Case Note & Summary
The dispute arose from eleven contracts dated 21.8.1979 between Hindustan Steel Workers Construction Ltd. (appellant) and G.S. Atwal & Co. (Engineers) Pvt. Ltd. (respondent) for construction of eleven schools in Nalut, Libya. The respondent furnished two bank guarantees issued by United Commercial Bank, Calcutta: one dated 16.8.1979 for Rs.6.50 lakhs (No.350/79) and another dated 10.10.1979 for Rs.32.50 lakhs (No.399/79). Disputes regarding contract performance led to arbitration, which was pending. The respondent filed an application under Section 41 of the Arbitration Act, 1940 in the Calcutta High Court seeking an injunction to restrain the appellant from encashing the bank guarantees. By order dated 29.8.1988, a learned single Judge granted the injunction, holding that guarantee No.399/79 was meant only for mobilisation advance but the bank issued a wider Mobilisation Advance-cum-Performance guarantee, and that guarantee No.350/79 being a performance guarantee required the appellant to assess the quantum of loss and mention an ascertained figure before invocation. The appellant challenged this order before the Supreme Court after obtaining special leave. The Supreme Court examined the guarantee clauses, which provided that the bank unconditionally and irrevocably agreed to pay on demand without demur and that the creditor (appellant) would be the sole judge of whether any breach occurred and the extent of loss. The Court reiterated the established principle that courts should not interfere with confirmed bank guarantees or irrevocable letters of credit unless fraud and irretrievable damages are established, and fraud must be an established fraud. The Court found that the bank guarantees were unconditional and that the appellant's claim for balance due on account of security deposit and outstanding advances was not less than the guarantee amounts. The High Court's reasoning that the bank had issued a guarantee in a wider form than agreed between the bank and the respondent could not fetter the appellant's right to invoke the unconditional guarantee, and the requirement of prior assessment of quantum of loss was erroneous. The entire dispute was pending before the arbitrator, and the bank was not a party to arbitration. Accordingly, the Supreme Court held that the learned single Judge acted illegally and without jurisdiction in affirming the interim injunction. The appeal was allowed, the order dated 29.8.1988 was set aside, and no order as to costs was made.
Headnote
A) Bank Guarantee - Injunction - Grounds for Interference - Arbitration Act, 1940, Section 41 - Courts will not interfere with invocation of confirmed bank guarantees or irrevocable letters of credit unless there is fraud and irretrievable damages are involved; fraud must be an established fraud. The High Court granted injunction without any such grounds and thereby acted illegally and without jurisdiction (Paras 5-6). Held: Injunction set aside. B) Bank Guarantee - Unconditional and Irrevocable Nature - Creditor as Sole Judge - Arbitration Act, 1940, Section 41 - The guarantee clauses provided that the bank would pay on demand without demur and the creditor would be sole judge of breach and extent of loss; no prior assessment of quantum of loss is required before invocation. The High Court's reasoning requiring the appellant to assess quantum before invocation is legally erroneous (Paras 4,6). Held: Appeal allowed, injunction vacated.
Issue of Consideration
Whether the Calcutta High Court was justified in granting an injunction restraining the appellant from encashing unconditional bank guarantees pending arbitration, and whether the principles for interference with bank guarantees (fraud and irretrievable injustice) were satisfied.
Final Decision
The Supreme Court set aside the order dated 29.8.1988 of the Calcutta High Court and allowed the appeal. The injunction against invocation of the bank guarantees was vacated. No order as to costs.
Law Points
- Courts will not interfere with confirmed bank guarantees or irrevocable letters of credit unless fraud and irretrievable damages are established
- fraud must be an established fraud. Unconditional bank guarantee and creditor as sole judge of breach and amount due are enforceable
- bank must pay on demand without demur. Dispute between parties to contract does not affect bank guarantee
- bank is not party to arbitration. Single Judge's reasoning that bank issued wider guarantee than agreed between customer and bank cannot fetter beneficiary's right to invoke unconditional guarantee. Performance guarantee can be invoked without prior assessment of quantum of loss by beneficiary.
