Holding

Injunctions restraining the encashment of an unconditional bank guarantee may be granted only in the exceptional cases of established fraud or irretrievable harm, which were absent here, so the injunction was unlawful.

Summary

Dwarikesh Sugar Industries Ltd. entered into a contract with Prem Heavy Engineering Works (P) Ltd. for supply of equipment, the latter furnishing two unconditional bank guarantees from State Bank of India. When the equipment was not delivered, Dwarikesh invoked the guarantees, but Prem obtained ex parte injunctions restraining the encashment. The trial court later vacated the injunctions, but the Allahabad High Court, on revision, reinstated a temporary injunction without referring to Supreme Court precedents. Dwarikesh appealed, arguing that injunctions against unconditional guarantees are permissible only in two exceptional situations: established fraud or irretrievable harm, neither of which existed. The Supreme Court held that the High Court erred, reaffirmed the settled principle that courts must be slow to grant such injunctions, and set aside the High Court order, restoring the trial court's dismissal of the injunction applications. Consequently, Dwarikesh was entitled to encash the guarantees and awarded costs.

Issues considered

The appropriateness of granting an injunction restraining the encashment of an unconditional bank guarantee.
Whether the presence of alleged fraud or irretrievable harm justifies such an injunction.
The applicability of the doctrine of unjust enrichment to the encashment of bank guarantees.
The duty of a bank to honour an unconditional guarantee irrespective of pending disputes.
The correctness of the High Court's failure to apply Supreme Court precedent on interim relief.

Legislation cited

Arbitration Act, 1940s. Section 20
Code of Civil Procedure, 1908s. Order 39 Rule J
Constitution of Indias. Article 141

Subjects

bank guaranteeinjunctionunconditional guaranteefraudirretrievable harmunjust enrichmentinterim reliefCode of Civil Procedurecommercial contract

Judgment

A DWARIKESH SUGAR INDUSTRIES LTD.
v.
PREM HEAVY ENGINEERING WORKS (P) LTD.

MAY 7, 1997

B IK.S. PARIPOORNAN, K. VENKATASWAMY
AND B.N. KIRPAL, JJ.]

Code of Civil Procedure, 1908 : Order 39 Rule J.

C Bank Guarantee-Encashment of unconditional bank guarantee-In-
junction restraining-No allegation of fraud or i"etrievable ham1 or injustice
made in the injunction application-Held : Only in exceptional case of
established fraud which would vitiate the very foundation of the bank guaran-
tee or its encashment resulting in i"etrievable hann or injustice which would
make it impossible for the guarantor to reimburse himself, if it ultimately
D succeeded, cowt should nonnally not grant injunction-Principle of undue
enrichment not applicable to encashme11t of bank guarantee-In the cir-
- cwnstances of the case, High Coult emd in granting the injunction without
referring to the decisions of the Supreme Coult-Bank also not shown profes-
sional efficiency and acted in a paltisan manner in not honouring its com-
E mitmellts even when there was no restraint order of any coult.
Bank guarantee---£ncashment of-Injunction restraining-Held : In-
junction of cowt ought not to be an i11strnme11t which is used in nullifying
the temis of a co/llract, agreement or u11de1taki11g which is lawfully enforc2-
able.
F
Constitution of India, 1950: A1ticle 141.

Precedelll-Wlzen law is well settled as a result of judicial pronounce-
mellls of Supreme Cowt it would amount to judicial impropriety and judicial
adventurism for the mbordinate cowts including the High Coult to ignore the
G same and pass contrwy orde~Such practice strongly deprecated.

Doctrines :

"Doctrine of Unjust EnrichmeJZt''-Applicability of

H The appellant and respondent No. I had entered into an agreement
184
DWARJKESH SUGAR IND. LTD. v. PREM HEAVY ENGG. WORKS LlD. 185

whereby respondent No. 1 was to supply boiling house equipment to the A
appellant within a fixed time schedule. Respondent No. 1 furnished two
bank guarantees in favour of the appellant. One of the bank guarantees
was issued to ensure timely delivery of equipment and supply by respon-
dent No. 1. The other bank guarantee was issued for securing the advance
given by the appellant. The terms of the bank guarantees were similar.
B
The respondent on the very next day obtained an ex parte injunction
from the civil court restraining the appellant from encashing the bank
guarantee. Hence, the bank made no payment. Subsequently, respondent
No. 1 obtained another ex parte injunction in respect of the second bank
guarantee. c
After the appellant became aware of the filing of the suit and the
injunction application it entered appearance in court although no notice
had been served on it. The Civil Judge vacated the ex parte injunctions and
dismissed the injunction applications relying on a number of decisions of
this Court. D

The appellant again approached the bank for the encashment of the
guarantees, but without success. Respondent No. 1 then filed a revision
petition before the High Court challenging the order of the trial court. The
Single Judge of the High Court remanded the matter back to the trial' E
Court for a fresh decision but, at the same time, directed that till the
disposal of the injunction application the bank guarantees in question
would not be invoked or encashed.

