Holding

The beneficiary, being the party to the unconditional guarantee, is the best judge to decide its encashment and no exception of fraud or irretrievable injustice applies, so the appellant is entitled to encash the bank guarantees.

Summary

Mis BSES Ltd. (now Reliance Energy Ltd.) awarded a captive power plant contract and issued four work orders to M/s Fenner India Ltd., which furnished four unconditional, irrevocable bank guarantees from State Bank of India. Under a "wrap‑around" agreement, BSES was entitled to encash the guarantees for any breach of the four contracts. Fenner invoked the arbitration clause and sought a declaration and interim injunction under Section 9 of the Arbitration and Conciliation Act, 1996 to restrain BSES from encashing the guarantees pending arbitration. The Madras High Court granted the injunction, but the Supreme Court held that the beneficiary is the best judge to decide when to call a guarantee, that the guarantees covered both advance payments and performance, and that no exception (fraud or irretrievable injustice) applied. Consequently, the High Court’s injunction was set aside and the appeal was allowed, confirming BSES’s right to encash the guarantees.

Issues considered

The beneficiary's right to encash an unconditional, irrevocable bank guarantee despite pending arbitration.
Whether the exceptions to the rule of non‑intervention (fraud or irretrievable injustice) apply to restrain encashment.
Whether the bank guarantees were limited to securing advances or also secured performance of the contracts.
Whether the court can grant an interim injunction under Section 9 of the Arbitration and Conciliation Act, 1996 to restrain the beneficiary.
The interpretation of the wrap‑around agreement concerning the right to retain and encash guarantees.

Legislation cited

Arbitration and Conciliation Act, 1996s. 17, s. 9

Subjects

bank guaranteeunconditional guaranteeirrevocable guaranteewrap‑around agreementarbitrationSection 9 Arbitration Actinterim injunctionfraud exceptionirretrievable injusticebeneficiary's right to call guarantee

Judgment

y MIS BSES LTD. (NOW RELIANCE ENERGY LTD.) A
v.
M/S FENNER INDIA LTD: AND ANR.

FEBRUARY 3, 2006

[H.K. SEMA AND B.N. SRIKRISHNA, JJ.) B

"i-
' Arbitration and Conciliation Act, 1996-Section 9-Appellant and
respondent entering into a Wrap Around under which respondent agreed to
perform its four contracts on a turnkey basis-Respondent submitted to the C
appellant four unconditional and irrevocable bank guarantees as per the
agreement-Encashment of bank guarantees by the appellant for non-
performance of contractual obligations-Respondent filing a petition before
trial court seeking a declaration that the appellant was not entitled to invoke
bank guarantees and interim injunction restraining the appellant from
encashing the bank guarantees-Trial Court declined to give interim D
injunction-High Court allowed the· appeal of the respondent and granted
interim injunction-Correctness of-Held, beneficiary of the bank guarantee
is the best judge to decide as to when and for what reason the bank guarantee
should be encashed-Jt is no function of the Bank or the Court to enquire the
due performance of the contract-On facts, under the agreement, the appellant E
. had a right to encash any or all of the bank guarantees for any breach in any
of the terms of the four contracts.

Appellant was awarded a contract for setting up a captive power plant.
The appellant awarded a part of the work to first respondent by issuing four
work orders. As per the agreement, the first respondent submitted four F
unconditional and irrevocable bank guarantees from th·e second respondent-
Bank to the appellant and the first respondent entered into a "wrap-around
agreement" under which it was agreed that the first respondent would
perform its contractual obligations on a turnkey basis.
The appellant invoked the four bank guarantees. The first respondent G
invoked the arbitration claust: as provided in the works contract. The first
respondent filed a petition under section 9 of the Arbitration and Conciliation
. 'i Act, 1996 before the trial court for a declaration that the appellant was not
entitled to invoke the four bank guarantees. The first respondent also sought
an interim injunction for restraining the appellant from encashing or receiving
47 lI
)
48 SUPREME CO! 'RT REPORTS [2006] 2 S.C.R.

