Holding

An injunction restraining the invocation of a bank guarantee is permissible only where the guarantee is not encashable on its terms and a prima facie case of fraud or irretrievable injustice exists; thus, the Court granted injunction only against the conditional retention‑money guarantee (item 3) and denied it for the other guarantees.

Summary

Larsen & Toubro Ltd. (appellant) entered into a contract with Maharashtra State Electricity Board (respondent) for a coal handling plant, furnishing five bank guarantees for advance, performance, retention money and liquidated damages. After the plant was taken over, the respondent invoked all guarantees except the performance guarantee, prompting the appellant to seek an injunction alleging fraudulent and dishonest invocation and that some guarantees were invoked after expiry. The Supreme Court examined the principles governing injunctions against bank guarantees, holding that such guarantees can be interfered with only on a prima facie case of fraud and irretrievable injustice. It found the advance guarantee was invoked timely, no fraud existed for the retention‑money guarantee (item 5) or the liquidated‑damages guarantee, but the conditional retention‑money guarantee (item 3) was not encashable after successful trial and takeover, warranting an injunction against its invocation. Consequently, the appeal was allowed in part, granting a limited injunction against respondents 1 and 4 while upholding the lower court’s order on the other guarantees.

Issues considered

The timeliness and validity of the invocation of the advance bank guarantee.
Whether the invocation of the retention‑money guarantees amounted to fraud or caused irretrievable injustice.
Whether the conditional guarantee for partial release of retention money was encashable after successful trial and takeover.
Whether an injunction can be granted to restrain the invocation of bank guarantees absent proof of fraud and irretrievable injustice.
The propriety of invoking the liquidated‑damages guarantee before quantifying damages and after its expiry.

Legislation cited

Code of Civil Procedure, 1908s. Order 39 Rule 1, s. Order 39 Rule 2

Subjects

bank guaranteeinjunctionfraudirretrievable injusticearbitrationcontract performanceretention moneyliquidated damagesconditional guarantee

Judgment

LARSEN AND TOUBRO LTD. A
v.
MAHARASHTRA STATE ELECTRICITY BOARD AND ORS.

SEPTEMBER 13,1995

[J.S. VERMA AND K.S. PARIPOORNAN, JJ.] B

Civil Procedure Code, 1908, Order-39, Rules I and 2-Bank Guaran-
tees-Fumished under the contract Injunction against invocation of-A con-
fi1med bank guarantee can not be inte1fered with, unless there is an established
fraud and iJTetrievable injustice involved in the case. c
A contract was executed between the parties upon furnishing Bank
Guarantees by appellants viz. security against advance, performance, two
guarantees for partial release of retention money and security against
liquidated damages.
D
As per contract clauses, after taking trial and performance test, the
Plant was taken over by the respondent Electricity Board and a taken over
certificate was issued in favour of appellant. For the settlement of its claim,
appellant invoked the arbitration clause as per contract. Meeting of ar-
bitrators took place and certain directions were passed by them for filing E
the respective claims of the parties to contract. prior to filing its claim,
respondent no.I invoked all the Bank Guarantees except performance
guarantee. Appellant filed arbitration petition contending that Bank
Guarantees have been fraudulently and dishonestly invoked and that also
after the date of expiry of said guarantees. Petition was dismissed by the
High Court holding only in the event of fraud or irretrievable injustice, the F
court would be entitled to interfere in a transaction involving a Bank
Guarantee and under no other circumstances; No fraud or irretrievable
injustice have been made out; Relief regarding the amount wrongly
recovered from the appellant can be claimed before arbitrator by way of
damages; and that Communication by the respondent to the appellant and G
Bank concerned requesting for extension of expiry date serves the purpose
of notices for invocation of Bank Guarantee, so it can not be said that
invocation was after the date of expiry of the said guarantees.

Against the Order of High Court Appellant preferred an appeal by
way of special leave, contending that Bank Guarantees have been H
615
616 SUPREME COURT REPORTS (1995] SUPP. 3 S.C.R.

