Capacite Infra Projects Ltd vs M/S. Siddha Sheka Developers Llp
2021 Latest Caselaw 1935 Kant

                                       COMAP. No.53 OF 2021
                             1




 IN THE HIGH COURT OF KARNATAKA AT BENGALURU

       DATED THIS THE 21ST DAY OF APRIL, 2021
                        PRESENT
   THE HON'BLE MR. ABHAY S. OKA, CHIEF JUSTICE
                           AND
   THE HON'BLE MR. JUSTICE SURAJ GOVINDARAJ
                    COMAP. No.53 OF 2021
BETWEEN:
CAPACITE INFRAPROJECTS LTD
A COMPANY LIMITED BY SHARES
HAVING ITS REGISTERED OFFICE AT
605-607, SHRIKANT CHAMBERS
PHASE-1, 6TH FLOOR, ADJACENT TO
R.K. STUDIOUS, SION-TROMBAY ROAD
CHEMBUR, MUMBAI - 400 070

ALSO AT: NO. 1112, 11TH FLOOR
BARTON CENTRE, MAHATMA GANDHI
ROAD, BENGALURU- 560 001

REP BY ITS AUTHORISED
SIGNATORY MR. GOVINDRAJAN M KONAR           ... APPELLANT

(BY SRI. DHYAN CHINNAPPA, SENIOR COUNSEL FOR
    SRI. SRINANDAN.K, ADVOCATE OF S.K. LAW CHAMBERS-PH)

AND:
1. M/S SIDDHA SHEKA DEVELOPERS LLP
   A LIMITED LIABILITY PARTNERSHIP HAVING
   ITS ADDRESS AT 1/1 NV HOUSE
   1ST FLOOR, H-SIDDIAH ROAD
   BENGALURU, KARNATAKA
   INDIA
   REP. BY ITS PARTNERS
2. UNION BANK OF INDIA
   HAVING ITS BRANCH OFFICE AT
   MID CORPORATE BRANCH, MUM(S)
                                              COMAP. No.53 OF 2021
                                2



     UNION BANK BHAVAN
     39, VIDHAVAN BHAVAN MARG
     NARIMAN POINT, MUMBAI - 400 021
     REP. BY ITS MANAGING DIRECTOR             ... RESPONDENTS

(BY SRI. UDAYA HOLLA, SENIOR COUNSEL FOR
    SRI. SANJAY H. SETHIYA AND
    MS. PRITHVI S. HEGDE, ADVOCATES OF
    LAW SQUARE FOR C/R1-PH)

       THIS APPEAL IS FILED UNDER SECTION 13(1A) OF THE
COMMERCIAL COURTS ACT, 2015 READ WITH SECTION 37(1)(B) OF
THE ARBITRATION AND CONCILIATION ACT, 1996 READ WITH
ORDER XLIII RULE 1(R) OF THE CPC 1908, PRAYING TO SET ASIDE
THE ORDER DATED 12.03.2021 PASSED BY THE LEARNED LXXXII
ADDITIONAL CITY CIVIL AND SESSIONS JUDGE, (COMMERCIAL
JUDGE) (CCH-83) AT BENGALURU IN COMM. A.A.NO.22/2020 VIDE
ANNEXURE-W AND I.A.NO.1, FILED BY THE APPELLANT AND
CONSEQUENTLY        ALLOW   IA.NO.1    AND    THE    SECTION   9
APPLICATION FILED UNDER THE ARBITRATION AND CONCILIATION
ACT, 1996 AND ETC.

                              *****

       THIS APPEAL COMING ON FOR HEARING AND HAVING BEEN
RESERVED      FOR    ORDERS      ON    05.04.2021,   THIS   DAY,
SURAJ GOVINDARAJ J., PRONOUNCED THE FOLLOWING:


                         JUDGMENT

1. The Appellant is before this Court seeking for

setting aside the order dated 12.03.2021 passed

by the learned LXXXII Additional City Civil and COMAP. No.53 OF 2021

Sessions Judge (Commercial Judge) (CCH-83),

Bangalore in Comm.A.A.No.22/2020 dismissing

I.A.No.1 filed by the Appellant under Section 9 of

the Arbitration and Conciliation Act, 1996 and

also seeking for allowing the said application.

