Holding

The bank guarantee is unconditional and irrevocable; the appellant may invoke it on demand, and an injunction restraining its encashment is unavailable absent proof of fraud or irretrievable injury.

Summary

The appellant, a Karnataka co‑operative sugar society, contracted a respondent to design, supply, erect and commission a sugar plant, with the respondent furnishing a bank guarantee. The guarantee stipulated that the bank would pay the appellant on demand without demur, and the appellant alone would decide if the guarantee was payable, irrespective of any dispute. The appellant invoked the guarantee alleging failure by the respondent to conduct trial tests and commission the plant. The respondent sought an injunction under Section 9 of the Arbitration and Conciliation Act, 1996, claiming the guarantee was conditional and its invocation was fraudulent. The Supreme Court held that the guarantee was unconditional and irrevocable, that the bank must honour it on demand, and that an injunction could be granted only on grounds of fraud or irretrievable injury, which were not established. Consequently, the High Court’s injunction was set aside and the appeal was allowed.

Issues considered

The nature of the bank guarantee: whether it is conditional or unconditional.
Whether the appellant can invoke the guarantee despite disputes over contract performance.
Whether an injunction can be granted to restrain the encashment of the guarantee under Section 9 of the Arbitration and Conciliation Act, 1996.
The applicability of the fraud and irretrievable injury exceptions to restraining a bank guarantee.

Legislation cited

Arbitration and Conciliation Act, 1996s. 9

Subjects

bank guaranteeunconditional guaranteeinjunctionArbitration and Conciliation Actfraudirretrievable injurycontract breachco-operative societiessugar plantcommercial law

Judgment

A MAHATMA GANDHI SAHAKRA SAKKARE KARKHANE
v
NATIONAL HEAVY ENGG. COOP. LID. AND ANR.

JULY 11. 2007

B [TRAUN CHATTERJEE AND B. SUDERSHAN REDDY, JJ.]

Bank guarantee-Stipulating that (i) guarantor undertook to pay the
specified amount without demur: (ii) it was not open to guarantor to know
C reasons or investigate or to go into merits ofdemands or question or challenge
demand or to know any facts affecting demand: (iii) purchasers had sole
discretion as to whether amount of bank guarantee had become recoverable
or sellers breached terms and conditions of agreement: (iv) right to recover
from guarantor was not to be suspended due to any dispute between seller
and purchaser-Deed of guarantee also making a reference to principal
D agreement between the parties-Injunction to prevent invocation of the
guarantee-Held, the sellers were entitled to the injunctiolr-Graund that
there was a dispute with the purchaser could not be allowed as that would
make clause to that effect in bank guarantee meaningless-Mere fact that the
guarantee referred to principal agreement without referring to any sp(!cijic
E clause in preamble of deed of guarantee did not make the guarantee a
conditional one-As the guarantee was unconditional and irrevocable. it
was not open to bank to raise any objection whatsoever to pay amounts
thereunder-It was more so as no factual foundation had been laid in
pleadings regarding allegatirn of fraud and how irreparable loss would be
caused in case the guarantee was cncashed.
F
Appellant invited tenders for expanding capacity of their sugar factory.
They accepted offer of the respondent undertaking to design. procure
manufacture, supply transport and deliver at the site and to do the supervision
of erection and commissioning of the Sugar Plant and Machinery in
G conformity with the agreed specifications. In terms of the agreement between
them, the respondent furnished a bank guarantee and appellant on its part
released an amount of money to them. Clause I of the bank guarantee stated
that the Guarantor undertook to pay to the appellant within 30 days of demand,
without demur a sum not exceeding 3% of the contract price as the Appellant
may demand upon the failure of the supplier to conduct the trial test of the
H 274
M"8ATM" GA."-DHI SAHAKA...\ S~ARE KARAH"~E 1· ~ATIO'Al HE"\'Y ~GG CO-OP.LID
275
.,.._ sugar plant by the specified date and also upon the failure of the responde'1t A
to commission the Plant and Machinery before the specified date. Clause 2
thereof stated that the (i) Guarantor would pay to the appellant on demand the
sum without demur and without requiring the appellant to invoke any legal
remedy that may be available to them, it being understood (ii) the appellant
shall be the sole judge of and as to whether the amount of bank guarantee
has become reconrable from the respondent or whether the respondent have B
.., committed any breach(es) of the terms and conditions of the agreement between
them and the extent of losses, damages, costs, charges and expenses caused
~
to or suffered by or that may be caused to or suffered by purchasers from
titne to time shall be final and binding to the Guarantor (iii) the right of the
appellant to recover from the guarantor any amount due to the appellant under c
this guarantee shall not be affected or suspended by reasons of the fact that
any dispute or disputes have been raised by the respondent with regard to
their liability or that proceedings are pending before any tribunal
Arbitrator(s) or court with regard thereto or in connection therewith (iv) the
guarantor shall immediately pay the aforesaid guaranteed amount to the
·• appellant on demand and it shall not be open to the Guarantor to know the D
~ reasons of or to investigate or to go into the merits of the demands or to
question or challenge the demand or to know any facts affecting the demand,
(v) it was not open to the guarantor to require the proof of the liability of the
respondent to pay the amount, before paying the sum demanded under clause
1 above (vi) the invocation of the guarantee shall be by a letter signed by the E
appellant and countersigned by the Commissioner of Sugar.

