Supreme Court (15.10.1993) in Svenska Handelsbanken vs Indian Charge Chrome [1994 AIR 626, 1994 SCC (1) 502] held that;
# 41.Again it appears that the High Court found a strong prima facie case against defendant 4 merely on reading the plaint. Pleadings make only allegations or averments of facts. Mere pleadings do not make a strong case of prima facie fraud. The material and evidence has to show it. No material whatsoever is referred to by the High Court.
# 42.In A.L.N. Narayanan Chettyar v. Official Assignee, High Court Rangoon' the Privy Council held that:
- "Fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjecture."
Excerpts of the order;
The Judgment of the Court was delivered by YOGESHWAR DAYAL, J.- Special leave granted. Heard.
# 2.This is an appeal by M/s Svenska Handelsbanken (defendant 4) against the judgment and order dated October II, 1991 of the High Court of Orissa in Misc. Appeal No. 370 of 1991 whereby the Single Judge of the High Court accepted the appeal filed on behalf of the plaintiff while injuncting defendants 4 to 12 from encasing the bank guarantee furnished by Industrial Development Bank of India (defendant 12) in favour of defendants 4 to 11 for a period of 2 years or till the disposal of the suit whichever is earlier and set aside an order passed by the Subordinate Judge, Cutback dated August 14, 1991 vacating an order of ad interim injunction dated April 25, 1991 and dismissing the application for ad interim injunction (Misc. Case No. 143 of 1991) against defendants 4 to 12.
# 3.We 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.
# 31. On these averments, the trial court held:
(1) that defendant 12 has not committed any fraud nor has it any knowledge of it on the material produced;
(2) that the project report was not prepared by defendant 4;
(3) that the defendant 4 made the payments to the suppliers only on instructions and notice issued by the plaintiff/borrower as per the credit agreements;
(4) that there is no direct allegation of fraud against defendants 4 to 11 and the allegations of fraud are based on suspicion;
(5) that the allegation of fraud against defendants 4 to 11 "is practically without substance";
(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 between the 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 suppliers. This being so no adjustments can be made so far as the repayment of the loans with that of the claim of the plaintiff against defendants 1 to 3 which is yet to be adjudicated and defendants 4 to 11 are entitled to the repayment of the loans advanced by them notwithstanding any claim of the plaintiff against the suppliers that is defendants 1 to 3;
(10) that the bank guarantee had been issued by defendant 12 in favour of the lenders on the writ petitions filed by the plaintiff itself and defendant 13 and a direction issued by the Supreme Court and, therefore, no fraud has been played in execution of the bank guarantee;
(11) that the breach of terms between the plaintiff and defendants 1 to 3 does not prima facie give rise to any cause of action against defendants 4 to 11 and for breach of contracts by defendants 1 to 3 remedies are available to the plaintiff;
(12) that the bank guarantee in question is independent of the contracts between the plaintiff and the suppliers and the same can be enforced without reference to any claim or counterclaim arising from the main contracts between the plaintiff and defendants 1 to 3;
(13) that the plaintiff has failed to establish prima facie case of established fraud, therefore, in the absence of clear and established fraud against defendants 4 to II there is no prima facie case in favour of the plaintiff; and
(14) that the plaintiff will not suffer any irreparable loss and the balance of convenience is also against the plaintiff and in favour of defendants 4 to II.
# 32. On these findings, as stated earlier, the trial court vacated the ad interim injunction and dismissed the application for interim relief.
# 33.The plaintiff being dissatisfied went up in appeal to the High Court (Miscellaneous Appeal No. 370 of 1991). It appears that when the appeal was listed for admission before the High Court defendants 4 and 12 entered appearance and since the matter was urgent in nature, it was heard finally without issue of notice to defendants 1 to 3 and 5 to 11 who had not entered appearance in the trial court.
# 34.The High Court noticed that defendant 4 had already paid the suppliers. Defendants 5 to 11 are not directly connected with the captive power plant and defendant 4 is their agent. Since defendants 5 to 11 are not concerned and defendants 1 to 3 have already received payments, there is no question 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 in terms of US Dollars which is now precious for our republic. If defendant 12 which gave the guarantee by direction of the Supreme Court was not happy about the filing of the suit by the plaintiff it could have approached the Supreme Court, which gave the direction, to get an order to discharge its obligation to defendant 4 and ought to have acted upon such direction. The High Court also noticed that the fraud is alleged against defendants 1 to 4 and, therefore, it thought it fit to examine whether the prima facie allegation of fraud against defendants 1 to 4 has been made out by the plaintiff.
