TaxTMI 
TaxTMI 
2007 (7) TMI 659
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....ign, 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 : "Clause 5 : Supply, Delivery and Supervision of Erection and Commissioning. Clause 5.1 : The Seller agrees tosupply plant and machineryso 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 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 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 sellers intend to carry out steam and water trials to enable the purchasers to arrange fo....
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....2003. The appellant on its part released Rs. 140.41 lakhs on 5th July, 2003. 5. The case of the appellant is that the trial crushing did not start even as on 28th / 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 to notice further details in this regard as there is any amount of controversy between the parties as regards non-compliance with the terms and conditions of the agreement. Each is accusing the other of breach of terms of agreement. The appellant, however, relied upon the detailed report dated 16th January, 2004 furnished by National Federation of Co-operative Sugar Factories Ltd., 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 losses. 6. Be it as it may, the Board ....
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....n contention of the respondent is that the 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 guarantee with a malafide intention of depriving the respondent of its legitimate right to receive certain amounts. 9. The case of the respondent is that the bank guarantee is a conditional one and unless the condition precedent for enforcement of the bank guarantee is satisfied the appellant cannot be permitted to invoke the bank guarantee. 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 the application filed by the respondent herein and refused to grant any injunction restraining the appellant from en....
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....nt 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. 15. We have carefully considered the rival submissions made during the 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 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 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 =% (Half percent) of the contract price for every completed week of delay, but not exceeding 3% ....
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....d of agreement is extended due to Force Majeure or sellers not fulfilling their obligations under the agreement or for any other reasons whatsoever, sellers shall have such guarantees extended upto the corresponding extended period and failure of the sellers to 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. 18. The relevant portion of the bank guarantee is extracted herein below : " Clause 1 : 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 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. 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....
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....r, Shri Jayant Bhushan, learned senior counsel submitted 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 trial test of the sugar plant by 24th July, 2003 and also upon the failure of the sellers to commission the project before December, 2003. This condition forms an integral part of the bank guarantee was the submission. We find it 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 1 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 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 ....
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....ry credits are irrevocable and independent, the Bank must pay when demand is made. Since the bank 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. 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 form of preventing irretrievable injustice between the parties. 23. 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 guaran....
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.... 14.08.2002 to 10.01.2003. It is further alleged that the 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 averments 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 appellant. It was further contended that the bank guarantees were conditional bank guarantees and not unconditional. We have referred to the substance of the 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 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 restra....
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....nction 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 itself is bad. 30. The learned counsel in support of his submission relied upon the decision of this Court in Hindustan Construction Co. Ltd. Vs. 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 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 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 court found that the bank guarantee specifically refers to clause (9) of the pr....