Holding

A bank guarantee payable on demand may be invoked irrespective of pending arbitration, and the injunction restraining such invocation was unjustified.

Summary

The appellant, National Thermal Power Corporation Ltd., entered into a contract with Flowmore Private Ltd. for the supply of pumps and related equipment, under which Flowmore furnished five bank guarantees payable on demand. Disputes arose and the parties referred the matter to arbitration; during the pendency, the appellant invoked three of the guarantees, but Flowmore obtained an injunction under Section 41 of the Arbitration Act, 1940 restraining the appellant from encashing them. The Delhi High Court granted the injunction, and the appellant appealed. The Supreme Court held that a demand guarantee is unconditional and may be invoked irrespective of any arbitration proceedings, and that the High Court was not justified in restraining the realisation of the guarantees. It further found no ground for claiming that the guarantees were not properly invoked or that invoking them would cause irretrievable injustice. Consequently, the injunction was vacated and the appeals were allowed.

Issues considered

Whether a bank guarantee payable on demand can be invoked while arbitration proceedings are pending.
Whether the High Court was justified in granting an injunction under Section 41 of the Arbitration Act, 1940 to restrain the appellant from encashing the guarantees.
Whether the bank guarantees were properly invoked in accordance with their terms.

Legislation cited

Arbitration Act, 1940s. 28, s. 41

Subjects

bank guaranteedemand guaranteearbitrationSection 41injunctionperformance guaranteeirretrievable injusticecontract dispute

Judgment

...... ~

NATIONAL THERMAL POWER CORPORATION LTD. A
v.
MIS. FLOWMORE PRIVATE LTD. AND ANR.

MAY 8, 1995

[J.S. VERMA AND SUJATA V..MANOHAR, JJ.] B

Arbitration Act, 1940: Section 41.

Contract-Bank guarantees-Peiformance guarantees and guarantees
against advance-<Juarantees payable on demand-:Dispute between par- c;:
ties-Arbitration proceedings-Non-invokation of guarantees by owner during
the proceedings-Conduct' of party in renewing the guarantees from time to
time-Held no ground for preventing the beneficiary from invoking the guaran-
_,, tees.

,... Bank Guarantee-Clause that demand by beneficiary shall be bind- D
ing-Effect of
.....
In a contract between the appellant and the respondent, the latter
furnished five bank guarantees in favour of the appellant all of which were
payable on demand. Out of five, one of the guarantees contained an express
E
clause that any demand made by the owner shall be conclusive and binding
on the bank notwithstanding any difference between the parties or any
dispute pending before any court, Tribunal, Arbitrator or any other
authority. Disputes having arisen between the parties the matter was
referred for arbitration, and in view of these proceedings the appellant did
not invoke the bank guarantees while the respondent kept them alive by F
making necessary renewal from time to time. However, before the expiry
of the bank guarantees the appellant invoked three bank gnarantees but
on a petition filed by the respondent under Section 41 of the Arbitration
Act, 1940 a single judge of the High Court passed an injunction order
restraining the appellant from encashing the bank guarantees. The appeal
G
preferred before the Division Bench was dismissed.
-:-•
In appeal to this Court it was contended for the respondent that (i)
the bank guarantees were not properly invoked and (ii) the appellant was
precluded from invoking the bank guarantees because subsequent to in-
itiation of the arbitration proceedings the parties had proceeded on the H
29
30 SUPREME COURT REPORTS (1995] SUPP. I S.C.R.

A basis that the bank guarantees would not be invoked until the arbitration
a\.vard was made.