A any amount under the bank guarantees, pending disposal of the arbitration
proceedings. The trial court dismissed the petition of the first respondent by.
holding that it was not a case where irretrievable injustice would be done by
enforcement of the bank guarantees nor was it a case where a strong prirna
facie case of fraud had been made out. However, the trial court, with a view
B to safeguard the rights of the first respondent, dirl!cted the appellant to
maintain status quo for a period of one month within which the arbitration
proceedings would be disposed of. The first respondent preferred an appeal
before High Court challenging the order of the trial court. The High Court
t
allowed the appeal and granted interim injunction.

In appeal to the Court, the appellant contended that the bank is obliged
C to honour the unconditional and irrevocable bank guarantee irrespective of
any dispute between the beneficiary and the party at whose instance the bank
has given the guarantee.

The first responded contended that, as per the contract, the advances
which were given to it by the appellant for carrying out work orders were
D fully recovered by the appellant from the running bil:is issued by it and hence
encashing the bank guarantees, which were given to secure advance payments,
by the appellant was an act of fraud or created a situation of special equities
in its favour; and that one of the bank guarantees was intended to secure due
and faithful performance of the contract and that since the performance and
E been duly satisfied, there was no warrant for invoking the bank guarantee.

Allowing the appeal, the Court

F
HELD: 1.1. The bank guarantees were not given only for the purpose
of security as against the advance paid to the first respondent. Under the wrap
around agreement, the appellant had the right to encash any or all of the
..
guarantees for any breach in any of the terms of the four contracts. The
contention of the respondent that the first three bank guarantees were only
f'lr securing the advances paid and that only the fourth bank guarantee was
liable to be called for failure to perform the contract is not accepted. An
appraisal of the terms of the contract leads to the conclusion that the bank
G guarantees were intended for the purpose of securing the advances paid to
the first respondent and for securing the performance of the contract.
[57-D-E-F)

1.2. On examination of the evidence on record, this Court is primafacie
not satisfied that performance had been duty and satisfactorily certified. It is
H the case of the appellant that there was no satisfactory performance of the
, BSES LTD. v. FENNER INDIA LTD. 49

contract, as a result of which, the appellant was justified in encashing the A
concerned bank guarantee. It is no function of the second respondent Bank
nor of this Court to enquire as ~o. ,whether due performance had actually
happened when under the terms of the guarantee, the second respondent Bank
was obliged to make payment when the guarantee was called in, irrespective
of any contractual dispute between the appellant and the first respondent. B
[58-G; 59-A, BJ

1.3. Evidently there is no "egregious fraud". Since a similar prayer for
permanent injunction to restrain the appellant from encashing the bank
guarantees is pending before the Arbitral Tribunal, there is no situation of
"irretrievable injustice" if, at the present moment, the appellant is allowed C
to encash the bank guarantees: Nor does this Court see any special equity in
favour of the first respondent when there is in fact a dispute that performance
was prima facie not satisfactory, which enabled the appellant to encash all or
any of the four bank guarantees. The appellant is entitled to encash the bank
guarantees and the second respondent-Bank shall be free to honour its
guarantees, subject io adjustment in the arbitral proceedings.. [60-A, C, DJ D
v.
U.P. Cooperative Federation Ltd Singh Consultants and Engineers (P)
Ltd, [1998) 1SCC174; U.P. State Sugar Corporation v. Sumac International
Ltd., [1997) 1 SCC 568; State of Maharashtra v. National Constn1ction Co.,
Bombay, (1996) 1 SCC 735; United Commercial Balikv. Bank of India, (1981)
2 SCC 766; Centax (India) Ltd. v. Vinmar !mpex Inc., [1986) 4 SCC 136; State E
of Haryana v. Continental Construction Ltd, [2002) 10 SCC 508 and General
Electric Technical Services Company Inc. v. Punj Sons (P) Ltd, [1991) 4 SCC
230, referred to.