# 35. The High Court in paragraph 14 of its order took the view as under:
"14. Defendant 13 issued a global tender for execution of work of captive power plant. Defendant 2 on basis of such global tender offered to defendant by telex on October 5, 1982. On January 19, 1983 defendant 4 addressed a letter by defendant 13 offering financial assistance referring to defendant 2's arrangement for easy terms. On March 31, 1983 defendant 4 described the credit facilities which can be given by defendant 4. In spite of the fact that each party entered into separate agreements, the facts contained therein give a clear idea that defendant 4 had knowledge of the nature of work to be executed by defendants 1 to 3. Thus, there was collaboration with such links that agreement of defendant 4 cannot be separately read at this stage while considering the question of injunction."
Though no notice was issued to defendants 1 to 3 in the appeal, the High Court observed:
"It shall be sufficient to shortly state that I carry an 'Impression on reading the documents filed that defendants 1 to 3 had no capacity to execute the work of 108 MW captive power plant. Even if they had capacity, the execution was not perfect. They had knowledg e that the power plant Is to be commissioned based on Talcher Coal. They, however, commissioned the same on Australian Coal. All these were within their knowledge. Defendant 4 was linked with them in such manner that for the purpose of considering the question of injunction, defendant 4 ought not to be delinked and treated separately."
# 36.The High Court also held that it is true that the plaintiff failed to bring to the notice of defendant 4 about its grievances and about the nature of work executed by defendants 1 to 3. If the same would have 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 the project and feasibility report. On account of generation of electrical energy which is far less than the assured units, there is no scope for payment on cash-flow basis. It has to divert its capital for payment of loans and in that process becomes owner of a sick industry. While on account of delayed payment defendant 4 may have some effect on its goodwill whereas the plaintiff will have to sacrifice its entire goodwill. Therefore, the balance of convenience is in favour of the plaintiff. The High Court then considered the nature of injunction that would be granted by it. For this it issued a direction to defendant 4 not to insist on defendant 12 for payment for two years till the end of 1993 and a direction to defendant 12 not to pay defendant 4 till that period on the basis of guarantee or till the disposal of the suit whichever is earlier and for this period of deferred payment the plaintiff shall pay interest at the rate of 18 per cent instead of subsidised interest for amount due during this period.
# 37.Before we examine the respective contentions of learned counsel for the parties we very much regret the observation made by the High Court against IDBI, defendant 12. It is true that the guarantee was given as per the order of this Court. In the order of this Court the guarantee culminated into the accepted agreements between the lenders and IDBI. There was no question of defendant 12 approaching this Court for taking direction as to what it should do while meeting its own contractual obligations as an apex Organisation of the Government in helping the industrialisation of the country. The remarks against defendant 12 are wholly uncalled for. Defendant 12 is a party to the suit. It is entitled to enter appearance on its behalf and to take the pleas open to it on facts and in law. It has to maintain its credibility and not merely be guided by the loss to our citizens. It has also to maintain its international credibility. Credibility is the most important thing for any banking institution. If the credibility goes the bank cannot survive. The bank in its working has to be most upright and honest in dealing with its customers.
# 38.Coming to the merits of the case itself it appears to us that the High Court totally misdirected itself in assuming that the present application for interim relief against the enforcement of bank guarantee is not to be decided 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 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 the suppliers. The other finding recorded by the trial court was that the rights and obligations of the parties flow from the agreements and, therefore, the agreements should be the basis for deciding the issue. Again the trial court had very specifically held that in view of the agreements between the lenders and borrower, breach, if any, of the agreements by defendants 1 to 3 and claim, if any, of the plaintiff against defendants 1 to 3 would be of no effect on the agreements between the borrower and lenders. None of these findings are either noticed or met by the High Court. On the other hand the High Court after noticing that the agreements between the borrower and suppliers are separate from the agreements between the lenders and borrower it jumped to the conclusion that "the facts contained therein give a clear idea that defendant 4 had knowledge of the nature of the work to be executed by defendants 1 to 3. Thus there was collaboration with such links that agreement of defendant 4 cannot be separately read at this stage while considering the question of injunction."
