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TMI Blog1993 (10) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... find it convenient to refer to the parties as they were described in the suit.4.The suit out of which the present appeal arises was filed by the plaintiff (hereinafter referred to as the 'borrower') before the Subordinate Judge, Cutback, inter alia for a declaration that the guarantees executed by Industrial Development Bank of India defendant 12 hereinafter referred to as the 'guarantor') in favour of defendants 4 and 5 to 11 (hereinafter referred to as the 'lenders') are void and for an order of injunction restraining the guarantor from making payments under the guarantees to the 'lenders'. 5.For appreciating the submissions made on behalf of the parties the facts shortly stated, leading to the filing of the present appeals are as follows. 6.Sometime in 1982 M/s Indian Metals Ferro Alloys Ltd., (in short 'IMFA' - defendant 13) issued a global tender for setting up a captive power plant, viz. a coal-fired steam power plant in Choudwar, Orissa. The tender indicated that credit by the suppliers will be preferred. Defendants 1 to 3 (hereinafter referred to as the 'suppliers' submitted their tenders in this regard. Since the tend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t escalations caused by delay. These two additional credit agreements were for US Dollars equivalent of Swedish Kroner 37,085,500 and 23,970,000. All the credit agreements inter alia purported to provide payments by the lenders to the suppliers on various documents, as provided in the credit agreements, being presented to the lenders and also against a notice of drawdown by the borrower. In relation to the third credit agreement the disbursements were to be made directly to the lenders in respect of the financial cost payable by the borrower upon notice of drawdown by the borrower. 10.The loans were required to be repaid by twenty (subsequently amended to eighteen) equal semi-annual (six monthly) consecutive instalments, the number of instalments and date of commencement of the instalments being separately provided for under each credit agreement. Repayments were required by the borrower to be made without demand or notice. It was specifically provided in the credit agreements that: Any amounts payable by the borrower shall be paid without set-off or counter-claim. The liability of the borrower to effect any payment under this Agreement is thus unconditional and shall not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were insulated from any possible dispute between the borrower and the suppliers and even the borrower and the lenders. In fact the form of guarantee was itself enclosed as an appendix to each credit agreement. 13.The terms of payment contained in the contracts between the borrower and defendants 1 and 2 (suppliers) which deals with disbursement of last 5 per cent of the respective contract price reads thus: 5 per cent of the contract price at the date of the purchasers' taking over of the Power Plant against presentation of a taking over certificate, issued by the purchaser, however, not later than 35 months after the date this contract has come into force unless the date of taking over is delayed due to reasons for which the supplier is responsible. Defendant 4 (lender) was to disburse the balance 5 per cent payment to defendants 1 and 2. 14.On June 24, 1989 the plaintiff (borrower) took over the plant and on June 25, 1989 issued a taking over certificate. On July 28, 1989 the plaintiff authorised defendant 4 to disburse the balance 5 per cent of the payment to defendant 3 as well. 15.It is common case that the amounts due to the suppliers were paid by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interconnected and constituted one transaction and are vitiated by fraud committed by defendants 1 to 4. It was pleaded that the plaintiff was fraudulently led into entering of contracts with the suppliers by fraud of the suppliers and defendant 4, the lender. The suppliers were not competent enough to manufacture 108 MW plant. They fraudulently persuaded the plaintiff to go in for a 'stoker fired' boiler instead of a 'pulverised fuel' boiler in spite of the recommendations of the Central Electricity Authority to the contrary. The representatives of the consortium/suppliers visited Bhubaneshwar and Choudwar in the second week of March 1983 and during discussions represented to the plaintiff that the recommendations of the Central Electricity Authority were not correct and that their vast experience in this field had shown that 'stoker fired' boilers were preferable over 'pulverised fuel' boilers in the instant case, with talcher coal as the basic raw material. The defendants 1 to 3 further represented that they had arranged credit facility for the proposed captive power plant through defendant 4 at a very low interest rate and specifically indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 on behalf of defendants 4 to 11 in twenty (which was later on reduced to eighteen) half-yearly instalments. 