Due to the dilatory tactics adopted by respondent No. 1 the said
injunction application had not yet been disposed of by the trial court with F
the result that the injunction gr,mted by the Single Judge continued. Being
aggrieved, the appellant preferred the present appeal.

Allowing the appeal, this Court

HELD : I.I. Courts should be slow in granting an injunction to G
restrain the realisation of the bank guarantee. The courts have carved out
only two exceptions : (l) II' there is a fraud in connection with the bank
guarantee which would vitiate the very foundation of such a bank guaran-
tee and the beneficiary seeks to take advantage of it, then he can be
restrained from doing so. But for that the fraud has to be an established H
186 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A fraud. (2) Where allowing the encashment of an unconditional bank
guarantee would result in irretrievable harm or injustice to one of the, / .
parties concerned. The resulting of irretrievable injury has to be such a
circumstance, which would make it impossible for the guarantor to reim-
burse himself, if he ultimately succeeds. This will have to be decisively
B established and it must be proved to the satisfaction of the Court that
there would be no possibility whatsoever of the recovery of the amount
from the beneficiary, by way of restitution. (195-D-F; 196-D-E]

U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1
SCC 568; Svenska Handeisbanken v. M/s. Indian Charge Chrome & Ors.,
C (1994) 1 SCC 502; Larsen & Toubro Ltd. v. Maharashtra State Electricity
Board & Ors., (1995) 6 SCC 68; Hindustan Steel Works Constrnction Ltd. v.
G.S. Atwal & Co. (Engi.neers) Pvt. Ltd., (1995) 6 SCC 76 and U.P. Coopera-
tive Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1
sec 174, relied on.
D Bolivi11ter Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351,
referred to.

1.2. If the bank could not in law avoid the payment, as the demand
had been made in terms of the bank guarantee, as has been done in the
E present case, then the court ought not to have issued an injunction which
had the effect of restraining the bank from fulfilling its contractual obliga-
tion in terms of the bank guarantee. An injunction of the court ought not
to be an instrument, which is used in nullifying the terms of a contract,
agreement or undertaking, which is lawfully enforceable. [197-C]

F 1.3. It is an admitted fact that in the plaint itself, there was no such
allegation. It was initially only in the first application for the grant of
injunction that in a paragraph it has been mentioned that the appellant
had invoked the bank guarantee arbitrarily. This application contains no
facts or particulars in support of the allegation of fraud. A similar bald
G averment alleging fraud is also contained in the second application for
injunction. This is not a case where respondent No. l had at any time
alleged fraud prior to the filing of the injunction application. The main
contract pursuant to which the bank guarantees were issued, was not
sought to be· avoided by alleging fraud, nor was it at any point of time
alleged that the bank guarantee was issued because any fraud had been
H played by the appellant. The bald assertion of fraud had been made solely
DWARIKESHSUGARIND.LID. v. PREMHEAVYENGG.WORKSLID. 187

with a view to obtain an order of injunction. In the absence of established A
fraud and not a mere allegation of fraud and that also having been made
only in the injunction application, the court could not, in the present case,
have granted an injunction to the encashment of the bank guarantees.
[198-G-H; 199-A-B]

2. The High Court erred in not considering it necessary to refer to B
various judicial pronouncements of this Court in which the principles,
which have to be followed, while examining an application for grant of
interim relief have been clearly laid down. The observation of the High
Court that reference to judicial decisions will not be of much importance
was clearly a method adopted by it in avoiding to follow and apply the law C
as laid down by this Court. Yet another serious error which was committed
by the High Court, in the present case, was not to examine the terms of the
bank guarantee and consider the letter of invocation which had been writ-
ten by the appellant. There is no justification for the High Court in invoking
the alleged principle of unjust enrichment to the facts of the present case
and then deny the appellant the right to encash the bank guarantees. In D
encashment of bank guarantee the principle of unjust enrichment has no
application. [199-C-F]

3. When a position in law, is well settled as a result of jndicial
pronouncement of this Court, it would amount to judicial impropriety to
say the least, for the subordinate courts including the High Courts to
E_
ignore the settled decisions and then to pass a judicial order is clearly
contrary to the settled legal position. Such judicial adventurism cannot be
permitted and the tendency of the subordinate courts in not applying the
settled principles and in passing whimsical orders which necessarily has
the effect of granting wrongful and unwarranted relief to one of the parties F
is strongly deprecated. It is time that this tendency stops. [200-8) .