2. The Appellant had filed A.A.No.22/2020 under

Section 9 of the Arbitration and Conciliation Act,

1996 seeking for an injunction restraining the

respondent No.1 either by itself or through its

agents, employees, officers, representatives,

consultants from taking any action, steps dealing

with encashing the Bank Guarantee No.49570

IGI 0029618 as also restraining respondent

No.2-Bank from honouring the Bank Guarantee

and ad-interim reliefs in respect thereto.

FACTS:

3. The Appellant, who was the applicant in A.A.No.22/2020 COMAP. No.53 OF 2021

3.1. Appellant who is a contractor who had been

awarded a contract for Rs.21,80,69,997/-

by Respondent No.1 on 12th December

2015 to carry out the civil work for the

purpose of construction of an apartment

building called 'Marquis' at Bull Temple

Road, Basavanagudi, Bangalore.

3.2. A letter of award was issued on 13th June

2016, mobilisation advance of 10% of the

contract value was agreed to be released to

the applicant in two tranches to facilitate

the applicant to perform the contract.

3.3. Clause 4.1 of the Letter of Award deals

with the mobilisation advance, which is

reproduced hereunder for easy reference:

"4.1. Mobilisation Advance: An interest-free recoverable Mobilisation Advance of 10% of the Contract Sum will be released to you in the following COMAP. No.53 OF 2021

trances against submission of equal amount of Bank Guarantees from reputed private banks.

The first tranche of 5% of Contract Sum shall be released on acceptance of Letter of Award by the Contractor and on submission of Bank Guarantee, amounting to 5% of Contract Sum i.e. Rs.1,09,03,500 valid till date of Virtual Completion.

The Second tranche of 5% of Contract Sum Rs.1,09,03,500 shall be released against submission of Bank Guarantee for equal amount and against successful mobilisation of Plant and Machinery.

4.2. Mobilisation Advance will be recovered from 3rd Running Account (RA) Bill on prorate basis and shall be recovered in total on or before 80% of work is completed." (emphasis supplied)

3.4. Respondent No.1 advanced a sum of

Rs.1,09,03,500/- as the first tranche of

mobilisation advance, which was secured

by the Appellant by way of two Bank

Guarantees dated 3rd March 2016 for a sum

of Rs.59,03,500/- and Rs.50,00,000/-, COMAP. No.53 OF 2021

which were initially valid till 29 th December

2016.

3.5. In October 2016, the second tranche of the

mobilisation advance of Rs.1,09,03,500/-

was advanced which was secured by Bank

Guarantee dated 13th October 2016 for a

sum of Rs.1,09,03,500/- issued by the

second respondent herein.

3.6. Subsequent thereto, apart from the Bank

Guarantee, independent performance Bank

Guarantee was also made available by the

Appellant to Respondent No. 1 for a sum of

Rs.43,60,000/-.

3.7. The Appellant commenced and continued

the work under the contract and raised

various Running Account Bills (RA Bills). In

the said RA Bills, a portion of the COMAP. No.53 OF 2021

mobilisation advance was deducted, and as

such, each time a Bank Guarantee was

extended. The amount covered under the

Bank Guarantee was progressively

reduced, taking into consideration the

amount adjusted.

3.8. In December 2019, certain disputes arose

between the Appellant and Respondent No.

1-employer. The parties agreed to reduce

the total value of the contract from

Rs.21,80,69,997 to Rs.13,96,00,000/- and

thereafter, the Appellant renewed the Bank

Guarantee on 31st December 2019 only for

a sum of Rs.56,28,324/-.

3.9. The Appellant contends that in February

2020 instead of making payment of the

balance amount due to the Appellant, COMAP. No.53 OF 2021

Respondent No. 1 invoked the mobilisation

Bank Guarantee, which came to be

informed by the Respondent No.2-Bank to

the Appellant and it is in such

circumstances that the Appellant filed the

above application in A.A.No.22/2020

seeking for aforesaid reliefs.

4. The Respondent No. 1-employer, on being

served with notice, entered appearance and filed

its objections contending that

4.1. The Respondent No. 1-employer has made

payments of several amounts from time to

time to the various suppliers of the

Appellant, labourers, sub-contractors,

electricity dues, etc.