TT/ Team Telecom Ltd. v. Hutchison JG UK Ltd., (2003) EWHC 762 F
(TCC) : (2003) 1 All ER (Comm) 914; Elian and Rabbath (Trading as Elian
and Rabbath) v. Mastas and Mastas, Etc., (1966) 2 Lloyd's Rep. 495 and Samwoh
Asphalt Premix Pte. Ltd v. Sum Cheong Piing Pte. Ltd., (2002) 1SLR1, referred
to.

CIVIL APPELLATE Jl1RISDICTION: Civil Appeal No. 955 of2006 G
From the Judgment and Order dated 30.7.2004 of the Madras High
Court in CMA (NPD) No.1239 of 2004.

Mukul Rohtagi, K.R. Sasiprabhu, Ms. Manali Singhal, Mustafa Alam
and Ardendu Thakur for the Appellant. H
50 SUPREME COURT REPORTS [2006] 2 S.C.R.

A Soli J. Sorabjee, Raju Ramachandran, R. Veera Raghavan. Subramonium
Prasad, Raghavendra S. Srivastava, P. Kapoor and V.G. Pragasam for the
Respondents.

The Judgment of the Court was delivered by

B SRIKRISHNA, J. Leave granted.

This is one more instance of an injunction being sought against a
beneficiary seeking to enforce his/her rights under a bank guarantee, <>lbeit
with a novel averment that "lack of good faith" or "enforcing with an oblique
t
purpose" constituted further exceptions to the general rule against intervention.
c
The Facts

Mis Godavari Sugars Ltd. awarded a contract for a captive power plant
to Mis BSES Ltd. (now Reliance Energy Ltd.) (hereinafter "the Appellant").
The Appellant, in turn, awarded a part of that work to Mis Fenner India Ltd.
D (hereinafter "the First Respondent"). In connection with this, the Appellant
issued to the First Respondent, four work orders/ purchase orders, as follows:
...
"(i) Work Order No. 2245 dated 15.3.2000/ 4.5.2000 for a sum of
Rs. 70,00,000/~
E (ii) Work Order No. 2246 dated 15.3.2000/ 4.5.2000 for a sum of
Rs.5,57,00,000/-
(iii) Work Order No. 2247 dated 15.3.2000/ 4.5.2000 for a sum of
Rs.90,00,000/-
(iv) Work Order No. 2248 dated 15.3.2000/ 4.5.2000 for a sum of
F Rs.50,00,000/-....."
'
As required by the terms and conditions of the s.iid work/ purchase
orders, the First Respondent submitted four bank guarantees from the State
Bank of India (hereinafter "the Second Respondent-Bank"), dated 23.3.2000
bearing, Nos. 288/99, 289/99, 290/99 and 291/99 in sums of
G Rs. 7,00,000/-, Rs. 9,00,000/-, Rs. 55,70,000/- and Rs. 38,35,000 respectively.
They were unconditional irrevocable bank guarante·~s, under which the Second
Respondent-Bank agreed to pay to the Appellant the amount claimed or
demanded by the Appellant. The amounts guarantei!d thereunder were payable
with or without any reason in writing from the Appellant, without protest or
H demur or proof of satisfaction, and without reference to the First Respondent,
(
/

BSES LTD. v. FENNER INDIA LTD. [SRIKRISHNA, J.] 51
upon being called by the Appellant, irrespective of any dispute between the A
Appellant and the First Respondent with regard to or touching any of the
contractual tenns between them. They were, of course, subject to the aggregate
limits stipulated,_ iQ each of the bank guarantees. ''"'"'
: .;-; ,, ' ' . . ' l ·~;
On I0.5.2000, the Appellant and the First Respondent entered into a
"wrap-around agreement", under which it was agreed that the First Respondent B
would perfonn its contractual obligations on a turnkey basis viz. as a composite
one. This principle was also made applicable to the bank guarantees. Thus,
Clause (4) of this agreement in tenns says:

"In case of any material breach of any or all the Contracts, BSES
...
sh.all have the right to embark upon the retentions and encashment of
Bank Guarantees of all the contracts."
C

