In SVENSKA HANDELSBANKEN VS INDIAN CHARGE CHROME (DAYAL, J.

)
ON 15 OCTOBER, 1993, it was held that:

PARA 60- We have referred to the observations of both Sabyasachi Mukharji as well as Shetty,
JJ. in extension to emphasize that in case of confirmed bank guarantees/irrevocable letters of
credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in
the case and fraud has to be an established fraud. The expression "to prevent irretrievable
injustice" appears to have been taken from the decision of the Court of Appeal in England in
the case of Elian and Rabbath (Trading as Elian & Rabbath) v. Matsas and MatsaS4. ………….
His Lordship observed that "it can well be argued that the guarantee was given on the
understanding that the lien was raised and no further lien imposed, and that when the
shipowners, in breach of that understanding imposed a further lien, they were disabled from
acting on the guarantee". If we closely analyze the facts of that case, irretrievable injustice
which was made the basis for grant of injunction really was on the ground that the guarantee
was not encashable on its terms when the buyers had paid 2000 Pounds to lift the original lien.

PARA 72.Again in this very judgment Shetty, J. referred to the observations of Mukharji, J.
that there should be prima facie case of fraud and special equities in the form of preventing
irretrievable injustice between the parties.
‘Mere irretrievable injustice without prima facie case of established fraud is of no consequence
in restraining the encashment of bank guarantee.’

PARA 88.The High Court was also in error in considering the question of balance of
convenience. In law relating to bank guarantees, a party seeking injunction from encashing of
bank guarantee by the suppliers has to show prima facie case of established fraud and an
irretrievable injury. Irretrievable injury is of the nature as noticed in the case of Itek Corpn.6
Here there is no such problem. Once the plaintiff is able to establish fraud against the suppliers
or suppliers-cum-lenders and obtains any decree for damages or diminution in price, there is
no problem for effecting recoveries in a friendly country where the bankers and the suppliers
are located. Nothing has been pointed out to show that the decree passed by the Indian Courts
could not be executable in Sweden.

1. OIL & NATURAL GAS CORPORATION LTD VS STATE BANK OF INDIA,

OVERSEAS ... ON 21 JULY, 2000

In Svenska Handelsbanken v. M/s Indian Charge Chrome and Others: (1994) 1 SCC 502, the
Supreme Court had held that confirmed bank guarantees/irrevocable letters of credit cannot be
interfered with unless there is fraud and irretrievable injustice involved in the case. The Court
further observed that fraud has to be an established fraud. In Larsen &Tourbo Limited v.
Maharashtra State Electricity Board and Others: (1995) 6 SCC 68, the Supreme Court referred
to its earlier decision in Svenska Handelsbanken (supra) and held as under:-

"PARA 5. Before we adjudicate the rival pleas urged before us by counsel for the parties, it
will be useful to bear in mind the salient principles to be borne in mind by the court in the
matter of grant of injunction against the enforcement of a bank guarantee / irrevocable letter of
credit. After survey of the earlier decisions of this Court in United Commercial Bank v Bank
of India, U.P. Coop. Federation Ltd. v Singh Consultants & Engineers (P) Ltd., General
Electric Technical Services Co. Inc v Punj Sons (P) Ltd. and the decision of the Court of Appeal
in England in Elian and Rabbath v Matsas and Matsas and a few American decisions, this Court
in Svenska Handelsbanken v. Indian Charge Chrome [AIR 1994 SC 626], laid down the law
thus:
"...in case of confirmed bank guarantees/ irrevocable letters of credit, it cannot be interfered
with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an
established fraud...
...irretrievable injustice which was made the basis for grant of injunction really was on the
ground that the guarantee was not encashable on its terms...
...there should be prima facie case of fraud and special equities in the form of preventing
irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case
of established fraud is of no consequence in restraining the encashment of bank guarantee.""

IMP PARAS- 6 – 8

2. HINDUSTAN STEELWORKS ... VS TARAPORE & CO. & ANR ON 9 JULY,

1996
PARA 20- Lastly, the learned counsel for the appellant relied upon the following observations
made in paragraph 60 of the 3-Judge decision of this Court in Svenska Handelsbanken vs. M/s
Indian Charge Chrome1994 (1) SCC 502:
"60. We have referred to the observations of both Sabyasachi Mukherji as well as Shetty, JJ.
in extenso to emphasise that in case of confirmed bank guarantee/irrevocable letters of credit,
it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case
and fraud has to be an established fraud."