# 40.With all due respect to the learned Judge, we fail to understand this reasoning. Section 92 of the Evidence Act debars the court from looking into oral evidence once the contract is executed in writing except as provided for in six provisos thereof.
# 41.Again it appears that the High Court found a strong prima facie case against defendant 4 merely on reading the plaint. Pleadings make only allegations or averments of facts. Mere pleadings do not make a strong case of prima facie fraud. The material and evidence has to show it. No material whatsoever is referred to by the High Court.
# 42.In A.L.N. Narayanan Chettyar v. Official Assignee, High Court Rangoon' the Privy Council held that:
"Fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjecture."
# 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 contract, grant or other disposition of property, or any matter required by law to be reduced to the form of a document, have been proved according to the last section, no evidence of any oral agreement 1 AIR 1941 PC 93 : 196 IC 404: 1941 OWN 1392 or statement shall be admitted, as between the parties to any such instrument or their representatives in interest, for the purpose of contradicting, varying, adding to, or substracting from, its terms:
Proviso (1).- Any fact may be proved which would invalidate any document, or which would entitle any person to any decree or order relating thereto; such as fraud, intimidation, illegality, want of due execution, want of capacity in any contracting party, want or failure of consideration, or mistake in fact or law."
# 45.It is clear from the averments in the plaint that the plaintiff was not seeking cancellation of any of the agreements either with the suppliers or the lenders. We have already reproduced the substance of the prayers made in the plaint. In fact the plaintiff prayed for diminution of the price towards the power plant by way of breach of contracts, goods being not of the specifications. The plaintiff prayed for avoidance of the take over certificate. Vis-a-vis taking over certificate there is no allegation of coercion or fraud against defendant 4 at all.
# 46.The plea that the lenders were to be paid from the cash flow by sale of surplus electricity in the market is nowhere mentioned in any of the contracts between the borrower and the suppliers and the High Court without any prima facie admissible material went on to rely on the bald averment in the pleadings. Again it is not known on what material the High Court got "the 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". Neither the trial court nor the High Court was required to go into the question of fraud on behalf of defendants 1 to 3 as there was no interim relief being claimed against them. Even if we assume fraud by defendants 1 to 3 where was the material to associate defendant 4 with defendants 1 to 3.
# 47.Mr Venugopal again stressed the fact that defendant 4, the lender was the agent of defendants 1 to 3, the suppliers. For this submission there is no material whatsoever except the suppliers' introducing defendant 4 as the formal 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.
# 54.In U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd.' the facts were: The appellant, a State Government enterprise, on or about May 17, 1983, entered into a contract with the respondent, a private limited company, for the supply and installation of a vanaspati manufacturing plant at a place in the district of Nainital. The contract bond contemplated guaranteed performance of the work at various stages in accordance with the time schedule prescribed and provided for completion and commissioning of the plant after trial run by May 15, 1984. According to the appellant, the time was essentially and indisputably the essence of the contract.
# 55.As per the terms and conditions of the contract bond, according to the appellant, the respondent was to furnish a performance bank guarantee for Rs 16.5 lakhs and yet another bank guarantee for Rs 33 lakhs as security for the monies advanced by the appellant to the respondent for undertaking the work. Both these guarantees as also the contract bond entitled the appellant to invoke them and call for their realisation and encashment on the failure of the respondent to perform the obligations for which the appellant was made the sole judge.
# 56.It was alleged that the respondent defaulted at various stages and finally failed to complete the work within the stipulated time. The appellant invoked the two guarantees one after the other, and thereafter proceeded to have the plant completed, etc. According to the appellant, the plant could actually be commissioned for commercial production in July/August 1985.