On 4.12.2003; the Appellant invoked the four bank guarantees. On
7.122003, the First Respond~nt. invoked the arbitration clause, as provided
in the work/ purchase orders. On 8.12,2003, the First Respondent moved a
petition under Section 9 of the Arbitration and Conciliation Act, 1996 D
(hereinafter "the Arbitration Act") before the District Court, M<tdurai, seeking
a declaration that the Appellant was not entitled to invoke the four bank
guarantees. The First Respondent also sought an interim injunction against
the Appellant restraining them from encashing or receiving any amount under
the bank guarantees, pending disposal of the arbitration proceedings. E
On 22.3.2004, the learned Principal District Judge, Madurai, dismissed
the First Respondent's petition by holding that this was not a case where
"irretrievable injustice" would be done by enforcement of the bank guarantees,
nor was it a case where a strongprimafacie case of fraud had been made out.
Despite this finding, the learned District Judge took the view that, although F
the Appellant was not entitled to an order of injunction, the Appellant's
rights would have to be safeguarded till the matter was disposed of in the
arbitration proceedings. Accordingly, the learned District Judge directed the
Appellant to maintain status quo for a period of one month (from the date of
the order), within which the arbitral proceedings were to be disposed of. The G
parties were directed to seek their remedies before the arbitrator.

Sometime in April 2004, an application was made under Section 17 of
the Arbitration Act before the Arbitral Tribunal. The First Respondent preferred
an appeal before the High Court of Madr11s challenging the order and judgment
dated 22.3.2004 of the learned District Judge. On 24.5.2004, even while-the H
52 SUPREME COURT REPORTS [2006 I 2 S.C.R.
'
A arbitral proceedings were pendi11g, the High Court made an interim order.
Further, by the impugned judgment dated 30. 7.2004, the High Court allowed
the appeal preferred by the First Respondent and granted the injunction as
prayed for, and set aside the order of the learned District Judge.

B The Rule and its Exceptions

Mr. Rohtagi, 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
C has given the guarantee, the bank is obliged to honour its guarantee, as long
as the guarantee is unconditional and irrevocable. Our attention was drawn
to the judgment of this Court in UP. Cooperative Federation ltd. v. Singh
Consultants and Engineers (P) Ltd.' (hereinafter "U.P. Cooperative
Federation"). 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,
D 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 werds, the bank must
pay according to the tenor of its guarantee, on demand, without proof or
condition.

E 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
F 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 Court2, that in
UP. State Sugar Corporation v. Sumac International ltd, 3 (hereinafter "UP.
State Sugar Corporation") this Court, correctly declared that the law was

G '(198811 sec 114.

'See, eg., U.P. State Sugar Corporation v. Sumac International ltd.. [1997) I SCC 568 at
pp. 574-577 (paragaraphs 12-16), State of Maharashtra v. National Construction Co.,
•
Bombay, [1996) I SCC 735 at p. 741(paragraph13). See. also United Commercial Bank
v. Bank ofIndia, (1981) 2 SCC 766 and Centax (India) ltd. v. Vinmar lmpexlnc., [1986)
4 sec 136.
H '1199711 sec 568.
.(
I

-· BSES LTD. v. FENNER INDIA LTD. [SRIKRISHNA. J.) 53
,..,
y "settled" A
Mr. Sorabjee, however, tried to expand upon the settled exceptions to
the rule by first, relying on an order of this Court in State of Haryana v.
.• Continental Construction ltd 5 (hereinafter "Continental·Construction ltd") .
I We are afraid that the short order in Continental Construction Ltd (supra)
) appears to have been made on the narrow facts of that case and does not B
I constitute a precedent binding us. Moreover, as mentioned earlier, a line of
/ judgments of this Court have long settled the law relating to the invocation
y of bank guarantees.

