Electronics Private Limited Vs. Hcl Infosystems Limited  Insc 1120 (2 November 2007)
Kabir & B.Sudershan Reddy
APPEAL NO. 5121 OF 2007 [ARISING OUT OF SPECIAL LEAVE PETITION (c)
NO.16098/2006] B.Sudershan Reddy, J.
dispute between the parties relates to invocation of the bank guarantee
furnished by the appellant to the respondent.
appellant M/s. Vinitec Electronics Private Limited entered into agreement dated
10th May, 2000 with the respondent HCL Infosystem Limited under which the
respondent agreed to buy UPS systems from the appellant for a consideration
value of Rs.1,68,12,400/-. The method of payment and terms thereof are provided
for in clause 15(a) and (d) in the said agreement.
payment terms will be :
30% Advance against a Bank guarantee from a Scheduled Bank of equivalent value.
shall be valid till the date of final delivery at the Company location(s).
. . . .
. . . .
10% after one year from the date of receipt of material at the customer
case of the appellant was that it had supplied all the equipments to the
respondent by 2nd August, 2000 but the respondent committed default in making
the stipulated payment amounting to Rs.49,99,338/-. The said sum according to
the appellant remained unpaid. The respondent agreed to pay the sum provided
the performance bank guarantee of 10% value was furnished. That is how bank
guarantee as required by the respondent was furnished which was amended on 20th August, 2001. The case of the appellant was that
even after furnishing the bank guarantee the respondent made a payment of only Rs.
30 lakhs on 22nd August, 2001 and false assertion of payment of Rs.11,99,335/-
was made. It was also alleged that a sum of Rs. 8 lakhs still remained unpaid.
appellants case before the trial court was that the respondent under no
circumstances is entitled to invoke the bank guarantee without paying the
balance amount of Rs.11,99,335/- or at least 8 lakhs which is admittedly liable
to be paid. The bank guarantee had become inoperative as the condition
precedent for its invocation was not complied with.
case of the respondent was that the original contract value was Rs.1,68,12,400/-
out of which Rs.1,60,12,400/- , i.e., 95% of the contract value stood paid and
all the obligations pursuant to clause 15(a) to (c) of the contract have been
fulfilled and it is only then the bank guarantee in question was furnished to
the respondent upon payment of 30% of the contract value to the appellant. It
was asserted that the bank guarantee furnished as it stands is an unconditional
learned Single Judge after elaborate consideration of the matter found no merit
in the injunction application filed by the appellant and accordingly dismissed
Division Bench of the Delhi High Court affirmed the order of the learned Single
learned senior counsel Sh.Kailash Vasdev mainly submitted that the High Court
committed an error in interpreting Paragraph 4 of the amended bank guarantee in
isolation and divorced from the terms and conditions of the contract dated May 10, 2000 entered between the parties.
submitted that the High Court instead of relying upon the operative portion of
the bank guarantee ought to have taken all the clauses which are material to
arrive at a real intention of the parties. The submission was that the
respondent did not make full payment of Rs.49,99,335/- to the appellant and
therefore the pre-condition embodied in the performance bank guarantee dated
10th August, 2001 as amended on 20th August, 2001 was never satisfied and as
such the performance guarantee did not come into being at all, remained
ineffective and unenforceable and therefore could not be invoked.
learned counsel for the respondent submitted that after the amendment of the
bank guarantee substituting clause 4 on 20th August, 2001, the conditional bank guarantee
furnished by the appellant became an unconditional one.
have carefully considered the rival submissions made during the course of
hearing of the appeal.
The law relating to invocation of bank guarantees is by now well settled by a
catena of decisions of this court.
