2007 (7) TMI 659 - SC - Indian Laws

Supreme Court Allows Bank Guarantee Encashment; Finds High Court's Restraint Incorrect, Emphasizes Unconditional Payment.

MAHATMA GANDHI SAHAKRA SAKKARE KARKHANE Versus NATIONAL HEAVY ENGG. COOP. LTD. & ANR

MAHATMA GANDHI SAHAKRA SAKKARE KARKHANE Versus NATIONAL HEAVY ENGG. COOP. LTD. & ANR - 2007 AIR 2716, 2007 (8) SCR 274, 2007 (6) SCC 470, 2007 (9) JT 212, ... Issues Involved:1. Whether the bank guarantee in question is conditional or unconditional.2. Whether the appellant has the right to invoke the bank guarantee.3. Whether the High Court was correct in restraining the appellant from encashing the bank guarantee.4. Whether the respondent made out a case for injunction based on fraud or irretrievable injury.Analysis of Judgment:1. Whether the bank guarantee in question is conditional or unconditional:The main question for consideration was the nature of the bank guarantee. The relevant clauses of the agreement and the bank guarantee were examined. Clause 1 of the bank guarantee stated that the guarantor undertook to pay the appellant within 30 days of demand, without demur, such a sum not exceeding Rs. 92.40 lakhs. Clause 2 emphasized that the purchasers alone shall be the sole judge in the matter of whether the amount of the bank guarantee has become recoverable or whether the sellers committed any breach of the terms and conditions of the agreement. The Court concluded that the bank guarantee was unconditional and irrevocable, as it did not allow the guarantor to question the demand or require proof of liability before payment.2. Whether the appellant has the right to invoke the bank guarantee:The appellant's right to invoke the bank guarantee was affirmed. The Court referenced several precedents, including U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd. and United Commercial Bank vs. Bank of India, which established that commitments of banks must be honored free from interference by courts, except in cases of fraud or irretrievable injustice. The Court reiterated that the appellant could invoke the bank guarantee despite any disputes between the parties, as the guarantee was unconditional.3. Whether the High Court was correct in restraining the appellant from encashing the bank guarantee:The High Court's decision to restrain the appellant from encashing the bank guarantee was found to be incorrect. The High Court had taken the view that the bank guarantee was conditional and that the invocation without informing the bank of the alleged breach amounted to fraud. The Supreme Court disagreed, stating that the High Court's interpretation was contrary to the terms of the bank guarantee. The Court emphasized that the bank guarantee explicitly stated that the guarantor must pay on demand without investigating the merits of the demand.4. Whether the respondent made out a case for injunction based on fraud or irretrievable injury:The Court found that the respondent did not make out a case for injunction based on fraud or irretrievable injury. The allegations made by the respondent mostly related to breaches of the agreement by the appellant, such as not arranging funds and not providing storage facilities. However, there were no serious allegations of fraud, nor was there a demonstration of how irreparable loss would be caused if the bank guarantee was encashed. The Court held that the only two exceptions for granting an injunction-fraud and irretrievable injury-were absent in the pleadings.Conclusion:The Supreme Court set aside the judgment of the High Court, allowing the appellant to invoke the bank guarantee. The Court clarified that the observations made in this judgment should not affect the dispute pending before the Arbitrator, which should be decided on its own merits. No costs were awarded.