Second, Mr. Sorabjee placed reliance on a number of foreign judgments,
especially that of the Queen's Bench Division in IT/ Team Telecom Ltd v.
c
Hutchison 3G UK Ltd, 6 wherein, the rule and its exceptions in England have
been elegantly summarized. 7 Mr. Sorabjee placed special emphasis on the
following propositions:

" ... (3) The basis for a contention of a breach of faith must be
D
established by clear evidence even for the purposes of interim relief.
.;i.t' A breach of faith can arise in such situations as: a failure by the
beneficiary to provide an essential element of the underlying contract
on which the bond depends; a misuse by the beneficiary of the
guarantee by failing to act in accordance with the purpose for which
it was given; a total failure of consideration in the underlying contract; E
a threatened call by the beneficiary for an unconscionable ulterior
motive; or a lack of an honest or bona fide belief by the beneficiary
that the circumstances, such as poor performance, against which a
performance bond had been provided, actually exist.

(4) In addition, where it appears that the call would be a nullity, a F
·--,: court will intervene to restrain that invalid call. Examples are where
a condition precedent to a call has not yet been fulfilled; where the
bond is a 'see to it' bond necessitating prior proof of loss by the

'Ibid at p. 574 (paragraph 12), per Sujata v. Manohar J. G
'120021 10 sec sos.
J ~';
'(2003) EWHC 762 (TCC); (2003] 1 All ER (Comm.) 914. See, also, Elian and Rabbath
(Trading as Elian and Rabbath) v. Matsas and Matsas, etc., (1996] 2 Lloyd's Rep. 495.
'Ibid. at paragraph 46, per Judge Thonnton QC.
H
-
54 SUPREME COURT REPORTS [2006) 2 S.C.R.

A beneficiary or poor performance by the third party which has not yet
been established; or where the demand or the supporting documents
show that the demand does not conform to the requirements imposed
by the bond for a valid demand.

(5) Otherwise, a threatened call will not be restrained. In particular an
B allegedly incorrect calling of a performance bond will not be restrained
merely because the factual basis of the call arising out of the underlying
contract is disputed. Thus disputes as to whether a breach of contract,
a determination of a contract for cause, a repudiation of a contract or
the incurring of loss have occurred, where these are events covered
by the performance guarantee, will not be allowed to found an
c application to restrain a call unless these disputes reveal a breach of
faith by the beneficiary. Any consequent payment under the bond ~o
the beneficiary which over-compensates the beneficiary may be
recouped in the 'accounting' exercise that the third party may claim
in subsequent litigation against the beneficiary under the underlying
D contract. .... " 8

Mr. Sorabjee, finally contended that in Singapore, where commercial
cases are expeditiously disposed of, the Court of Appeal in Samwoh Asphalt
Premix Pte. Ltd v. Sum Cheong Piling Pte. Ltd' has held that calling a
performance guarantee for an oblique purpose was not permissible.
E Specifically, using it as a "bargaining chip", as a "deterrent" or in an "abusive"
manner, would invite an injunction from the court. 10 He submitted that the
Singapore court has gone so far as to say that the unconscionable calling of
a bank guarantee was an exception i.ndependent of fraud.

We are afraid that in the face of the law succinctly laid down in U. P.
F Cooperative Federation (supra) and reiterated in numerous judgments of this
Court referred to earlier, we are unable to accept the wide proposition of law
laid down in the foreign judgments cited by Mr. Sorabjee. Whatever may be
the law, as to the encashment of bank guarantees in other jurisdictions, when
the law in India is clear, settled and without any deviation whatsoever, there
G
'Id.
'(2002) l SLR l.

'"Ibid. at pp. 7-8, per LP Thean, JA.

H
'
1
BSES LTD. v. FENNER INDIA LTD. [SRIKRISHNA, J.] 55
is no occasion to rely upon foreign case law. A

Contentions of the First Respondent

A reading of the impugned judgment of the High Court shows that the
learned Judge was cognizant of the settled rule relating to bank guarantees,
but came to the conclusion that the encashment of the bank guarantees· ~y the B
Appellant would present a case under one of the exceptions to the rule viz.
would cause "irretrievable injustice" to the First Respondent.

