Hansaria, C.J:— An important question relating to enforcement of bank guarantee has come up for consideration in this revision. The learned single Judge who dealt with the matter having noticed an apparent conflict in two decisions rendered by this Court in C.R No. 281 of 1986 (Kartar Singh Randhir Singh Gandhi v. National Aluminium Co. Ltd. disposed of on 15-9-1986) and C.R No. 273 of 1987 (Press Steels and Fabrication Pvt. Ltd. v. National Aluminium Co. Ltd., disposed of on 30-7-1987) has referred this matter to a larger Bench.
2. As we are concerned with the enforcement of bank guarantee which is playing an important and increasing role in the commercial world, it would be in fitness of things to state at the threshold that like irrevocable letter of credit, bank guarantee provides a mechanism of great importance in internal trade and commerce. Any interference with this mechanism is bound to have serious repercussions on trade and commerce. As such, except under exceptional circumstances, the Courts should not interfere with this mechanism. By a long line of decision the Apex Court has firmly laid down that in order to restrain the operation either of irrevocable letter of credit or of bank guarantee, there should be serious dispute and there should be a 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 guarantee would be negatived and the fabric of trading operation would get jeopardised.
3. The aforesaid has been the view of the highest Court of the land ever since its decision in Tarapore & Co. v. Tractoroexport, AIR 1970 SC 891, in which the Court interfered even with an interim order relating to grant of injunction because legal principles of great importance affecting international trade were involved. In that case, an irrevocable letter of credit had been issued in favour of a Russian firm which was sought to be injuncted from taking steps in pursuance of the letter of credit. The Court negatived such a move by saying that the letter of credit is a mechanism of great importance in international trade and any interference with that mechanism is bound to have serious repercussions on the international trade because of which except under exceptional circumstances the Court should not interfere with that mechanism. The Court noted approvingly the decision rendered by the Queen's Bench Division in Hamzah Walls and Sons v. British Imex Industries Limited, 1958-2 QB 127, wherein Jenkins, L.J, speaking for the Court observed, inter alia, that a confirmed letter of credit constituted a bargain between the banker and the vendor of the goods, which imposed upon the banker an absolute obligation to pay, irrespective of any dispute there might be between the parties as to whether the goods were up to contract or not. It was further observed that a vendor of goods selling against a confirmed letter of credit was selling under the assurance that nothing would prevent him from receiving the price. Reference was also made to a decision of the King's Bench in Urguhart Lindsay & Co. Ltd. v. Eastern Bank Limited, 1922-1 KB 318, wherein it was held that if the buyers had an enforceable claim that adjustment must be made by way of refund by the seller and not by way of retention by the buyer. It was further pointed out by the court that the letter of credit is independent of and unqualified by the contract of sale or underlying the transaction; is autonomy is entitled to protection, and as a rule, Courts refrain from interfering with that autonomy.
4. In the case of United Commercial Bank v. Bank of India, AIR 1981 SC 1426, it was stated that a bank guarantee is very much like a letter of credit and the Courts would do their utmost to enforce it according to its terms. It was pointed out that a letter of credit is not concerned with the underlying contract between the buyer and the seller and the duties of a bank under such a document are created by the document itself, and so, the bank is subject only to the limitations which are imposed on it by the letter of credit. The Court observed that except possibly the clear cases of fraud of which the banks have notice, the merchants are left to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts — the courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. This decision was referred with approval in Centax Ltd. v. Vinmar Impex Inc. AIR 1986 SC 1924. In Maharashtra State Electricity Board v. The Official Liquidator, AIR 1982 SC 1497, it was stated that if under a bank guarantee the bank has undertaken to pay any amount and the payment is not made dependent upon proof of any default on the part of the promisee, the bank has to pay the amount without demur under the bank guarantee.
5. The latest thinking of the Apex Court is reflected in U.P Co-operative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, in which the question of injuncting the beneficiary from enforcing the bank guarantees came up for consideration. The Court opined that the commitment of banks must be honoured free from interference by the Courts, and that in order to restrain the operation of 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. It was stated that otherwise the very purpose of the bank guarantee would be negatived and the fabric of trading operation would get jeopardised. This was a case where the guarantee had provided that the appellant would be the sole judge for deciding whether the respondent had fulfilled the terms of the contract or not. Subsequently, when dispute arose between the parties, the respondent approached the Court by a petition under Section 41 of the Arbitration Act read with Rules 1 and 2 of Order 39, C.P.C seeking an injunction restraining the appellant from invoking the bank guarantee. The High Court finding that the respondent had made a prima facie case restrained the appellant. The Apex Court, however, set aside the order of the High Court.
