AIR 1986 Cal 374
High Court Of Calcutta
Appellant: Banerjee & Banerjee v/s. Respondent: Hindustan Steel Works Construction Ltd. and Ors.
Hon'ble Judge: Pratibha Banerjee, J.

Counsels:
For Appellant/Petitioner/Plaintiff: A.C. Bhabra and D. K. Bose, Advs.
For Respondent/Defendants: Bhaskar Gupta and Debasis Bose, Advs.
For Banks: Utpal Bose, Adv.

Facts Of The Case:

1. An order preventing the respondent No. 1 from enforcing seven bank guarantees provided by the Bank of Madura Limited and the Indian Overseas Bank, the respondents Nos. 2 and 3 herein, on behalf of the petitioner in Favor of the respondent No. 1, is requested in this application under S. 41 of the Arbitration Act.
2. The contract dated 12-5-84 between the petitioner and respondent No. 1 for building activities in the Farakka Super Power Thermal Project at Farakka stipulated specifically that these bank guarantees would be issued in accordance with those provisions.
3. Five of the seven Bank guarantees are for securing mobilisation advances provided by respondent No. 1 to the petitioner, and two of them are in place of security deposits.
4. The Banks will not contest or question the respondent No. 1's determination of the extent of the damages. The Bank will be required to release the promised amount once these two requirements have been met.
5. Mr. Bhabra, the petitioner's attorney, further argues that the Banks will not be held liable under the guarantees unless the loss or harm is estimated or defined by respondent No. 1.
6. All seven of the guarantees have been demanded to be upheld in essentially the same language.
7. The banks will not be held liable to respondent No. 1 for incurring unliquidated damage until the damage is determined or assessed. However, the Banks must release the promised amount without delay and in full accordance with respondent No. 1's decision, which is binding and final in this matter. Respondent No. 1 violated the terms of the guarantees and failed to fulfill its obligation as the sole judge under the agreements by failing to determine the amount of the alleged loss. Additionally, by doing so, it illegally attempted to recover unliquidated damages, which is against the law, as stated in AIR 1974 SC 1265[1].
8. Any performance guarantee provided by a bank must be honored in accordance with its terms.
9. If so stated, the Bank must pay as per its guarantee immediately, without request for additional documentation or circumstances. The sole exception is when the Bank is aware of a blatant deception.
10. The appeals court mentioned the exception of an obvious deception.
11. A request for an order of injunction prohibiting the Bank from paying the buyer under the performance guarantee was also made by the plaintiff, Texmaco.
12. However, the Division Bench also held that there is an exception to this general principle and that the Bank guarantee can only be stopped on the grounds that "there is a clear fraud of which the Bank has notice" and that the Bank guarantee is an independent agreement that should not be prevented from being enforced by courts.
13. Being a third party to the bank guarantee, the contractor lacked standing to prevent the beneficiary from collecting on the bank guarantee or the Bank from making the payment. But our courts have gone a step further and added that the court can prevent parties to the guarantee from executing the guarantee at the contractor's request in cases where any unique equity would arise out of the specific circumstances of the case. Therefore, if the guarantee is executed through fraud, deception, the willful omission of material facts, or other illegal means, it will result in a special equity in the contractor's Favor, and that contractor will then have the right to suspend the execution of the guarantee by seeking a court order.
14. However, the principal contract must constitute the basis for the beneficiary's right to do so or his cause of action to do so. As a result, the Arbitrator has the authority to rule on the legality or validity of the enforcement of the bank guarantee and the extent of the claimant's damages.
15. The facts and circumstances of each case, as well as the court's ruling on the aforementioned factors, will determine whether or not the Bank guarantee should be enforced in a given situation.
16. According to Mr. Bhabra, "commercial manner" enforcement does not imply that the court will permit enforcement without looking into the claim of fraud or exceptional equity. Only when enforcement is carried out in accordance with the provisions of the agreement will the court permit it.
17. He cited Eastern Countries Building Society v. Russell, 1 All ER 500 (1947)[2], at 503, which explains how to interpret a bank guarantee: The actual language that the parties actually agreed on and used in the written instrument as a means of expressing what they intended to agree upon must be taken into account when interpreting the entire document.
18. The aforementioned rule was established in 1947. 1 All ER 500 and 2 All ER 734 (Eastern Countries Building Society v. Russell) were both approved by the Court of Appeal in 1947. The guarantee only becomes effective when the demand conforms with the guarantee's provisions, which is also a well-established legal principle.
19. However, if the guarantee is conditional, it only becomes enforceable if the specified criteria are met, and the beneficiary must claim this in the demand letter. If not, the Bank will not be required to make payment.
20. The petitioner also claimed that respondent No. 1 still owes the petitioner Rs. 83 lakhs for the completed work.
21. Additionally, the demand letters must follow the bank guarantees. On both grounds, the Court must halt the execution of these seven bank guarantees because, by legal standards, the banks have not yet come into responsibility as a result of the guarantees.
22. According to that interpretation, the temporary order is upheld. It has been noted that the respondent does not accept the petition's accusations on their own merits. The signed copy of the minutes must be followed by all parties and the involved banks.