4. Moreover, the bank, which has chosen not to be represented in
this case, has not shown professional efficiency, to say the least, and has
acted in a partisan manner with a view to help and assist respondent No. G
1. At the time when there was no restraint order from any Court, the bank
was under a legal and moral obligation to honour its commitments. It,
however, failed to do so. It appears that the bank deliberately dragged its
feet so as to enable respondent No. 1 to secure favourable order of
injunction from the Court. Such conduct of a bank is difficult to ap-
preciate. [200-D] H
188 SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.

A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3376 of
1997. • .

From the Judgment and Order dated 10.9.96 of the Allahabad High
Court in C.R. No. 257 of 1996.

B Harish N. Salve, Krishan Mahajan, P.H. Parekh and Indu Verma for
the appellant.

Sudhir Chandra, Manmohan, Sanjay Raghuvanshi and R. Sasiprabhu
for the Respondents.

c The Judgment of the Court was delivered by

KIRPAL, J. Special leave granted.

Having been thwarted by orders of the court below in its attempt to
D get encashment of the bank guarantees, issued by the State Bank of India,
Meerut Cantt. Branch (respondent No. 2) respondent No. 1 has led to the
" filing of this appeal by the aggrieved beneficiaries.

The appellant and respondent No. 1 had entered into an agreement
on 27th July, 1994 whereby respondent No. 1 was to supply boiling house
E equipment the cost of which was Rs. 5.23 crores. The supply of equipment
and material was to start from 15th September, 1994 and the same was to
be completed by 10th August, 1995, as per the schedule of the supply
agreed to by the parties.

According to one of the clauses of the aforesaid agreement respon-
F dent no. 1 had agreed to furnish bank guarantees in favour of the appellant.
Out of the above six, only four bank guarantees were furnished including
bank guarantee no. 40/51 dated 1st December, 1994 for a sum of Rs.
26,15,000 and bank guarantee no. 40/47 dated 24th November, 1994 for a
sum of Rs. 35 lacs. These are the bank guarantees with which we are
G concerned in the present case.
Bank guarantee no. 40/51 was issued to ensure timely delivery of
equipment and supply by respondent no. 1. The relevant clauses of the said
bank guarantee no. 40/51 are as follows :

H "In consideration of the premises the Guarantor hereby uncon-
DWARIKESHSUGAR IND. LTD. v. PREMHEAVY ENGG. WORKS LTD. [KIRPAI.,J.) 189

ditionally and irrevocably undertakes to pay to the Purchaser on A
their first written demand and without demur such a sum not
exceeding Rs. 26,15,000 (Twenty six lacs fifteen thousand only) as
the purchaser may demand representing 5% (five per cent) of the
contract price, and if the guarantor fails to pay the sum on demand
the guarantor shall also pay on the sum demanded interest at the B
bank lending rates then prevailing reckoned from the date of
demand till the date of payment.

2. The guarantor shall pay to the purchaser on demand the sum
under clause 1 above without demur and requiring the purchasers
to invoke any legal remedy that may be available to them, it being C
understood and agreed firstly that the purchasers shall be the sole
judge of and as to whether the sellers have committed breach( es)
of any of the terms and conditions of the said agreement and
secondly that the right of _the purchasers to recover from the
guarantor any amount due to the purchasers shall not be affected D
or suspended by reasons of the fact that any dispute or disputes
have been raised by the sellers with regard to their liability or that
proceedings are pending before any Tribunal, arbitrator( s) or
Court with regard to or in connection therewith, and thirdly that
the guarantor shall immediately pay the aforesaid guaranteed
amount on demand and it shall not be open to the guarantor to E
know the reasons of or to investigate or to go into the merits of
the demand or to question or to challenge the demand or to know
any facts affecting the demand, and lastly that it shall not be open
to the guarantor to require the proof of the liability of the seller
to pay the amount before paying the aforesaid guaranteed amount F
to the purchasers.