4.2. The Appellant, instead of completing the

work by 31st March 2018, had demobilised COMAP. No.53 OF 2021

from the site in January 2020, all the men

and machinery were removed from the

site, and as such, the employer was

required to engage the services of another

contractor to complete the works allotted

to the Appellant.

4.3. On account of the demobilisation, the

Respondent No. 1-employer was left with

no option but to invoke the Bank

Guarantee provided by the Appellant

towards mobilisation advance paid by the

Respondent No. 1-employer.

4.4. The Respondent No.1-employer further

contended that the invocation of the Bank

Guarantee was proper and correct in terms

of the Bank Guarantee issued. The

Respondent No. 1-employer had all rights COMAP. No.53 OF 2021

to invoke and/or encash the Bank

Guarantee and, as such, sought for

dismissal of the application filed by the

Appellant.

5. The trial Court, on consideration of the matter,

vide its order dated 12th March 2021,

5.1. Dismissed the application on the ground

that the Bank Guarantee was unconditional

and irrevocable Bank Guarantee.

5.2. No injunction could be issued restraining

the invocation of the same. Though it has

been contended by the Appellant that only

a sum of Rs.14.17 lakhs remains to be

adjusted from mobilisation advance, the

Respondent No. 1 - employer had

contended that a sum of Rs.1,43,65,390/-

had been paid by Respondent No. 1 to COMAP. No.53 OF 2021

various suppliers and contractors of the

Appellant. Therefore, the invocation could

be made for the entire amount covered

under the Bank Guarantee.

5.3. There are no grounds made out by the

Appellant for grant of an injunction

restraining the invocation of the Bank

Guarantee. The Bank Guarantee being

unconditional, no injunction order could be

granted and as such, dismissed the

application.

5.4. It is aggrieved by the said order that the

Appellant is before this Court.

6. Sri. Dhyan Chinnappa learned Senior counsel

instructed by Sri. Srinandan K., learned counsel

appearing for the Appellant submitted that:

COMAP. No.53 OF 2021

6.1. The Bank Guarantee, which has been

issued in the present case, is only related

to the mobilisation advance issued by

Respondent No. 1-employer and does not

cover any aspect. If the Bank Guarantee

had to be invoked, it could have been only

invoked in respect of the balance due on

the head of account of mobilisation and

nothing more.

6.2. The unadjusted mobilisation advance

covered by the Bank Guarantee is only

Rs.14.17 lakhs. Therefore, the entire Bank

Guarantee could not have been enchased.

The contract value is for a sum of

Rs.21,80,69,997/- as regards which a sum

of Rs.2,18,04,000/- had been advanced

towards which the Bank Guarantee had

been issued. Subsequent to the adjustment COMAP. No.53 OF 2021

of the mobilisation advance from various

RA bills, the same came to be reduced. As

such, the only Bank Guarantee which was

in operation was for a sum of

Rs.56,28,324/-. The unadjusted

mobilisation advance being only

Rs.14,17,633/-, a Bank Guarantee for a

sum of Rs.56,28,324/- could not be

encashed.

6.3. The letter invoking the Bank Guarantee

does not indicate the amounts due by the

Appellant to Respondent No. 1-employer.

There is no mention of the amounts in the

said invocation letter. As such, invoking the

entire Bank Guarantee for a paltry amount

due is improper and, therefore, ought to be

injuncted. In this regard, he relies upon the

following decisions:

COMAP. No.53 OF 2021

6.3.1. Hindustan Construction Co. Ltd. v.

State of Bihar, (1999) 8 SCC 436, more particularly, Paras 9 and 21 thereof:

9. What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of the bank guarantee are, therefore, extremely material. Since the bank guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad.

21. As pointed out above, bank guarantee constitutes a separate, distinct and independent contract. This contract is between the Bank and the defendants. It is independent of the main contract between HCCL and the defendants. Since the bank guarantee was furnished to the Chief Engineer and there is no definition of "Chief Engineer" in the bank guarantee nor is it provided therein that "Chief Engineer" would also include Executive Engineer, the bank guarantee could be invoked by none except the Chief Engineer. The invocation was thus wholly wrong and the Bank was under no obligation to pay the amount covered by COMAP. No.53 OF 2021

the "performance guarantee" to the Executive Engineer.