It is the case of the appellant that the trial crushing did not start on the
stipulated date and when commenced subsequently, had to be stopped due to
defects in the turbo alternator. Therefore, they wrote to the respondent
-- 1 regarding non-supply, defective erection and non-commissioning of the plant F
by them, and also relied upon a detailed report of the consultants to the project
in support thereof. Thereafter, they invoked the bank guarantee furnished by
the respondent and sent a letter to the Commissioner of Cane Development
and Director of Sugar to counter sign the invocation.

The case of the respondent is that the project fell into rough weather G
purely on account of the inability of the appellant to arrange the requisite
--~:(
funds. The bank guarantee is a conditional one and unless the conditions
precedent for its enforcement is satisfied the appellant cannot invoke it. It is
on this ground they filed Misc. Petition under Section 9 of the Arbitration
H
276 SUPREME COURT REPORTS (2007] 8 S.C.R.

A and Conciliation Act, 1996 seeking injunction against the appellant
restraining it from enchasing the bank guarantee. )

The trial court dismissed the application. It concluded that invocation
of the bank guarantee and its encashment by the appellant was neither
fraudulent nor untenable and further held that the respondent failed to prove
B that there will be irretrievable injustice in case bank guarantee is invoked.
Aggrieved thereby, the respondent appealed to the High Court. The High Court
allowed it and granted injunction restraining the appellant from encashing
the bank guarantee. It held that (i) the bank guarantee appeared to be
conditional; (ii) there was delinry, erection and commissioning of plant, and
C the invocation of the bank guarantee was fraudulent; (iii) the invocation of
the bank guarantee without informing to the bank as the fact of alleged breach
of agreement itself amounted to fraud; (iv) the l~tter invoking the bank
guarantee has not been countersigned by the prescribed authority. Hence the
present appeal

D Appellant contended that (i) the bank guarantee was an unconditional
one and the bank giving such a guarantee was bound to own it irrespecti,·e of
any dispute raised by the respondent; (ii) their right to invoke it cannot be
questioned except on the ground of fraud or irreparable injury or irretrievable
injury, which the respondent failed to make out

E Allowing the appeal, the Court

HELD: t. Clauses 1and2 of the guarantee executed by the banker in
favour of the purchaser are required to be read together. The respondent
cannot be allowed to contend that there is a dispute as to whether it had failed
to conduct the trial test of the sugar plant by 24th July, 2003 and therefore
F bank guarantee cannot be in\"oked. The acceptance of the argument would make
Clause 2 of the bank guarantee totally meaningless and inoperative.
(Para 19) (286-A-B)

2. Mere fact that the bank guarantee refers to the principal agreement
G without referring to any specific clause in the preamble of the deed of
guarantee does not make the guarantee furnished by the bank to be a
conditional one. What is relevant, therefore, is the terms incorporated in the
guarantee executed by the bank. On careful analysis of the terms and
conditions of the guarantee, it is found to be an uncondition~I one. The
respondent, therefore·, cannot be allowed to raise any dispute and prevent the
H
appellant from encashing the bank guarantee. (Para 291 (290-D, E, GI A
3.1. The \'iew of the High Court is totally contrary to the terms and
conditions of the bank guarantee executed by the bank in favour of the
appellant. (Para 26( (289-BI

3.2. If the bank guarantee furnished is an unconditional and irrevocable B
one, it is not open to the bank to raise any objection whatsoenr to pay the
amounts under the guarantee. The person in whose favour the guarantee is
furnished by the bank cannot be prevented by way of an injunction in enforcing
the guarantee on the pretext that the condition for enforcing the bank
guarantee in terms of the agreement entered between the parties has not been
fulfilled. Such a course is impermissible. The seller cannot raise the dispute C
of whatsoever nature and prevent the purchaser from enforcing the bank
guarantee by way of injunction except on the ground of fraud and irretrie\·able
injury. (Para 2211287-D-E(

U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers D
(PJ Ltd, (19981 1 SCC 174; United Commercial Bank v. Bank of India and
Ors., (1981) 2 SCC 766 and General Electric Technical Services Company
Inc. v. Pun) sons (P) Ltd. and Anr., (1991 J 4 SCC 230, relied on.

4. No factual foundation as such has been laid in the pleadings as
regards the allegation of fraud. Io fact there is no serious allegation of any E
fraud except using the word "fraud". It is also not stated as to how irreparable
loss would be caused in case the appellant is allowed to encash the bank
guarantee. The only two exceptions, namely fraud and irretrievable injury
based on which injunction could be granted restraining encahsment of bank
guarantee are singularly absent in the pleadings. (Para 25( (288-F-G(
F
UP. State Sugar Corporation v. Sumac International Ltd, (1997] 1 SCC,
relied on.

CIVIL APPELLATE JURJSDICTION : Civil Appeal No. 2952 of2007.