The other bank guarantee no. 40/47 was originally issued for a sum
of Rs. 51,70,000 for securing advance payment. The agreement con-
templated the liability being gradually reduced and on 28th August, 1995
this bank guarantee was reduced for a diminished amount of Rs. 33 lacs. G
The relevant clause of this bank guarantee is as follows :

"In consideration of the premises the guarantor hereby uncon-
ditionally and irrevocably undertakes to pay to the purchaser on
their first written demand and without demur such a sum not H .
190 SUPREME COURT REPORTS [1997] SUPP.1 S.C.R.

A exceeding Rs. 51,70,000 (Rupees fifty one lacs seventy thousand
only) as the purchasers may demand representing 10% (Ten per
cent) of the contract price, and if the guarantor fails to pay the
sum on demand the guarantor shall also pay on the sum demanded
interest at the bank lending rates then prevailing reckoned from
the date of demand till the date of payment. Provided that liability
B of the guarantor hereunder shall reduce to the extent of the
advance adjusted under clause 13 of the said agreement.

The guarantor shall pay to the purchaser on demand the sum
under clause 1 above without demur and requiring the purchasers
c to invoke any legal remedy that may be available to them, it being
understood and agreed firstly that the purchaser shall be the sole
judge of and as to whether the sellers have .committed any
breach( es) of any of the terms and conditions of th~ said agreement
and secondly that the right of the purchasers to recover from the
guarantor any amount due to the purchasers shall not be affected
D
or suspended by reasons of the fact that any dispute or disputes
have been raised by the sellers with regard to their liability or that
proceedings are pending before any Tribunal, arbitrator(s) or
court with regard thereto or in connection therewith, and thirdly
that the guarantor shall immediately pay the aforesaid guaranteed
E amount on demand and it shall not be open to the guarantor to
know the reasons of or to the investigate or to go into the merits
of the demand or to question or to challenge the demand or to
know any facts affecting the demand, and lastly that it shall not be
open to the guarantor to require the proof of the liability of the
seller to pay the amount before paying the aforesaid guaranteed
F
amount to the purchasers".

According to the appellant respondent no. 1 did not supply the
equipment at site, within the time allowed, nor replaced any of the defec-
tive items which, according to the appellant, had resulted in the late
G commencement of the trial crushing in the mill. It is further the case of the
appellant that it had to make direct purchases of many parts from other
sources as the respondent no. 1 had failed to supply the equipment.
Ultimately by letter dated 21st November, 1995 written to respondent no.
2; the appellant invoked the bank guarantee. The material portion of this
H letter was as follows :
DWARIKESHSUGARIND. LTD. v. PREMHEAVYENGG. WORKSLTD.iKIRPAL,J.] 191

"We wish to inform you that M/s. Prem Heavy Engineering A
Works (P) Ltd. Rani Mill, Delhi Road, Meerut have failed to fulfil
the conditions of our agreement dated 27.7.1994 in so far as timely
supply of the machinery and equipment under order with them.

In view of their failure, we hereby invoke the bank guarantee
in terms of clause 1, 2 and 3 of the aforesaid guarantee and hereby B
demand payment of Rs. 26,15,000 (Rupees twenty six lakhs fifteen
thousand only). You are, therefore, required to issue a demand
draft drawn in favour of our company payable at Najibabad for
Rs. 26,15,000 (Rupees twenty six lakhs fifteen thousand only). The
original guarantee is enclosed which may please be acknowledged." C
Respondent bank did not make the payment, notwithstanding the
receipt of the aforesaid letter dated 21st November, 1995 but the effect
which this letter had was that, on 23rd November, 1995, respondent no. 1
filed original suit No. 1182of1995 before the Court of Civil Judge, Meerut,
under Section 20 of the Indian Arbitration Act, 1940. In the said suit the D
appellant herein was impleaded as defendant no. 1 while the State Bank
of India was impleaded as defendant no. 2. The only relief claimed ieithis
suit \\'.as that the dispute between the parties should be referred to an
arbitrator. Along with this suit respondent no. 1 also field an application
for the grant of injunction restraining the appellant herein from encashing E
the aforesaid bank guarantee no. 40/51 which had been issued for a sum
of Rs. 26,15,000.