Allowing the appeals and oetting aside the injunction order passed
by the High Court, this Court

B HELD : 1. The High Court was not justified in issuing an order of
injunction to restrain the realisation of the bank guarantees by the appel-
lant. [35-F]

2. A bank guarantee which is payable on demand implies that the
C bank is liable to pay as and when a demand is made upon the bank by the
beneficiary. The bank is not concerned with any inter se disputes between the
beneficiary and the person at whose instance the bank had issued the bank
guarantee. All the bank guarantees invoked are payable on demand. There
is, therefore, no merit in the submission that the bank guarantees have not
been properly invoked. It is true that only one bank guarantee contains an
D express term to the effect that any demand made by the owner shall be
conclusive and binding on the bank. Nevertheless, this express term merely
reiterates the nature of a bank guarantee which is payable on demand being
made by the beneficiary of the bank guarantee. (35-B, 34-G, 35-A]

3. The fact that the respondent kept all the bank guarantees alive by
E
renewing them from time to time during the pendency of arbitration as well
as the fact that the appellant did not invoke the bank guarantees while the
arbitration was in progress cannot lead to the conclusion that the bank
guarantees cannot be invoked while the arbitration is pending. These cir-
cumstances do not constitute a bar on the right of the appellant to encash
F the bank guarantees. There is also no circumstance pointed out which
would result in any irretrievable injustice to the respondent. [35-C to E]

Itek Co!poration v. 77ie First National Bank of Boston Etc., 566 Fed.
Suppl. 1210, referred to.

G Svenska Handelsbanken v. Ms. Indian Charge Chrome and Ors.,
[1994] 1 S.C.C. 502 and U.P. Co-operative Federation Ltd. v. Singh Consult-
ants & Engineers Pvt. Ltd., [1988] l SCR 1124, relied on.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 5437-38
H of 1995.
N.T.P.C. v. FLOWMORE[SUJATA V.MANOHAR,J.] 31

From the Judgment and Order dated 20.10.94 of the Delhi High A
Court in 0.M.P. No. 47 of 1993.

Shanti Bhushan and Prashant Bhushan for the Appellant.

F.S. Nariman, Sanjeev Puri and N. Ganpathy for the Respondents.
B
The Judgment of the Court was delivered by

MRS. SUJATA V. MANOHAR, J. Leave granted.

The appellant had entered into a contract with respondent No. 1 on
18.1.80 under which respondent No. 1 had agreed to supply to the appellant C
pumps together with butterfly valves, motors etc. The terms of the contract
also contained an arbitration clause.

Jn connection with various payments made or to be made under this
contract, the first-respondent furnished to the appellant, inter alia, five
, . bank guarantees in favour of the appellant issued by the Canara Bank D
which are the subject-matter of dispute before us. These are : (1) a bank
guarantee dated 27.2.80 for Rs. 11,54,290, (2) a bank guarantee dated
26.7.86 for Rs. 85,000, (3) a bank guarantee dated 26.7.86 for Rs. 2,53,250,
(4) a bank guarantee dated 26.7.86 for Rs. 63,411.42 and (5) a bank
guarantee dated 26.7.86 for Rs. 3,79,875. While the first two bank guaran- E
tees are performance guarantees, the other three bank guarantees are to
secure the advances given by the appellant to the first-respondent to be
adjusted against payments to be made under the contact. All these bank
guarantees are payable on demand. Clause 1 of the bank guarantee dated
26.7.86 for Rs. 85,000 is as follows :-
F
"In consideration of the Owner having agreed to accept from
the contractor First Pump with Cast Iron Impeller temporarily in
lieu of Stainless Steel Impeller (to be replaced by the Contractor
with Stainless Steel Impeller by 31.12.86. We, Canara Bank, having
our Head Office at Bangalore-560 002 and Branch at F-19, Con-
naught Circus, New Delhi (hereinafter referred to as the "Bank" G
which expression shall unless repugnant to the context or meaning
thereof, (include its successors, administrators, executors and as-
signs) do hereby guarantee and undertake to pay the Owner imme-
diately on demand any or, all moneys payable by the Contractor to
the extent of Rs. 85,000 (Rupees Eighty five thousand only) at any H
A
32 SUPREME C:OURT REPORTS [1995] SUPP. 1 S.C.R.

time upto 31-12-1986 without any reference to the Contractors. Any
such demand made by owner shall be conclusive and binding not-
-
withstanding any difference between the owner and the Contractor or
any dispute pending before any Court, Tribunal, Arbitrator or any
other Authority.
B The Bank agrees that the Guarantee hereinafter contained shall
continue to be enforceable till the sum due to the Owner or till
the Owner discharges this Guarantee."

