Svenska Handelsbanken vs Indian Charge Chrome (Dayal, J.) on 15 October, 1993

           PETITIONER:
SVENSKA HANDELSBANKEN

	Vs.

RESPONDENT:
INDIAN CHARGE CHROME (Dayal, J.)

DATE OF JUDGMENT15/10/1993

BENCH:
YOGESHWAR DAYAL (J)
BENCH:
YOGESHWAR DAYAL (J)
VERMA, JAGDISH SARAN (J)
JEEVAN REDDY, B.P. (J)

CITATION:
 1994 AIR  626		  1994 SCC  (1) 502
 JT 1993 (6)   189	  1993 SCALE  (4)124


ACT:



HEADNOTE:



JUDGMENT:

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
504
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 tender indicated
that suppliers’ credit for the entire project is preferred,
the suppliers approached defendant 4 (one of the lenders) to
finance the project. Inquiries were made to find out the
possibilities for financial assistance by the Swedish
Government in the form of interest at subsidised rates.

7.Since 85 per cent of the foreign exchange portion of
the total price of the project was to be financed,
discussions were held between the borrower and defendant 4
(one of the lenders) for finalising the terms and conditions
of the loans. Discussions were also held between the
borrower and the suppliers in regard to the terms and
conditions of the loans so as to ensure that the credit
agreements would be ‘In accordance with the Swedish Law and
regulations for subsidised export credit facilities.

8.The borrower made extensive investigation itself over a
period of about two years into the details of the proposed
plant. On or about September 28, 1984 contracts were
entered into between the borrower (plaintiff) and the
suppliers for setting up the power plant and for supplying
the machinery and other equipments for the plant to the
borrower.

9.Defendant 4 (one of the lenders) formed a consortium of
banks i.e. defendants 5 to 11 (Swedish Banks) (lenders) and
an American Bank for financing the project. The American
Bank subsequently assigned its interest in favour of one of
the defendant Bank (lender). The lenders entered into two
credit agreements dated October 30, 1984 with the borrower.
The credit agreements were entered into by defendant 4 for
itself and on behalf of defendants 5 to 11 under which the
lenders agreed to lend 85 per cent of the foreign exchange
portion of the cost of the project to the borrower by way of
certain credit facilities. A third credit agreement dated
November 15, 1984 between the borrower and defendant 4
(lender) in its individual capacity was entered into. The
first two credit agreements were for the loans of US Dollars
equivalent of Swedish Kroner 370,855,000 and 239,700,000 and
the third was for the loan of the sum of US Dollars
1,754,000. Two additional credit agreements were also
entered ‘Into between the borrower and the lenders
supplemental to the first and second credit agreements on
December 23, 1987 providing for additional loans of 10 per
cent of the original loans which the borrower required to
finance cost escalations caused by delay. These two
additional credit agreements were for US Dollars equivalent
of
505
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 any way be
dependent upon the performance of the
contracts i.e. the agreements between the
borrower and the suppliers-exporters or be
affected by any other claim which the borrower
may have against the exporters or against any
other party (natural or legal) collaborating
with the exporters.

(These are the actual words of the relevant
clause in each credit agreement.)”
The credit agreements also provided:
“All disputes arising from the provisions of
this Agreement or its performance shall be
finally settled by arbitration under the Rules
of Conciliation and Arbitration of the
International Chamber of Commerce by
three arbitrators appointed in accordance with
these rules. Arbitration shall take place in
Stockholm and be conducted in the English
language. The award of the arbitral tribunal
is final and obligatory for the parties
without any right for a further appeal or
contestation of its fulfilment. The borrower
hereby expressly submits to the jurisdiction
of the above mentioned arbitration tribunal.
(These are the actual words of the relevant
clause in each Credit Agreement.)”

11.The credit agreements also provided that the borrower
shall furnish guarantees in favour of the lenders as
security for the loans covering 100 per cent of each of the
loans plus interest, costs and fees payable under the credit
agreements. As quoted above, the agreements also contained
an arbitration clause which contemplates disputes arising
from the agreements to be finally settled by arbitration
under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce by three arbitrators
appointed in accordance with these rules. The arbitration
is provided to take place at Stockholm.