6.3.2. Standard Chartered Bank v. Heavy Engg. Corpn. Ltd., (2020) 13 SCC 574

23. The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between Bank and the beneficiary and the Bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the Bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee.

6.4. Though copies of several other decisions

have been produced, they have not been

relied on by the learned Senior counsel. He

limits his reliance on the aforesaid

decisions.

6.5. On the above basis, he submits that the

trial Court ought to have injuncted COMAP. No.53 OF 2021

Respondent No. 1-employer from invoking

the Bank Guarantee and second

respondent - Bank from honouring any

such invocation.

7. Sri. Udaya Holla learned Senior counsel

instructed by Sri. Sanjay H.Sethiya, learned

counsel appearing for Respondent No. 1-

employer would submit that

7.1. The Bank Guarantee which has been issued

is an unconditional Bank Guarantee.

Admittedly, there are disputes between the

parties as regards which the Appellant has

invoked the arbitration clause.

7.2. The Appellant has not completed the works

awarded to the Appellant; instead

demobilised its men and machinery from

the worksite. Hence, Respondent No. 1-

COMAP. No.53 OF 2021

employer was constrained to make

payment of various amounts of monies to

the suppliers/sub-contractors of the

Appellant, which Respondent No. 1-

employer is entitled to recover.

7.3. It is in this background that the Bank

Guarantee has been invoked by

Respondent No. 1-employer.

7.4. The entire reading of either the application

under Section 9 as also the present

memorandum of appeal would not indicate

any allegation of fraud as against the

employer-Respondent No. 1, and as such,

there is no embargo on the Respondent No.

1-employer from invoking the Bank

Guarantee. The Bank Guarantee being a

commercial instrument executed in favour COMAP. No.53 OF 2021

of Respondent No. 1-employer, Respondent

No. 1 could invoke the same which cannot

be injuncted by a Court of law. In this

regard, he relies upon the following

decisions:

7.4.1. U.P. Cooperative Federation Ltd., vs. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, more particularly, Paras 21 and 35 thereof, which are reproduced hereunder for easy reference:

21. In the instant case, the learned Judge has proceeded on the basis that this was not an injunction sought against the Bank but this was the injunction sought against the Appellant. But the net effect of the injunction is to restrain the Bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated man in such circumstances is not remedyless. The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the Appellant for damages. In this case, there cannot be any basis for apprehension that irretrievable damages would be caused if any. I am of the opinion that this is not a case in which injunction should be granted. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well settled principle of the law in COMAP. No.53 OF 2021

England. This is also a well settled principle of law in India, as I shall presently notice from some of the decisions of the High Court and decisions of this Court.

35. Mr. Tarkunde submitted before us that in this case the grievance of the Appellant was that there was delay in performance and defective machinery had been supplied. He submitted that if at this stage Appellant was allowed to enforce the bank guarantee, damage would be done. He submitted before us that Appellant could not be permitted to take advantage of illegality by invoking the bank guarantee. But in my opinion these contentions cannot deter us -- in view of the principle well settled that there should not be interference in trade. This is not a case where irretrievable injustice would be done by enforcement of bank guarantee. This is also not a case where a strong prima facie case of fraud in entering into a transaction was made out. If that is the position, then the High Court should not have interfered with the bank guarantee.

7.4.2. Vinitech Electronics Private Ltd vs. HCL Infosystems Ltd., (2008) 1 SCC 544 more particularly, Paras 11 and 12 thereof, which are reproduced hereunder for easy reference:

11. The law relating to invocation of bank guarantees is by now well settled by a catena of decisions of this Court. The bank guarantees which provided that they are payable by the guarantor on demand is considered to be an unconditional bank guarantee. When in the course of commercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realise such a bank guarantee in terms thereof irrespective of any pending disputes. In U.P. State Sugar COMAP. No.53 OF 2021

Corpn. v. Sumac International Ltd. this Court observed that: (SCC p. 574, para 12)

"12. 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 realise 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 realisation 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 coexist in some cases."