A fraudulently and dishonestly invoked, and that as far as Bank Guarantee
towards advance was concerned, no amount remained balance towards
advance, rather they have to recover some amount from respondent no. l.
Contention with regard to two bank guarantees towards retention money
was that respondent no. 1 was bound to return the retention money as per
clause of contract when plan was taken over by them after taking trial r..:ad
B performance test. Regarding Guarantee towards liquidated damages it was
contended that damages should be proved and be quantified before invoca-
tion of Bank Guarantees.

Allowing the appeal in part, this Court
c HELD : 1. Invocation of advance Bank Guarantee was in proper
time. [624-B]

2. No fraud of irretrievable injustice have been made out by invoca-
tion of Bank Guarantees regarding partial retention money and security
D against liquidated damages. [624-H]

3. Guarantee dealing with partial release of retention money fur-
nished by Citi Bank, N.A. was a conditional guarantee, and will ensure only
till successful completion of the trial operation and plant is taken over by
first respondent. Since stipulation as per clauses of agreement have been
E successfully, fulfilled and plant was admittedly taken over by the first
respondent that event having ensured, the invocation of Bank Guarantee
is not encashable on its terms. [624-E]

4. The appellant is entitled to an order of injunction, to a limited
extent, against respondent nos. 1and4 (Citi Bank, N.A.), restraining them
F from invoking the Bank Guarantee given by the 4th respondent-citi Bank,
N.A. dated 10.5.1989. [626-B]

Savenska Handelsbaken v. Indian Charge Chrome a~id Others, [1994]
1 SCC 502; United Commercial Bank v. Bank of India and Others, [1981] 2
G SCC 766; UP. Cooperative Federation Ltd. v. Singh Consultants & Engineers
(P) Ltd., [1988] 1 SCC 174; General Electlic Technical Services Company
Inco. v. Pwzj Sons (P) Ltd. and Anr., [1991] 4 SCC 230 and Elian and
Rabbath v. Matsas and Mat.ms, [1966] 2 Lloyd's Report 495, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 8254.of
H 1995.
L.T. LTD. v. MAHARASHTRA STATE ELECTRICITY BD. (PARIPOORNAN, J.) 617

From the Judgment and Order dated 20.10.94 of the Bombay High A
Court in Arbitration Petition Lodg. No. 240 of 1994.

B.M. Naik, V. B. Trivedi and Bharat Sangal, for the Appellant.

Harish N. Salve, and A.S. Bhasme, for the Respondents.
B
The Judgment of the Court was delivered by

PARIPOORNAN, J. Leave granted.

The appellant, petitioner in arbitration petition Lodg. No. 240/94 in C
the High Court of Judicature at Bombay, initiated under Section 41 of the
Arbitration Act, has filed this appeal by special leave against the order
passed by N.D. Vyas, .T. dated 20.10.1994. The appellant's prayer for
injunction against the first respondent (Maharashtra State Electricity
Board) from invoking or claiming or demanding or releasing any amount D
whatsoever, under certain bank guarantees given by respondent Nos. 2 to
5 was dismissed by the aforesaid order by the learned Judge. Respondent
Nos. 1to5 in the arbitration petition Lodg. No 240/94 as also in this appeal
are- (1) Maharashtra State Electricity Board, Bombay, (2) Standard
Chartered Bank, Branch Bombay, (30 Grindlays Bank P.1.C., Branch Bom-
bay, (4) Citi Bank, N.A., branch Bombay and (5) Bank of Baroda, branch E
Bombay.

The first respondent invited tenders for supply and commission of
Coal Handling Plant. The appellant's tender,which was accepted, cul-
minated in a contract, executed between the parties, dated 9.3.1989. The
F
value of the contract was Rs. 61,11,07,200. The appellant furnished the
following five Bank Guarantees :

Amount of
No. of the Nature of Last
Sl. Name of the the Bank
Bank the Bank extended
No. Bank Guarantee G
Guarantee Guarantee date.
in Rs.
1. Standard 529/88/153 Security 5,50,30,000 31.5.94
Chartered against
Bank/Respo- advance
ndent No.2 payment
H
618 SUPREME COURT REPORTS [1995] SUPP. 3 S.C.R.