From the Final Judgment & Order dated 17.12.2004 of the High Court G
of Karnataka at Bangalore in Miscellaneous First Appeal. bearing No. 6188
.- -. of2004.

S.S. Javali. B.M. Arun. B.K. Choudhary. Vikas Rojipura and E.C. Vidya
Sagar for the Appellant.
H
,.
)--
278 SUPREME COURT REPORTS [2007) 8 S.C.R.

A Jayant Bhushan. Manish K. Bishnoi and Madan Konde for the
Respondent.

The Judgment of the Court was delivered by

8. SUDERSHAN REDDY, J. I. Leave granted.
B
2. The appellant herein is a Co-operative Society registered under the
provisions of the Kamataka Co-operative Societies Act. 1959. It has established
a sugar factory at Hunji, Balki Taluk, Bidar District. Kamataka with a capacity
of2500 TCD per day with a provision to expand the same upto 4000 TCD per
day. The appellant had undertaken expansion of its sugar factory from 2500
C TCD to 4000 TCD crushing capacity per day and accordingly invited tenders.
The offrr of the first respondent which is also a Co-operative Society registered
under the Multi-State Co-operative Societies Act which is involved in supply,
erection and commissioning of Sugar Plants was accepted in the meeting of
the State Level Advisory Committee held on 10th August, 2000. The first
D respondent undertook to design. procure manufacture, supply transport and
deliver at. the site and to do the supervision of erection and commissioning
of the Sugar Plant and Machinery in conformity with the agreed specifications
vide agreement dated 1st November, 2000. The clauses of the agreement dated
1st November, 2000 which are relevant to be noticed are reproduced as under:

E "Clause 5 : Supply, Delivery and Supervision of Erection and
Commissioning.

Clause 5.1 : The Seller agrees to supply plant and machinery so that
the supply and erection of the plant and machinery is completed in
all respects and to the satisfaction of the Purchaser and the Sugar
F Plant and Machinery is Commissioned and made ready for commercial
production and use by 11th December, 2001.

8.0 TRIALS AND TAKE OVER :

8.1. As soon as the Plant is ready for commissioning after completion
G of the supply of plant and machinery and erection of the same to the
satisfaction of the purchasers. the sellers on getting information from
the erection contractor shall notify in writing to the purchasers
specifying the date and time, at least 30 days before the seilers intend ~- ...._
to carry out steam and water trials to enable the purchasers to arrange
for boiler feed water, fuel, operational staff and workmen and other
H
MAHATMA GANDHI SAHAKRA SAKKAREKARKHANE v. NATIONAL HEAVYENGG. CO-OP. LTD.(B: SUDERSHAN REDDY. I.I 279

facilities. Unless otherwise agreed by the purchasers and the sellers, A
,;. the sellers shall begin the said trial on the date and time so notified.
>-
Provided that the water, steam and vacuum trials shall be conducted
by the sellers for a period of one month before the commissioning of
the plant and machinery after complete delivery and erection to the
entire satisfaction of the purchasers. B
8.2. After the said steam, water and vacuum trials have been completed
.... to the entire satisfaction of the purchasers and on their furnishing a

- certificate to the effect that all the plant and machinery mentioned in
Annexure I to III have been inspected and approved by the Inspection i
Agency, delivered as per detailed parts list of materials referred tol
I
c
above, erected and commissioned under the supervision of the sellers
1

according to the terms and conditions of this agreement, the sellers
guarantees given in pursuance of clause 17 .2 shall be deemed to have
been fulfilled."

3. Bank guarantees were required to be furnished by the respondent in D
terms of the agreement. The case of the appellant is that the first respondent
failed to commission the plant in terms of the agreement. The appellant sent
a notice dated 26th April, 2003 duly putting the respondent on notice of its
failure to commission the plant by the scheduled date i.e. I Ith February, 2001
and other revised dates, i.e., 26th January, 2002, 25th November, 2002, 28th E
February, 2003 and 25th April, 2003. Thereafter, a meeting was held between
the parties at the intervention of the Government of Kamataka on l st July,
2003 where both the parties had agreed as hereunder:

(i) 1st respondent shall furnish bank guarantee for Rs.92.40 lakhs
towards delivery and commissioning of the plant valid upto F
28.02.2004.(Clause 1).

(ii) Simultaneously, with the receipt of the aforesaid bank guarantee,
the petitioner shall release Rs.140.41 lakhs to the 1st respondent
(Clause 4)
G
(iii) 1st respondent will start trial run to crush 500-1000 tonnes of
sugarcane within 20 days from the date of receipt of Rs.140.41 lakhsl
as aforesaid (Clause 6).
,... ·~
(iv) The plant will be fully commissioned by November/December 2003

H
280 SUPREME COURT REPORTS [2007] 8 S.C.R.

A (Clause 7).
-<
...
4. The first respondent in tenns of the agreement reached between the
parties furnished a bank guarantee for a sum of Rs. 92.40 lakhs dated 4th July,
2003. The appellant on its part released Rs. 140.41 lakhs on $th July, 2003.