12.It is thus prima facie clear from the aforesaid terms
of the credit agreements with the borrower that the lenders
are, as a matter of law and
506
express agreement, in no way connected or related to or
dependent upon the contracts entered into between the
borrower and the suppliers. At the instance of defendant 4,
defendant 12 provided the bank guarantee for the payments to
be made by lenders to the suppliers. In order to ensure
that the guarantor would be liable in all circumstances in
the event of the borrower failing to carry out its
obligations, the lenders insisted that the guarantees very
clearly made express provision to be unconditional first
demand guarantees which 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 the lenders on instructions from the borrower,
plaintiff and the suppliers have been paid in full by the
lenders. After the issuance of the take over certificate by
the plaintiff, three instalments of payments were made by
the guarantor on behalf of the plaintiff as per their
instructions vide payments dated October 31, 1989; April 30,
1990 and October 31, 1990 under the first two credit
agreements of the sum of US Dollars 9,033,324.47;
8,810,563.87 and 8,681,062.40 towards principal plus
interest.

16.Again the three instalments were paid by the
IDBI/guarantor under the third agreement on October 15,
1989; May 15, 1990 and November 15, 1990 amounting to US
Dollars 301,339.99; 278,468.14 and 270,778.54 towards
principal plus interest.

17.It was on or about April 28, 1991 that the present suit
was filed by the plaintiff for : (a) a declaration that the
taking over certificate dated June 25, 1989 is void/voidable
instrument and the same may be delivered and cancelled; (b)
it be further declared that the plaintiff is entitled to
diminution/extinction of price towards the power plant as
mentioned in Annexure ‘A’ to the plaint, in the alternative,
if the court finds, that any amount is payable to defendants
1 to 11 jointly or severally, the same be directed to be
paid as per reschedule of payment to be calculated on a
cash-

507

flow basis on actual generation as determined on inquiry;

(c) a decree of declaration that the guarantees obtained
from defendants 12 and 13 by defendants 1 to 11 are
void/voidable instruments and ought to be delivered and
cancelled; (d) a decree of perpetual injunction restraining
defendants 12 and 13 from making payments dated April 30,
1991 and payments filling due on subsequent dates under any
guarantee to defendant 4 and/or defendants 4 to 11; and (e)
a decree of perpetual injunction restraining defendants 4 to
11 from recalling the loan and/or taking any steps from
recovering the said loan either in full or in part, etc.
etc.

18.The basis of the plaintiff’s claim against defendants 1
to 12 was that defendants 1 to 3 had promised to supply the
captive power plant of the capacity of 108 MW worked with
teacher coal whereas on working, the plant was found to be
of the capacity of 60 MW. The case of the plaintiff further
was that all the agreements between the borrower and the
suppliers and borrower and lenders are 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 indicated that
their offer was limited to the setting up of only ‘stoker
fired’ boilers. It was further alleged in the plaint that
the plaintiff relying on the judgment, representation and
advice given by the suppliers decided to go ahead with
setting up of the power plant although Central Electricity
Authority and other advisors had expressed reservations that
the boilers of the size as suggested by the suppliers would
be less effective. Since the plaintiff had never undertaken
and were unaware of the technology/expertise required for
the setting up of the captive power plant they had no other
option/altemative but to rely totally upon the skill of the
suppliers in this regard. It was further pleaded that
subsequently in August 1983 with a view to further induce
the plaintiff to act on the representations made by
consortium that the suppliers were capable of setting up a
108 MW plant with ‘stoker fired’ boiler, defendant 4 on
behalf of itself and defendants 5 to 11 approached the
plaintiff directly and represented that the said defendant 4
would finance the project of setting up the captive power
plant at a very low interest rate if the plaintiff accepted
the offer of suppliers for supply, erection
508
and commission of the said plant with ‘stoker fired’
boilers. It was alleged that defendant 4 further
represented to the plaintiff that the suppliers are the
valued clients of defendant 4 and that defendant 4 was aware
of the background and experience of the suppliers.

19.It was pleaded that defendant 4 along with defendants 1
to 3 prepared a feasibility report for setting up 108 MW
plant. The feasibility report was prepared on the
assumptions (a) a 108 MW plant shall be established
guaranteeing a minimum generation of 700 million units of
electricity per year and (b) raw material used will be
talcher coal. The feasibility report specifically
enumerated and set out a cash-flow statement which was based
on an assumption that 700 million units would be generated
each year. Based on this assumption a cash-flow statement
was prepared on the basis of generation of a minimum of 700
million units per year which was with the knowledge of
defendants 1 to 4 and the plaintiff was informed that
generation at 700 million units per annum would be the basis
of the repayment schedule to be adopted for defraying the
proposed loans to be given by defendant 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 defendant 3 agreed to erect and commission
the captive power plant. The third agreement in clauses 12.
1, 12.2, 12.7 and 13.1 provided as under:

” 12.1. Taking over.- The plant shall be
deemed to have been taken over by the
purchaser at the time when the Tests on
Completion have shown that the Plant has the
operational characteristics which, in
accordance with the Agreement, it should have
at the time of taking over, and when the
Contractor has fulfilled all other obligations
to be performed by him under the terms of the
Agreement before taking over the Plant.
12.2.Taking over Certificate.- The purchaser
shall issue a certificate to confirm taking
over in accordance with clause 12. 1.