bank guarantees which provided that they are payable by the guarantor on demand
is considered to be an un- conditional bank guarantee. When in the course of
commercial dealings, unconditional guarantees have been given or accepted the
beneficiary is entitled to realize such a bank guarantee in terms thereof
irrespective of any pending disputes. In U.P. State Sugar Corporation vs. Sumac
International Ltd. , this court observed that :
law relating to invocation of such bank guarantees is by now well settled. When
in the course of commercial dealings an unconditional bank guarantee is given
or accepted, the beneficiary is entitled to realize such a bank guarantee in
terms thereof irrespective of any pending disputes. The bank giving such a
guarantee 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 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 such a fraud of which the beneficiary seeks to take advantage, he can
be restrained from doing so. The second exception relates to cases where
allowing the encashment of an unconditional bank guarantee would result in
irretrievable harm or injustice to one of the parties concerned. Since in most
cases payment of money under such a bank guarantee would adversely affect the
bank and its customer at whose instance the guarantee is given, the harm or
injustice contemplated under this head must be of such an exceptional and
irretrievable nature as would over ride the terms of the guarantee and the
adverse effect of such an injunction on commercial dealings in the country. The
two grounds are not necessarily connected, though both may coexist in some
is equally well settled in law that bank guarantee is an independent contract
between bank and the beneficiary thereof. The bank is always obliged to honour
its guarantee as long as it is an unconditional and irrevocable one. The
dispute between the beneficiary and the party at whose instance the bank has
given the guarantee is immaterial and of no consequence. In BSES Limited (Now
Reliance Energy Ltd.) vs. Fenner India Ltd. And anr. this court held :
10. There are, however, two exceptions to this Rule. The first is when there is
a clear fraud of which the Bank has notice and a fraud of the beneficiary from
which it seeks to benefit. The fraud must be of an egregious nature as to
vitiate the entire underlying transaction. The second exception to the general
rule of non- intervention is when there are special equities in favour
of injunction, such as when irretrievable injury or
irretrievable injustice would occur if such an injunction were not
granted. The general rule and its exceptions has been reiterated in so many
judgments of this court, that in U.P. State Sugar Corpn. V. Sumac International
Ltd. (1997) 1 SCC 568 (hereinafter U.P. State Sugar Corpn) this
Court, correctly declare that the law was settled.
Himadri Chemicals Industries Ltd. V. Coal Tar Refining Company , this court
summarized the principles for grant of refusal to grant of injunction to
restrain the enforcement of a bank guarantee or a letter of credit in the
following manner :
14.. . . . .
While dealing with an application for injunction in the course of commercial
dealings, and when an unconditional bank guarantee or letter of credit is given
or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a
Letter of Credit in terms thereof irrespective of any pending disputes relating
to the terms of the contract.
The Bank giving such guarantee is bound to honour it as per its terms
irrespective of any dispute raised by its customer.
The courts should be slow in granting an order of injunction to restrain the
realization of a bank guarantee or a Letter of Credit.
Since a Bank Guarantee or a Letter of Credit is an independent and a separate
contract and is absolute in nature, the existence of any dispute between the
parties to the contract is not a ground for issuing an order of injunction to
restrain enforcement of Bank Guarantees or Letters of Credit.
Fraud of an egregious nature which would vitiate the very foundation of such a
Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage
of the situation.
Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit
would result in irretrievable harm or injustice to one of the parties
Mahatama Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engg. Coop. Ltd and
anr. , this court observed :
Para 22. 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 from 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 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.
Para 28. What is relevant are the terms
incorporated in the guarantee executed by the bank. On careful analysis of the
terms and conditions of the guarantee in the present case, it is found that the
guarantee is an unconditional one. The respondent, therefore, cannot be allowed
to raise any dispute and prevent the appellant from encashing the bank guarantee.
The mere fact that the bank guarantee refers to the principle agreement 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.
Keeping these principles in mind we shall now proceed to apply the same to the
facts of this case.
Shorn of all the embellishments the question that really arises for our
consideration is as to whether bank guarantee furnished is an unconditional and
irrevocable one or a conditional one? It may not be necessary to refer in
detail the terms and conditions of the contract except to analyse the original
clause of the bank guarantee dated August 10, 2001 and as well as the
subsequent amendment of the relevant clause in the said bank guarantee on 20th
The relevant clause in the bank guarantee dated 10th August, 2001 furnished by the appellant is to the following effect :
M/s Vinitec Electronics Pvt. Ltd. H-33, Bali Nagar, New Delhi(hereinafter
called the Supplier) supplied their Vinitec on- line UPS systems of
various capacities pursuant to their Agreement dated 10th May, 2000 &
P.O.No.4500011730 dated 30.05.00 (hereinafter called the Company) for
the final Purchaser President of India through the Director, National Crime
Records Bureau, Ministry of Home Affairs, Government of India, New
Delhi(hereinafter called the Purchaser).