(Underlining ours)
c The other four bank guarantees do not contain such an express clause to
the effect that the demand made by the beneficiary shall be binding. They
all, however, provide that the Canara Bank "do hereby guarantee and
undertake to pay the owner on demand any and all monies payable by the
contractor by reason of any breach'' of the terms of the contract.
D
There were disputes between the parties in respect of the supply of
pumps under the contract. The appellant by its letter dated 15th of March,
1990 addressed to the first-respondent demanded from the first-respondent
payment of a sum of Rs. 13,22,466.80, being the net recovery which the
appellant was entitled to make from the first-respondent as per the par-
E
ticulars set out in that letter. The appellant called upon the first-respondent
to pay the said amount on or before 25.3.90 failing which they would invoke
the above bank guarantees without any further notice.

On 11.6.90 the first-respondent invoked the arbitration clause under
F the contract and appointed his Arbitrator. The appellant thereafter also
appointed its Arbitrator. The Institute of Engineers, India appointed a
third Arbitrator. The disputes between the parties were referred to arbitra-
tion. In view of the arbitration proceedings the appellant did not realise
the bank guarantees while the first-respondent kept the bank guarantees
G alive by renewing them from time to time. The time for making the award
expired in January 1992. As the appellant declined to extend the time for
making the award, an application under Section 28 of the Arbitration Act
for extending the time for making the award is filed by the first-respondent
and is pending before the Delhi High Court.

H The Bank guarantees were about to expire on 31st March, 1993.
N.T.P.C. v. FLOWMORE [SUJATA V. MANOHAR,J.] 33
. Hence the appellant by its letters all dated 22.3.93 addressed to the Canara A
Bank invoked the bank guarantees for Rs. 11,54,290 and Rs. 85,000. The
appellant also partially invoked the bank guarantee for Rs. 3,79,875 by
· demanding form the Canara Bank payment of a sum of Rs. 2,30,910 under
the said bank guarantee. In respect of the remaining two b~nk guarantees
and the balance amount under the partially invoked bank guarantee the
B
appellant called upon the Canara Bank to extend the validity period of the
bank guarantees by a further period of six months failing which its letters
_}
should be treated as invocation of the guarantees in question and it
demanded payment of those guarantee amounts also. As the Canara Bank
objected to partial invocation of the bank guarantee for Rs. 3,79,875, the
appellant by its letter dated 26th of March, 1993 invoked the bank guaran- c
tee for Rs. 3,79,857 also in full.

On 26th March, 1993 the first-respondent filed a petition before the
Delhi High Court under Section 41 of the Arbitration Act seeking an
injunction to restrain the present appellant from invoking the guarantees
D
and the Canara Bank from remitting the amounts under the bank guaran-
tees to the appellant. A Learned Single Judge of Delhi High Court by his
order dated 20.10.94 granted an injunction restraining the appellant from
encashing the bank guarantees. An appeal filed by the first-respondent
before the Division Bench of the Delhi High Court was dismissed by the
Delhi High Court on the ground that an appeal was not maintainable E
against an order passed in exercise of power under Section 41 of the
Arbitration Act read with the second Schedule.

The present appeals are filed from these judgments and orders of
the Delhi High Court. The question of jurisdiction of the Division Bench F
of the Delhi High Court to entertain an appeal from an order of a Single
Judge of the High Court granting an injunction under Section 41 of the
Arbitration Act, need not detain us when we are examining the order of
the learned 'Single Judge under Article 136 of the Constitution of India,
an appeal from that order having been dismissed. On merit, the order of
injunction issueµ by a learned Single Judge of the Delhi High Court cannot G
~ ''l ..
be sustained. In the case of Svenska Handelsbanken v. M/s. Indian Charge
Chrome and Ors., (1994] 1 SCC 502, a Bench of three Judges of this Court
has, while dealing with performance guarantees and guarantees against
advances, observed that looking to the obligation assumed by the bank
under such guarantees or letters of credit, the bank cannot be prevented H
34 SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R.