Learned counsel for the First Responderit strongly supported this line
of argument of the High Court. He contended that the bank guarantees were
for different purposes, either to: (i) secure the payment of advances or (ii) C
secure performance. As far as the bank guarantees to secure advance payments
were concerned, he contends that there is a provision in the contract that the
amount of advance was to be recovered by deduction from the gross accepted
amount of any running bill. The contract stipulates two modes of recoveries:
(i) By deduction from the gross amount from the running bill, and (ii) By D
invocation of the bank guarantee. Mr. Sorabjee further urged that it had been
found by the District Court and the High Court concurrently that the entire
amount of the bank guarantee had been recovered from the running bills of
the First Respondent. Accordingly, he argued that, encashing the bank
guarantee after having recovered the full amount of advances from the running
bills was an "egregious fraud" or at any rate, created a situation of "special E
equities" in favour of the First Respondent. The High Court, he submits, was
fully justified in granting an injunction since these facts were prima facie
established as triable issues.

Further, Mr. ·sorabjee submitted that the fourth bank guarantee (No. F
291199 dated 23 .3 .2000) was further qualified by "due and faithful performance
of the contract", and that the contract had been admittedly performed. In the
circumstances, he submits that, the encashment of this guarantee was fraudulent
or created a situation of special equities, which was covered by U.P.
Cooperative Federation Ltd. (supra). Mr. Sorabjee's assertions, however, need
closer scrutiny through examining the contractual clauses, as well as through G
examining the conduct of the First Respondent.

The Contractual Clauses

Mr. Sorabjee is correct in that both the District Court and the High
Court have concurrently held that the documents placed on record do bear H
56 SUPREME COURT REPORTS [2006] 2 S.C.R.

A out that the entire guarantee amount had been recovered. We are, however,
unable to accept Mr. Sorabjee's contention that the bank guarantees were
given only for the purpose of security as against the advance paid to the First
Respondent. Indeed, Mr. Rohtagi is justified in his submission that the final
contract was a "wrap-around agreement". The terms of the agreement signed
B on 10.5.2000 make it clear, after referring to the four contract agreements for
work/ purchase orders, that:

" .... .It is specifically agreed between the parties that CONTRACTOR
is not only responsible and liable for its scope of supplies in Contract ,:

No. I and for its scope of services in the Contract Nos. JI, III and IV,
but also to perform and take care of all such works which though are
c not specifically mentioned in these four contracts, but are essential to
complete the "BAGASSE HANDLING SYSTEM PACKAGE" as a
whole in its true intent and requirement unless the exclusion(s) are
specifically agreed by BSES. Contract-III shall also include unloading
of plant and equipment supplied under Contract-I consequent to receipt
D at site, movement within site to stores and/or to intermediate location
and/or to final location, co-ordination with Owner for entry in their
store documents, issue of Store Issue Voucher, etc." 11

The agreement further provides vide Clause (2)

E "The successful and timely completion of the 'BAGASSE HANDLING
SYSTEM PACKAGE' by CONTRACTOR and its performance thereof
under Contract-I, Contract-II, Contract-lll and Contract-IV shall be
jointly and severally bound by the terms of the "Contract" and shall
be jointly and severally liable to BSES for the performance of all
obligations under the "Contract".
F
Clause (3) of the agreement dee !ares:
~-

"CONTRACTOR agrees that if liquidated damages for delay and/.or
performance guarantees, claim on warranty/workmanship, punch lists
and any breach of contract by CONTRACTOR are applied under the
G provisions of any of the four "Contracts", it automatically shall qe
construed that the same provision can be applied on all the four
contracts as read together. BSES shall have the right to treat the
contracts jointly as turnkey contract and money can be recovered by
"'-
H 11 Vide Clause (I) ofagreemement dated 10.5.2000.
(
BSES LTD. v. FENNER INDIA LTD. [SRIKRISHNA, J.] 57

BSES including but not limited to liquidated damages, fines or A
penalties of whatever nature as per the "Contract" and any excess
costs and expenses associated with the completion of the job by
BSES for the "BAGASSE HANDLING SYSTEM PACKAGE"."