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

4 DECEMBER, 1996
PARA- 13 The same question came up for consideration before this Court in Svenska
Handelsbanken v. M/s Indian Charge Chrome & Ors. (1994 [1] SCC 502). The Court once
again reiterated that a confirmed bank guarantee/irrevocable letter of credit cannot be interfered
with unless there is established fraud or irretrievable injustice involved in the case.
Irretrievable injury has to be of the nature noticed in the case of Itek Corporation v. The First
National Bank of Boston etc. (566 Fed Supp. 1210). On the question of fraud this Court
confirmed the observations made in the case of U.P. Cooperative Federation Ltd. (supra) and
stated that the fraud must be that of the beneficiary, and not the fraud of anyone else.
 3. U.P. CO-OPERATIVE FEDERATION LTD. V. SINGH CONSULTANTS AND
ENGINEERS (P) LTD.,

The relevant facts of the case are that the respondent before the Supreme Court entered into an
agreement with the appellant therein for constructing a Vanaspathi manufacturing plant. As
required by the contract between the parties the respondent furnished two bank-guarantees for
proper construction and successful commissioning of the plant. Under the terms of the bank-
guarantees the Bank undertook not to revoke the guarantee in any event before the expiry of
the due date, and to make unconditional payments on demand without reference to the
respondent. The guarantees further provided that the appellant shall be the sole judge for
deciding whether the respondent had fulfilled the terms of the contract, or not. Subsequently,
disputes arose between the parties as to the erection and performance of the plant. The
respondent approached the Civil Court by a petition under Section 41 of the Arbitration Act
read with Rules 1 and 2 of Order XXX1X, C.P.C. seeking an injunction restraining the
appellant from invoking the bank-guarantees. Though the Civil Court dismissed the petition,
the High Court, in appeal, granted the injunction asked for. The matter was taken to Supreme
Court, which allowed the appeal observing that it was not a case where injunction ought to
have ,been granted. The effect of injunction, it was observed, was to restrain the Bank from
performing the bank-guarantee, which cannot be done; what cannot be done directly cannot be
allowed to be done indirectly. A maltreated party in such circumstances, it was observed, was
not remediless; he can sue the appellant for damages; there was no apprehension of irretrievable
damages, nor was any strong prima facie case of fraud in entering into the transaction, made
out. It was further observed that commitments of banks must be honored free from interference
by the courts. An irrevocable commitment either in the form of confirmed bank-guarantee or
irrevocable letter of credit cannot be interfered with by courts; in order to restrain the operation
either of irrevocable letter of credit or of confirmed letter of credit, or of bank-guarantee, there
should be serious dispute and there should be good prima facie case of fraud and special
equities in the form of preventing irretrievable injustice between the parties. It was observed
that if the above principle is not followed, the very purpose of bank-guarantees would be
negative and the fabric of grading operation will get jeopardized. Upon bank-guarantees, it was
observed, revolves much of the internal trade and many transactions in a country.

IMP PARA- 21, 24, 35

 4. HINDUSTAN CONSTRUCTION CO. LTD. V. NATIONAL HYDRO
ELECTRIC POWER CORPORATION LTD. (SUPRA), THE DIVISION
BENCH OF THIS COURT HAD held that a bank guarantee cannot be interdicted on
account of contractual disputes. The relevant extract of the said decision is set out
below:-

PARA 9. The law relating to grant of injunctions to restrain the invocation/encashment of

unconditional BGs is well settled. BGs are distinct agreements between the banks and its
customers and are independent of the main contract between the customer and the beneficiary
and therefore, disputes between the latter two will have no bearing on the obligation of the
bank giving such a guarantee to honor its invocation by the beneficiary in terms of the bank
guarantee, more so when it is unconditional. The courts are slow to restrain the realization of a
BG, but have, however, carved out two exceptions to the rule, one being fraud and the other
being special equities in the form of irretrievable harm or injustice being caused if encashment
is allowed. [SEE : UP State Sugar Corporation v. Sumac International Ltd. (1997) 1 SCC 568;
Standard Chartered Bank v. Heavy Engineering Corporation Ltd. 2019 SCC Online SC 1638].

PARA 10. Fraud, calling for the intervention of the court, has to be of an egregious nature.
There must be fraud established and mere allegations will not suffice. Fraud in connection with
a BG should vitiate its very foundation. It is when the beneficiary seeks to benefit thereby, that
the courts will restrain encashment. Fraud must be that of the beneficiary and none else.
Injunction can be granted also where the bank itself is proved to have knowledge that the
demand for payment of the BG is fraudulent. [SEE : U.P. Coop. Federation Ltd. v. Singh
Consultants and Engineers (P) Ltd. (1988) 1 SCC 174; Svenska Handelsbanken v. Indian
Charge Chrome (1994) 1 SCC 502].

