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10. The Railways issued a termination notice dated 28.06.2025
under clause 62 of the GCC. Thereafter on 30.06.2025, the
appellant filed a petition under Section 9 of the A&C Act -
Com.A.A.No.284/2025, which was dismissed by an impugned
order dated 23.01.2026.
11. The learned counsel for the appellant contended that the
appellant was not obliged to carry on any further works as he had
already executed the works of the value as quoted. He contended
that since the increase in the scope and specifications of the works
was substantial, the appellant had no obligation to execute the
works at the rates determined by the Railways.
12. He also cited clause 41 of the GCC, which requires that any
modification to the contract be in writing.
13. We have heard the learned counsel for the appellant at
length. It is immediately evident from the facts outlined above that
there is a dispute between the parties concerning the performance
of the agreement. Admittedly, the works have not been completed.
The appellant asserts that the delay in executing the works was
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attributable to the Railways. The Railways have issued letters
claiming that progress in executing the works has been slow. We
also note that GCC includes provisions allowing the Engineer to
modify the scope of works. Nevertheless, it is not necessary to
examine this controversy further. It is sufficient to observe that a
dispute exists between the parties concerning the performance of
the agreement in question.
14. It is a trite law that invocation of bank guarantees cannot be
interdicted on account of contractual disputes. The Supreme Court
has authoritatively held that BG can be interdicted only in cases
where the invocation is not in terms of the bank guarantee or in
exceptional cases of egregious fraud and special equities.
15. In U.P. Cooperative Federation Limited v. Singh
Consultants and Engineers Pvt. Ltd.: (1988) 1 SCC 174,
Sabyasachi Mukharji J, had observed as under:--
"17. This question was again considered by the Queen's
Bench Division by Mr. Justice Kerr in R.D. Harbottle
(Mercantile) Ltd. v. National Westminster Bank Ltd. [(1977) 2
All ER 862] In this case injunction was sought on a question
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in respect of performance bond. The learned Single Judge
Kerr, J. gave the following views:
"(i) Only in exceptional cases would the courts interfere with
the machinery of irrevocable obligations assumed by banks.
In the case of a confirmed performance guarantee, just as in
the case of a confirmed letter of credit, the bank was only
concerned to ensure that the terms of its mandate and
confirmation had been complied with and was in no way
concerned with any contractual disputes which might have
arisen between the buyers and sellers. Accordingly, since
demands for payment had been made by the buyers under
the guarantees and the plaintiffs had not established that the
demands were fraudulent or other special circumstances,
there were no grounds for continuing the injunctions....
(ii) If it was right to discharge the injunctions against the
bank, the fact that the Egyptian defendants had taken no
part in the proceedings could not be a good ground for
maintaining those injunctions. Further, equally strong
considerations applied in favour of the discharge of the
injunctions against the Egyptian defendants, and their failure
to participate in the proceedings did not preclude the court
from discharging the injunctions against them."
18. In my opinion the aforesaid represents the correct state
of the law. The court dealt with three different types of cases
which need not be dilated here.
** ** **
34. On the basis of these principles I reiterate that
commitments of banks must be honoured free from
interference by the courts. Otherwise, trust in commerce
internal and international would be irreparably damaged. It is
only in exceptional cases that is to say in case of fraud or in
case of irretrievable injustice be done, the court should
interfere".
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16. We may also refer to the following passage in the concurring
opinion of K. Jagannatha Shetty J., in UP Co-operative Federation
Limited (supra).
"53. Whether it is a traditional letter of credit or a new device
like performance bond or performance guarantee, the
obligation of banks appears to be the same. If the
documentary credits are irrevocable and independent, the
banks must pay when demand is made. Since the bank
pledges its own credit involving its reputation, it has no
defence except in the case of fraud. The bank's obligations
of course should not be extended to protect the
unscrupulous seller, that is, the seller who is responsible for
the fraud. But, the banker must be sure of his ground before
declining to pay. The nature of the fraud that the courts talk
about is fraud of an "egregious nature as to vitiate the entire
underlying transaction". It is fraud of the beneficiary, not the
fraud of somebody else. If the bank detects with a minimal
investigation the fraudulent action of the seller, the payment
could be refused. The bank cannot be compelled to honour
the credit in such cases. But it may be very difficult for the
bank to take a decision on the alleged fraudulent action. In
such cases, it would be proper for the bank to ask the buyer
to approach the court for an injunction."
17. In Svenska Handlesbanken v. M/s. Indian Charge
Chrome : (1994) 1 SCC 502, the Supreme Court explained as
under:
"... in case of confirmed bank guarantees/irrevocable letters
of credit, it cannot be interfered with unless there is fraud
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and irretrievable injustice involved in the case and fraud has
to be an established fraud....
... irretrievable injustice which was made the basis for grant
of injunction really was on the ground that the guarantee was
not encashable on its terms....
... there should be prima facie case of fraud and special
equities in the form of preventing irretrievable injustice
between the parties. Mere irretrievable injustice without
prima facie case of established fraud is of no consequence
in restraining the encashment of bank guarantee."
18. In a later decision in the case of Larsen & Tourbo Ltd. v.
Maharashtra State Electricity Board : (1995) 6 SCC 68, the
Supreme Court reiterated the law regarding interdiction of bank
guarantees. It is relevant to refer to the following extracts from the
said decision.