12. It is equally well settled in law that bank guarantee is an independent contract COMAP. No.53 OF 2021

between Bank and the beneficiary thereof. The Bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the Bank has given the guarantee is immaterial and of no consequence. In BSES Ltd. v. Fenner India Ltd. this Court held: (SCC pp. 733-34, para 10)

"10. There are, however, two exceptions to this rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non-intervention is when there are 'special equities' in favour of injunction, such as when 'irretrievable injury' or 'irretrievable injustice' would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated in so many judgments of this Court this Court, correctly declared that the law was 'settled'."

7.4.3. BSES Ltd (Now Reliance Energy Ltd.) vs. Fenner India Ltd and Another (2006) 2 SCC 728 Paras 9 and 10 thereof, which are reproduced hereunder for easy reference:

The rule and its exceptions

9. Mr Rohatgi, learned Senior Counsel for the Appellant, urged that the settled law in this country is that a bank guarantee is an independent contract between the Bank and the beneficiary thereof. Accordingly, irrespective of any dispute between the beneficiary and the party at whose instance the Bank has given the guarantee, the Bank is obliged to honour its guarantee, as long as the guarantee is unconditional and COMAP. No.53 OF 2021

irrevocable. Our attention was drawn to the judgment of this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.. It was pointed out in that case that a bank guarantee must be honoured in accordance with its terms as the Bank, which gives the guarantee, is not concerned with the relations between the supplier and the customer. Neither is the Bank concerned with the question whether any of them have failed in their contractual obligations or not. In other words, the Bank must pay according to the tenor of its guarantee, on demand, without proof or condition.

10. There are, however, two exceptions to this rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of non-intervention is when there are "special equities" in favour of injunction, such as when "irretrievable injury" or "irretrievable injustice" would occur if such an injunction were not granted. The general rule and its exceptions has been reiterated in so many judgments of this Court, that in U.P. State Sugar Corpn. v. Sumac International Ltd., this Court, correctly declared that the law was "settled"

7.4.4. U.P.State Sugar Corporation vs. Sumac International Ltd, (1997)1 SCC 568. Paras 12 and 16 thereof, which are reproduced hereunder for easy reference:

12. 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 COMAP. No.53 OF 2021

accepted, the beneficiary is entitled to realise 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 realisation 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 coexist in some cases. In the case of U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. which was the case of a works contract where the performance guarantee given under the contract was sought to be invoked, this Court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The Bank which gives the guarantee is not COMAP. No.53 OF 2021

concerned in the least with the relations between the supplier and the customer; nor with the question whether the supplier has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The Bank must pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the Bank has notice. The fraud must be of an egregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honouring its guarantee, this Court in the above case quoted with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank (All ER at p. 352): (at SCC p. 197)

"The wholly exceptional case where an injunction may be granted is where it is proved that the Bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear both as to the fact of fraud and as to the Bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the Bank to have it charged."

This Court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee.

16. Clearly, therefore, the existence of any dispute between the parties to the COMAP. No.53 OF 2021

contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be a fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the Appellant and his claim that time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is a fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the Bank guarantees fraudulent. The High Court has also referred to the conduct of the Appellant in invoking the bank guarantees on an earlier occasion on 12-4-1992 and subsequently withdrawing such invocation. The Court has used this circumstance in aid of its view that the time was not of the essence of the contract. We fail to see how an earlier invocation of the bank guarantees and subsequent withdrawal of this invocation make the bank guarantees or their invocation tainted with fraud in any manner. Under the terms of the contract it is stipulated that the respondent is required to give unconditional bank guarantees against advance payments as also a similar bank guarantee for due delivery of the contracted plant within the stipulated period. In the absence of any fraud the Appellant is entitled to realise the bank guarantees.

7.4.5. Himadri Chemicals Industries Limited vs. Coal Tar Refining Co., (2007) 8 SCC 110 more particularly, Paras 11 and 13 thereof, which are reproduced hereunder for easy reference:

11. Except under these circumstances, the courts should not readily issue injunction COMAP. No.53 OF 2021

to restrain the realisation of a bank guarantee or a letter of credit. So far as the first exception is concerned i.e. of fraud, one has to satisfy the Court that the fraud in connection with the bank guarantee or letter of credit would vitiate the very foundation of such a bank guarantee or letter of credit. So far as the second exception is concerned, this Court has held in that decision that it relates to cases where allowing encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. While dealing with the case of fraud, this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. held as follows: (SCC p. 197, para 53)

The fraud must be of an egregious nature such as to vitiate the entire underlying transaction.