20.It was further pleaded that defendant 4, in fact, acted as a representative or an agent of defendants 1 to 3. It was also pleaded that in fact the supply of the plant and financing thereof through deferred credit was one composite transaction in which defendant 4 was integrally involved and interconnected as defendants 1 to 3. It was pleaded that the plaintiff relying upon the representations made by defendants 1 to 3 and 4 entered into three separate contracts with the suppliers on September 28, 1984 for erection and commissioning of the captive power plant. 21.It is not necessary at this stage to elaborately refer to the terms and conditions of the suppliers' agreements with the borrower except to mention that under the first contract, defendant I had agreed to supply turbine and other accessories for a total consideration of Swedish Kroner 432 million; under the second contract between the borrower and defendant 2, defendant 2 had agreed to supply 4 'chain grate stoker fired' boilers with other accessories and under the third contract defen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as stated earlier made some payments to the lenders before and after the taking over certificate. 25.It was further pleaded in the plaint that defendants 1 to 3 on May 29, 1989 conducted a test on completion of the captive plant using Australian coal. Defendants 1 to 3 wrongfully, fraudulently and illegally began to insist that the said test on completion was in terms of the contract and that the plaintiff should give a 'take over certificate' of the captive power plant to enable defendant 3 to receive the final 5 per cent payment from defendant 4. It was pleaded that the attempt of the consortium was to deceive the plaintiff that they had supplied, erected and commissioned a plant having 108 MW capacity which would run with talcher coal. It was pleaded that the plaintiff was not satisfied with the plant and expressed its unwillingness to give a take over certificate. The plaintiff pointed out to defendants 1 to 3 that talcher coal was going to be used and the plant should be made ready to accept the same. It was pleaded that defendants 1 to 3/suppliers threatened the plaintiff that if it did not take over the plant immediately, they would shut down 50 per cent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he representatives of plaintiff and induced the plaintiff by their fraudulent misrepresentations to enter into an agreement with the plaintiff. The cause of action also arose on May 29 and 31, 1990 when the plaintiff for the first time became aware of the fraud perpetuated by the defendants on the plaintiff The cause of action also arose when in March 1990 the plaintiff discovered the fundamental breach committed by the consortium. The cause of action for this suit also arose when the defendant 4 as agent, on behalf of defendants 4 to 11 called upon the plaintiff by telex dated March 4 , 1991 to pay the sum of US $ 8.40 million by April 30, 1991. Furthermore defendant 12 has also called upon the plaintiff to make a sum of US $ 8.40 million payable by April 30, 1991. The cause of action is continuous and no part of it is barred by law of limitation. 28. We have already noticed that defendant 12, on instruct ions from the plaintiff, made payments to the lenders on October 31, 1989 and again on November 15, 1990. 29.On receipt of summons in the suit and notice on the application for interim injunction filed by the plaintiff, defendants 1 to 3 did not enter appearance. Defendant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiff had waited for nearly seven years since the signing of the loan agreements and three years for commissioning of the plant before raising such spurious assertions and this would show that there is no prima facie case in favour of the plaintiff. 30.Defendant 12, the guarantor, also filed objections to the application for interim injunction with regard to the guarantee executed by defendant 12 in favour of defendants 4 to 11. It was pleaded that the plaintiff itself had filed Writ Petition Nos. 5218 and 5219 and this Court (Supreme Court) by order dated June 5, 1985 directed defendant 12 to make disbursements prior to June 15, 1985 of the first down payment of 15 per cent of the loan amount and to issue guarantee as per the letter of intent dated October 27, 1984. Even on application filed before the Supreme Court by defendant 12 for modification of the order the Supreme Court directed by order dated June 17, 1985 that the earlier order directing down payment of 15 per cent of the loan amount and issue of guarantee are to be carried out by defendant 12 on or before June 25, 1985. In pursuance of the aforesaid direction the plaintiff executed necessary documents in favour of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ; (6) that after the execution of the agreements only the agreements are to be looked into and there is no allegation of the plaintiff that defendants 4 to 11 have breached any terms and conditions of agreements executed between the plaintiff and defendants 4 to 11; (7)that the agreements executed by defendants 4 to 11 are not incidental to the designing, manufacturing, erection and fabrication of the project and defendant 4 being a banker has no concern with the agreements executed between the plaintiff and suppliers; (8)that the rights and obligations of the parties flow from the agreements and therefore the agreements should be based for deciding the issue;and (9)that the dues of the lenders as per clause 10.07 of the agreements betweenthe plaintiff and the lenders provide that