Arguments

1. In accordance with Section 41 of the Arbitration Act, which permits judicial involvement in arbitration procedures, the petitioner is asking for this order.
2. The petitioner contends that a contract signed on December 12, 1954, between them and respondent No. 1 expressly provided that these bank guarantees would be issued in accordance with the terms of the contract.
3. Five of the seven bank guarantees are in place as security deposits, and the other two are aimed to protect mobilisation advances that respondent No. 1 provided to the petitioner.
4. The petitioner claims that respondent No. 1's determination of the extent of damages is not subject to challenge or disagreement by the banks. Once the two conditions are satisfied, the banks must disburse the pledged sums.
5. The petitioner contends that the guarantees will not hold the banks accountable unless respondent No. 1 estimates or defines the loss or harm.
6. In essentially the same terms, all seven bank guarantees have been called for to be upheld.
7. Unless there is clear deceit involved, the banks are required to pay immediately in accordance with their guarantees.
8. To prove that imposing unliquidated damages is illegal, the petitioner references legal precedence, including AIR 1974 SC 1265[3] in particular.
9. The petitioner stresses the importance of adhering to the terms of any performance guarantee a bank offers.
10. The petitioner mentions that the appeals court recognized an exemption for blatant fraud.
11. The Division Bench ruled that the only justification for canceling a bank guarantee is "clear fraud of which the Bank has notice." Bank guarantees are separate contracts that should not be barred from legal enforcement.
12. The petitioner understands that they might not have standing to block the execution of the bank guarantee because they are a third party to it. The courts have, however, permitted exclusions when special equity develops due to certain circumstances, such as fraud or dishonesty.
13. The petitioner claims that the Arbitrator is qualified to decide whether or not the bank guarantee can be enforced and how much damage should be awarded.
14. The petitioner stresses that the particular facts and circumstances of the case should be taken into account when determining whether the bank guarantee can be enforced.
15. The petitioner claims that applying the law in a "commercial manner" does not prevent the court from taking fraud or unusual equity into account in the case.
16. The petitioner uses the case Eastern Countries Building Society v. Russell to argue that bank guarantees should be interpreted in accordance with the language used in the written document.
17. If the guarantee is conditional, the petitioner contends that it can only be enforced if certain requirements are satisfied and that it must be stated as such in the demand letter.
18. According to the petitioner, respondent No. 1 still owes them Rs. 83 lakhs for work that has been completed.
19. According to the petitioner, the bank guarantees must arrive before the demand letters, and in this case, the banks have not yet assumed responsibility in accordance with the law.
20. The petitioner is asking for the temporary injunction to remain in place until all parties, including the banks, have complied with the signed copy of the minutes.

Judgement
According to the facts and the arguments presented in front of the bench, it was contended that there was no privity of contract between the bank and the contractor. The contractual relationship existed solely between the beneficiary and the bank. Henceforth, the contractor here was a third party to the guarantee and had no locus standi to restrain the beneficiary from enforcing it or preventing the bank from making the payments.

The argument went on to say that by allowing the option of preventing parties to the guarantee from enforcing it at the contractor's request in instances where unique equity would develop due to the particulars of the case, the courts had gone one step further.

Also, the contractor would need to make a very compelling, initially arguable case for the claim of fraud or special equity in order to get a court order stopping the enforcement of a bank guarantee. Based merely on claims of fraud or exceptional equity, courts would not interfere with enforcing bank guarantees or letters of credit, whether they were unconditional or conditional.

Therefore, when the petitioner petitioned for the continuation of the interim order on the returnable date, the respondent chose not to submit an affidavit in objection, and the case was decided solely on the basis of the law. According to that interpretation, the temporary order is upheld. In the arbitration process, costs are incurred. It has been noted that the respondent does not accept the petition's accusations on the merits of the case. The signed copy of the minutes must be followed by all parties and the concerned banks.

Case Comment
The enforcement of seven bank guarantees issued by two banks on behalf of the petitioner (Banerjee & Banerjee) in Favor of respondent No. 1 (Hindustan Steel Works) is the subject of a complicated legal dispute in this case. The petitioner's request for a court order to stop respondent No. 1 from enforcing seven bank guarantees granted by two banks, the Bank of Madura Limited and the Indian Overseas Bank, is the central claim in the case.

A contract for construction work on the Farakka Super Power Thermal Project was tied to these promises. The petitioner claimed that the agreement they had with respondent No. 1 specifically stated that these bank guarantees would be given out in accordance with its terms.

The petitioner received mobilisation advances from respondent No. 1 in the amount of five of the seven bank guarantees; the other two were used as security deposits. The banks had stipulated that they would not dispute or call into question how much harm Respondent No. 1 had determined. They were required to disburse the promised sums upon fulfilling certain requirements.

There were other legal defences made, such as:
The banks should not be held accountable unless respondent No. 1 calculated or specified the loss or harm. In much the same words, it had been asked that the bank guarantees be honoured.

The banks must release all of the money that was promised in accordance with respondent No. 1's final, binding decision.

The banks contended that the contractor (petitioner) lacked standing to stop the beneficiary from collecting on the bank guarantee, but the court agreed that in situations where special equity arises because of particular circumstances, the court could stop parties to the guarantee from executing it at the contractor's request. This special equity may result from fraud, misrepresentation, wilful concealment of relevant information, or other criminal activity.

In conclusion, it can be said that respondent No. 1 had violated the conditions of the bank guarantees, and the court upheld an interim injunction. The case serves as a reminder of the complex legal concerns underlying bank guarantees, including how they should be interpreted, how they should be enforced, and how fraud or other exceptional circumstances might affect how they are carried out. It emphasises how crucial it is to consider the particular facts and language of bank guarantee agreements when resolving disputes.

End-Notes:

• Union of India Vs. Raman Iron Foundry and Ors., AIR 1974 SC 1265
• Eastern Countries Building Society v. Russell, 1 All ER 500 (1947)
• Union of India Vs. Raman Iron Foundry and Ors., AIR 1974 SC 1265