"5. Before we adjudicate the rival pleas urged before us by
counsel for the parties, it will be useful to bear in mind the
salient principles to be borne in mind by the court in the
matter of grant of injunction against the enforcement of a
bank guarantee/irrevocable letter of credit. After survey of
the earlier decisions of this Court in United Commercial Bank
v. Bank of India [(1981) 2 SCC 766], U.P. Coop. Federation
Ltd. v. Singh Consultants & Engineers (P) Ltd. [(1988) 1
SCC 174], General Electric Technical Services Co. Inc. v.
Punj Sons (P) Ltd. [(1991) 4 SCC 230] and the decision of
the Court of Appeal in England in Elian and Rabbath v.
Matsas and Matsas [(1966) 2 Lloyd's Rep 495, CA] and a
few American decisions, this Court in Svenska
Handelsbanken v. Indian Charge Chrome [(1994) 1 SCC
502], laid down the law thus : (SCC pp. 523-27, paras 60-72)
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"... in case of confirmed bank guarantees/irrevocable letters
of credit, it cannot be interfered with unless there is fraud
and irretrievable injustice involved in the case and fraud has
to be an established fraud....
... irretrievable injustice which was made the basis for grant
of injunction really was on the ground that the guarantee was
not encashable on its terms....
... there should be prima facie case of fraud and special
equities in the form of preventing irretrievable injustice
between the parties. Mere irretrievable injustice without
prima facie case of established fraud is of no consequence
in restraining the encashment of bank guarantee."
19. In Himadari Chemicals Industries Ltd. v. Coal Tar
Refining Company: (2007) 8 SCC 110, the Supreme Court
referred to the earlier decisions and summarized the principles
regarding interdiction of a bank guarantee as under:
"14. From the discussions made hereinabove relating to the
principles for grant or refusal to grant of injunction to restrain
enforcement of a Bank Guarantee or a Letter of Credit, we
find that the following principles should be noted in the
matter of injunction to restrain the encashment of a Bank
Guarantee or a Letter of Credit:--
(i) While dealing with an application for injunction in the
course of commercial dealings, and when an unconditional
Bank Guarantee or Letter of Credit is given or accepted, the
Beneficiary is entitled to realize such a Bank Guarantee or a
Letter of Credit in terms thereof irrespective of any pending
disputes relating to the terms of the contract.
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(ii) The Bank giving such guarantee is bound to honour it as
per its terms irrespective of any dispute raised by its
customer.
(iii) The Courts should be slow in granting an order of
injunction to restrain the realization of a Bank Guarantee or a
Letter of Credit.
(iv) Since a Bank Guarantee or a Letter of Credit is an
independent and a separate contract and is absolute in
nature, the existence of any dispute between the parties to
the contract is not a ground for issuing an order of injunction
to restrain enforcement of Bank Guarantees or Letters of
Credit.
(v) Fraud of an egregious nature which would vitiate the very
foundation of such a Bank Guarantee or Letter of Credit and
the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional Bank
Guarantee or a Letter of Credit would result in irretrievable
harm or injustice to one of the parties concerned."
20. It is also instructive to refer to the decision of the Supreme
Court in Dwarikesh Sugar Industries Ltd. v. Prem Heavy
Engineering Works (P). Ltd. : AIR 1997 SC 2477. The Court had
referred to earlier decisions and held as under.
"21. Numerous decisions of this Court rendered over a span
of nearly two decades have laid down and reiterated the
principles which the courts must apply while considering the
question whether to grant an injunction which has the effect
of restraining the encashment of a bank guarantee. We do
not think it necessary to burden this judgment by referring to
all of them. Some of the more recent pronouncements on
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this point where the earlier decisions have been considered
and reiterated are Svenska Handelsbanken v. Indian Charge
Chrome [(1994) 1 SCC 502], Larsen & Toubro Ltd. v.
Maharashtra SEB [(1995) 6 SCC 68], Hindustan Steel
Workers Construction Ltd. v. G.S. Atwal & Co. (Engineers)
(P) Ltd. [(1995) 6 SCC 76] and U.P. State Sugar Corpn. v.
Sumac International Ltd. [(1997) 1 SCC 568] The general
principle which has been laid down by this Court has been
summarised in the case of U.P. State Sugar Corpn. [(1997)
1 SCC 568] as follows : (SCC p. 574, para 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
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
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guarantee and the adverse effect of such an injunction
on commercial dealings in the country."
21. The learned Commercial Court had rightly referred to the
decision of the Supreme Court in UP State Sugar Corporation v.
Sumac International Ltd.: 1997 (1) SCC 568. In this decision, the
Court had, in unambiguous terms, explained that the existence of
any dispute between the parties would not be a ground to issue a
notice restraining the enforcement of bank guarantees. It would be
relevant to refer to the following passage from the said decision.
"16. Clearly, therefore, 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.
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..".
22. In the present case, there is no allegation of egregious fraud
by the respondent. The respondent has sought to invoke the BG
alleging breach of the contract in question. Although the appellant
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stoutly disputes that it has breached the contract, the enforcement
of the BG cannot be injuncted.
23. As noted above, it is well settled that the BGs cannot be
interdicted on the ground that the liability to pay the amount is
disputed.
24. In view of the above, we find no infirmity with the decision of
the learned Commercial Court in rejecting the petitioner's prayer for
staying the invocation / enforcement of the BG.
25. The appeal is, accordingly, dismissed.
26. The pending interlocutory application also stands disposed
of.
Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE
Sd/-
(C.M. POONACHA)
JUDGE
SD
List No.: 2 Sl No.: 10