# 57.The respondent, on August 4, 1986, filed an application under Section 41 of the Arbitration Act, 1940 (The Act) in the Court of the Civil Judge, praying for an injunction restraining the appellant from realising and encasing the bank guarantees. The Civil Judge dismissed the application. The respondent filed a revision petition before the High Court, which allowed the same, holding that the invocation of the performance guarantees was illegal, and the contentions of the appellant that the performance guarantees constituted independent and separate contracts between 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 in which injunction should be granted. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except if a case of fraud or a case of a question of apprehension of irretrievable injustice has been made out. This is the well-settled principle of the law in England. This is also the well-settled principle of law in India. No fraud and no question of irretrievable injustice was involved in the case."(emphasis supplied)
The teamed Judge at pages 1141 and 1142 held as under: (SCR headnote)
"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 a serious dispute and a 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 would be jeopardised. The commitments of the 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, in cases of fraud or in cases of irretrievable injustice that the court should interfere. This is not a case where irretrievable injustice would be done by enforcement of the bank guarantee. This is also not a case where a strong prima facie case of fraud in entering into a transaction was made out. The High Court should not have interfered with the bank guarantee. The judgment and order of the High Court set aside. The order of the Civil Judge restored." (emphasis in original)
# 59.Shetty, J. concurring with Mukharji, J. noticed the question involved at page 1143 of the report as under: (SCR headnote)
"Whether the obligation is similar to the one arising under a letter of credit?
Whether the Court could interfere in regard to such obligation, and if so, under what circumstances? These are the questions raised in the appeal."
The learned Judge at pages 1 144 to 1 145 observed: (SCR headnote)
"The primary question for consideration is whether the High Court was justified in restraining the appellant from invoking the bank guarantees. The basic nature of the case relates to the obligations assumed by the bank under the guarantees given to the appellant. If under the law, 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 transactions, the seller (beneficiary) receives payment from the issuing bank when he presents a demand as per the terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the seller and the buyer must be settled between themselves. The Courts, however, in carving out an exception to this rule of absolute independence, held that if there has been a 'fraud in the transaction', the bank could dishonour beneficiary's demand for payment. The Courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else.
In modem commercial transactions, various devices are used to ensure performance by the contracting parties. The traditional letter of credit has taken a new meaning. Stand-by letters of credit are also used in business circles. Performance bond and guarantee bond are also devices increasingly adopted in transactions. The Courts have treated such documents as analogous to letter of credit." (emphasis supplied) Learned Judge at pages 1149 and 1150 again observed as under: (SCR headnote) "Whether it is a traditional letter of credit or a new device, like performance bond or performance guarantee, the obligation of the bank appears to be the same. Since the bank pledges its own credit, involving its reputation, it has no defence except in the case of fraud. The nature of the fraud that the courts talk about is the fraud of an 'egregious nature as to vitiate the entire underlying transaction'. It is the fraud of the beneficiary, not fraud of somebody else. The bank cannot be compelled to honour the credit in such cases. 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 irrevocable documentary credit. In order to restrain the operation of irrevocable letter of credit, performance bond or guarantee, there should be a serious dispute to be tried and there should be a good prima facie act of fraud." (emphasis supplied) Learned Judge at page 1150 observed: (SCR headnote) "The sound banking system may, however, require more caution 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)
# 61.Another matter came before this Hon'ble Court in General Electric Technical Services Company Inc. v. Punj Sons (P) Ltd.5 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.
# 64.Respondent I, instead of furnishing the two performance bonds, wrote a letter for a revised proposal, which was accepted by the appellant.
# 65.As the Respondent I failed to complete the project within the stipulated time, as per contractual specifications, despite repeated opportunities, the appellant terminated Respondent 1's right to continue the project and sought for encashment of the bank guarantee for Rs 1,06,12,500, which was issued to the appellant by the bank.
# 66.Respondent I filed a suit for injunction against the appellant and the bank in the High Court and obtained an ex parte injunction from the Single Judge, restraining the bank and the appellant from encashing the bank guarantee.
# 67.When the ex parte injunction was vacated, Respondent I preferred an appeal to the Division Bench of the High Court. The Division Bench allowed the appeal, staying the encashment of the bank guarantee till the disposal of the respondent's suit.