509

12.7Performance Testing.- Taking over of
Plant as above does not relieve the Contractor
from carrying out Performance Testing in
accordance with Section 13.

13.1. Time point for determination of
performance.- Determination of whether the
Plant has the performance and other
characteristics as guaranteed in the agreement
shall be done when the Plant undergoes
Performance Testing.”

22.That an agreement was also signed on September 28, 1984
between the plaintiff and defendant 3 wherein it was
specifically guaranteed that the said plant would be 108 MW
plant and capable of producing a minimum of 1400 million
units of electricity over a period of 2 years. The loan was
required to be repaid as per the agreement by 20 equal semi-
annual consecutive instalments, the first six months after
the taking over date, but in no case later than February 1,
1988. (Later on changed to October 1988 and instalments
reduced to 18 half-yearly instalments.)

23.The borrower also undertook to furnish to defendant 4
the guarantee in favour of the lenders as security for the
loan covering 100 per cent of the loan. As mentioned
earlier the plaintiff furnished the guarantee of defendant
12 to defendant 4 (defendant 4 acting for itself and on
behalf of defendants 5 to 11) to guarantee repayment of
loans given by defendants 4 to 11. Defendant 12 in turn was
provided a guarantee by defendant 13.

24.We may mention that defendant 12 furnished the
guarantees as per directions of this Court on a writ
petition being filed by the plaintiff to direct defendant 12
to furnish the guarantees in relation to the aforesaid
contracts. The guarantor made payment of 15 per cent of the
contract price immediately and 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 plant
as they had by then already received 100 per cent of the
payment. Further to induce the plaintiff to issue take over
certificate, the suppliers offered a ‘package deal’ if the
plaintiff gave a taking over certificate to the suppliers.
Under the ‘package deal’ defendants 1 to 3
510
offered that if the take over certificate was given by the
plaintiff the suppliers would rectify all the defects of the
plant and increase the defect liability period. Although
the plaintiff was not satisfied by the test which on
completion was specifically communicated to the suppliers
but in view of the threat of the suppliers and on the basis
of the offer of ‘package deal’ which was accepted by the
plaintiff, the plaintiff gave a conditional taking over
certificate on June 25, 1989 with effect from June 24, 1989.
Tile said take over certificate was a part of the ‘package
deal’, it was pleaded. It was also pleaded that when the
plant was operated on talcher coal the plaintiff came to
know that the defendants had no,. supplied the plant as per
the specifications envisaged under the contracts and that
the plant was not of 108 MW. It was pleaded that defendants
1 to 3 have committed a fundamental breach of the contracts.

26.It was on these allegations that the plaintiff pleaded
that the conduct of defendants 1 to 4 clearly shows that
they made fraudulent representations to the plaintiff which
were false to the knowledge of defendants 1 to 4 to induce
the plaintiff to enter into agreements with the suppliers
and defendants 4 to 11 when the defendants 1 to 4 knew that
the plaintiff would suffer because of an under-capacity
overrated plant. It was pleaded that defendants 1 to 4 were
aware that the captive power plant is not of the
specifications as contracted for and the suppliers by their
letters dated July 3, 1989 and August 23, 1989 intentionally
terminated the ‘package deal’ with a view to perpetuate the
fraud.

27. In paragraph 52 of the plaint it was
specifically pleaded thus:

“52. That the cause of action arose in favour
of the plaintiff on June 25, 1989 when the
defendants 1 to 4 fraudulently misrepresente
d
to the plaintiff regarding their intention to
supply the goods as per the description and
requirement of the plaintiff. The cause of
action again arose on the various dates when
the representatives of defendants 1 to 4 met
the 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.