B 5. The case of the appellant is that the trial crushing did not start even
as on 28th I 29th July, 2003; no doubt, the trial crushing commenced on 26th
November, 2003 but the same had to be stopped on 22nd December, 2003 due
to defects in the turbo alternator. The appellant addressed letter dated 27th >-
December, 2003 to the respondent regarding non-supply, defective erection
and non-commissioning of the plant by the first respondent. It is not necessary
---
c to notice further details in this regard as there is any amount of controversy
between the parties as regards non-compliance with the tenns and conditions
of the agreement. Each is accusing the other of breach o~ tenns of agreement.
The appellant, however, relied upon the detailed report dated 16th January,
2004 furnished by National Federation of Co-operative Sugar Factories Ltd.,
D the consultants to the project, in support of the plea that the trial run was
unsuccessful and incomplete. The appellant stated on account of the teething ,_
problems the appellant could not undertake the crushing of sugarcane leading
to heavy Yosses.

6. Be it as it may, the Board of Directors of the appellant Society
E resolved in its meeting dated 13th March, 2004 to invoke the bank guarantee
of Rs. 92.40 furnished by the first respondent. The appellant accordingly sent
a letter requesting the Commissioner of Cane Development and Director of
Sugar to counter sign the invocation letter on the ground that the respondent
herein had failed to commission the plant as agreed.

F 7. The case of the respondent in nut shell is that the project fell into
rough weather purely on account of the inability of the appellant-Society to
arrange the requisite funds. It is however admitted that after-exchange of
several acrimonious letters and notices, the parties finally agreed on a final
course with a revised time frame to erect and commission the plant in a
G meeting held or. 1st July, 2003. It is pursuant to that agreement the respondent
furnished the bank guarantee in question and the appellant released the
amount of Rs.140.41 lakhs on 5th July, 2003 and required the respondent to
implement the trial run by 25th J':lly, 2003. It is submitted that the contract
between the parties envisaged four different kinds of bank guarantees to
ensure particular set of obligations by the respondent. Clauses 16.4 and 17 .5
H
- _...; >-
MAHAlMAGANDHISAHAKRASAKKAREKARKHANE v. NATIONAL HEAVY ENGG. CO-OP. LID.(B. SUDERSHAN REDDY. I.)

deal with the bank guarantees for timely delivery of civil drawings and clause
17.6 deals with bank guarantee for advance payments; for timely delivery and
commissioning of plant is dealt with clauses 8, 16, 16.3, 17.4,17.9 and for
ensuring perfonnance of the plant is dealt with by clauses 9, 16.2, 17.3 and
281

A

17.9.

8. It is the case of the respondent that the trial run of plant and B
machinery was arranged during 25th July, 2003 and 2nd August, 2003 and the
..
-
...
...
trial run was found satisfactory. The actual commissioning was to take place

to the respondent after continuous crushing of the sugarcane for about. a
·'
from 21st July, 2003 but has actually started on 27th November, 2003. According

month all of a sudden there was a problem in the working of the machinery
which was attended to on the spot. We do not propose to notice furt~er
c
details in this regard for each one of the parties is blaming the other. There
is any amount of controversy between the parties in this regard and it wou.ld
not be proper to make any comment at this stage since the parties are already
before the Arbitrator who is required to decide the dispute on merits jn
accordance with law. The main contention of the respondent is that the D
--r
appellant raised false and untenable claims only with a view to avoid or
~
postpone the payment of huge amount of Rs. 327 lakhs due and payable to
the respondent. It is under those circumstances the respondent got issued
notice to the appellant to refer the dispute for resolution through arbitration.
The appellant instead of responding to the notice resolved to invoke the bank
I E
guarantee with a malafide intention of depriving the respondent of its legitimate
right to receive certain amounts.
i
9. The case of the respondent is that the bank guarantee is a conditiorial
one and unless the condition precedent for enforcement of the bank guarantee
is satisfied the appellant cannot be permitted to invoke the bank guarantee. F
It is on that ground the respondent filed Misc. Petition Under Section 9 of
the Arbitration and Conciliation Act, 1996 seeking injunction against the
appellant restraining it from encashing the bank guarantee No.56/03 dated 4th
July, 2005.

10. The trial court after an elaborate consideration of the matter dismissed G
the application filed by the respondent herein and refused to grant any
injunction restraining the appellant from encashing the bank guarantee as
>" prayed for by the respondent. The trial court came to the conclusion that
invocation of the bank guarantee and its encashment by the appellant cannot
be held to be fraudulent or untenable and further held that the respondent
H
')__
(

282. SUPREME COURT REPORTS [2007] 8 S.C.R.
, .
A has failed to prove that there will be irretrievable injustice in case bank -~ "-...
guarantee is invoked.