(emphasis supplied)

While coming to a conclusion as to what constitutes fraud, this Court in the above case quoted (at SCC p. 197, para 54) with approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank, All ER at p. 352g-h which is as follows:

"The wholly exceptional case where an injunction may be granted is where it is proved that the Bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the Bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a COMAP. No.53 OF 2021

bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the Bank to have it discharged."

(emphasis supplied)

13. So far as the second exception is concerned, this Court in U.P. State Sugar Corpn. v. Sumac International Ltd. as considered herein earlier, at SCC para 14 on pp. 575-76 observed as follows:

"14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the Court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in Itek Corpn. case. In that case an exporter in USA entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American bank in favour of an Iranian bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The Court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American courts would not be executable in Iran under these circumstances and realisation of the bank guarantee/letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail COMAP. No.53 OF 2021

of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek case there was a certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the Bank and its customer would be found entitled to receive the amount paid under the guarantee."

(emphasis supplied)

7.4.6. Daewoo Motors India Ltd. v. Union of India (2003) 4 SCC 690 more particularly, Paras 10 and 13 thereof, which are reproduced hereunder for easy reference:

10. It is too well settled a proposition to admit of detailed reasoning that for encashment of bank guarantee, the Bank cannot have any valid resistance, except, of course, in a case of fraud. The clause in the bank guarantee, on which Mr Chidambaram relies, reads as under:

"We, Times Bank Ltd., PTI Building, Parliament Street, New Delhi 110 001 do hereby unconditionally and irrevocably agree to pay the President of India on demand without any demur or protest the amount due and payable under the abovesaid bond not exceeding Rs 4,80,00,000 (Rupees four crores eighty lakhs only) by way of loss or damage caused or suffered by the President of India by reason of non-fulfilment of the export obligation under the abovesaid notification or by reason of any breach of any of the terms and conditions of the COMAP. No.53 OF 2021

abovesaid bond by M/s daewoo motors india limited."

13. From a perusal of the above clauses, it is abundantly clear that the bank guarantee furnished by the Bank is an unconditional and absolute bank guarantee. The Bank has rendered itself liable to pay the cash on demand by the President of India "notwithstanding any dispute raised by M/s Daewoo Motors India Limited in any proceeding before any court or tribunal". It is worth noticing that the clause in the bank guarantee specifically provides that the demand made by the President of India shall be conclusive as regards the amount due and payable by the Bank under this guarantee and the liability under the guarantee is absolute and unequivocal. In the face of the clear averments, it is trite to contend that the bank guarantee is a conditional bank guarantee. Therefore, the Bank has no case to resist the encashment of the bank guarantee. Inasmuch as we have held that the bank guarantee is an unconditional bank guarantee, the case of Hindustan Construction Co. Ltd. v. State of Bihar is of no avail to the Appellant.

7.5. In the case of 'Hindustan Construction'

(supra), the Bank Guarantee was not an

unconditional Bank Guarantee whereas in

the present case, it is unconditional Bank

Guarantee and as such, he submits that

the dicta of the Apex Court in 'Hindustan COMAP. No.53 OF 2021

Construction' (supra) would not be

applicable to the present facts and

circumstances.

7.6. On the above grounds, he submits that the

order passed by the trial Court is just and

proper and does not require any

interference.

8. Heard Sri. Dhyan Chinnappa learned Senior

counsel instructed by Sri. Srinandan K., learned

counsel appearing for the Appellant and Sri.

Udaya Holla learned Senior counsel instructed by

Sri. Sanjay H.Sethiya learned counsel appearing

for the Respondent No. 1 - employer.

Respondent No.2 being a formal party, notice

has been dispensed with.

COMAP. No.53 OF 2021

9. On the basis of the submission made by both the

counsel and the documents on record, the points

that would arise for our determination are:

9.1. Whether the Appellant had made out a case for grant of injunction restraining the invocation of the mobilisation advance Bank Guarantee?

9.2. Whether the order of the trial court suffers from any infirmity requiring interference by this Court?

9.3. What order?

10. Answer to Point No.1: Whether the Appellant had made out a case for grant of injunction restraining the invocation of the mobilisation advance Bank Guarantee?