Clauses ( 4) and (5) in express tenns respectively ·state:
B
"In case of any material breach of any or all the Contracts, BSES
shall have the right to embark upon the retentions and encashment of
Bank Guarantees of all the contracts."

"Notwithstanding the works undertaken by the designated sub-
contractor(s) of the Contractor subject to provisions of the contract, C
the Contractor shall remain wholly liable to perfonn, fulfill and
discharge all the obligations and responsibilities under this contract
. on a turnkey basis and the same shall in no way be reduced or
diminished for any reasons whatsoever."

Upon a careful reading of this agreement, we are satisfied that the D
contract though, for the sake of convenience, was split up into four sub-
contracts (viz. the four work/ purchase orders), was a composite contract
executable on a turnkey basis. The tenns of this turnkey contract were reduced
into writing by the "wrap-around agreement" of I0.5.2000. We are of the
definite view that under the "wrap-around agreement'', the Appellant had the E
right to encash any or all of the guarantees for any breach in any of the tenns
of the four contracts. Hence, we are unable to accept the submission of Mr.
Sorabjee that the first three bank guarantees were only for securing the
advances paid and that it was only the fourth bank guarantee (No. 291/99
dated 23 .3 .2000) that was liable to be called for failure to perfonn the contract.
In fact, an appraisal of the tenns of the contract leads us to the conclusion F
that the bank guarantees were intended for both purposes: for securing the
advances paid to the First Respondent and also for securing due perfonnance
of the contract.

Renewal of the Guarantees
G
Our conclusions as to the real purpose of the bank guarantees are
fortified by our examination of the conduct of the First Respondent. Indeed,
we repeatedly asked Mr. Sorabjee as to why and under what cir~umstances
the First Respondent continued the first three guarantees, purportedly pertaining
to advances, even after the First Respondent knew that the advance amount H
\
1
58 SUPREME COURT REPORTS (2006] 2 S.C.R.

A had been fully recovered. Mr. Sorabjee claimed sometime to put an Additional
Affidavit to deal with this query, which according to him, had been raised by 1
this Court for the first time. In the Additional Affidavit (dated 11.11.2005)
filed on behalf of the First Respondent, the explanation given for the
continuation of bank guarantees even after full recovery of the advances is
that:
B
" ..... the petitioner (the Appellant) has been insisting on extension of
bank guarantees and threatened to encash them if they were not
extended .... Thus under petitioner's threat of encashment of the bank
guarantees, and in the hope of amicably settling the issue with the
petitioner, the first respondent (sic) felt compelled to extend the bank
c guarantees. " 12
In our view, this is an unsatisfactory explanation in the circumstances
of the case and in any event, this explanation neither establishes "egregious
fraud" by the Appellant nor creates a situation of "irretrievable injury".

D The Fourth Bank Guarantee
Finally, Mr. Sorabjee tried to intervene in the fourth bank guarantee
(No.29[/99 dated 23.3.2000) and contended that this was the only bank ..
guarantee intended to secure "due and faithful performance of the contract".
He further urged that the performance had been duly satisfied arid, therefore,
E there was no warrant for calling this bank guarantee. Mr. Sorabjee turned to
a certificate issued by M/s Godavari Sugar Mills Ltd. (dated 18.3.2003) to
contend that there had been due and satisfactory performance of the contract.
We are, however, not impressed with Mr. Sorabjee's argument because the
evidence on record is precisely to the contrary. In fact, the certificate, in
terms, says that there was a technical defect found:
F
" .... for which correction will be done by Fenner representative (sic)
as assured by him. After completion of all those points further tests
can be carried out."
Accordingly, we are prima facie not satisfied that performance had
G been duly and satisfactorily certified. Under the terms of the "wrap-around
agreement", the Appellant was entitled to encash all or any of the bank
guarantees for breach of the First Respondent's obligations under any one of
the contracts. In our view, it is the case of the Appellant that ther2 was no