A 2. ANZ 1101/88/384/G Performance 6,17,28,000 31.3.95
Grindlays
Bank, PLC
Respondent
No. 3
B 3. Citi Bank, 26247 Partial 2,72,39 ,850 19.11.94
N. A. release of
Respondent retention
No. 4 money
4. Bank of 73/309 Security 6.,13,40,978 26.9.94
c Baroda, against
Respondent liquidated
No. 5 damage
5. Standard 529/92/380 Partial 1,12,00,000 31.12.94
Chartered release of
D Bank, retention
Respondent money
No. 2

(Vol. II page 4 of Paper Book)

E The completion of the Plant seems to have been delayed. The parties are
blaming each other for the delay. After taking the trial and performance
test, the Plant was taken over by the first respondent on 10.6.1994. On the
same day a take-over certificate was also issued. It is seen that earlier on
29.3.1994, the appellant lodged its claim. The first respondent denied the
F claims so made. they did not make any counter-claim then. On 4.6.1994,
the appellant invoked the arbitration clause as per the contract. A meeting
of the Arbitrators took place on 14.9.1994. The Arbitrators gave certain
directions. In pursuance thereto the appellant filed its claim on 30.9.1994.
The Arbitrators gave time to the first respondent to file their counter claim
on or before 30.11.1994. In the mean-while on 1.10.1994 the first respon-
G dent invoked all the Bank Guarantees except Guarantee No. 2 mentioned
herein-above (Performance Guarantee). The Court passed an order direct-
ing the status quo to be mentioned on 17.10.1994. Appellant filed arbitra-
tion petition Lodg. No. 240/94 and contended that the Bank Guarantees
have been fraudulently and dishonestly invoked. Regarding Guarantees in
H respect of advance and liquidated damages, it was further alleged that they
L.T. LTD. v. MAHARASHTRASIATEELECIRICITYBD. (PARIPOORNAN,J.] 619

were invoked after the date of expiry of the said guarantees. V?'as, J. A
rejected the above pleas and declined to grant the interim relief as p~ayed
for the appellant. As agreed to by counsel on both sides, the interim order
was made the order in the main petition itself. Arbitration petition Lodg.
No. 240/94 was dismissed. Hence this appeal by special leave.

We heard appellant's counsel Mr. B.M. Naik, senior Advocate, and B
Mr. Barish N. Salve, senior Advocate, who appeared for the respondents.
At the outset we should make it clear that the Bank guarantee relating to
performance, item No. 2 mentioned in the preceding paragraph, was not
invoked and is not covered by the subject matter of this proceeding.
c
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 and Ors., [1981] 2 SCC 766, U.P. Cooperative Federation Ltd. D
v. Singh Consultants & Engineers (P) Ltd., [1988] 1 SCC 174, General
Electlic Technical Service Company Inc. v. Punj Sons (P) Ltd. and Anr.,
[1991] 4 SCC 230 and the decisions of the Court of appeal in England in
Elian and Rabbath v. Matsas and Matsas, [1966] 2 Lloyd's Report 495 and
a few American decisions, this Court in Svenska Handelsbanken v. Mis. E
Indian Charge Chrome and Others, [1994] 1 SCC 502, laid down the law
thus:

"......... 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 F
established fraud ......" (p.523)

".......... 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 ..........." (p.524)
G
"... ....... 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 en-
cashment of bank guarantee." (pp. 526-527) H
620 SUPREME COURT REPORTS [1995] SUPP. 3 S.C.R.

A In the order appealed against the learned Judge has referred to the
decisions aforesaid and has held thus :
11
Only in the event of fraud or irretrievable injustice, the Court
••••••••

would be entitled to interfere in a transaction involving a bank
guarantee and under no other circumstances. The petitioners have
B failed on both these counts."