10.1. The facts and contentions of the Appellant

are stated hereinabove. Suffice it to say

that according to the Appellant,

mobilisation advance remaining to be

adjusted was only a sum of Rs.14,17 lakhs

and Bank Guarantee for a sum of COMAP. No.53 OF 2021

Rs.56,28,324/- could not be encashed. It is

further contended that mobilisation Bank

Guarantee could only be invoked insofar as

remaining unadjusted mobilisation advance

and therefore, invocation ought to have

been only restricted to the said amount.

10.2. Admittedly,    the      contract        as    initially

     awarded        was       for         a       sum     of

Rs.21,80,69,997/- as regards which the

mobilisation advance for a sum of

Rs.2,18,04,000/- had been advanced which

had been secured by the Bank Guarantees.

Subsequent thereto, under various RA bills,

the amounts advanced as mobilisation

advance was deducted in RA bills, and as

such, on 13.12.2019, the Bank Guarantee

was renewed only for a sum of

Rs.56,28,324/-.

COMAP. No.53 OF 2021

10.3. The Bank Guarantee as issued in the year

2016 continues to be in force, and no

particular amount has been adjusted. The

only dispute now remaining is that

according to the Appellant, the amount due

is only Rs.14,17,633/- on account of

mobilisation advance, whereas Respondent

No. 1-employer contends that the entire

Bank Guarantee could be encashed by

Respondent No. 1.

10.4. The contention of the Appellant is that as of

the date of the invocation, only an amount

of Rs.14.17 lakhs remains to be adjusted,

and the entire Bank Guarantee could not

have been invoked and encashed.

10.5. Per contra, the contention of Sri. Udaya

Holla, learned Senior Counsel appearing for COMAP. No.53 OF 2021

Respondent No. 1, is that the Bank

Guarantee had been invoked in a proper

and required manner, and neither the Bank

nor the Appellant can contend that the

Bank Guarantee cannot be invoked. The

Bank Guarantee being a commercial

document, has to be given a commercial

meaning. The purpose of issuance of a

Bank Guarantee will be defeated if an

injunction is granted restraining the

invocation of the Bank Guarantee.

10.6. Sri. Dhyan Chinnappa, learned Senior

counsel, has relied upon the Hindustan

Construction's case (supra) to contend

that invocation of the Bank Guarantee has

to be made in a manner provided under the

Bank Guarantee. If the same is not done in

that particular manner, then the invocation COMAP. No.53 OF 2021

is held to be bad and requires to be set

aside. He has also relied upon the decision

of the Apex Court in the case of Standard

Chartered Bank (supra) to contend that

even as regards invocation of Bank

Guarantee, an injunction order could be

granted.

10.7. Sri. Udaya Holla learned Senior counsel by

relying upon the decision in the case of

Daewoo Motors (supra) has contended

that the Hindustan Construction's case is

not applicable to the present facts since, in

Hindustan Construction's case, the Bank

Guarantee was not an unconditional Bank

Guarantee whereas in the present case is

an unconditional Bank Guarantee. Be that

as it may, he submits that the respondent

has invoked the Bank Guarantee in terms COMAP. No.53 OF 2021

of the said Bank Guarantee. Therefore,

even on facts, the Hindustan

Construction case is not applicable to the

present facts. He has also relied upon

several other decisions extracted

hereinabove that there cannot be an

injunction restraining the invocation of the

Bank Guarantee. It is in the above facts

that the present point needs to be

considered.

10.8. Admittedly, there was a contract entered

into between the Appellant as the

Contractor and the respondent as an

employer for a value of Rs.21,80,69,997/-.

In the said contract, an amount equivalent

to 10% of the contract value was released

as mobilisation advance to the Appellant

amounting to Rs.2,18,04,000/-. Thereafter, COMAP. No.53 OF 2021

a portion of the mobilisation advance was

adjusted from time to time under various

Running Account bills. Though initially Bank

Guarantee had been issued for a sum of

Rs.2,18,04,000/-, subsequently on 31st

December 2019, an amount under the

Bank Guarantee was reduced to

Rs.56,28,324/-. It is only thereafter the

disputes commenced between the

Appellant and the respondent and the Bank

Guarantee was invoked by the respondent.

