appellant and the First Respondent. (Para 23)

       As we have stated repeatedly, the First Respondent can succeed only if the case can be brought under the two accepted exceptions to the general rule against intervention. Evidently, there is no “egregious fraud” so as to fall within the first exception. Hence, only one more point remains: whether encashment of the guarantees will create special equities (in particular, “irretrievable injury”) in favour of the First Respondent? We are not satisfied on facts that such is the present situation. There is no dispute that arbitral proceedings are pending. In fact, we were shown that one of the disputes referred to arbitration is whether the bank guarantees are null and void. Further, one of the substantive prayers in the arbitration made on behalf of the First Respondent, is to make an award declaring the four bank guarantees unenforceable, illegal, void and liable to be discharged. Further, there is also a prayer for permanent injunction to restrain the Appellant from encashing the bank guarantees. Therefore, since this prayer is already pending before the Arbitral Tribunal, we see no situation of “irretrievable injustice” if, at the present moment, the Appellant is allowed to encash the bank guarantees. For justice can always be rendered to the First Respondent, if he succeeds before the Arbitrators. Nor do we see any special equity in favour of the First Respondent, when there is in fact a dispute that performance was prima facie not satisfactory, which enabled the Appellant to encash all or any of the four bank guarantees. (Paras 25 & 26)

       In this view of the matter, we see no merit in the stand taken by the First Respondent. In our judgment, the Madras High Court erred in interfering with the bank guarantees and in granting injunction as sought for. In the result, the impugned judgment of the High Court is set aside and the judgment of the learned District Judge, Madurai is affirmed, except with regard to the maintenance of status quo directed on the encashment of guarantees. It is made clear that the Appellant is entitled to encash the bank guarantees and the Second Respondent-Bank shall be free to honour its guarantees, subject to adjustment in the arbitral proceedings. (Para 27)