It appears that there was some discussion between the repre-
sentatives of the appellant and respondent no. 1 in connection with the
encashment of the said bank guarantee no. 40/51. Pursuant thereto letter F
dated 24th November, 1995 was written by respondent no. 1 to the appel-
lant which was to the following effect : ·

As discussed with your managing director Sh. G.R. Mararka
today at your Delhi guest house, we are confirm that we shall G
despatch balance parts except lime elevator direct from our works
by 26.11.1995 and shall arrange despatch of balance fright oil after
payment except air compressor by 27.11.1995. We shall ensure
commissioning of the two shall of cooling towers o( one complete
shall of twin crystalizer and F.M. Piping by 30.111995 and F.M.
I
Tonor with rouling in 10.12.1995. We request you to kindly keep H
192 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A the invocation of the above guarantee in abeyance till 10.12.1995.

According to the appellant it was not aware that original suit No.
1182 of 1995, along with an application for injunction had already been
filed by respondent no. 1 a day earlier to the respondent's letter dated 24th
B November, 1995. Acting on the basis of the aforesaid letter of the respon-
dent no. 1 the appellant wrote a letter dated 27th November, 1995 to the
Manager, State Bank of India, Meerut Cantt. After expressing its regret
that the proceeds of the guarantee had not been paid to the appellant, it
was stated in this letter that respondent no. 1 had assured to make a
complete supply of the ordered plant and machinery within next three or
C four days. In view of this it wthdrew its letter of invocation dated 21st
November, 1995 but it was added that "it may, however, be noted that
demand payment is being withdrawn without prejudice to our right of
invocation under the guarantee".

D Apparently having succeeded in pursuading the appellant to write
the aforesaid letter dated 27th November, 1995 withdrawing the letter of
invocation, respondent no. 1 on the very next day, i.e., 28th November, 1995
obtafried an et parte injunction from the Court of Civil Judge, Meerut, .
restraining the appellant from encashing the aforesaid bank guarantee no.
40/51.
E
According to the appellant, respondent no. 1 did not make the
requisite supplies with the result that vide letter dated 9th January, 1996,
written to the Assistant General Manager, State Bank of India, Meerut, it
invoked bank guarantee no. 40/51 by, inter alia, stating as follows :
F
"As per clause 14 of the supply agreement M/s. Prem Heavy
Engineering Works (P) Ltd., Meerut has failed to deliver the
equipments and its commissioning within the scheduled time
frame.

G Now we hereby invoke the aforesaid guarantee for Rs. 26,15,000
(Rupees twenty six lacs fifteen thousand only) being 5% of the
contract value and enclose herewith the original guarantee for your
record. Kindly hand over the Demand Draft in our favour payable
at Najibabad, Distt. Bijnor, Uttar Pradesh towards the invocation
H amount."
DWARIKFSHSUGARIND.LTD. v. PREMHEAVYENGG. WORKSLID.(KIRPAI,J.] 193

As on 28th November, 1995 respondent no. 1 h!ld already obtained A
an er parte injunction restraining the encashment of bank guarantee, no
payment was made to the appellant by the bank.

- Respondent no. 1 then filed another injunction application dated
12th January, 1996 with regard to the second bank guarantee dated 24th
November, 1994 which was for a sum of Rs. 33 lacs. It obtained an er par.
injunction in respect thereto on the same day. Being ignorant of this the
B

appellant wrote a letter dated 16th January, 1996 to the respondent bank
invoking the said bank guarantee no. 40/47. In the said letter it was stated
that respondent no. 1 had failed to deliver the equipment as per the terms
of the agreement and that the appellant had J>rought equipment from C
various markets due to which the advance amount which had been paid to
respondent no. 1, in respect of which this bank guarantee had been issued,
remained unadjusted. The bank was accordingly required to pay the said
amount of Rs. 33 lacs.

-According to the appellant it is only after 16th January, 1996 that it D
became aware of the filing of the aforesaid suit and the injunction applica-
tion and it entered appearance in Court on 18th January, 1996 even though
no notice had been served on it. As per the appellant, there was delay in
the disposal of the injunction application, consequently it approached the
High Court for appropriate directions and the Allahabad High Court vide E
order dated 10th May, 1996 directed the Civil Judge, Meerut Cantt, to
dispose of the suit within the time fixed by it.

By a detailed order dated 20th August, 1996, the Second Civil Judge
(Sr. Division), Meerut vacated the er parte injunctions which had been
granted and dismissed the injunction applications. In arriving at this con·. F
clusion it observed that respondent no. 1 had not stated that the work had
been completed and nor was there any allegation of cheating or fraud
contained in the plaint which had been filed. The trial court referred to a
number of decisions of this Court and came to the conclusion that there
was no basis, in law, for the grant of any interim prolubitory order. G
The appellant on 22nd August, 1996 again approached the respon-
dent bank for the encashment of the bank guarantees, but without success.