11. Being aggrieved by the order passed by the trial court rejecting the
injunction application, the respondent herein filed MFA No.6188/04 challenging
the legality and the correctness of the order passed by the trial court. The
B High Court upon reappreciation of the evidence and material available on
record reversed the order passed by the trial court and accordingly granted
injunction restraining the appellant herein from encashing the bank guarantee. f
The appellate court has taken the view that the bank guarantee appears to '-_

be a conditional one and "under the documents the guarantor is entitled to
c know that the appellant has failed to conduct the trial test and the
commissioning of the project as agreed." The appellate court however also
took a strange view that the invocation of the bank guarantee without informing
to the bank as to the fact of alleged breach of agreement itself amounts to
l
i;_·
\

fraud. The Appellate Court also took the view that the letter invoking the
bank guarantee should be counter signed by the Commissioner of Sugar,
D Bangalore, but the same has been signed by some other authority and not
by the Commissioner of Sugar. 'r

12. Being aggrieved by the orders passed by the High court restraining
the appellant from invoking the bank guarantee the preS'ent appeal has been
preferred.
E
13. Shri S.S. Javali, learned senior counsel, submitted that the bank
guarantee. executed by the respondent herein in favour of the appellant is an
unconditional one. The bank giving such a guarantee is bound to own it
irrespective of any dispute raised by the respondent. T,he appellant's right to
F invoke the bank guarantee cannot be questioned except on the ground of
fraud or irreparable injury or on the ground that invoking the bank guarantee y
would.cause irretrievable injury. The respondent failed miserably to make out
any case for grant of injunction. The High Court's order suffers from incurable
infirmities was the submission.

G 14. Shri Jayant Bhushan, learned senior counsel, appearing on behalf of
the first respondent supported the judgment of the High Court and submitted
that the bank guarantee in question was a conditional bank guarantee to
ensure test trials and commissioning within the specified time periods and
since these events have already been ensued the bank guarantees cannot be
encashed.
H
MAllAThlA GANDHI SAHAKRA SAKKARE KARKHANE •· NATIONAL HEAVY ENGG. CO-OP. LTD.fB. SUDERSHAN REDDY. lf 283
15. We have carefully considered the rival submissions made during lhe A
course of the hearing of the appeal. We have perused the entire material
available on record including the orders passed by the trial court as well as
the High Court.

16. The main question that arises for our consideration is whether the
bank guarantee· in question is a conditional one or not. Before we proceed B
further it would be appropriate to have a look at the relevant clauses of the
agreement dated 1st November, 2000:

"16.3.1 : If the sellers fail to commission the plant according to the
schedule of commissioning which is to be worked out mutually to C
enable the commissioning of the plant within the schedule time, fixed
or extension allowed by the purchasers, if any, thereof the sellers shall
pay penalty by an amount equal to 1/2% (Half percent) of the contract
price for every completed week of delay, but not exceeding 3% of the
total contract price.
D
16.3.2 : To secure the obligations under clause 16.3.1, the sellers shall
furnish to the purchac;ers,bank/insurance guarantees in the form set
out by the purchasers as provided in clause 17.4 hereinafter.

17.9 : The bank/insurance guarantee (s) required to be furnished by
the sellers under the provisions hereof to secure the timely delivery, E
erection, commissioning, as well as for performance of the plant and
machinery supplied by the sellers or for any other purpose under the
provisions hereof shall be in the form of purchasers after mutual
discussions between the purchasers and sellers which form(s) shall
invariably include the provisions that the decision of the purchas:ers F
as to whether there has been any loss or damage or default and or
negligence on the part of the sellers will be final and binding on the
sellers, that the right of the purchasers shall not be affected or
suspended by reasons of the fact that any dispute or disputes have
been raised by the sellers with regard to their liability or tjrnt
proceedings are pending before any Tribunal, Arbitrator(s) or cdurt G
with regard thereto or in connection therewith, that the Guarantee
shall pay to the purchasers the sum under the guarantee(s) without
demur on first demand and without requiring the purchasers to invoke
any legal remedy that may be available to them, that it shall not be
open to the guarantee to know the reasons of or to investigate to' go H
)-.
284 SUPREME COURT REPORTS (2007) 8 S.C.R.

A into the merits of the demand or to question or to challenge the
deni_and or to know any facts affecting the demand or to require proof
of the liability of the sellers before paying the amount demanded by
the purchasers under the: guarantee (s). In case of invocation of any
bank guarantee by the purchasers, the same should be countersigned
by the Commissioner for Cane Development and Director of Sugar of •
B
the concerned State Government.

The Bank/Insurance guarantee or guarantees required to be furnished f
by the sellers under the provisions hereof to secure timely delivery, ..___
erection, commissioning as well as for performance of the plant and
c machinery supplied by the sellers or for any other purpose under the
provisions hereof shall be for such period as may cover the period of
complete supply, erection and commissioning and performance
respectively, as the case may be, as stipulated under the agreement.
If however, the period of agreement is extended due to Force Majeure
or sellers not fulfilling their obligations under the agreement or for any
D other reasons whatsoever, sellers shall have such guarantees extended
upto the corresponding extended period and failure of the sellers to y

do so will amount to a breach of the contract and in no case the
extension of the period of the contract shall be construed as waiver
of the right of the purchasers to enforce the guarantee.
E
17. The relevant portion of the bank guarantee is extracted herein below:

