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TMI Blog1987 (11) TMI 375X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate limited company for the supply and installation of a Vanaspati manufacturing plant at Harducharu in the District of Nainital, in the State of Uttar Pradesh. The contract bond contemplated, according to the appellant, guaranteed performance of work at various stages in accordance with the time schedule prescribed therein and provided for completion and commissioning of the plant after due trial run by the 15th May, 1984. The appellant contends that time was essentially and indisputably the essence of the contract. The contention of the appellant was that as per the terms and conditions of the contract bond, the respondent was to furnish a performance bank guarantee for ₹ 16.5 lakhs and yet another bank guarantee for ₹ 33 lakhs as security for the monies advanced by the appellant to the respondent for undertaking the work. Both these two guarantees as also the contract bond entitled the appellant to invoke them and call for their realisation and encashment on the respondent's failing to perform the obligations for which the appellant was made the sole judge The 15th of May, 1984 was the date fixed for completion and commissioning of the plant after 15 days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards Haldwani. and the agreement further stated:- AND WHEREAS the seller (the respondent herein) has undertaken to provide technical know-how and fabricate, design, engineer, manufacture, procure, import, supply, erect, instal, give trial runs and commission the Vanaspati Complex as referred to above complete in all respects at Halducharu District-Nainital (U.P.) as per specifications contained at Annexures 'A' to 'Q' and signed by both the parties in token of incorporation as an integral part of this agreement with guaranteed performance on the terms and conditions hereinafter appearing and contained. AND WHEREAS the contract price here-in-after mentioned is based on the 'Seller's undertaking to com mission and make ready for commercial production the said Vanaspati Complex by May 15, 1984 and if the seller fails to do so the contract price shall stand reduced to the extent as hereinafter provided. AND WHEREAS the contract price hereinafter mentioned is also based on the guaranteed performance of the said Vanaspati Complex as here- in-after provided and it is a term of this Agreement that if the said Vanaspati Complex fails to give the guaranteed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the seller's failure to fulfil the terms of the sale on the following terms and conditions (emphasis supplied) A) The sole judge for deciding whether the seller has failed to fulfil the terms of the sale, shall be the PCF. B) This guarantee shall be valid upto twelve months from the date of issue. i.e upto 24.6.84. C) Claims. if any must reach to be Bank in writing on or before expiry date of this guarantee after which the Bank will no longer be liable to make payments to the pCF D) Bank's liability under this guarantee deed is limited to ₹ 16.5 lacs (Rupees sixteen lacs fifty thousand only). E) This guarantee shall not be revoked by the Bank in any case before the expiry of its date without written permission of the Federation. The Bank guarantee No. 17/ 15 of the said date further went on to provide as follows:- AND WHEREAS to secure the said advance, the seller requested the Bank to furnish a Bank Guarantee of the said amount of ₹ 33 lacs (Rupees thirty three lacs) in favour of the PCF and the Bank accepted the said request and agreed to issue the required Bank guarantee in favour of the Feder ation. Now, therefore, in consideration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot been assailed as a fact. The High Court was of the view, that in these circumstances this cannot be said that the invocation order was final and irrevocable. The High Court was further of the view that having taken over the possession of the plant it was necessary to consider all the aspects and held that the bank guarantees could not be invoked. The High Court was of the view that it was not a question of restraining the performance of any bank guarantee. I am, however, unable to agree. The principles upon which the bank guarantees could be invoked or restrained are well-settled our attention was also drawn to several decisions of the High Court as well as of this Court. Reference had also been made to some of the English decisions. So far as the position of English law is concerned, the principles by now are well-settled. I will refer to some of the decisions and explain the position. The question arose before the Court of Appeal in England in Hamzeh Melas Sons v. British Imex Industries Ltd., [1958] 2 Q.B .D. 127. There the plaintiffs, a Jordanian firm, contracted to purchase from the defendants, a British firm, a large quantity of reinforced steel rods, to be deliver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffs' cargo (consigned to Hungary) from Beirut to Rijeka. Discharge was delayed at Rijeka and shipowners exercised lien on cargo in respect of demurrage Third defendant bank put up guarantee in London in favour of second defendants (first defendants' London agents) to secure release of cargo. There was a claim by Yugoslavians to distrain on goods, involving ship in further delay and master of Flora M, on lifting original