6. We may now refer to some of the decision of different High Courts of the country. Texmaco Ltd. v. State Bank of India, AIR 1979 Calcutta 44, was a case where the bank had undertaken to pay the amount due under the guarantee ‘notwithstanding any dispute between the parties’. It was, therefore, held that the bank was under obligation to pay irrespective of any dispute as to whether there had been performance in an orderly manner and contractual obligations by the parties. National Project Construction Corporation Ltd.… v. G. Ranjan…., AIR 1985 Cal 23, saw a Division Bench stating that bank guarantee stands independent of other connected transactions, namely, the contract between the beneficiary and the promisee. It was also stated in this decision that the bank guarantee stands independent of claim or counter-claim arising out of the contract between the parties. Of course, the enforcement of bank guarantee would be subject to fulfilment of the conditions laid down therein. But then, it would be independent of the adjudication of the dispute raised and proposed to be referred to arbitration pursuant to the contract between the parties. It was stated in Banerjee and Banerjee v. Hindustan Steel Works Construction Ltd., AIR 1986 Calcutta 374, by a learned single Judge that if a bank guarantee is enforced by fraud, misrepresentation, deliberate suppression of material facts and the like, that will give rise to a special equity in favour of the contractor who will then have a right to stop its enforcement by obtaining an order from the Court. If the bank guarantee be conditional, the same becomes enforceable upon the fulfilment of the condition stipulated and in such a case the beneficiary must allege in the demand that the condition has been fulfilled. The latest decision of the Calcutta High Court is the one rendered in National Thermal Power Corporation Ltd. v. Hind Galvanizing and Engineering Co. Ltd., AIR 1990 Cal 421, in which the Bench has stated that as long as the demand of the beneficiary is in terms of the bank guarantee, it is not a defence that under the parent contract the beneficiary of the guarantee is not entitled to the amount from the bank.
7. In Synthetic Foams Ltd. v. Simplex concrete Piles (India) Pvt. Ltd., AIR 1988 Delhi, 207, a learned single Judge has stated that misrepresentation, suppression of material facts and violation of the terms of the guarantee can be regarded as species of the same genus as fraud which would disentitle a beneficiary to enforce the bank guarantee. It had been earlier stated in B.L.R Mohan v. Punjab State Co-operative Supply & Marketing Federation Ltd., AIR 1982 Delhi 357, by another learned single Judge that the demand under the bank guarantee must be in strict accord with the terms of the guarantee.
8. We may also refer to a recent decision of the Punjab & Haryana High Court in National Project Construction Corporation Ltd. v. Sadhu and Company, AIR 1990 P & H 300, that the demand under the bank guarantee has to be in accordance with the eventualities mentioned in the deed of guarantee, and it is conclusive as regards the amount due and payable by the bank.
9. From the aforesaid decisions it is clear that Courts' interference in enforcing bank guarantees must be minimal. It is in the case of fraud or to prevent irretrievable injustice that Courts interfere to prevent enforcement of bank guarantees. Of course, a bank guarantee has to satisfy the conditions laid down therein before a bank can be called upon to make payment as per the guarantee. If the terms of the bank guarantee be unconditional, the bank has to pay without demur. The payment of bank guarantee cannot be made subject to the claims and counter-claims arising out of the main contract between the parties. If a bank guarantee were to state that payment shall be made notwithstanding any dispute between the parties, the bank would be obliged to do so. To determine whether a bank guarantee is conditional or unconditional, it is the document guarantee which is to be scanned.
10. The bank guarantees at hand are irrevocable. There is, however, a condition mentioned in the bank guarantees that the same shall become enforceable “should the contractor commit default in performing any of the terms and conditions of the contract or in the payment of any money due to the OWNER or in case the amount ……. from the running bills of the contractor cannot be deducted by the OWNER towards the payment of MOBILISATION ADVANCE”. The learned single Judge who dealt with the matter earlier found that in C.R No. 281 of 1986, the bank guarantee which was in the aforesaid terms of was throughout to be not independent of the contract whereas in C.R No. 273 of 1987 the same was held to be independent of the contract between the parties. As already noted, it is to resolve this apparent conflict that the case has been referred to this Bench. (Though Shri Misra has brought to our notice a Bench decision of this Court in O.J.C No. 3276/88 disposed of on 3-3-1989, that does not assist us to decide the controversy at hand inasmuch as there no dispute was raised that encashment of bank guarantee has to await adjudication of the dispute by arbitrator. This position has been very much assailed in the instant case by Shri Rath.)
11. In view of the law noticed earlier, we would state that the aforesaid type of bank guarantee has to be regarded as independent of the contract between the parties and the same can be enforced without reference to any claim or counter-claim arising out of the main contract between the parties. It is also to be regarded as independent of the adjudication of disputes raised and proposed to be referred to arbitration. But then, the bank guarantees at hand cannot be regarded as absolutely unconditional inasmuch as the payment under guarantees is dependent upon the contractor committing default in performing any of the terms and conditions of the contract or in the payment of any money due to the owner or in case the amount at the specified rates cannot be deducted from the running bills of the contractor by the owner towards the payment of Mobilisation Advance. As to the fulfilment of those conditions, we would state that the statement of the beneficiary would be taken at its face value unless the contractor be in a position to establish that the stand of the beneficiary is actuated by fraud, misrepresentation, deliberate suppression of material facts or the like which would give rise to special equities in favour of the contractor. So, in the absence of a case of fraud, misrepresentation, deliberate suppression of material facts or the like, to establish which a heavy onus lies on the contractor, a bank guarantee like the one at hand has to be honoured by the bank and the beneficiary cannot be restrained from enforcement. Further, decision about fraud, etc. has to be arrived at by the court approached by the contractor to restrain the beneficiary from enforcing the bank guarantee. The court cannot await for this purpose the finding of the arbitrator.
12. This is our answer to the question posed before this Bench. Let the matter be now placed before the learned single Judge to dispose of the revision in the light of the opinion expressed by us.
Dash, J.:— 13. I agree.
Order accordingly.