all amounts payable by the borrower under the agreements shall be paid without set off or counter-claim and liability of the borrower to effect any payment under these agreements is unconditional and is not in any way dependent on the performance of the contracts or be affected by any other claim which the borrower may have against the suppliers or against any other party collaborating with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any restraint on them. It was noticed by the High Court that defendant 4 is the lender and the plaintiff is the borrower. The High Court observed that principles of guarantee would not be strictly applicable to it. General principles of induction on lender would alone be applicable. The High Court examined the terms of clause 2.1 of the guarantee given by defendant 12 in favour of defendants 4 to 11 and took the view that this clause under the guarantee agreement creates an obligation on defendant 12 to pay to defendant 4 upon first demand if the plaintiff does not pay any amount when due or the loan is declared default. There is neither any demand nor a declaration of default. Much before the same the suit had been filed alleging fraud in the transaction. On the receipt of the plaint the defendant 12 was required to make investigation whether there was a fraud and how defendant 4 is connected therewith. Defendant 12 without making any inquiry ought not to have entered appearance to contest the claim of the plaintiff and ought to have waited till the order of the court. Instead it has contested the claim which may give rise to suspicion that it is anxious to pay to defendant 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been brought to the notice of defendant 4 and in spite of it defendant 4 would have paid to defendants 1 to 3 basing upon clearance given by the plaintiff, a strong prima facie case of fraud by defendant 4 could have been made out. However, on the facts as presented at this stage it cannot be said that defendant 4 is as innocent as it claims to be. The High Court took the view that the inference of fraud is to be drawn not from individual event and such event by itself may not be sufficient for drawing inference of fraud. Totality of the events cumulatively have the effect of fraud and in this case, if the facts and circumstances from the stage of global tender till the suit is filed are considered together, a clear impression of fraud in the transaction of captive power plant by defendants 1 to 3 is created and defendant 4 cannot be fully disassociated from it. On balance of convenience the High Court took the view that if the injunction is granted, payment to defendant 4 would be delayed and if no injunction is granted, defendant 12 would pay to defendant 4 periodically on demand and fall back on the plaintiff to pay the dues. The plaintiff is to pay on cash-flow basis as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded strictly on principles of injunction in relation to bank guarantee but general principles of injunction on lenders would be applicable and on that basis proceeded to decide the matter. 39.Whenever an appeal is heard it is the duty of the appellate court to examine the findings of the trial court and if the findings of the trial court are not correct, to deal with it. What we find in the present case is that the High Court did not even appear to have noticed the findings of the trial court much less any attempt being made to meet them. We have noticed earlier the findings which were recorded by the trial court. One of the basic findings of the trial court was that there is no material of established fraud against defendant 4 nor defendant 4 has any knowledge of any fraud having been committed by defendants 1 to 3. The allegation of fraud against defendant 4 has been made on suspicion. Another important finding given by the trial court was that one has to look at the actual agreements executed between the parties and defendants 4 to 11 have not committed any breach of agreements with the plaintiff. Another finding given by the trial court was that the agreements executed by de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiff (defendant 13) including the letters dated October 5, 1982, January 7, 1983, March 31, 1983, April 14, 1983, project report dated August 12, 1983, the financial pattern as well as various proposals made by defendants 1 to 3 to defendant 13, draft agreements and other documents till the culmination of contracts with defendants 1 to 3. Learned counsel also took us through the various letters dated April 7, 1989; April 20, 1989, May 22-24, 1989 from the plaintiff to defendants 1 to 3 and other documents including letter dated October 6, 1989 from the plaintiff to defendant 3 and a mass of other documents. 44.We are prima facie debarred from looking at various proposals, drafts, project reports, if any, before the contracts between the borrower and defendants 1 to 3 on one hand and the credit agreements between the borrower and the lenders having been executed later. Facts which come within provisos 1 to 6 to Section 92 of the Evidence Act can be proved. The plaintiff could have resorted to proviso 1 to Section 92 of the Evidence Act. Section 92 with proviso (1) of the Evidence Act reads as follows: 92. Exclusion of evidence of oral agreement.