(Paper Book - Vol.-I p. 7)

Appellant's Counsel contended that the Bank Guarantees have been
fraudulently and dishonestly invoked by the first respondent. It was sub-
c mitted that so far as the Bank Guarantee towards advance was concerned,
no amount remains as balance towards advance and in fact a sum of Rs.
27,000 is recoverable from the first respondent. With regard to the two
Bank Guarantees, dealing with retention money (Item Nos. 3 and 5) it was
contended that the trial was taken by the first respondent after which
D performance test was also done and thereafter the take-over was com-
pleted and so, on the basis of the contract, the first respondent was bound
to return the Retention Guarantees. Regarding liquidated damages (Item
No. 4) it was contended that the first respondent should prove that they
suffered damages and quantify the same before invoking the Guarantee. It
was also contended that the invocation of the Guarantee relating to ad-
E
vance and liquidated damages was after the expiry of the period. The
learned Judge found that no fraud or irretrievable injustice has been made
out. The Court also held that the appellant will be able to claim relief
before the Arbitrators by way of damages, for amounts wrongly recovered,
and so no irretrievable injustice can be said to exist. The learned Judge
F also held that the first respondent by separate letters dated 14.9.1994 and
10.5.1994 addressed to the Bank of Baroda and Standard Chartered Bank
respectively, while requesting to extend the Bank Guarantee, specifically
stated that, if it was not so done, the communication should be treated as
notice for encashment of the Bank Guarantee and these communications
G addressed to the respective banks prior to the Guarantees would serve the
purpose of notice to the banks and so it cannot be held that the invocation
was after the date of expiry of the said Guarantees.

Having heard Counsel and on perusing the relevant records, we are
of the view that the order of the Court below regarding Item No. 3 - Partial
H relase of retention money in the sum of Rs. 2,72,39,850, Guarantee given
LT.LTD. v. MAHARASIITRASTATEELECTRICTIYBD. [PARIPOOR.~AN,J.) 621

by the Citi Bank alone requires modification. We will deal with the various A
items in seriatim :

ITEM NO. l: Security against advance payment (Advance Bank
Guarantee).

The Guarantee given on this count by the Standard Chartered Bank B
for a sum of Rs. 5,50,30,000 is contained in paper book Volume II at pages
109 to 113. It was agreed at the bar that the Bank Guarantee has not been
invoked for the entire sum of Rs. 5.50_ crores but is limited to a sum of Rs.
8 lakhs only. We find that dispute exists with regard to the said subject
matters, as is evident from the relevant papers - (Volume II Pages 312 and C
316). It is seen from the communication dated 10.5.1994 addressed by the
first respondent to the appellant, with an endorsement to the Standard
Chartered Bank, that a request was made to extend the validity of the Bank
Guarantee for a further period of 6 months, i.e., 30.11.1994 and in case the
extension is not received before that date, the communication be treated
as notice for encashment (Vol. II pages 33 to 34 of the Paper book). We D
are of the view that the invocation of the Guarantee is in time. We hold
that in the light of the dispute pending before the Arbitrator, the Court
below was justified in declining to grant an injunction against the invocation
of the Bank Guarantee on this count.
E
Item Nos. 3, & 5 : Partial release of retention money :

Items 3 and 5, though come under the same category, are not similar
in content and scope. Item 3, relates to Bank Guarantee furnished by the
Citi Bank, N.A. in the sum of Rs. 2.72 cores. It is a conditional Guarantee.
Copy of the document is available in paper book Volume II at pages 122 F
to 126. The relevant portions in the Guarantee in volume II at pages 124
and 125 of the paperbook, are as follows :

"AND WHEREAS at the request of the contractors, we, CITI
BANK N.A. (hereinafter referred to as "The Bank" has agreed to G
guarantee 2, 72,39,850 (Rupees Two Crores, Seventy Two lakhs,
Thirty Nine thousand, Eight hundred fifty only) covering the
amount of the said payments till successful completion of t1ial
operations. "

In pursuance of the said agreement and in Consideration of the H
622 SUPREME COURT REPORTS [1995] SUPP. 3 S.C.R.

A board making the said payment to the contractors, the Bank hereby
agree with the Board as follows :

1. The Bank hereby agree unequivocally and uncondition to
guarantee the said amount released by the Board till successful
completion of trial operations in due perfonnance of the contract
B and undertakes to at Bombay within 48 hrs. on demand in writing
from MSEB, or any officer authorised by it in this behalf of any
amount upto and not exceeding Rs. 2,72,39,850/- (Rupees Two
crores, Seventy two lakhs, Thirtynine thousand, Eight hundred fifty
only) to the Maharashtra State Electricity Board on behalf of the
c contractors ......................... .