"Vide paragraph 11 of the Additional Affidavit filed on behalfofthe First Respondent (dated
H I LI l.2005).
, BSES LTD. v. FENNER INDIA LTD. [SRIKRISHNA. J.] 59
satisfactory performance of the contract, as a result of which, the Appellant A
't' was justified in encashing the concerned bank guarantee. Indeed, as per the
· terms of the bank guarantee itself, the Appellant is the best judge to decide
as to when and for what reason the bank guarantees should be encashed.
Further, it is no function of the Second Respondent-Bank, nor of this Court,
to enquire as to whether due performance had actually happened when, under B
the terms of the guarantee, the Second Respondent-Bank was obliged to
make payment when the guarantee was called in, irrespective of any contractual
dispute between the Appellant and the First Respondent. Indeed, in similar
circumstances, this Court in General Electric Technical Services Company
Inc. v. Punj Sons (P) Ltd., 13 held:
" ... the Bank must honour the bank guarantee free from interference c
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, the court
should interfere. The nature of the fraud that the courts talk about is
fraud of an "egregious nature as to vitiate the entire underlying D
transaction". It is fraud of the beneficiary, not the fraud of somebody
else." 14
This was also a case where, after having recovered certain amount from
the running bills, a call was made on the bank guarantee in respect of the full
guaranteed amount. In an observation with direct relevance for the present E
case, this Court pointed out that the bank was not concerned with the
outstanding amount payable under the running bills:
"The right to recover the amount under the running bills has no
relevance to the liability of the Bank under the guarantee. The liability
. ofthe Bank·.remained intact irrespective of the recovery of mobilisation p
advance or the non-payment under the running bills. The failure on
the part of.. ...(the Beneficiary)to specify the remaining mobilisation
advance in the Jetter for encashment of bank guarantee is of little
consequence to the liability Qf the bank under the guarantee." 15
lrre"fi.ie.vable Injury
G
As we have stated repeatedly, the First Respondent can succeed only if
"[199114 sec 230.

• -~ "Ibid. at p. 237 (paragraph 9.) per K. Jagannatha Shelly, J See also, UP. Cooperative
Federation Ltd. v. Singh Consultants and Engineers (P) Ltd.. (1998] 1 SCC at p. 189
(paragraph 28). H
''Ibid, at p. 238 (paragraph) 10, per K. Jagannatha Shelly. J.
60 SliPRE\1E l'Ot:RT REPORTS [2006 J 2 S.C.R.

A the case can be brought under the two accepted exceptions to the general rule
against intervention. Evidently. there is no ··egregious fraud'' so as to fall
within the first exception. Hence, only one more point remains: whether
1
encashment of the guarantees will create special equities (in particular,
"irretrievable injury") in favour of the First Respondent? We are not satisfied
B on facts that such is the present situation.

There is no dispuk that arbitral proceedings are pending. Jn fact, we
were shown that one of the disputes referred to arbitration is whether the
bank guarantees are null and void. Further, one of the substantive prayers in
the arbitration made on behalf of the First Respondent, is to make an award
C declaring the four bank guarantees unenforceable, illegal, void and liable to ,.
be discharged. Further, there is also a prayer for permanent injunction to
restrain the Appellant from encashing the bank guarantees. Therefore, since
this prayer is already pending before the Arbitral Tribunal, we see no situation
of "irretrievable injustice" if, at the present moment, the Appellant is allowed
to encash the bank guarantees. For justice can always be rendered to the First
D Respondent. if he succeeds before the Arbitrators. Nor do we see any special
equity in favour of the First Respondent, when there is in fact a dispute that
performance was prima facie not satisfactory, which enabled the Appellant
to encash all or any of the four bank guarantees.

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

The appeal is accordingly allowed with costs quantified at Rupees
G Twenty Thousand.
B.S. Appeal allowed.

... .