"Clause I : In consideration of the above premises, the Guarantor
hereby undertakes to pay to the purchasers within 30 days of demand,
without demur such a sum not exceeding Rs. 92,40,000/- (Rupees
F Ninety two lakhs forty thousand only), representing 3% of the contract
price as the purchasers -may demand upon the failure of the supplier
to conduct the trial test of the sugar plant by 24th July, 2003 and also
upon the failure of the sellers to commission the Project (Plant and
Machinery) before December 2003.
G 2. The Guarantor shall pay to the purchasers on demand the sum
without demur and without requiring the purchasers to invoke any
legal remedy that may be available to them, it being understood and
agreed FIRSTLY that the purchasers shall be the sole judge of and as
to whether the amount of bank guarantee has become recoverable ;<..-

H from the sellers or whether the sellers have committed any breach(es)
MAHATMA GANDHI SAHAKRA SAKKARE KAAKHANE v. NATIONAL HEAVY ENGG. CO-OP. LlD.(B. SUDERSHAN REDDY. J.( 285

,>
~
of the tenns and conditions of the said agreement and the extent of A
losses, damages, costs, charges and expenses caused to or suffered
by or that may be caused to or suffered by purchaser's from time, to
time shall be final and binding to the Guarantor and SECONDLY that
the right of the purchasers to recover from the guarantor any amount
due to the purchasers under this guarantee shall not be affected or
suspended by reasons of the fact that any dispute or disputes have B
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 amount to
the purchasers on demand and it shall not be open to the Guarantor c
to know the reasons of or to investigate or to go into the merits of
the demands or to question or 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 sellers to pay
the amount, before paying the sum demanded under clause I abtjve.
D
8. The invocation of this guarantee shall be by a letter as herein,
signed by the purchasers and countersigned by the Commissioner of
Sugar, Bangalore, Kamataka State."

l 8. A plain reading of Clauses (l) and (2) of the bank guarantee makes
it abundantly clear that the guarantor had undertaken to pay to the appellant E
within 30 days of demand, without demur such an amount not exceeding
Rs.92.40 lakhs. The sole discretion is conferred on the purchasers as to
whether the amount of bank guarantee has become recoverable from the
sellers or whether the sellers have committed any breach of the terms and
conditions of the said agreement. The right of the purchaser to recover from
F
the guarantor the guaranteed amount shall not be affected or suspended by
the reasons of the fact that any dispute or disputes have been raised by, the
sellers with regard to their liability or that the proceedings are pending before
any tribunal or court with regard thereto or in connection therewith.

19. However, Shri Jayant Bhushan, learned senior counsel submitted G
that the purchasers were entitled to invoke the bank guarantee and demand
the payment of money only upon the failure of the supplier to conduct the
,J .,,It- ..... trial test of the sugar plant by 24th July, 2003 and also upon the failu~e of
the sellers to commission the project before December, 2003. This condition
fonns an integral part of the bank guarantee was the submission. We find it
H
286 SUPREME COURT REPORTS (2007] 8 S.C.R.

A difficult to accept the submission. The guarantee executed by the guarantor
(PNB) in favour of the purchaser (appellant) ,cannot be dissected in the
manner suggested by the learned senior counsel for the respondent. Clauses
I and 2 of the guarantee executed by the banker in favour of the purchaser
are required to be read together. The respondent cannot be allowed to contend
B that there is a dispute as to whether it had failed to conduct the trial test of
the sugar plant by 24th July, 2003 and therefore bank guarantee cannot be
invoked. The acceptance of the argument would make Clause 2 of the bank
guarantee totally meaningless and inoperative. The guarantor essentially agreed
that the purchasers alone shall be the sole judge in the matter as to whether
the amount of bank guarantee has become recoverable from the sellers or
C whether the seller had committed any breach of the terms and conditions of
the agreement. The dispute, if any, between the parties with regard to the
liability in any proceedings either before the arbitral tribunal or court in no
manner affects the right of the purchaser to invoke the bank guarantee and
realise the guaranteed sum from the guarantor.

D 20. In UP.Cooperative Federation Ltd. v. Singh Consultants and
Engineers (P) Ltd, [1998] I SCC 174 the respondent therein entered into an
agreement with the appellant for constructing a Vanaspati manufacturing
plant for the latter. The contract required the respondent to furnish two bank
guarantees for proper construction and successful completion of the plant.
E The Bank of India executed two bank guarantees in favour of the appellant.
Under the terms of guarantee the bank undertook to make unconditional
payments on demand without reference to the respondent. The guarantees
also provided that the appellant would be the sole judge for deciding whether
the respondent had fulfilled the terms of the contract or not. Disputes arose
between the parties as to the erection and performance of the plant. The seller
F approached the civil court seeking injunction restraining the purchaser from
invoking the bank guarantee. The High Court, proceeding on the basis that
the injunction was sought not against the bank but against the appellant,
restrained the appellant from invoking the bank guarantee. This court after
elaborate consideration of the matter held :