Respondent no. 1 then filed revision petition No. 257 of 1996 on 10th
September, 1996 before the Allahabad High Court challenging the order H
194 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A dated 20th August, 1996 of the trial court. Single judge of the Allahabad
High Court took up the revision petition and disposed it of on the same
day and, after setting aside the order dated 20th August, 1996 it remanded
the matter back to the trial court for a fresh decision but, at the same time,
directed that till the disposal of injunction application the bank guarantees
in question shall not be invoked or encashed. The trial court was directed
B
to hear the parties within fifteen days of the receipt of the order and to
dispose of the injunction application with fifteen days thereafter. Needless
to state, due to dilatory tactics adopted by respondent no. 1, which is
evident from the documents available on the record of this case, the said
injunction applications have not been disposed of till date with the result
C that the injunction granted by the single judge of the High Court vide order
dated 10th September, 1996 still continues.

While· allowing the civil revision the single judge in his judgment did
c
not think it necessary to refer to the judicial decision which were cited
D before him. The court observed that reference to the same was not neces-
sary because the trial court, who had observed that the plaint did not
•• contain any allegation with regard to fraud, had not noticed that allegation
of fraud was contained in the injunction application. The learned judge
noticed that the liability of bank under the guarantee was absolute and that '
it was not supposed to question the authority of the beneficiary to encash
E the bank guarantee but observed that the same "could not be the guideline
for allowing the defendant to encash the bank guarantee unless there was
a finding that the defendant was having undue enrichment thereby".

The aforesaid decision of the High Court has been assailed by Sh.
F Harish N. Salve, learned senior counsel for the appellant, who has con-
tended that the High Court fell in serious error in ignoring and not in even
referring to the decisions of this Court where the principles regarding the
grant of injunction in matters relating to encashment of bank guarantees
have been clearly spelt out. Had this been done, the learned counsel
submits, the High Court could not, in law, have continued with the tem-
G porary injunction.

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
H which has the effect of restraining the encashment of a bank guarantee. We
DWARIKESH SUGAR IND. LTD. v. PREMHFAVY ENGG. WORKS LTD. (KIRPAI.,J.] 195

do not think it necessary to burden this judgment by referring to all of A
them. Some of the more recent pronouncements on this point where the
earlier decisions have been considered and reiterated are Svenska Hand-
elsbanken v. Mis. Indian Charge Chrome and Ors., [1994] l SCC 502; Larsen
& Toubro Ltd. v. Maharashtra State Electricity Board and Ors., [1995] 6 SCC
68; Hindustan Steel Works Constrnction Ltd. v. G.S. Atwal & Co (Engineers) B
Pvt. Ltd., [1995] 6 SCC 76 and U.P. State Sugar Cotporation 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. Sugar
Cotporation 's case as follows :

"The law relating to invocation of such bank guarantees is by C
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 D
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 realiza-
tion 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 E
if there is such a fraud of which the beneficiary seeks to take the
advantage, he can be restrained from doing so. The second excep-
tion relates to cases where allowing the encashment of an uncon-
ditional bank guarantee would result in irretrievable harm or
injustice to one of the parties concerned. Since in most cases F
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 over-
ride the terms of the guarantee and the adverse effect of such an
injunction on commercial dealings in the country." G

Dealing with the question of fraud it has been held that fraud has to be an
,, established fraud. The following observations of Sir John Donaldson, M.R.
in Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351, are
apposite : H
196 SUPREME COURT REPORTS (1997] SUPP. lS.C.R.

A "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 nonnally be sufficient that this rests on the uncorroborated
B 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."

c (emphasis supplied)

The aforesaid passage was approved and followed by this Court in U.P.
Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.,
(1988] 1 sec 174.

D The second exception to the rule of granting injunction, i.e., the
resulting of irretrievable injury, has to be such a circumstance whic.li would
make it impossible for the guarantor to reimburse himself, if he ultimately
succeeds. This will have to be decisively established and it must be proved
to the satisfaction of the Court that there would be no possibility what-
E soever of the recovery of the amount from the beneficiary, by way of
restitution.

