Author- Richard Ekka, 4th Year law student at Rajiv Gandhi National University of Law.
This case is between Hindustan Steel Works Construction Limited and Tarapore and Co. and Another. The case was lodged in the year 1990 and the judgement was delivered in the year 1996.
Essential Details of the Case
- citation- (1996 )5SCC 34
- Petitioner(s)– Hindustan Steelworks Construction Ltd.
- Respondent(s)- Tarapore & co. & Anr.
- Petitioner’s Lawyers– Shankar Ghosh and Badar Durrez Ahmed, Advocates.
- Respondent’s Lawyers- G.L. Sanghi, K.R. Nambiar and R. Murari, Advocates.
- Concerned Statute and Provision- The Arbitration Act, 1940. Section 41 (b).
- Bench- Justice S.C. Agarwal and Justice G.T. Nanavati.
- Date of Judgement- 09.06.1996.
- Present Status- Valid
Facts of the case
- Hindustan Steel Construction Ltd. (HSCL) had contracted Tarapore & Co. for Civil Work in their Visakhapatnam Steel plant. The contract was signed on 25.04.84 for a lump sum amount of Rs. 19,21,36,804.
- The work was incomplete on the due date and the contractor asked for more time for the completion of the work, even after extending the time for completion he still failed in meeting the deadline.
- A dispute arose between the parties, and both appointed an arbitrator to solve the dispute, a mutual agreement was made where the work was reduced, and the price was Rs. 4.5 Crore. The contractor yet again failed to complete the work within the extended stipulated time and HSCL rescinded the contract.
- During this time Bank of India gave 14 guarantees in total in favour of HSCL for providing working funds to the contractor regarding the Contract.
- These bank guarantees were made to indemnify HSCL against any kind of damage or loss caused by the contractor by breach of Contract. It was stated by the bank while giving the guarantees that HSCL is the sole Judge as to decide whether there was a breach of the contract.
- Was the High court right in its decision to restrain the Appellant from executing the Bank Guarantees?
Arguments from the Petitioner
- Since in the contract HSCL is the sole judge to determine the breach of contract and its decision is conclusive they can encash the guarantee. But the high court rejected it relying on the case of UOI v. Raman Iron Factory.
- Dr. Shankar stated that the court did not apply the law correctly, the matter of encashment should not be interfered by the court unless it is a case of fraud or may result in irretrievable injustice with the help of cases such as Bank v. Bank of India and U.P. Cooperative federation Ltd. v. Singh Consultants and Engineers (P) Ltd.
- It is argued by the learned counsel that the law has been laid down in a 3 judge bench case of General Electric Technical Services Inc. and U.P. Cooperative federation Ltd, the position of law is given, wherein in exceptional cases that is in case of fraud or where irretrievable injustice will be done the Courts can intervene.
Arguments from the Respondent
- The bank Guarantees were given for due performance and would be encashable once the arbitrator has decided that there is a breach of contract and the loss or damage accrued to HSCL is quantified.
- The learned counsel states that while agreeing that fraud is an exception in interference of the case, they say that the court should interfere where special circumstances or special equities are seen.
- The judgement given in this case set aside the previous judgement and order. No stay was given during the remainder of these appeals.
- It is stated in the judgement that the court cannot interfere between the dispute, it can only interfere in case of fraud and irretrievable injustice by encashing the Bank Guarantee. The case of fraud was not pleaded, and it did not amount to the interference of the court, the High Court was wrong in interfering and granting an Injunction against the appellant.
- The respondent however, tried making it a case with special circumstances or special equities in reference to who breached the contract.
- The correct law is that the banks should be left free from the intervention between the banks, in case of any fraud or irretrievable injustice might be done with the encashing of the bank guarantee only then can the courts interfere.
- Hence, the court dismissed it by stating that unless and until the dispute is settled first with the arbitrators the bank guarantee cannot be encashed.
- The correct position of law regarding the execution of the Bank Guarantee given by the Bank is uncontested; this is well highlighted in the case of U.P. Co-op. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. It is also included that the party in whose favour the bank Guarantee is made is not entitled to an injunction.
- It is well stated that this is the rule because of which many Commercial dealings take place and hampering it would lead to a disruption in the flow of business.
- For the court to intervene in such cases would be when it is a case of fraud which would vitiate the entire transaction of the Bank Guarantee, and the bank is to be made aware of such fraud.
- Such fraud must have been committed by the Beneficiary in this transaction but, there was none.
- Bank guarantee also entitles the Beneficiary for encashing the whole or part of the amount, irrespective of any dispute that exists on behalf of whom the guarantee was made.