A by the party at whose instance the guarantee or letter of credit, was issued,
from honouring the credit guaranteed. Since the bank pledges its own
credit involving its reputation, it has no defence except in the case of fraud
or irretrievable injustice. Fraud must be of an "egregious nature" so as to
vitiate the entire underlying transaction. While irretrievable injustice
should be of the kind arising in an irretrievable situation which was referred
B to in the U.S. case of Itek Corporation v. The First National Bank of Boston
etc., 566 Fed. Supp. 1210. The irreparable harm should not be speculative. (
It should be genuine and immediate as well as irreversible - a kind of
situation which existed in the case of Itek Corporation (supra) where, on
account of the revolution in Iran the American Government had cancelled
C all export contracts to Iran and had blocked all Iranian assets within the
jurisdiction of the United States. Fifty two Americans had been taken
hostages in Iran. In this situation the Court felt that the plaintiff had no
remedy at al and the harm to him would be irreparable. This kind of a
situation is not a likely situation. This Court in the case of Svenska Hand-
D elsbanken (supra) has cited with approval the observations of this Court in
the court case of U.P. Cooperative Federation Ltd. v. Singh Consultants &
Engineers Pvt. Ltd., [1988] 1 SCR 1124 to the effect that the Court should
not lightly interfere with a performance bond or guarantee unless there is
fraud of the beneficiary and not somebody else.

E In the present case Mr. Nariman, leani~d counsel for the first-
respondent has attempted to justify the order of injunction issued by the
Delhi High Court on two grounds; (1) that the bank guarantees were not
invoked in terms of the bank guarantees in question, except for the bank
guarantee of Rs. 85,000 which, he conceded, was invoked in terms of that
F bank guarantee. (2) After the arbitration clause was invoked on 11th of
June, 1990 and the Arbitrators were appointed by the parties in September
and December, 1990, the parties had proceeded on the basis that the bank
guarantees would not be invoked until the arbitration was over and award
made. Hence by its own conduct the appellant had precluded itself from
invoking the bank guarantees.
G
Both these submissions cannot be accepted. It is true that the bank
guarantee of Rs. 85,000 contains an express term to the effect that any
demand made by the owner shall be conclusive and binding on the bank
notwithstanding any difference between the Owner and the Contractor or
H any dispute pending before any Court, Tribunal, Arbitrator or any other
N.T.P.C. v. FLOWMORE [SUJATA V. MANOHAR, J.] 35

Authority. Nevertheless, this express term merely reiterates the nature of A
a bank guarantee which is payable on demand being made by tlie
beneficiary of the bank guarantee. A bank guarantee which is payable on
demand implies that the bank is liable to pay as and when a demand is
made upon the bank by the beneficiary. The bank is not concerned with
any inter se disputes between the beneficiary and the person at whose B
instance the bank had issued the bank guarantee. All the three bank
guarantees which have been invoked are payable on demand. There is,
therefore, no merit in the submission that the bank guarantees have not
been properly invoked.

The second submission relates to the conduct of parties. Learned C
counsel for the first-respondent has relied upon the fact that the first-
respondent kept all the bank guarantees alive by renewing them from time
to time during the pendency of arbitration and on the fact that the
appellant did not invoke the bank guarantees while the arbitration was in
progress. Neither of these two circumstances can lead to the conclusion
that the bank guarantees cannot be invoked while the arbitration is pend- D
ing. The bank guarantees are unconditional and payable on demand. The
circumstances pointed out by learned counsel for the first-respondent do
not constitute a bar on the right of the appellant to encash the bank
guarantees. In the present case there is also no circumstance pointed out
which would result in any irretrievable injustice to the first-respondent of E
the kind referred to in the case of Itek Corporation (supra) if the bank
guarantees are realised.

In the premises, the Delhi High Court was not justified in issuing an
order of injunction to restrain the realisation of the bank guarantees by the
appellant. The appeals are, therefore, allowed. The order of the Delhi High F
Court dated 20.10.94 is set aside and the order of injunction is vacated.
The first- respondent shall pay to the appellant the costs of the appeals.

T.N.A. Appeals allowed.