in terms of Clause No.15 of the Agreement for receiving the entire balance
payments of Rs.49,99,335/- from the company, the supplier have agreed to
provide a Performance Bank Guarantee equivalent to Rs.16,81,238.50 as 10% of
the value of the contract to be kept valid till the warranty period during
which times the Supplier is required to perform their warranty obligations to
the Purchaser; and Whereas pursuant to the application made by the supplier, we
Oriental Bank of Commerce, Kirti Nagar, New Delhi (hereinafter called the
Bank) have accordingly agreed to give the supplier a bank guarantee
for the aforesaid purpose.
we, the bank, hereby affirm that we are guarantors and responsible on behalf of
the supplier upto a total of Rs.16,81,238.50(Rupees sixteen lacs eighty one
thousand two hundred thirty eight and paise fifty only) and we undertake to pay
any sum or sums within the limit of Rs.16,81,238.50(Rupees sixteen lacs eighty
one thousand two hundred thirty eight and paise fifty only) as aforesaid upon
receipt of written demand from the purchaser and Company within the validity of
this Bank Guarantee establishing the supplier to be in default for the
performance of their warranty obligations under the contract.
the bank, affirm that our liability under this guarantee is limited to the
total amount of Rs.16,81,238.50(Rupees sixteen lacs eighty one thousand two
hundred thirty eight and paise fifty only) and it shall remain in full force upto
and including 31st August,2003 and shall be extended from time to time for such
further period(s) as desired by the purchaser, Company and supplier on whose
behalf this Guarantee has been given."
Thereafter by a letter dated 20th August, 2001,
the bank guarantee was amended and Paragraph 4 of the bank guarantee dated 10th August, 2001 was substituted and the same reads
as under :
we, the Bank, hereby affirm that we are Guarantors and responsible on behalf of
the supplier upto a total of Rs.16,81,238.50 (Rupees sixteen lacs eighty one
thousand two hundred thirty eight and paise fifty only) and we undertake to pay
any sum or sums within the limit of Rs.16,81,238.50 (Rupees sixteen lacs eighty
one thousand two hundred thirty eight and paise fifty only) as aforesaid upon
receipt of written demand from the Company within the validity of this Bank
the unamended bank guarantee the bank affirmed that they are guarantors and
responsible on behalf of the supplier upto a total of Rs. 16,81,238.50 (Rupees
sixteen lakhs eighty one thousand two hundred thirty eight and fifty paise
only) and had undertaken to pay any sum or sums within that limit upon receipt
of written demand from the purchaser within the validity of bank guarantee
provided it is established the supplier to be indefault for the performance of
their warranty obligations under the contract. This makes it abundantly clear
that what was furnished was a conditional bank guarantee and the bankers were
liable to pay the amounts only upon establishing the fact that the supplier was
in default for the performance of their warranty obligations under the
contract. But by the subsequent letter dated 20th August, 2001, the relevant
clause in bank guarantee was amended whereunder the banks stood as guarantor
and responsible on behalf of the supplier upto a total of Rs.16,81,238.50
(Rupees sixteen lakhs eighty one thousand two hundred thirty eight and fifty paise
only) and had undertaken to pay any sum or sums within that limit upon
receipt of written demand from the Company within the validity of this bank
guarantee. This amended clause makes it abundantly clear that the bank had
undertaken to pay amounts upto a total of Rs.16,81,238.50.
condition that the amounts shall be paid only upon establishing the supplier to
be indefault for the performance of their warranty obligation under the
contract has been specifically deleted. In our considered opinion, the bank
guarantee as amended replacing Paragrah 4 of the original bank guarantee makes
the bank guarantee furnished as unconditional one. The bankers are bound to honour
and pay the amounts at once upon receipt of written demand from the respondent.
The learned senior counsel however relying upon the decision of this court in
Hindustan Construction Co. Ltd.and ors. vs. State of Bihar and ors contended that the bank
guarantee could not said to be unconditional or unequivocal in terms so that
the respondent could claim any unfettered right to invoke the bank guarantee
and demand immediate payment thereof from the bank. We find no substance in the
submission so made by the learned senior counsel on behalf of the appellant. In
Hindustan Construction (supra), the appellant Company was awarded a contract by
the State of Bihar for construction of a dam.
