Suraj Rai and Bros. vs Coal India Ltd.

Baboo Lall Jain, J.—This is an application u/s 41 of the Arbitration Act made by Suraj Rai and Brothers praying, inter alia, for an order of injunction restraining Coal India Ltd., the respondent herein, from encashing the bank guarantees mentioned in paragraphs 7 and 41 of the petition. The petition also prays for a mandatory injunction directing Coal India (sir). The petitions are as hereunder :

The particulars of the bank guarantees as given in paragraph 7 of the petition are as hereunder :

"Particulars of the bank guarantee.

Bank guarantee No. Date Amount (Rs. in lakhs)

36/85 18-07-1385 7.50

46/85 15-08-1985 5.50

95/89 25-05-1989 5.00

18.00

The said bank guarantees were given by the Canara Bank, Lower Circular Road Branch, Calcutta, in favour of Coal India Ltd. The said bank guarantees, according to the petitioner, have been extended from time to time and at present the extended date in respect of the said three bank guarantees is July 15, 1994.

The case made out by the petitioner is that the petitioner is entitled to make a claim against Coal India Ltd. to the extent of more than Rs. 46,00,000. The further case of the petitioner is that the respondent Coal India Ltd. is not entitled to make any claims as against the petitioner. From the petition of the petitioner as also the document annexed to the petition it appears that certain claims were made by Coal India Ltd. as against the petitioner. However, this court is not concerned at this stage with the validity of such claims either of the petitioner against Coal India Ltd. or of Coal India Ltd. against the petitioner, The claims and counterclaims, if any, of the parties, may be decided by the arbitrator in case the petitioner succeeds in its application u/s 20 of the Arbitration Act which is pending before this court.

Learned counsel appearing on behalf of the petitioner has placed before me the various paragraphs of the petition as also some of the annexures to the petition. Admittedly, no case of fraud had been pleaded or made out. The petitioner has stated, inter alia, in the petition that in case the bank guarantees are encashed then the petitioner will suffer irreparable loss and prejudice. According to learned counsel appearing on behalf of the petitioner, this comes in the category of special equities or irretrievable injury and this statement is sufficient for grant of injunction as against the respondent from encashing the bank guarantees.

Learned counsel for the petitioner cited before me the case of General Electric Technical Services Co. Inc. v. Punj Sons (P.) Ltd. [1992] 74 Comp .Cas 624, 648. The Supreme Court, in the said case, held as follows :

"The question is whether the court was justified in restraining the bank from paying to GETSCO under the bank guarantee at the instance of respondent No. 1. The law as to the contractual obligations under the bank guarantee has been well-settled in a catena of cases. Almost all such cases have been considered in a recent judgment of this court in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., wherein Sabyasachi Mukherjee J., as he then was, observed of [1988] 1 SCC189 and at page 295 of 65 Comp Cas) : ''that in order to restrain the operation either of an irrevocable letter of credit or of a confirmed letter of credit or of a bank guarantee, there should be a serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operations will get jeopardised''. It was further observed that the bank must honour the bank guarantee free from any interference by courts. Otherwise, trust in commerce, internal and international, would be irreparably damaged. It is only in exceptional cases, that is to say in cases of fraud or in cases of irretrievable injustice, the court should interfere. In the concurring opinion one of us (K. Jagannatha Shetly J.) has observed that whether it is a traditional bond or performance guarantee, the obligation of the bank appears to be the same. If the documentary credits are irrevocable and independent, the bank must pay when demand is made. Since the bank pledges its own credit 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 fraud that the courts talk about is fraud of an ''egregious nature so as to vitiate the entire underlying transaction''. It is fraud of the beneficiary, not the fraud of somebody else.

The High Court has observed that failure on the part GETSCO to make a reference to the mobilisation advance in the letter seeking encashment of the bank guarantee would be tantamount to suppression of material facts, in the sense that the mobilisation advance was under the contract to be recovered from running bills. It was further observed that disclosure of such facts would have put the bank to further inquiry as to what was the amount covered by those bills and what was the corresponding amount of the mobilisation advance and to what extent the amount covered by the bank guarantee remained payable. In any event, the High Court said that GETSCO could not demand the full amount of the bank guarantee on April 17, 1989. It seems to us that the High Court has misconstrued the terms of the bank guarantee and the nature of the rights inter se of the parties under the contract. The mobilisation advance is required to be recovered by GETSCO from the running bills submitted by the respondent. If the full mobilisation advance has not been recovered, it would be to the advantage of the respondent. Secondly, the bank is not concerned with the outstanding amount payable by GETSCO under the running bills. The right to recover the amount under the running bills has no relevance to the liability of the bank under the guarantee. The liability of the bank remained intact irrespective of the recovery of the mobilisation advance or the non-payment under the running bills. The failure on the part of GETSCO to specify the remaining mobilisation advance in the letter for encashment of bank guarantee is of little consequence to the liability of the bank under the guarantee. The demand by GETSCO is under the bank guarantee and as per the terms thereof. The bank has to pay and the bank was willing to pay as per the undertaking. The bank cannot be interdicted by the court at the instance of respondent No. 1 in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. The High Court in the absence of a prima facie case on such matters has committed an error in restraining the bank from honouring its commitment under the bank guarantee,

In the result, we allow the appeal, set aside the impugned judgment and order of the High Court. The appellant is entitled to costs in this court."

My attention was also drawn to another judgment of the Supreme Court in Svenska Handelsbanken v. Indian Charge Chrome [1994] 79 Comp Cas 589, wherein the Supreme Court held that in the law relating to bank guarantee, a party seeking injunction from encashing of bank guarantee by the suppliers has to show a prima facie case of established fraud and irretrievable injury, i.e., where the plaintiff has no adequate remedy at law, and the allegations of irreparable harm are not speculative, but genuine and immediate and the plaintiff will suffer irreparable harm if the requested relief is not granted.

In the instant case, even if the respondent realises the amount of the bank guarantee from the bank furnishing the bank guarantee, I do not think that there is any question of any irretrievable injury or of any special equities in favour of the petitioner. The petitioner can always recover the amount from Coal India Ltd. through arbitration or by obtaining a decree as against Coal India Ltd. I am making it quite clear that so far as the bank guarantee is concerned it is a contract as between the banker furnishing the bank guarantee and the beneficiary thereof, i.e., Coal India Ltd. It is entirely up to the beneficiary to invoke the bank guarantees as and when the beneficiary thinks it fit and proper. It is entirely for the banker concerned to make his own decision in the matter of payment. I am not making any observation in respect of the rights inter se as between the banker and the beneficiary of the bank guarantees.

So far as the instant application of the petitioner is concerned, I do not find that the petitioner is entitled to any order of injunction or mandatory injunction as prayed for at all. The application made u/s 41 of the Arbitration Act is, therefore, dismissed and all interim orders including the order dated April 21, 1994, are vacated.

There will be no order as to costs.