PARA 21. The law relating to encashment of BGs under the second exception has attained
wider dimensions over a period of time. The courts were initially very circumspect and required
existence of fraud before it prevented encashment of unconditional BGs. Then it looked into
the question of who was in breach of the contract to determine the relief to be granted under
special equities. Through various judicial pronouncements the scope of what constitutes special
equities was expanded to include cases of irretrievable injury, extraordinary special equities
including the impossibility of the guarantor being reimbursed at a later stage if found entitled
to the money and the invocation of the BG being not in terms of the BG itself. In the absence
of any straight-jacket formula, the courts are required to examine each case to find out whether
it falls within these heads."
 5. LARSEN & TOUBRO LIMITED VS MAHARASHTRA STATEELECTRICITY
on 13 September, 1995

PARA 5- Before we adjudicate the rival pleas urged before us by Counsel for the parties, it
will be useful to bear in mind the salient principles to be borne in mind by the Court in the
matter of grant of injunction against the enforcement of a Bank Guarantee/irrevocable Letter
of Credit. After survey of the earlier decisions of this Court in United Commercial Bank v.
Bank of India and ors., 1981 (2) SCC 766, U.P. Cooperative Federation Ltd. v. Singh
Consultants & Engineers (P) Ltd., 1988 (1) SCC 174, General Electric Technical Services
Company Inc. v. Punj Sons (P) Ltd. and anr., 1991 (4) SCC 230 and the decision of the Court
of Appeal in England in Elian and Rabbath v. Matsas and Matsas, 1966 (2) Lloyd's Report 495
and a few American decisions, this Court in Svenska Handelsbanken v. M/s. Indian Charge
Chrome And Others, 1994 (1) SCC 502, laid down the law thus :-

"...... in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered

with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an
established fraud. ......" (p.523) "....... irretrievable injustice which was made the basis for grant
of injunction really was on the ground that the guarantee was not encashable on its terms......."
(p.524) "...... there should be prima facie case of fraud and special equities in the form of
preventing irretrievable injustice between the parties. Mere irretrievable injustice without
prima facie case of established fraud is of no consequence in restraining the encashment of
bank guarantee." (pp.526-527)

PARA 6- In the order appealed against the learned Judge has referred to the decisions aforesaid
and has held thus: "...... only in the event of fraud or irretrievable injustice, the Court would be
entitled to interfere in a transaction involving a bank guarantee and under no other
circumstances. The petitioners have failed on both these counts."

6. HINDUSTAN CONSTRUCTION CO. LTD VS STATE OF BIHAR AND ORS

ON 8 OCTOBER, 1999

PARA 8- Now, a Bank Guarantee is the common mode, of securing payment of money in
commercial dealings as the beneficiary, under the Guarantee, is entitled to realise the whole
of the amount under that Guarantee in terms thereof irrespective of any pending dispute
between the person on whose behalf the Guarantee was given and the beneficiary. In
contracts awarded to private individuals by the Government, which involve huge
expenditure, as, for example, construction contracts, Bank Guarantees are usually required
to be furnished in favour of the Government to secure payments made to the contractor as
"Advance" from time to time during the course of the contract as also to secure performance
of the work entrusted under the contract. Such Guarantees are encashable in terms thereof
on the lapse of the contractor either in the performance of the work or in paying back to the
"Government Advance", the Guarantee is invoked and the amount is recovered from the
Bank. It is for this reason that the Courts are reluctant in granting an injunction against the
invocation of Bank Guarantee, except in the case of fraud, which should be an established
fraud, or where irretrievable injury was likely to be caused to the Guarantor. This was the
principle laid down by this Court in various decisions. In U.P. Cooperative Federation Ltd.
v. Singh Consultants & Engineers Pvt. Ltd., [1988] 1 SCC 174, the law laid down in
Bolivinter Oil SA v. Chase Manhattan Bank, [1984] 1 All E.R. 351 was approved and it
was held that an unconditional Bank Guarantee could be invoked in terms thereof by the
person in whose favour the Bank Guarantee was given and the Courts would not grant any
injunction restraining the invocation except in the case of fraud or irretrievable
injury. In Svenska Handelsbanken v. Indian Charge Chrome, [1994] 1 SCC 502; Larsen &
Toubro Ltd. v. Maharashtra State Electricity Board, [1995] 6 SCC 68; Hindustan Steel
Works Construction Ltd. v. G.S. Atwal & Co. (Engineers) (P) Ltd., [1995] 6 SCC
76; National Thermal Power Corporation Ltd. v. Flowmeore (P) Ltd., [1995] 4 SCC
515; State of Maharashtra v. National Construction Co., [1996] 1 SCC 735; Hindustan
Steel Works Construction Ltd. v. Tarapore & Co., [1996] 5 SCC 34 as also in U.P. State
Sugar Corporation v. Sumac International Ltd., [1997] 1 SCC 568, the same principle has
been laid down and reiterated.