- When the terms of any such co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l channel for making the credit available. The communication of defendant 4 to the plaintiff mentioning the suppliers as valuable clients of defendant 4 is again of no consequence. A banker has to deal with its customers every day. If the bank calls its customer a valuable client it only means the credit worthiness of the client. Nothing more nothing less. It made no mention of the professional capability of the suppliers. 48.United Commercial Bank v. Bank of India2 as it appears from its title, was a case between two bankers i.e. United Commercial Bank and Bank of India. In that case appellant bank was a bank for the buyer whereas the respondent bank was a bank for the seller. The facts were that Respondent 2 entered into a contract to sell to Respondent 3 the goods valued at approximately ₹ 86 lakhs pursuant to which the buyer opened a letter of credit with the appellant bank. After dispatching the goods to various destinations to which they were instructed to send, the seller 2 (1981) 2 SCC 766:(1981) 3 SCR 300 presented 20 sets of documents in the first lot and 27 sets of documents in the second, the aggregate value of which was equivalent to the amount of the letter o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the seller merely because of the alleged discrepancies. 52.On an appeal the Division Bench summarily dismissed the appellant bank's appeal with the result that the seller received the whole of the amount of the letter of credit as well as bought the whole lot of goods for ₹ 18.53 lakhs. 53.On the question whether the High Court should, in a transaction between a banker and a 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 at the instance of the beneficiary this Court held that: (SCR headnote) (SCC p. 784, para 41) [T]he High Court was wrong in granting the temporary injunction restraining the appellant bank from recalling the amount paid to the respondent bank. 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, rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the guarantor bank and the beneficiary and created independent rights, liabilities and obligations under the guarantee bonds themselves, as being technical 3 (1988)1 SCC 174:(1988) 1 SCR 1124 pleas . The High Court, however, directed the respondent to keep alive the bank guarantee during the pendency of the arbitration proceedings. 58.The appellant then moved this Court and this Court through Sabyasachi Mukharji and Shetty, JJ. allowed the appeal; at page 1138 of the report Mukharji, J. observed as under: (SCR headnote) Under the terms agreed to between the parties, there is no scope of injunction. The High Court proceeded on the basis that this was not an injunction sought against the bank but 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. The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. There cannot be any basis in the case for apprehension that irretrievable damage would be caused, if any. His Lordship was of the opinion that this was not a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank cannot be prevented by the respondent from honoring the credit guarantees, the appellant also cannot be restrained from invoking the guarantees. What applies to the bank must equally apply to the appellant. Therefore, the frame of the suit by not implemented the bank cannot make any difference in the position of law. Equally, it would be futile to contend that the court was justified in granting the injunction since it has found a prima facie case in favour of the respondent. 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. (emphasis in original) The learned Judge further at pages 1145, 1146 and 1148 observed: (SCR headnote) The modern documentary credit had its origin from letters of credit. The letter of credit has developed over hundreds of years of international trade. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for a buyer to pay for goods prior to their delivery. The bank's letter of credit came to bridge this gap. In such t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the issuance of irrevocable documentary credits. It would be for the banks to safeguard themselves by other means, and, generally, not for the courts to come to their rescue with injunctions unless there is established fraud. The appeal must be allowed, and the order of the Civil Judge, restored. (emphasis supplied) 60.We have referred to the observations of both Sabyasachi Mukharji as well as Shetty, JJ. in extenso to emphasise 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 MatsaS(1966) 2 Lloyd's Rep 495. The facts of that case were peculiar. The first defendant, a vessel, was chartered by Lebanese charterers for carriage of plaintiffs' cargo (consigned to Hungary) from Beirut to Rijeka. Discharge of the cargo was delayed at Rijeka and the shipowners exercised their lien on cargo in respect of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that understanding imposed a further lien, they were disabled from acting on the guarantee . If we closely analyse 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. 61.Another matter came before this Hon'ble Court in General Electric Technical Services Company Inc. v. Punj Sons (P) Ltd. (1991) 4 SCC 230: (1991) 3 SCR 412 The facts of the case are as follows. 