1996 (12) TMI 294 - SC - Companies Law

Supreme Court sets aside injunction on bank guarantees, emphasizing prompt honoring except in fraud or injustice

UP. State Sugar Corpn. Versus Sumac International Ltd.

The Supreme Court allowed the appeal, setting aside the High Court's judgment and vacating the injunction against the enforcement of the bank guarantees. ... Whether the respondent has committed any breach of the terms and conditions of the agreement? Held that:- Any scheme which the Board may frame under the said Act will be subject to this undertaking given by the appellant to set apart the amounts realised under the bank guarantees in question for meeting any validly adjudicated claims of the respondent against the appellant under or arising from the said contract. If any scheme is required to be framed, the Board shall take into account this undertaking while framing the scheme. As both sides are agreed that for a speedy resolution of their disputes they are willing to refer all their disputes under or arising from the said contract to the sole arbitration of Justice R.M. Sahai, a retired judge of this court. We accordingly refer all disputes between the parties under or arising from the contract to the sole arbitration of Justice R.M. Sahai (Retd.). The arbitrator may fix his remuneration in consultation with the parties. The parties shall obtain appropriate directions from the learned arbitrator in connection with the filing of claims, replies, etc., in accor-dance with law. Issues Involved:1. Agreement and obligations under the contract.2. Delay in completion of the project.3. Termination of the contract and invocation of bank guarantees.4. Legal principles governing the invocation of bank guarantees.5. Alleged fraud and irretrievable injustice.6. Reference to arbitration.Issue-wise Detailed Analysis:1. Agreement and Obligations under the Contract:The appellant, U.P. State Sugar Corporation, entered into an agreement with the respondent, Sumac International (P.) Ltd., on 2-8-1989, to design, prepare an engineering layout, and supply machinery for a sugar plant extension. The total contract price was Rs. 1,780 lakhs. The respondent was required to set up the plant for commercial production by 30-11-1990, with time being of the essence. The agreement required the respondent to provide five bank guarantees to secure timely delivery, performance, and advance payments.2. Delay in Completion of the Project:The project was not completed within the stipulated time. In a meeting on 1-10-1991, the completion time was extended to May 1992, but the respondent still did not complete the project. Subsequently, the State of U.P. decided to transfer the project to the joint sector, leading to the cancellation of the agreement by the appellant on 7-9-1995.3. Termination of the Contract and Invocation of Bank Guarantees:Following the contract's termination, the appellant sought a refund of the unutilized advance payment and invoked the bank guarantees to recover Rs. 3,14,78,093. The respondent filed a petition under Section 20 of the Arbitration Act for the appointment of an arbitrator and sought interim relief to stay the encashment of the bank guarantees. The Civil Judge dismissed these applications, but the High Court granted an injunction, which led to the present appeal.4. Legal Principles Governing the Invocation of Bank Guarantees:The court reiterated that an unconditional bank guarantee must be honored irrespective of any disputes between the parties. The bank is obligated to pay on demand without demur. Courts should be slow to grant injunctions against the realization of such guarantees, except in cases of fraud or irretrievable harm or injustice. The court cited several precedents, including U.P. Co-operative Federation Ltd. v. Singh Consultants & Engineers (P.) Ltd., Svenska Handelsbanken v. Indian Charge Chrome, and others, emphasizing that the existence of disputes is not a ground for restraining the enforcement of bank guarantees.5. Alleged Fraud and Irretrievable Injustice:The respondent argued that the appellant's invocation of the bank guarantees was fraudulent and that allowing their encashment would cause irretrievable injustice, given the appellant's status as a sick industrial company. The court found no fraud in the invocation of the guarantees. The High Court's conclusion that the termination of the contract was fraudulent was deemed erroneous. The court also rejected the argument of irretrievable injustice, noting that the mere pendency of a reference before the Board for Industrial and Financial Reconstruction did not suffice to bring the case within this exception. The appellant's undertaking to earmark the amounts realized from the bank guarantees for any validly adjudicated claims of the respondent was considered sufficient protection.6. Reference to Arbitration:Both parties agreed to refer all disputes under the contract to the sole arbitration of Justice R.M. Sahai, a retired judge of the Supreme Court. The petition filed by the respondent under Section 20 of the Arbitration Act was disposed of accordingly.Conclusion:The Supreme Court allowed the appeal, set aside the High Court's judgment, and vacated the injunction against the enforcement of the bank guarantees. The parties were directed to bear their own costs.