# 68.On the question, whether the court was justified in restraining the bank from paying the appellant under the bank guarantee at the instance of Respondent I, allowing the appeal of the appellant-company, this Court held as under:
"In the instant case, the High Court has misconstrued the terms of the bank guarantee and the nature of the inter-se rights of the parties under the contract. The mobilisation advance is required to be recovered by the appellant from the running bills submitted by the respondent. If the full mobilisation advance has not been recovered, it would be to the advantage of the respondent. Secondly, the Bank is not concerned with the outstanding amount payable by the appellant under the running bills. The right to recover the amount under the running bills has no relevance to the liability of the Bank under the guarantee. The liability of the Bank remained intact irrespective of the recovery of mobilisation advance or the non-payment under the running bills. The failure on the part of the appellant to specify the remaining mobilisation advance in the letter for encashment of bank guarantee is of little consequence to the liability of the Bank under the guarantee. The demand by the appellant is under the bank guarantee and as per the terms thereof. The Bank has to pay and the Bank was willing to pay as per the undertaking. The Bank cannot be interdicted by the court at the instance 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, para 8) "The second bank guarantee with which we are concerned makes a reference to the first guarantee. It states that the guarantee is a composite bank guarantee for mobilisation of advance and performance bond. It further states that all the other terms and conditions of the original guarantee will remain unchanged."
# 70.The Court first decided that all the terms of the first bank guarantee were there except that earlier guarantee was towards the mobilisation advance whereas the later guarantee was a composite bank guarantee for both performance of the contract as well as for recovery of mobilisation advance. The Court noticed how the liability under the guarantee will get reduced from stage to stage by realisation from running bills towards mobilisation advance and under the first guarantee itself the bank had undertaken to pay to the appellant the amount guaranteed without any demur merely on demand stating that the amount is due by way of loss or damage caused to or would be caused to or suffered by any breach committed by the respondent on any of the terms or conditions contained in the agreement or by reason of respondent's failure to perform the agreement and that such demand shall be conclusive as regards the amount due and payable by the bank under the guarantee. The appellant had only sought to enforce the bank guarantee for the balance amount of the mobilisation advance on a complaint that Respondent I had failed to perform the contract as per terms and conditions. As mobilisation advance could be recovered earlier only from the running bills and since the contract had been terminated, the balance of mobilisation advance was sought to be recovered from the bank guarantee. The bank had undertaken to pay this amount and in fact the bank was prepared by pay the same. It was in these circumstances that the Court accepted the appeal and observed that the law has been settled in the aforesaid case of U.P. Cooperative Federation Ltd. and again noticed the observations of Mukharji, J. in that case and observed at page 421 that the High Court has misconstrued the terms of the bank guarantee and the nature of the inter-se rights of the parties under the contract. It was on the question whether the amount was due under the terms and conditions of the bank guarantee that the learned Judge speaking for the Court observed that in the absence of prima facie 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. 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. 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 Itek has demonstrated that it has no adequate remedy at law, and because I find that the allegations of irreparable harm are not speculative, but genuine and immediate, I am satisfied that Itek will suffer irreparable harm if the requested relief is not granted."
# 74.The facts in that case were that the exporter in USA entered into an agreement with Imperial Government of Iran and brought action seeking order terminating its liability on stand-by letters of credit issued by American Bank in favour of Iranian Bank as part of the contract. The learned District Court held that the contractor was entitled to issuance of preliminary injunction.
# 75.It will be noticed that this judgment is on peculiar facts of its own and the situation created after the Iranian Revolution when the American Government cancelled the export licence in relation to Iran as it related to high technology. As the American Government had cancelled the export licence in view of revolution in Iran and the Iranian Government had forcibly taken 52 American citizens as hostages and President Carter by executive order blocked all Iranian assets subject to the jurisdiction of the United States and also cancelled the export contracts, the plaintiff informed the importer in Iran invoking force majestic but the Iranian importer in spite of it resorted to encashment of the bank guarantee. The court was of the view that even if claim for damages is decreed by the American courts situation in Iran was such that the decree will not be executable in Iran. It was on these facts that the court felt that it was a case where the plaintiff had demonstrated that it has no adequate remedy at law and the allegations of irreparable harm are not speculative but genuine and immediate and the plaintiff would suffer irreparable harm if the requested relief is not granted. The court also found as a fact on page 1217 itself that "the uncontested facts in the record, if proved at trial, appear to make out a prima facie case of fraud within the meaning of Section 5- 114(2)(b) and held that under these circumstances, any demand on the guarantees or letters of credit by Iranian importer in March 1980 would necessarily have been fraudulent".