10.9. In view of the above, it is clear that until

the date of issuance of the Bank

Guarantee, the amount adjusted have

already been taken into consideration while

issuing the Bank Guarantee. Though it is

contended that the amounts due as on the

date of the invocation of the Bank COMAP. No.53 OF 2021

Guarantee on account of the mobilisation

advance is less than that covered by the

Bank Guarantee, the same cannot be

adjudicated by a Court of law at the

interlocutory stage. The same can only be

adjudicated after trial. Even if the Bank

Guarantee is invoked for a higher amount

than what is due, the same could always be

adjudicated and appropriate orders can be

passed after trial.

10.10. It is not the case of the Appellant that

fraud is played by the respondent. The only

case of the Appellant is that the amount

actually due is less than that covered by

the Bank Guarantee. The issuance of the

Bank Guarantee is also not in dispute.

COMAP. No.53 OF 2021

10.11. We are of the considered opinion that the

Bank Guarantee is required to be paid on

demand, it being the foundation of the

commercial dealings and/or commercial

contracts, any injunction restraining the

invocation of the Bank Guarantee would

have a cascading negative effect on

business transactions. The purpose of

issuance of a Bank Guarantee is that the

same may be invoked by the person to

whom it is issued and the Bank is required

to honour the same. Any dispute as such

between the parties can neither be decided

by the Bank nor by any Court in

interlocutory proceedings.

10.12. In the present case, admittedly, the

disputes between the parties are being

referred to Arbitration, Arbitration clause COMAP. No.53 OF 2021

already having been invoked. Any and all

contentions of the Appellant as regards the

wrongful or improper invocation of the

Bank Guarantee can be adjudicated by the

Arbitrator as and when appointed.

10.13. The only exception for invocation of the

Bank Guarantee being "fraud" and the

same not even having been raised in the

present matter, we find no reason to

injunct the invocation of the Bank

Guarantee.

10.14. Hence, we answer Point No.1 by holding

that the Appellant has not made out a case

for grant of injunction restraining the

invocation of the mobilisation advance

Bank Guarantee.

COMAP. No.53 OF 2021

11. Answer to Point No.2: Whether the order of the trial court suffers from any infirmity requiring interference by this Court?

11.1. The trial Court has considered all the above

aspects in its well-reasoned order. The trial

Court having taken into consideration that

the Bank Guarantee was unconditional one,

there being amounts due on the part of the

Appellant to the respondent, as on the date

of the invocation of the Bank Guarantee,

the Bank Guarantee was valid and

subsisting has refused the order of

injunction as sought for by the Appellant.

11.2. We find no reason to interfere with the

well-reasoned order passed by the trial

Court.

11.3. Hence, we answer Point No.2 by holding

that the order passed by the trial Court COMAP. No.53 OF 2021

does not suffer from any infirmity requiring

interference by this Court.

12. Answer to Point No.3: What order?

12.1. In the result, the above appeal stands dismissed. No costs.

Sd/-

CHIEF JUSTICE

Sd/-

JUDGE

Prs* COMAP. No.53 OF 2021

CJ & SGRJ: COMAP No.53/2021 21.04.2021

ORDER

1. After the judgment was pronounced in open Court, the

learned counsel appearing for the appellant submitted

that the appellant is ready to deposit the entire amount

covered by the Bank Guarantee and prays for extension

of the interim order passed earlier to enable the

appellant to approach the Apex Court.

2. In view of the said submission made, the operation of

the interim order passed earlier is extended by a period

of four weeks from today subject to deposit being made

by the appellant of the entire amount covered by the

Bank Guarantee within one week from today.

3. Needless to state that if the amount is not deposited

within one week from today, this order of extension of

the interim order will stand automatically vacated.

COMAP. No.53 OF 2021

4. As and when the amount is deposited, the Registry to

deposit the same in a Fixed Deposit in any of the

Nationalised Banks in the name of the Court and renew

it from time to time until further orders.

5. Since this order has been passed in the presence of

both the learned counsel, there is no need for receipt of

certified copy of the order for due compliance.

Sd/-

CHIEF JUSTICE

Sd/-

JUDGE

bkv*