G "...... commitments of banks must be honoured free from interference
by the courts. Otherwise, trust in commerce internal and international
would be irreparably damaged. It is only in exception case that is to
say in case of fraud or in case or irretrievable injustice be done, the
court should interfere."
H
MAHATMA GANDHI SAHAKRA SAKJWIE KARKHANE v. NATIONAL HEAVY ENGQ. CO-OP. LTD.(8. SUDERSHAN REDDY. I.( 287
.> '?-- 21. This court relied upon its own earlier decision in United Commercial A
Bank v. Bank ofIndia and Ors., [ 1981] 2 SCC 766 in which it is observed "that
a bank issuing or confinning a letter. of credit is not concerned with the
underlying contract between the buyer and seller. Duties of a bank under a
letter of credit are created by the documents itself." In General Electric
Technical Services Company Inc. v. Punj sons (P) Ltd and Anr., [ 1991] 4 SCC
230 this court observed " if the documentary credits are irrevocable and 'B
.,. independent, the Bank must pay when demand is made. Since the bank
_,It pledges its own credit in involving its reputation, it has no defence except
in the case of fraud. The Bank's obligation of course should not be extended
to protect the unscrupulous party, that is, the party who is responsible for
the fraud. But the banker must be sure of his ground before declining to pay. c
The nature of the fraud that courts talk about is fraud of a "erregious nature
as to· vitiate the entire underlying transaction." It is the fraud of the beneficiary
not the fraud of somebody else. The bank cannot be interdicted by the court
at the instance of purchaser in the absence of fraud or special equities in the
fonn of preventing irretrievable injustice between the parties.
D
-...' 22. In our considered opinion if the bank guarantee furnished is an
unconditional and irrevocable one, it is not open to the bank to raise any
objection whatsoever to pay the amounts under the guarantee. The person
in whose favour the guarantee is furnished by the bank cannot be prevented
by way of an injunction in enforcing the guarantee on the pretext that the
condition for enforcing the bank guarantee in terms of the agreement entered
E
between the parties has not been fulfilled. Such a course is impermissible. The
seller cannot raise the dispute of whatsoever nature and prevent the purchaser
from enforcing the bank guarantee by way of injunction except on the ground
of fraud and irretrievable injury.
F
23. In U.P. State Sugar Corporation v. Sumac International Ltd, (1997]
1 SCC 568 this court had laid down the principle as to the enforcement of the
bank guarantees as under :

"The law relating to invocation of such Bank Guarantees is by
now well settled. When in the course of commercial dealings an G
unconditional bank guarantee in terms is given or accepted, the
beneficiary is entitled to realise such a bank guarantee in terms thereof
...... ;;,,·
irrespective of any pending disputes. The bank giving such aguarantee
is bound to honour it as per its terms irrespective of any dispute
raised. by its customer. The very purpose of giving such a bank
H
\
+

288 SUPREME COURT REPORTS (2007) 8 S.C.R.
,') .,

A guarantee would otherwise be defeated. The courts should, therefore,
--<' <.-
be slow in granting an injunction to restrain the realization of such a
bank guarantee. The courts have carved out only two exceptions. A
fraud in connection with such a bank guarantee would vitiate the very
foundation of such a bank guarantee. Hence if there is a fraud of
which the beneficiary seeks to take advantage, he can be restrained
B from doing so. The second exception relates to cases where allowing
the encashment of an unconditional bank guarantee would result in
:I-
irretrievable hann or injustice to one of the parties concerned".
"'··-
24. We do not propose to burden this judgment of ours with various

c other authoritative pronouncements on this very subject.

25. In the present case the respondent in its application filed under
Section 9 of the Arbitration and Conciliation Act, 1996 in the district court,
Bidar mostly highlighted as to how the.very vital conditions of the agreement
have been breached by the appellant herein by not arranging the funds at the
D proper time. It is alleged that the appellant did not even complete their
obligation in respect of providing storage facilties for valuable goods etc. It r
is specifically alleged that: required funds were not available with the appellant. ....
On account of non availability of funds there were two halts of nine months
and five months during the execution of the project from 03.12.2001 to
14.08.2002 and from 14.08.2002 to 10.01.2003. It is further alleged that the
E appellant failed to arrange for all the pre-requisites. It is not necessary for the
purpose of disposal of this appeal to notice all the allegations and avennents
filed by the respondents except to note that the main thrust of the allegation
relate to alleged breach of the conditions of the agreement by the appella_nt.
It was further contended th 1t the bank guarantees were conditional bank
F guarantees and not unconditional. We have referred to the substance of the
'r ,
allegations only to highlight that no factual foundation as such has been laid
in the pleadings as regards the allegation of fraud. In fact there is no serious
allegation of any fraud except using the word "fraud". It is also not stated
as to how irreparable loss would be caused in case the appellant is allowed
to encash the bank guarantee. The only two exceptions, namely fraud and
G irretrievable injury based on which injunction could be granted restraining
encashment of bank guarantee are singularly absent in the pleadings. Once
it is held that the bank guarantee furnished by the banker is an unconditional
"];(,-......~/'
one, the appellant in our considered opinion cannot be restrained from
encashing the bank guarantee on the ground that a serious dispute had arisen
between the parties and on the allegations of breach of tenns and conditions
H
J
MAHAlMAGANDHI SAHAKRA SAKKARE KARKHANE "·NATIONAL HEAVY ENGCi CO-OP. LID.(B. SUDERSHAN REDDY. J.(
289