62.The appellant's contract with Indian Airlines included the construction and fabrication of aircraft testing centre/engine repair centre in Delhi. For getting that work done, the appellant entered into a contract with Respondent. 63.As per the contract, Respondent I was required to provide performance bond equal to 30 per cent of the total value of contract price, which was to be split up into two performance bonds partly to be released on completion of the project, and the balance upon the expiration of the warranty, and to furnish a bank guarantee to secure the mobilisation advance of 25 per cent of contract value. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of Respondent I in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. The High Court in the absence of prima facie case on such matters has committed an error in restraining the Bank from honouring its commitment under the bank guarantee. 69.One of the arguments in that case was that as per the terms of bank guarantee it could not be encashed at that stage. This Court at pages 416 to 418 noticed the terms and conditions of the first bank guarantee which was towards the performance of the project and to secure mobilisation advance of 25 per cent of the contract value. Again at page 418 the Court noticed the replaced second composite bank guarantee dated January 25, 1988 keeping the other terms of the original bank guarantee dated October 28, 1986 unchanged. The case of the plaintiff was that there was no proper demand for payment of balance of the mobilisation advance nor was it mentioned in the letter of demand to the bank. It was also the case of the respondent that on terms of the bank guarantee the stage had not reached to encash it. This Court noticed at pages 419-420 of the report as follows: (SCC p. 236, par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case on such matters the High Court committed error in restraining the bank from honouring its commitment under the bank guarantee. 71.Shetty, J. speaking for the Bench noticed the earlier observations of Mukharji, J. in the case of U.P. Cooperative Federation Ltd.3 and stated that 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. 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. 73.Mr Venugopal, learned counsel for the borrower referred us to the decision in Itek Corpn. v. The First National Bank of Boston etC. 566 Fed Supp 1210, 1217 by the United States District Court, Massachusetts reported in 566 Federal Supplement 1210, particularly observations at page 1217, which read thus: Because I find that It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lations with the United States of America and in any case on the prima facie finding of fraud being given by the learned court read with the finding of irreparable harm which could not be avoided by adequate remedy at law due to peculiar situation in Iran. 77.It will be noticed that the plea of the plaintiff was that the contract will get frustrated due to restrictions imposed for import and export by the American Government. Along with it the plea was of irretrievable injury which was explained in the judgment also as to what it meant. 78.Mr Venugopal then referred us to the decision of Berger, J. in Handerson v. Canadian Imperial Bank of Commerce and Peat Marwick Ltd. 40 British Columbia LR 318 Here again the facts were peculiar. The plaintiff arranged an irrevocable letter of credit to fulfil his obligation to purchase 20 episodes of two television shows from a production company. Although the shows were never produced and the production company went into bankruptcy, the receiver of the seller made demand upon the bank for payment under the letter of credit and the plaintiff brought an application for an interlocutory injunction to stop the bank from making payment. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Volume 9, para 542 observes as follows: 542. Conditions and warranties.- The predominant modern 542. Conditions and warranties.--- The predominant modern approach is to consider the nature of the terms of the contract in order to decide whether those terms are conditions or warranties. Prima facie a breach of condition entitles the innocent party to rescind the contract and claim damages for any loss he may have suffered, whereas a breach of warranty only entitles him to damages. 83.Section 12 of the Sale of Goods Act, 1930 provides the difference between'condition' and 'warranty' and reads as follows: 12. Condition and warranty.- (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. (2)A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. (3)A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. (4)Whether a stipulation In a contract of sale is a condition or a warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of this country being executable in the courts in Sweden. 87.The High Court was not right in working on mere suspicion of fraud or merely going by the allegations in the plaint without prima facie case of fraud being spelt out from the material on record. 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. 89.The High Court totally ignored the irretrievable injury which will be caused to defendant 12 in not honouring the bank guarantee in international ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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