1997 (5) TMI 421 - SC - Indian Laws

whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee? Held that - It is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be fullowed while examining an application for grant of interim relief have been clearly laid down. Yet another scrious for which was carmnitted by the High Court in the present case was not to examine the tenns of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had trail the trouble of examining the documents on record which had been referred to by the trial court in its order refiling to grant injunction the court would not have granted the interim injunction. No justification for the High Court in invoking the alleged principle of adjust enrichment to the facts of the present case and then deny the appellant the Iight to encash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guarantee the applicability of the principle of undue enrichment has no application. From the facts stated hereinabove it appears to us that the respondent bank has not shown professional efficiency to say the least and has acted in a partisan manner with a view to help and assist respondent no. 1. At the time when there was no restraint order from any Court the bank was under a legal and moral obligation to honour its commitments. It however failed to do so. It appears that the bank deliberately draged its feet so as to enable respondent no.1 to secure favourable order of injunction from the Court. Such conduct of a bank is difficult to appreciate we do not wish to say anything more but it may feel that it will be prejudicial in the event of the appellant taking action against it. Appeal is allowed. The judgment and order of the Allahabad High Court set aside and the order of the trial court dismissing the injunction application is restored.

Summary

Issues Involved:
1. Encashment of Bank Guarantees
2. Allegation of Fraud
3. Judicial Impropriety and Adherence to Precedents
4. Conduct of the Respondent Bank

Detailed Analysis:

1. Encashment of Bank Guarantees:
The appellant and respondent no.1 entered into an agreement on 27th July 1994, where respondent no.1 was to supply boiling house equipment. As per the agreement, respondent no.1 furnished four bank guarantees, including bank guarantee no. 40/51 dated 1st December 1994 for Rs.26,15,000/- and bank guarantee no. 40/47 dated 24th November 1994 for Rs.35 lacs. The appellant invoked these guarantees due to respondent no.1's failure to supply the equipment on time. The bank guarantees were unconditional and irrevocable, requiring the bank to pay the appellant on their first written demand without demur. The appellant's invocation of the bank guarantees was in accordance with their terms, and the bank was under an obligation to honor its commitment. The court emphasized that an injunction should not nullify the terms of a contract that is lawfully enforceable.

2. Allegation of Fraud:
The trial court found that respondent no.1 had not alleged any fraud in the plaint, and the High Court's observation of fraud was based on a bald assertion in the injunction application. The Supreme Court reiterated that fraud must be established and not merely alleged. The court referred to previous judgments, emphasizing that a bank guarantee can only be restrained in cases of established fraud or where irretrievable harm would result from its encashment. The court concluded that there was no established fraud in this case, and the High Court erred in granting an injunction based on unsubstantiated allegations.

3. Judicial Impropriety and Adherence to Precedents:
The Supreme Court criticized the High Court for not referring to established judicial precedents on the matter of bank guarantees. The High Court's failure to consider the terms of the bank guarantees and the letters of invocation was a serious error. The court emphasized the importance of adhering to settled legal principles and condemned the tendency of lower courts to grant unwarranted relief by ignoring authoritative pronouncements. The court reiterated that the principles regarding the grant of injunctions in matters relating to bank guarantees have been clearly laid down in numerous decisions and must be followed.

4. Conduct of the Respondent Bank:
The Supreme Court expressed concern over the conduct of the respondent bank, which failed to honor its commitments despite no restraint order from any court. The bank's delay in fulfilling its obligations appeared to be a deliberate attempt to assist respondent no.1 in securing a favorable injunction. The court found this conduct unprofessional and partisan, suggesting that it might be prejudicial if the appellant takes action against the bank.

Conclusion:
The Supreme Court allowed the appeal, setting aside the Allahabad High Court's judgment dated 10th September 1996, and restored the trial court's order dated 20th August 1996 dismissing the injunction application. The appellant was awarded costs quantified at Rs.20,000/-. The court reiterated the principles governing the encashment of bank guarantees and condemned the lower courts' failure to adhere to established legal precedents.