..> -..,.. of the agreement entered between the parties . A
26. The High Court in its judgment went to the extent of recording a
finding that it cannot be said that there was no delivery, erection and
commissioning of plant. The High Court also took the view that the appellant
has agreed to invoke the bank guarantee only in case of default on the part
of the respondent in delivery, erection, commissioning of the plant. This view B
of the High Court is totally contrary to the terms and conditions of the bank
guarantee executed by the bank in favou¥ of the appellant. It has been
--"' specifically agreed by the banker to pay the guaranteed amount to the appellant
on demand and " it shall not be open to the guarantor to know the reasons
of or to investigate or to go into the merits of the demands or to question
or challenge the demand or to know any facts affecting the demand." The
c
bank guarantee further makes it clear 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 sum demanded. In the process the High Court made the following
observations which in our considered opinion are totally untenable and
unsustainable being contrary to the terms and conditions incorporated in the D
bank guarantee. The High Court observed :
""(

"From the facts and circumstances narrated by the petitioner, it is
clear that the first respondent could not have invoked the bank
guarantee when the setting up of the machinery and commissioning
in accordance with the agreement and all these facts therefore show E
that the invocation of the bank guarantee was fraudulent." .

27. It is further held that since the appellant failed to give any information
to the bank as to the fact of any alleged breach of agreement in order to
invoke the bank guarantee itself amounts to fraud. We must however hasten
to add that the learned senior counsel appearing for the respondent did not
F
support this part of the judgment of the High Court.

28. However, Shri Jayant Bhushan, learned senior counsel appearing for
the respondents contended that invocation of the bank guarantee relating to
"delivery and commissioning of the plant" was wholly illegal and the High
G
Court was right in granting the injunction order relating to that guarantee. It
was submitted that the said bank guarantee could be invoked only on the
' ..._ ''<' failure of the respondent to commission the plant according to the schedule
of commissioning in terms of the relevant clauses of the principal agreement
entered into between the parties and since the conditions contemplated under
those clauses did not exist, the invocation of the guarantee by the appellant H
290 SUPREME COURT REPORTS (2007] 8 S.C.R.
_;_,

A itself is bad. -< ~

29. The learned counsel in support of his submission relied upon the
decision of this Court in Hindustan Construction Co. Ltd v. State of Bihar
& Ors., (1999) 8 SCC 436. This Court in Hindustan Construction Co. (supra)
having referred to the terms of clause (9) of principal contract between the
B parties therein came to the conclusion that the bank guarantee specifically
refers to the original contract and postulates that the obligations expressed
in the contract, are not fulfilled by HCCL, the right to claim recovery of the ;i-
~
whole or part of the "advance mobilisation" then alone the bank was liable
to pay the amount due under the guarantee to the Executive Engineer. The
c court found that the bank guarantee specifically refers to clause (9) of the
principal agreement and it is under those circumstances came to the conclusion
that the amount covered by the bank guarantee becomes payable and the
same could be invoked, only in the circumstances referred to in clause (9) of
the principal agreement. The bank guarantee executed by the bank in the
instant case in favour of the appellant herein does not contain any such
D clause. Mere fact that the bank guarantee refers to the principal agreement }--
without referring to any specific clause in the preamble of the deed of
y-
guarantee does not make the guarantee furnished by the bank to be a
conditional one. In the very said judgment this Court observed that "what is
important, therefore, is that the bank guarantee should be in unequivocal
terms, unconditional and recite that the amount would be paid without demur
E
or objection and irrespective of any dispute that might have cropped up or
might have been pending between the beneficiary under the bank guarantee
or the person on whose behalf the guarantee was furnished. The terms of the
bank guarantee are, therefore, extremely material. Since the bank guarantee
represents an independent contract between the bank and the beneficiary,
F both the parties would be bound by the terms thereof The invocation, >--'
therefore, will have to be in accordance with the terms of the bank guarantee,
or else, the invocation itself would be bad " What is relevant, therefore, is
the terms incorporated in the guarantee executed by the bank. On careful
analysis of the terms and conditions of the guarantee, we find the guarantee
to be an unconditional one. The respondent, therefore, cannot be allowed to
G raise any dispute and prevent the appellant from encashing the bank guarantee.

30. For all the aforesaid reasons, we hold that the respondent herein did
)(........_,
not make out any case for grant of injunction restraining the appellant herein
from encashing the bank guarantee.
H
/
MAHATMA GANDHI SAllAKRA SAKKARE KARKHANE v. NATIONAL HEAVY ENGG. CO-OI'. l ID.(B. SUOERSHAN REDDY. I. I 291

31. For the reasons stated above, the impugned judgment of the Appellate A
Court is set aside and the appeal is allowed.

32. Before parting with the judgment, it is made clear that the
observations, if any made, in this or~er shall have no bearing whatsoever
upon the dispute pending before the Arbitrator which is required to be
disposed of on its own merits uninfluenced by the observations, if any, made B
in this order.

33. No costs.

vs. Appeal allowed.

-·\ +- ,,,,