# 76.It is thus clear that this judgment is based on peculiar facts, particularly of situation in the Government of Iran which came into power after the revolution in Iran and its relations 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.7 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 court granted the interim injunction and held that the letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agreed to pay upon presentation of documents, not goods. There is an exception to this rule; the bank should not pay under the credit where it knows that the request for payment is made fraudulently in circumstances when there is no right to payment. The case fell within this exception. The bank had been put in knowledge of the fact that the shows had not been produced and, therefore, the receiver was not entitled to the proceeds. It will be noticed that this decision is based on obvious fraud and this view was given by Berger, J. after considering the case of Sztejn v. J. Henry Schroder Banking Corpn.8
# 79.A decision of New York Supreme Court in NMC Enterprises, Inc. v. Columbia Broalcasting System, Inc.9 was also referred to by Mr Venugopal. Here again Fein, J. observed that preliminary injunctive relief will be granted, restraining bank from honouring a letter of credit, where a prima facie showing has been made of fraud in the underlying transaction and the plaintiff has further shown that it may be irreparably injured if the relief is not granted.
# 80.On the facts the Court had taken the view that the plaintiff had made a sufficient showing of fraud to justify an injunction against the honouring of the letter of credit covering the sale of stereo receivers and related equipment where it appeared by affidavit that at the time the contract was negotiated, the plaintiff was provided with brochures containing technical performance specifications for the receivers including their continuous power-output ratings; that the receivers did not comply with the representation as to continuous power output thereby reducing their value; that an officer of the defendant had allegedly admitted that defendant was aware of the nonconformity prior to the execution of the contract and failed to disclose it to British Columbia Reporting Services 1427 the plaintiff; and that if the letter of credit was drawn up or negotiated plaintiff might be forced into bankruptcy.
# 81.It will again be noticed that in this case the dispute was between the supplier and the purchaser and the decision is based on the facts found by the court for grant of preliminary injunction.
# 82. Halsbury Fourth Edn., 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 depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract."
Again Section 13 of the Sale of Goods Act provides when 'condition' is to be treated as 'warranty', relevant part of sub-sections (1) and (2) thereof reads as under:
"13. When condition to be treated as warranty.-
(1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.
(2)Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect."
# 84.It will be noticed that in the present case prima facie the provision for capacity of the power plant being of 108 MW was a condition. Therefore, the plaintiff could have repudiated the contract as provided in Section 12(2) of the Sale of Goods Act or treated as a warranty by waiving the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.
# 85.In the present case the plaintiff has not repudiated the contract. In fact it is working with the power plant and, therefore, the breach of condition has been treated by the plaintiff as a breach of warranty and in view of Section 12(3) of the Sale of Goods Act, the breach of warranty gives a right to claim for damages but not to a right to reject the goods and treat the contract as repudiated. Even the prayer in the plaint is for diminution of the price of the power plant and the relief is based on Section 59 of the Sale of Goods Act.
# 86.We have already held that the contracts between the lenders and the borrower are not vitiated by any fraud much less established fraud and there is no question of irretrievable injury. Therefore, there was no reason for the High Court to set aside the order of the trial court. Again there is no case of any irretrievable injury either of the type as held in the case of Itek Corpn.6 as there is no difficulty in the 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 market which may cause grievous and irretrievable damage to the interest of the country as opposed to the loss of money to the borrower/plaintiff. There was no question of defendant 4 not making any demand. The instalments for repayment of the loans had already been fixed and liable to be paid without demand by defendant 4. Defendant 12 is under a duty to pay the instalments regularly on a fixed date without any demand to defendant 4.
# 90.We may make it clear that our views are only tentative and prima facie for the purpose of the decision of the application for injunction and should not be construed as expression of opinion at all on the merits of the controversy between the plaintiff and the defendants.
# 91.For the reasons stated above the appeal is accepted; the judgment and order of the High Court dated October II, 1991 is set aside and that of the trial court dated August 14, 1991 is restored and the application of the borrower/plaintiff for interim injunction against the lenders is dismissed with costs.
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