LexHINDUSTAN STEELWORKS CONSTRUCTION LTD. versus TARAPORE AND CO. AND ANR.
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A HINDUSTAN STEELWORKS CONSTRUCTION LTD. B c v. TARAPORE AND CO. AND ANR. JULY 9, 1996 (S.C. AGRA WAL AND G.T. NANA VAT!, JJ.] Bank Guarantee-Enforcement of-Commitments of banks must be honoured free from inte1fcrence by courts--Powers of courts to inter- fere-Lin1itations. The appellant awarded a contract to the contractor for construction of civil works. Some disputes arose between the appellant and the contrac- tor. Two arbitrators were appointed by the parties for deciding those disputes. The appellant rescinded the contract as the contractor did not D complete the work. Bank of India has given 14 guarantees on different dates in favour of the appellant at the instance of the contractor. By these bank guarantees, bank had undertaken to indemnify the appellant against any loss or damage caused to or suffered by it by reason of any breach by the contractor, stating that appellant shall be the sole Judge on the question as to whether the contractor had committed any breach of the E contract and also regarding the extent of loss and damage. The bank had nndertaken to pay the appellant any amount pay.able by the contractor without any demur and protest and such demand by the appellant had to be required as conclusive and binding on the bank notwithstanding any difference between the appellant and the contractor. On the day on which F the appellant rescinded the contract, the appellant called upon the bank to pay to it the amount of loss/damage it has suffered as the contractor had failed to fulfil its obligations under the contract and had committed breach of its terms and conditio~,S' The contractor prayed for an injunc- tion restraining the appellant froin encashing the bank guarantees alleging that there were genuine disputes between the parties and those disputes G had been referred to the Arbitrators for adjudication. Both the petitions were dismissed as the court refused to grant injunction holding that the bank guarantees were unconditional. The contractor filed revision peti- tions against the judgment contending that the bank guarantees were given by way of security for due performance of the contract and for the purposes H connected therewith and therefore they would be encashable only when,the 396 HINDUSTAN STEEL WORKS CONSTN. LTD. v. TARAPORE AND CO. 397 arbitrators decide that the contractor had committed a breach of the A contract and the amount of loss or damage caused to or suffered by the appellant was quantified and that as the dispute in this behalf were pending before the arbitrators the demand for encashment of the bank guarantees was premature. Allo\\ing the revisions, the High Court held that in absence of any detern1ination by the Court or the arbitrator no amount could be said to be payable by the contractor to the appellant by way of damages. Therefore, it will be just and proper to restrain the appellant from enforcing the bank guarantees; that any term in the agree- ment that one of the parties shall be the sole judge to quantify the same B has to be held as invalid and that it is for the Court or the arbitrator to decide as to who bad committed the breach and till the liability was C ascertained, it could not be said that there was a 'debt due or debt owing' and that the interest of the appellant could be safeguarded by directing the contractor to go on extending the bank guarantees till the matter was settled by the arbitrators. This appeal had been filed against the judgment of the High Court. D The appellant submitted that in the matter of encashment of a bank guarantee the Court should not as a rule interfere unless it is a clear case of fraud and is likely to result in frretrievable injustice. The respondent contended that though fraud is an established exception to the general rule regarding interference with the autonomy of irrevocable letter of credit or E a bank guarantee that is not the only exception and the Court can and should interfere where special circumstances or special equities exist and they are likely to resultin irretrievable injustice. Allowing the appeals, this Court p HELD 1.1. An irrevocable letter of credit is a contract between the banker and the beneficiary and is independent of and unqualified by the contract of sale or other underlying transaction and that obligation of a ·.bank in such a case is absolute, as a letter of credit constitutes the sole G contract with the bank and the bank issui
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