U.P. STATE SUGAR CORPORATION versus M/S SUMAC INTERNATIONAL LTD.

Citation: [1996] SUPP. 9 S.C.R. 511 · Decided: 04-12-1996 · Supreme Court of India · Bench: M.M. PUNCHHI · Disposal: Appeal(s) allowed

Judgment (excerpt)

U.P. STATE SUGAR CORPORATION 
A 
v. 
M/S SUMAC INTERNATIONAL LTD. 
DECEMBER 4, 1996 
[M.M. PUNCH! AND SUJATA V. MANOHAR, JJ.] 
B 
Code of Civil Procedure, 1908 : Order 39 Rules 1 and 2. 
Interim injunction-Bank guaralllee-Invocation of-Consideration 
Joi-Guarantee worded in absolute tem1s-Gura11tor bound to make payment C 
on demand wit/tout demur-Irrespective of pendency of legal proceed-
ings-Held, in tlte circumstances, stay of bank guarantee was pennissible only 
on grounds of fraud or irretrievable hann or injustice-Existence of dispute 
about tem1ination of contract is not a ground for issuing injunction. 
Sick Industrial Companies (Special Provisions) Act, 1985: Sections 16, D 
17, 18 and 22. 
Reference before Board--Pendency of-Bank guarantee-Effect on in-
vocation of-Claimant undertook to ean11ark amoulll realised from bank 
guarantee subject to any sclteme framed by Board-Held, such pendency 
itself was not "irretrievable injustice''-Hence, invocation of bank guarantee 
not liable to be stayed. 
E 
The appellant entered into an agreement with the respondent under 
which the respondent agreed to set up a complete sugar plant for the 
appellant. The agreement stated that time was the essence of the contract F 
and the respondent-seller was required to furnish five irrevocable bank 
gnarantees which were payable on demand. It was expressly provided that 
it would not be open to the gurantor to know the reasons or or to 
investigate or to go into the merits of the demand invoking the bank 
gnarantee or to question or challenge the demand or to require the proof 
or the liability of the seller before paying the amount demanded. It was G 
further provided that the invocation of the bank guarantee would be 
binding on the respondent and that the invocation of the bank gnarantee 
would not be affected in any manner by reason or the fact that any dispute 
or disputes had been raised by the respondent with regard to Its liability. 
Nor would it be affected by the fact that proceedings were pending· before H 
511 
512 
SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R. 
A any Tribunal, Arbitrator or Court with regard thereto. 
The contract was not carried out within the time envisaged under 
the contract. Thereafter, the time for completion of the contract was 
extended. The respondent, however, did not complete the contract within 
the extended period. The appellant invoked the bank guarantees and 
B subsequently withdrew such invocation. 
In the meanwhile, the State Government transferred the appellant's 
sugar plant to the joint sector. Therefore, the appellant cancelled the 
aforesaid agreement and invoked the bank guarantees. Being aggrieved the 
C respondent filed applications before Civil Judge under Section 41(b) of the 
Arbitration Act, 1940 for interim stay against encashment of bank guaran-
tees. These applications were dismissed and the High Court, in revision, 
granted an injunction restraining the appellant from enforcing the bank 
guarantees on the ground that the termination of the contract by the 
appellant showed that time was not the essence of the contract and, 
D therefore, there was a fraud in the invocation of the bank guarantee. The 
High Court also referred to the conduct of the appellant in invoking the 
bank guarantee on an earlier occasion and subsequently withdrawing such 
invocation. 
E 
On behalf of the appellant it was contended that the appellant-com-
pany undertook to earmark the amounts realised from the bank guaran· 
tees in question for the recovery of any claims which the respondent was 
entitled to recover from the appellant. 
On behalf of the respondent it was contended that there would be 
F irretrievable injustice to the respondent if the bank guarantees were 
allowed to be realised because the appellant was a sick industrial company 
in respect of which a reference was pending before the Board for Industrial 
and Financial Reconstruction under the Sick Industrial Company (Special 
Provisions) Act, 1985; and, therefore, even if the respondent succeeded 
G before the Arbitrator it would not be able to realise its claim from the 
appellant. 
Allowing the appeal, thi• Court 
HELD : 1.1. The bank guarantees which are irrevocable in nature, 
H in terms, provide that they are payable by the guarantor to the appellant 
U.P. STATE SUGAR CORPN. v. SUMAC INTERNATIONAL LTD. 
513 
on demand without demur. The bank guarantees further provide that the A 
right of the purchaser to recover from the 

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