In the instant case, as has been already noticed there were two types
of bank guarantees which were issued. Bank Guarantee no. 40/51 for Rs.
26,15,000 was issued to ensure timely performance of the agreement by
F respondent no. 1. The relevant terms of this guarantee firstly makes it clear
that the bank has unconditionally and irrevocably undertaken to pay to the
appellant, on written demand and without demand, the amount demanded
by it. Secondly, Clause II of the said guarantee clarifies that the payment
shall be made without demand and on the undertaking that the appellant
(
is to be sole judge whether the seller has committed any breach. Conse-
G quently the right of the appellant to recover the guaranteed amount is not
to be effected or suspended by reason of any dispute which can be raised
or pending bef~re the courts tribunals or arbitrator, Thirdly the guarantor
had no right to know the reasons of or to investigate the merits of the
demand or to question or to challenge the demand or to know any facts
H affecting the demand and lastly it was not open to the bank to require the
DWARIKESHSUGAR IND. LTD. v. PREMHFAVY ENGG. WORKS LTD. [KIRPAI.,J.] 197

proof of the liability of respondent no. 1 to pay the amount before paying A
the aforesaid guaranteed amount to the appellant.

The letter of invocation issued by the appellant demanding the
payment of Rs. 26,15000 was in accordance with the terms of bank guaran-
tee no. 40/51 and the bank was, therefore, under an obligation to honour B
its undertaking and to make •the payment. It, however, chose not to fulfil
its obligation. If the bank could not ·in law avoid the payment, as the
demand had been made in terms of the bank guarantee, as has been done
in the present case, then the court ought not to have i.Ssued an injunction
which had the effect of restraining the bank from fulfilling its contractual
obligation in terms of the bank guarantee. An injunction of the court ought C

... not to be an instrument which is used in nullifying the terms of a contract,
agreement or undertaking which is lawfully enforceable. In its aforesaid
letter dated 24th November, 1995 respondent no. 1 had clearly admitted
that entire supply had not been made. In view of this also the High. Court
was not justified in granting an injunction. D

Bank guarantee no. 40/97 dated 24th November 1994, which had
been issued to secure the advance of Rs. 129.24 lacs which had been given
by the appellant, was also similar in terms to the earlier bank guarantee
no. 40/51. The main contract between the parties contemplated that the
amount of bank guarantee shall stand reduced on adjustment being made. E
It is contended by Shri Sudhir Chandra, learned counsel for the respon-
dents that the full amount which was given had been adjusted and no
amount remained outstanding and therefore, the bank guarantee no. 40/47
could no longer be regarded as alive. In support of this contention, the
learned counsel relied on the observations of this Court in Larson & Tubro F
Ltd. v. Maharashtra State ElectJicity Board and Ors., [1995) 6 SCC 68 where
an injunction was granted where the bank guarantee which was issued was
to be kept alive till the successful completion of trial operations. In our
opinion, this decision can be of no assistance to respondent no. 1 because
in Larson & Turbo's case (supra) this Court found that the guarantee which
had been given by the bank was to ensure only till the successful completion G
of the trial operations and the taking over of the plant. The documents
revealed that the contractual term in this regard has been complied with
and after successful completion of the trial operation, the plant had admit-
tedly been taken over. In view of this, it was held by this Court that the
terms of the bank guarantee did not permit its invocatil;m once the trial H
'
198 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A operations have been successfully completed.

In the present case clause 3 of bank guarantee no. 40/47 relating to
adjustment of the advance stipulated as follows :

"The guarantee shall come into force from the date thereof and
B shall remain valid till the full advance amount is adjusted under
Clause 13 of the said agreement which according to the terms and
conditions of the said Agreement is stipulated to be adjusted
proportionately from each bill of the Sellers against actual
deliveries of the machinery and equipment at site but if the
•·
c deliveries as aforesaid have not been completed by the Sellers
within the said period for any reason whatsoever the Guarantor
hereby undertakes that the Sellers shall furnish a fresh or renewed
guarantee on the Purchaser's proforma for such further period as
...
the purchaser's may intimate failing which the guarantor shall pay
to the purchasers a sum not exceeding Rs. 51,70,000 (Rupees Fifty
D one lacs seventy thousand only) or the residual amount of balance
unadjusted advance left after proportionate adjustment in accord-
ance with clause I above as the purchaser may demand."

No plea was taken before the courts below, and no document has
E been shown to us by the respondents, which can prim a f acie indicate that
the full amount of advance had been adjusted under Clause 13 of the main
contract between the appellant and the defendant no. 1. According to the
appellant, the original guarantee was for Rs. 51,70,000 but the same, after
adjustment of the advance, in terms of clause 13 of the main agreement,
stood reduced to Rs. 33,00,000. This amount was still outstanding and,
F therefore, the bank guarantee had not come to an end and was rightly
invoked.

