Author: Surya, 3rd Year student at RNB Global University, Bikaner.
Date of Decision: 11 July, 2007
Bench: Tarun Chatterjee, B. Sudershan Reddy
Original Copy: N/A
Statutes involved: Indian Arbitration and Conciliation Act, 1996,
Issue in question:
- Whether the bank guarantee in question is a conditional one or not?
- The appellant was a Co-operative Society which was registered under the Karnataka Co-operative Societies Act, 1959. Appellant set up a sugar factory at Hunji, Bidar District, Karnataka. The same had a capacity of 2500 TCD per day but it was intended to increase the capacity up to 4000 TCD.
- The 1st Respondent which was also a Co-operative Society had registration under the Multi-State Co-operative Societies Act made an agreement with the Appellant on 1 Nov.2000. By entering in this contract with the appellant, the respondent took the responsibility to design, find manufacture, deliver at the site and to supervise the erection and commissioning of the Sugar Plant and Machinery.
- According to the Agreement the respondent needed to furnish a bank guarantee but appellant contended that as per the terms of the agreement the respondent had failed to commission the plant that’s why he sent many notices to the respondent regarding this. Then a meeting was held between the parties with the intervention of the Karnataka Government and in that meeting both parties agreed to some common points.
- They agreed that the first respondent would furnish a bank guarantee of Rs. 92.40 lakhs and simultaneously the petitioner shall give Rs.140.41 lakhs to the respondent. And after this within 20 days the respondent will start the trial of crushing sugar.
- On 04.07.2003 the respondent furnished the bank guarantee and the appellant released Rupees One Hundred Forty Lakh Forty-One Thousand on 05.07.2003. But the crushing of sugar did not start even after 20 days. It was started on 26th Nov. 2003 but on 22 Dec. 2003 it was stopped due to some defects in machinery.
- On 27.12.2003 appellant sent a letter to the respondent and informed that the supply was not made, erection had defects and even the plant was not commissioned.
- On 13 Mar. 2004 a meeting of Board of Directors of appellant society was held to invoke the bank guarantee, that is why the appellant sent a request to the Commissioner of Cane Development and Director of Sugar to countersign the invocation letter because the respondent had failed to commission the plant.
- The Respondent sent a notice to the appellant to refer the issue for arbitration but the appellant didn’t give any response to that notice and invoked the bank guarantee.
- The respondent filed Miscellaneous Petition under Section 9 of the Arbitration and Conciliation Act, 1996 to seek injunction against the appellant so as to restrain it from encashing the bank guarantee furnished on 04.07.2005. But the trial court refused to give injunction and said that the encashment of bank guarantee by the appellant cannot be held to be fraudulent.
- The respondent challenged the legality of the order of trial court. The HC reversed the order of the trial court and granted injunction. It was said that the encashment of bank guarantee was fraudulent and the letter invoking the bank guarantee needed to be countersigned by the Commissioner of Sugar, Bangalore, but it was signed by some other authority.
- Thus, the appellant preferred an appeal to the SC. The appellant contended that the bank guarantee furnished by the respondent was unconditional and the appellant has right to invoke the bank guarantee which can’t be challenged on grounds other than fraud or irreparable injury.
- As per Clause 1 of the agreement the guarantor undertook the responsibility to pay a sum not exceeding Rs. 92.40 lakh within 30 days of demand. And the purchaser may demand the same on failure of the supplier to start the trial test of the sugar plant by 24th July, 2003 and also upon the failure of the sellers to commission the Project before December 2003.
- SC set aside the judgment of HC and allowed the appeal. It was held that the respondent did not make out any case of grant of injunction to restrain the appellant from encashing the bank guarantee.
- It was also said that the observation made in this order shall not apply to the dispute pending before the arbitrator, which is required to be disposed of on its own merits and it must remain uninfluenced by the observation made by the court in its order.
- In this case the bank guarantee furnished by the respondent was unconditional thus the SC has rightly held the injunction should not be granted to restrain the appellant from encashing the bank guarantee.
- It was mentioned in the agreement that the purchasers were entitled to invoke the bank guarantee and demand the payment of money only upon the failure of the supplier to conduct the trial test of the sugar plant by 24th July, 2003 and also upon the failure of the sellers to commission the project before December, 2003.
- And the right of appellant to invoke the bank guarantee can’t be challenged on grounds other than fraud or irreparable injury.
- So, on the basis of facts and circumstances the SC has allowed the appeal.