9 of the contract between the parties provided that the State would make an
advance loan to the Company for the costs of mobilisation in respect of the
works on furnishing of a bank guarantee by the appellant for an amount equal to
the advance loan. The advance loan was required to be used exclusively for mobilisation
expenditure. In case of misappropriation of the advance loan the loan at once
shall become due and payable immediately. In terms of this clause bank
guarantee was furnished by the bank agreeing unconditionally and irrevocably to
guarantee payment on demand without any objection but with the qualification
that such payment shall be only in the event the obligations expressed in
Clause 9 of the original contract have not been fulfilled by the contractor
giving the right of claim to the employer for recovery of the whole or part of
the advance mobilisation loan. Clause 9 of the main contract was thus
incorporated and made part of the bank guarantee furnished by the banker. It is
under those circumstances this court took the view that the bank guarantee
furnished was not an unconditional one. Clause 9 in the bank guarantee refers
to the terms and conditions of the contract between the parties. The bank
guarantee thus could be invoked only in the circumstances referred to in Clause
9 wherein the amount would become payable only if the obligations are not fulfilled
or there is misappropriation.
the present case the amended clause does not refer to any of the clauses
specifically as such but on the other hand the bank had undertaken
responsibility to pay any sum or sums within the guaranteed limit upon receipt
of written demand from the Company. The operative portion of the bank guarantee
furnished by the bank does not refer to any of the conditions for payment under
the bank guarantee. It is true that the bank guarantee furnished makes a
reference to the principal agreement between the parties in its preamble. Mere
fact that the bank guarantee refers to the principal agreement in the preamble
of the deed of guarantee does not make the guarantee furnished by the bank to
be a conditional one unless any particular clause of the agreement has been
made part of the Deed of Guarantee.
The recitals in the preamble in the deed of guarantee do not control the
operative part of the deed.
careful analysis of the terms of the guarantee we find the guarantee to be an
unconditional one. The appellant, therefore, cannot be allowed to raise any
dispute and prevent the respondent from encashing the bank guarantee.
The next question that falls for our consideration is as to whether the present
case falls under any of or both the exceptions namely whether there is a clear
fraud of which the bank has notice and a fraud of the beneficiary from which it
seeks to benefit and another exception whether there are any special
equities in favour of granting injunction.
This Court in more than one decisions took the view that fraud, if any, must be
of an egregious nature as to vitiate the underlying transaction. We have
meticulously examined the pleadings in the present case in which no factual
foundation is laid in support of the allegation of fraud. There is not even a
proper allegation of any fraud as such and in fact the whole case of the
appellant centers around the allegation with regard to the alleged breach of
contract by the respondent. The plea of fraud in appellants own words is
to the following effect:
despite the respondent, HCL being in default of not making payment as
stipulated in the Bank Guarantee, in perpetration of abject dishonesty and
fraud, the respondent, HCL fraudulently invoked the Bank Guarantee furnished by
the applicant and sought remittance of the sums under the conditional Bank
Guarantee from the Oriental Bank of Commerce vide letter of invocation dated
our considered opinion such vague and indefinite allegations made do not
satisfy the requirement in law constituting any fraud much less the fraud of an
egregious nature as to vitiate the entire transaction. The case, therefore does
not fall within the first exception.
Whether encashment of the bank guarantee would cause any irretrievable
injury or irretrievable injustice.
is no plea of any special equities by the appellant in its favour. So
far as the plea of irretrievable injustice is concerned the appellant
in its petition merely stated:
should the respondent be successful in implementing its evil design, the same
would not only amount to fraud, cause irretrievable injustice to the applicant,
and render the arbitration nugatory and infructuous but would permit the
respondent to take an unfair advantage of their own wrong at the cost and
extreme prejudice of the applicant.
The plea taken as regards irretrievable injustice is again vague and
not supported by any evidence.
There is no dispute that arbitral proceedings are pending. The appellant can
always get the relief provided he makes his case before the Arbitral Tribunal.
There is no allegation that it would be difficult to realize the amounts from
the respondent in case the appellant succeeds before the Arbitral Tribunal.
this view of the matter, we see no merit in this appeal.
make it clear that this order and as well as the order passed by the Delhi High
Court shall have no bearing on the merits of the case pending before the
The appeal is accordingly dismissed. We make no order as to costs.