2. That the guarantee hereby given shall be continuing guarantee
upto 19 May, 1990. The validity of this Bank guarantee will be
extended one month prior to its present validity at the request of
the Board for suitable period(s) till successful completion of trial
D operations."

(emphasis supplied)

Volume II, pages 46 to 108, contains a copy of the agreement
executed between the appellant and the first respondent Board. The fol-
E lowing clauses therein at pages paragraphs 70.1, 70.2, 70.3 and 70.4.01,
appearing at pages 92 to 95, are relevant in the this connections. They are
as fellows:

"70.1 (i) .......................................... .
F (ii) ............................................

(iii) After the precommissioning tests are satisfactorily
completed equipment shall be considered ready for
initial operation. During initial .operation, the complete
G equipment shall be operated integral with sub-system
and supporting equipment as a complete plant.

70.2 TRIAL OPERATION :

(I) After satisfactory initial operation, the Plant shall
H' then be. put on trial operation. The period of trial
L.T.LID. v. MAHARASHTRASTATEELEcrRIC11YBD. (PARIPOORNAN,J.) 623

operation shall be 30 days from the date of completion A
of initial operation. During the period of trial operation,
all the necessary adjustments in the plant/equipments
shall be made by the Contractor and make ready the
same in all respects for performance and guarantee test.
Out of trial operation, the plant shall run for atleast a
B
period of 100 hours at the rated capacity. Out of these
100 hrs. a minimum of 20 hours of operation at the
rated load shall be established for the mode of opera-
tion from wagon tippler to the bunker.

70.3 PERFORMANCE TESTS AT SITES: c
(i) The perfomiance test shall be conducted at site by the
Contractor, after successful completion of trial operation.
The duration of the performance t~st of the plant at
the rated capacity shall be of 2 hours. Performance
Guarantee test shall in any case be conducted within D
45 days of successful completion of trial operation or
within the extended period as can be mutually agreed.
In case the performance test cannot be conducted
within a period of 75 days after successful completion
of trial operation due to reasons solely attributable to E
owner, the time frame and method of conductance of
the same shall be discussed mutually and finalised.

xxx xxx xxx

(v) Any special equipment, tools and tackles required F
for the successful completion of the performance tests
shall be provided by the Contractor free of cost."

"70.4.01 Upon successful completion of all the performance
tests at site, the owner shall issue to the Contractor a
"Taking Over Ce1tificate" as a proof of the final accep- G
tance of the equipment........... "

(emphasis supplied)

The first respondent Board intimated the appellant by communication
dated 10.6.1994 thus: H
624 SUPREME COURT REPORTS [1995] SUPP. 3 S.C.R.

A "After reasonable completion of the Coal Handling Plant works as
per the contract 2 M part-A, capacity operation of the various
equipments of C.H.P. were planned from 15th January, 1994. Rates
as well as design capacity trials also tried Certain Points for
stabilisation which were pointed to L&T were attended. Since these
tlials are generally satisfa.ctOJy as per Claus.e no. 70.2 & 70.3, all the
B commissioned equipments under the contract of 2M Part-A are
taken over by MSEB for regular operation and maintenance from
10th June, 1994 as per Clause No. 70.4 of Contract Agreement Vol.
I."

c (emphasis supplied)

The appellant wrote to the first respondent on 21.2.1994 that the plant was
completed and so all Bank Guarantees have served their contractual
requirements. On a perusal of the relevant clauses in the contract, executed
D between the appellant and the first respondent, and the communication of
the first respondent dated 10.6.1994, it is fairly clear that the stipulations
or conditions mentioned as per clauses 70.2, 70.3 and 70.4 have been
successfully fulfilled and the Plant was admittedly taken over by the first
respondent. The Guarantee given by the Citi Bank, N.a. dated 10th of May,
1989 appearing in Volume II at pages 122 to 126 will ensure only till
E successful completion of the trial operations and the plant is taken over.
That event having ensued, the invocation of the Guarantee given by the Citi
Bank dated 10.5.1985 in the sum of Rs. 2.72 crores is not encashable on its
terms and in order to prevent irretrievable injustice, an injunction as
prayed for, to respondents 1 and 4 deserves to be issued on that score. The
F Court below was in error in not doing so. We hereby restrain respondents
1 and 4 from invoking the Bank Guarantee aforesaid.

