LexM/S BSES LTD. (NOW RELIANCE ENERGY LTD.) versus M/S FENNER INDIA LTD: AND ANR.
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y "i-' MIS BSES LTD. (NOW RELIANCE ENERGY LTD.) v. M/S FENNER INDIA LTD: AND ANR. FEBRUARY 3, 2006 [H.K. SEMA AND B.N. SRIKRISHNA, JJ.) A B Arbitration and Conciliation Act, 1996-Section 9-Appellant and respondent entering into a Wrap Around under which respondent agreed to perform its four contracts on a turnkey basis-Respondent submitted to the C appellant four unconditional and irrevocable bank guarantees as per the agreement-Encashment of bank guarantees by the appellant for non- performance of contractual obligations-Respondent filing a petition before trial court seeking a declaration that the appellant was not entitled to invoke bank guarantees and interim injunction restraining the appellant from encashing the bank guarantees-Trial Court declined to give interim D injunction-High Court allowed the· appeal of the respondent and granted interim injunction-Correctness of-Held, beneficiary of the bank guarantee is the best judge to decide as to when and for what reason the bank guarantee should be encashed-Jt is no function of the Bank or the Court to enquire the due performance of the contract-On facts, under the agreement, the appellant E . had a right to encash any or all of the bank guarantees for any breach in any of the terms of the four contracts. Appellant was awarded a contract for setting up a captive power plant. The appellant awarded a part of the work to first respondent by issuing four work orders. As per the agreement, the first respondent submitted four F unconditional and irrevocable bank guarantees from th·e second respondent- Bank to the appellant and the first respondent entered into a "wrap-around agreement" under which it was agreed that the first respondent would perform its contractual obligations on a turnkey basis. The appellant invoked the four bank guarantees. The first respondent G invoked the arbitration claust: as provided in the works contract. The first respondent filed a petition under section 9 of the Arbitration and Conciliation . 'i Act, 1996 before the trial court for a declaration that the appellant was not entitled to invoke the four bank guarantees. The first respondent also sought an interim injunction for restraining the appellant from encashing or receiving 47 lI 48 SUPREME CO! 'RT REPORTS [2006] 2 S.C.R. A any amount under the bank guarantees, pending disposal of the arbitration proceedings. The trial court dismissed the petition of the first respondent by. holding that it was not a case where irretrievable injustice would be done by enforcement of the bank guarantees nor was it a case where a strong prirna facie case of fraud had been made out. However, the trial court, with a view B to safeguard the rights of the first respondent, dirl!cted the appellant to maintain status quo for a period of one month within which the arbitration proceedings would be disposed of. The first respondent preferred an appeal before High Court challenging the order of the trial court. The High Court allowed the appeal and granted interim injunction. In appeal to the Court, the appellant contended that the bank is obliged C to honour the unconditional and irrevocable bank guarantee irrespective of any dispute between the beneficiary and the party at whose instance the bank has given the guarantee. The first responded contended that, as per the contract, the advances which were given to it by the appellant for carrying out work orders were D fully recovered by the appellant from the running bil:is issued by it and hence encashing the bank guarantees, which were given to secure advance payments, by the appellant was an act of fraud or created a situation of special equities in its favour; and that one of the bank guarantees was intended to secure due and faithful performance of the contract and that since the performance and E been duly satisfied, there was no warrant for invoking the bank guarantee. Allowing the appeal, the Court HELD: 1.1. The bank guarantees were not given only for the purpose of security as against the advance paid to the first respondent. Under the wrap F around agreement, the appellant had the right to encash any or all of the guarantees for any breach in any of the terms of the four contracts. The contention of the respondent that the first three bank guarantees were only f'lr securing the advances paid and that only the fourth bank guarantee was liable to be called for failure to perform the contr
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