Coming to the allegation of fraud, it is an admitted fact that in the
plaint itself, there was no such allegation. It was initially only in the first
application for the grant of injunction that in a paragraph it has been
G mentioned that the appellant herein had invoked the bank guarantee
arbitrarily. This application contains no facts or particulars in support of
the allegation of fraud. A similar bald averment alleging fraud is also
contained in the second application for injunction relating to bank guaran-
tee no. 40/47. This is not a case where defendant no. 1 had at any time
H alleged fraud prior to the filing of injunction application. The main con-
DWARIKESHSUGAR!ND. LID; v. PREMHEAVYENGG. WORKSLID.[KIRPAl,J.] 199

tract, pursuant to which the bank guarantees were issued, was not sought A
to be avoided by alleging fraud, nor was it at arty point of time alleged that
the bank guarantee was issued because any fraud had been played by the
appellant. We have no manner of doubt that the bald assertion of fraud
had been made solely with a view to obtain an order of injunction. In the
absence of established fraud and not a mere allegation of fraud and that B
also having been made only in the injunction application, the cdurt could
not, in the present case, have granted an injunction relating to the encash-
ment of the bank guarantees.

It is unfortunate that the High Court did not consider it necessary to
refer to various judicial pronouncements of this Court in which the prin- C
ciples which have to be followed while examining an application for grant
of interim relief have been clearly laid down. The observation of the High
Court that reference to judicial decisions will not be of much importance
was clearly a method adopted by it in avoiding to follow and apply the law
as laid down by this Court. Yet another serious error which was committed D
by the High Court, in the present case, was· not to examine the terms of
the bank guarantee and consider the letters of invocation which had been
written by the appellant. If the High Court had taken the trouble of
examining the documents on record, which had been referred to by the
trial court, in its order refusing to grant injunction, the court would not
have granted the interim injunction. We also do not find any justification E
for the High Court in invoking the alleged principle of unjust enrichment
to the facts of the present case and then deny the appellant the right to
encash the bank guarantee. If the High Court had taken the trouble to see
the law on the point it would have been clear that in encashment of bank
guarantee the applicability of the principle of undue enrichment has no F
application.

We are constrained to make these observations with regard to the
manner in which the High Court had dealt with this case because this is
not an isolated case where the courts, while disobeying or not complying
with the law laid down by this Court, have at time been liberal in granting G
injunction restraining encashment of bank guarantees.

It is unfortunate, that notwithstanding the authoritative pronounce-
ments of this Court, the High Courts and the courts subordinate thereto,
still seem intent on affording to this Court innumerable opportunities for H
200 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A dealing with this area of law, thought by this Court to be well settled.
When a position, in law, is well settled as a result of judicial pronoun-
cement of this Court, it would amount to judicial impropriety to say the
least, for the subordinate courts including the High Courts to ignore the
settled decisions and then to pass a judicial order which is clearly contrary
B to the settled legal position. Such judicial adventurism cannot be permitted
and we strongly deprecate the tendency of the subordinate courts in not
applying the settled principles and in passing whimsical orders which
necessarily has the effect of granting wrongful and unwarranted relief to
one of the parties. It is time that this tendency stops.
c Before concluding we think it appropriate to mention about the
conduct of the respondent - bank which has chosen not to be represented
in this case. From the facts stated hereinabove it appears to us that the
respondent bank has n,ot shown professional efficiency, to say the least, and
has acted in a partisan manner with a view to help and assist respondent
D no. 1. At the time when there was no restraint order from any Court, the
bank was under a legal and moral obligation to honour its commitments.
It, however, failed to do so. It appears that the bank deliberately dragged
its feet so as to enable respondent no. 1 to secure favourable order of ,.
injunction from the Court. Such conduct of a bank is difficult to appreciate.
E We do not wish to say anything more lest it may feel that it will be
prejudicial in the event of the appellant taking action against it.

For the aforesaid reasons this appeal is allowed. The judgment and
order of the Allahabad High Court dated 10th September, 1996 in revision
petition no. 257 of 1996 is set aside and the order of the trial court dated
. p 20th August, 1996 dismissing the injunction application is restored. The
appellant would be entitled to costs which are quantified at Rs. 20,000.

v.s.s. Appeal allowed.