But item No. 5 partial release of retention money, for which the
second respondent, Standard Chartered Bank has given a Bank Guarantee
for Rs. 1,12,00,000 (Rs. 1.12 crores) stands on a different footing. The
G relevant Guarantee is contained in paper book Volume II at pages 134 to
138. The first respondent made an ad hoc payment of Rs. 1.11 crores out
of the total retention amount for which the Guarantee was furnished by
the Standard Chartered Bank. It is an unequivocal and unconditional
Guarantee. We hold that no fraud or irretrievable injustice has been made
H out by the appellant. The court below was justified in declining to issue an
LT.LID. v. MAHARASHTRASfAIBELECIRICilYBD. (PARIPOORNAN,J.] 625

order of injunction on -this count. A
The last item is covered by the Guarantee specified as No. 4
hereinabove. It was furnished by the Bank of Baroda as a security against
'liquidated damages'. The Guarantee is contained in paper book Volume
II at pages 129-131.
B
The Bank has given Guarantee for Rs. 6.13 crores against the liqui-
dated damages recoverable by the first respondent Board, from the appel-
lant. The relevant clause regarding levy of liquidated damages is contained
at pages 99 and 100 of the Paper book, (Clause 75.01), to the following
effect: c
"75.01 If the Contractor fails to complete the works as per the
clause 72.01 item 1, 2 and 3 within a period of 25 months from the
date of letter of intent or within any extension of time granted by
the owner then the liquidated damages shall be levied by the
Owner on the Contractor at the rate of 1/2% (one half of one per D
cent) per week of delay of the contract price for the works limited
to 10% (ten percent) of the contract price of the works."

Appellant's Counsel argued that before invoking the Bank Guarantee
the first respondent should have levied the liquidated damages and only E
for the sum so determined, and intimated to the appellant, the Bank
Guarantee can be invoked. It was further argued that the Guarantee was
due for expiry on 26.9.1994 and it bas been invoked after the expiry of the
said period. There is no force in the above pleas. It is common ground that
the arbitration proceeding for resolving the dispute between the parties
(appellant and the respondent) is pending before the arbitrator. The F
parties are at issue as to whether the Plant was completed in time or was
delayed. They are blaming each other for the delay. That is a matter to be
adjudicated in the proceedings. It is also brought to our notice that the
first respondent has claimed liquidated damages as per clause 75.01 of the
contract of more than eight crores - much more than the amount of Rs.
6.13 crores guaranteed. Since the decision in the arbitration proceedings G
• has an impact on this aspect, we are of the view that no prima facie case
of fraud or irretrievable injustice is made out to restrain respondents, 1
and 5 from invoking the Bank Guarantee. Perusal of the communication
dated 14.9.1994, sent by the first respondent to· the appellant and also t6
the Bank of Baroda appearing in paper book Volume 1 at pages 35 to 36, H
626 SUPREME COURT REPORTS [1995] SUPP. 3 S.C.R.

A will show that a request to extend the validity of the Bank Guarantee which
was to expire on 26.9.1994, was made and if not so done, the communica-
tion was to be treated as notice for encashment of the Bank Guarantee.
The plea that the invocation was not in proper time is also without
substance.

B In the result, we hold that the appeal succeeds in part. The appellant
is entitled to an order of Injunction, to a limited extent, against respondent
Nos. 1 and 4 (Citi Bank N.A.), restraining them from invoking the Bank
Guarantee given by the 4th respondent - Citi Bank, N.A. dated 10.5.1989
(item No. 3 stated hereinabove) (Volume II at pages 122 to 126 of the
C Paper book). Subject to the above modification, the order passed by the
Court below dated 20.10.1994 is affirmed. In the circumstances, their shall
be no order as to costs.

R.A. Appeal allowed.