lien, immediately exercised another lien in respect of extra delay (which was raised when Hungarian buyers put up 2000) Two years later, shipowners claimed arbitration with charterers to assess demurrage for which first lien was exercised and claimed to enforce guarantee. Plaintiff claimed declaration that guarantee was not valid and injunction to restrain shipowners or their agents from enforcing guarantee First and second defendants appealed against granting of injunction by Blain, J. It was held by the Court of Appeal that it was a special case in which the Court should grant an injunction to prevent what might be irretrievable injustice. Lord Denning, M R., observed that although the shippers were not parties to the bank guarantee, nevertheless they had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce demands for payment had been made by the buyers under the guarantees and the plaintiffs had not established that the demands were fraudulent or other special circumstances, there were no grounds for continuing the injunctions. ii) It was right to discharge the injunctions against the bank, the fact that the Egyptian defendants had taken no part in the proceedings could not be a good ground for maintaining those injunctions. Further, equally strong considerations applied in favour of the discharge of the injunctions against the Egyptian defendants, and their failure to participate in the proceedings did not preclude the court from discharging the injunctions against them. In my opinion the aforesaid represents the correct state of the A law. The Court dealt with three different types of cases which need not be dilated here In Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., [1978] 1 All England Law Reports 1976. English suppliers, entered into a contract with Libyan buyers to supply goods to them in Libya The contract was subject to a condition precedent that the plaintiffs would arrange for a performance bond or guarantee to be given, for ten per cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een right to discharge the injunction and that the appeal would be dismissed. Lord Denning, M.R. held that Justice Kerr was right in discharging the injunction and reiterated that the bank must honour its commitment. The principle must be that upon that basis trade and commerce are conducted. Lord Denning, M.R., indicated at page '984 that seeing that the bank must pay, and will probably come down on the English suppliers on their counter-guarantee, it followed that the only remedy of the English suppliers was to sue the Libyan customers for damages. The contract contained a clause giving exclusive jurisdiction to the courts of Libya. In the instant case, the learned Judge has proceeded on the basis that this was not an injunction sought against the bank but this was the injunction sought against the appellant But the net effect of the injunction is to restrain the bank from performing the bank guarantee That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated man in such circumstances is not remedyless The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing from a particular situation which might entitle the party on whose behalf guarantee is given to an injunction restraining the bank in performance of bank guarantee and in the absence of any clear fraud, the Bank must pay to the party in whose favour guarantee is given on demand, if so stipulated, and whether the terms are such have to be found out from the performance guarantee as such. There the Court held that where though the guarantee was given for the performance by the party on whose behalf guarantee was given, in an orderly manner its contractual obligation, the obligation was undertaken by the bank to repay the amount on first demand and 'without contestation, demur or protest and without reference to such party and without questioning the legal relationship subsisting between the party in whose favour guarantee was given and the party on whose behalf guarantee was given, and the guarantee also stipulated that the bank should forthwith pay the amount due notwithstanding any dispute between the parties, it must be deemed that the moment a demand was made without protest and contestation, the bank had obliged itself to pay irrespective of any dispute as to whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guarantee. In that case the learned Single Judge came to the conclusion that the suit involved serious questions to be tried and particularly relating to the plea of fraud, which was a significant factor to be taken into account and claim for interdicting the enforcement of bank guarantee should have been allowed. I am however, of the opinion that these observations must be strictly considered in the light of the principle enunciated. It is not the decision that there should be a prima facie case. 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. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised. In Tarapore Co. Madras v. M/s V/o Tractors Export, Moscow and Anr. [1969] 2 S R 920 this Court observed that irrevocable letter of credit had a definite implication. It was independent of and unqualified by the contract of sale or other underlying transactions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This Court was concerned with the bank guarantee and referred to the previous decision of this Court in United Commercial Bank v. Bank of India and others, (supra). This Court found that this case was covered. The Court observed that the Court should not, in transaction between a banker and banker, grant an injunction at the instance of the beneficiary of an irrevocable letter of credit, restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank, acting on behalf of the beneficiary against a document of guarantee, indemnity at the instance of the beneficiary On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the Court should interfere. Mr. Tarkunde submitted before us that in this case the grievance of the appellant was that there was delay in performance and defective machinery had been supplied. He submitted that if at this stage appellant was allowed to enforce th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge for deciding whether SCE(P) Ltd. has fulfilled the terms of the contract or not. The guarantee was thus undisputedly irrevocable with absolute discretion for UPCOF Ltd. to invoke the same. The dispute arose between the parties as to the erection and performance of the plant. The SCE(P) Ltd. apprehending that the bank guarantees would be invoked by the UPCOF Ltd, approached the Court of the Civil Judge, Lucknow for a restraint order against the latter. The action was brought under Sec. 41 of the Arbitration Act read with order 39 r. 1 and 2 of the Code of Civil Procedure contending inter-alia, that there was no default in the construction or delivery of possession of the plant. But the UPCOF Ltd. had a different version. It contended that the construction was not within the time schedule and performance of the plant was not up to the mark. It also contended that the Court should not grant injunction in the matter. The trial court refused to interdict UPCOF Ltd. the SCE(P) Ltd. took up the matter in revision before Lucknow Bench of the Allahabad High Court. The learned Judge before whom the matter came up for disposal was of the view that SCE(P) Ltd. has made out a prima facie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference in the position of law. Equally, it would he futile to contend that the court was justified in granting the injunction since it has found a prima facie case in favour of the SCE(P) Ltd. The question of examining the prima facie case or balance of convenience does not arise if the court cannot interfere with the unconditional commitment made by the bank in the guarantees in question. The modern documentary credit had its origin from letters of credit. We may, therefore, begin the discussion with the traditional letter of credit. Paul R. Verkuil in an article [Bank Solvency and Guaranty Letters of Credit, Standford Law Review V. 25 (1972-73 at p. 719)] explains the salient features of a letter of credit in these terms: C The letter of credit is a contract. The issuing party-usually a bank-promises to pay the 'beneficiary'-traditionally a seller of goods-on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of credit thus 'eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against payment under letters of credit. The defendant bank, against its customer, filed the equivalent of a motion to dismiss for failure to state a claim. In that posture all the allegations of the complaint were taken as true, and those allegations were gross fraud that the holders in due course were involved. On those facts, the court issued an injunction against payment. The exception of fraud created in the above case has been codified in sec. 5-114 of the Uniform Commercial Code. It has been accepted by Courts in England. See: (i) Hamzeb Milas and Sons v. British Lmex Industries Ltd. [1958] 2 QBD 127], (ii) R.D. Harbottle (Mercantile) Ltd. and another v. National West-Minister Bank Ltd. [1977] 2 All E.R. 862; (iii) Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., [1978] l All E.R. 976 and (iv) UCM (Investment) v. Royal Bank of India, [1982] 2 All E.R. 720. The last case is of the House of Lords where Lord Diplock in his speech said (at p. 725): The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the Bank of India in terms of the letter of guarantee or indemnity executed by it. The courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another. If such temporary injunctions were to be granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail. In view of the banker's obligation under an irrevocable letter of credit to pay, his buyer- customer cannot instruct him not to pay. In Centax (India) Ltd., [1986] 4 SCC 136, this Court again speaking through A.P. Sen, J. following the decision in the United Commercial Bank case said: We do not see why the same principles should not apply to a banker's letter of indemnity. It is true that both the decisions of this Court dealt with a contract to sell specific commodities or a transaction of sale of goods with an irrevocable letter of credit. But in modern commercial transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank's obligations of course should not be extended to protect the unscrupulous seller, that is the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the Courts talk about is fraud of an egregious nature as to vitiate the entire underlying transaction . It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the Court for an injunction. The Court, however, should not lightly interfere with the operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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