511

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 4
entered appearance specifically in Misc. Case No. 143 of
1991 i.e. in relation to the application for ad interim
injunction and specifically denied the case of fraud against
the lenders. It also challenged the jurisdiction of the
trial court to entertain the suit as well as the
miscellaneous application in view of the provision for
arbitration under the Rules of Conciliation and Arbitration
of the International Chamber of Commerce. It was pleaded
that separate loan agreements were executed between the
plaintiff and the lenders. All the loan agreements were
governed by Swedish Law. All three loan agreements were
separately guaranteed by defendant 12 as primary obliger and
not as a surety and the amount was payable by defendant 12
upon first demand. It was pleaded that the liability of the
borrower is unconditional and shall not in any way be
dependent upon the performance of the contracts for supply
of power plant and the payment to the lenders is not in any
way affected by any other claim which the borrower may have
against the suppliers. It was also pleaded that all
disbursements and payments under the loan agreements were
made by defendant 4 to defendants 1 to 3 in Sweden and they
have been paid in full and it is only the lenders, who had
to be paid by the borrower and in view of such express
provision in the loan agreements the Indian Courts have no
jurisdiction to entertain the suit or the miscellaneous case
as against the lenders. It was pleaded that if the order
for injunction is vacated no irreparable loss would be
caused to the plaintiff because the amount could always be
recovered from the banks, if any amount is declared
repayable by them. It was pleaded that the lenders are
large and reputed banks, and that the plaintiff has no prima
facie case nor the balance of convenience is in its favour.
The loan agreements provided a complete answer to the claim
of the plaintiff. It was pleaded that the plaintiff
attempted to allege fraud but the lenders had nothing to do
with the negotiations or agreements or subsequent
performance of the project and there is no question of fraud
as alleged against the lenders. It was pleaded that there
might have been some misrepresentations or fraud on the part
of the suppliers which is not to their knowledge. The
lenders have no concern with the suppliers with regard to
the alleged fraud. It was pleaded that the plaintiff 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
512
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
defendants 4 to 11 and in turn defendant 12 executed the
necessary guarantee in favour of defendants 4 to 11 and
defendant 4 as agent of defendants 5 to 11. It was pleaded
that under clause 5.2 action or proceedings against the
guarantor in respect of the loan agreements or loans may be
brought in the High Court of Justice in England or in some
other Court in United States or in the Court of Sweden or
Indian Court as the lenders or any of them may determine.
It was pleaded that in view of the aforesaid provisions
under the guarantee executed by defendant 12 no proceeding
arising out of the loan guarantees or the loans can be
brought in any court in India and the jurisdiction of the
Indian Courts is expressly ousted. It was also pleaded that
under clause 1.2 of the payment guarantee, the guarantee
shall not be impaired by any dispute or claim with regard to
the borrower and the sellers or between the borrower and the
lenders. Under clause 2.1 if the borrower does not pay any
amount when due, the guarantor shall forthwith without any
protest of any kind pay the full amount due and payable
under the agreements on first demand. It was pleaded that
the alleged dispute of the plaintiff with the suppliers does
not affect the liability or obligation of defendant 12. It
was also pleaded that in case defendant 12 is restrained
from honoring its obligation under the payment-guarantee
executed by it, this will seriously affect its image and
financial reputation in the international market and the
objects of defendant 12 for development of industries in the
country shall be frustrated and that defendant 12 may be
dragged into litigation in Swedish Courts in view of the
guarantee executed by it. It was also pleaded that
defendant 12 is neither aware nor concerned with any fraud.

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 theallegations
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;

513

(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
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
counter-claim 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
514
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.”

515

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
516
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
517
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.”

43.Mr Venugopal, learned counsel for the plaintiff, took
us through the entire correspondence exchanged between the
supplier (defendant 2) and the holding company of the
plaintiff (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
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
518
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.

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 Rs 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
519
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 of credit. The
appellant, who was the buyer’s bank refused to make payment
“except under reserve” pointing to a discrepancy in the
railway receipts as regards the description of goods. On
instructions from the seller the respondent bank received
the money in respect of the first lot of 20 documents “under
reserve” and credited the amount to their account with a
specific notation that the amount was paid “under reserve”
as a result of discrepancies between the railway receipts
and the instructions in the letter of credit.

49.In respect of the second lot, the appellant bank
refused payment on the ground of discrepancies in the
railway receipts as before as also on the ground that some
of the railway receipts were “stale”. In the meantime the
appellant bank asked the respondent to refund the amount
paid in respect of the first lot of documents under reserve
because the bills were not acceptable to the buyer due to
discrepancies. Some correspondence ensued between the
parties and the bank; eventually on the faith of an
undertaking given by the seller the appellant bank paid the
remainder amount in respect of the 27 bills as well”under
reserve” so that the value in respect of both the sets of
bills paid to the seller in two instalments was made “under
reserve”.

50.The seller filed the suit in the High Court. A few
days thereafter the appellant bank served a letter of demand
on the respondent bank for refund of the entire amount paid
to it in respect of two sets of bills together with interest
thereon because, according to it, the bills of exchange had
not been retired by the buyer for the reasons that the
railway receipts were stale; that the goods had not been
supplied according to the terms of the agreement and that
chemical analysis of the oil showed that it was not fit for
human consumption.

51.The respondent bank in turn wrote to the seller to
refund the whole amount whereupon the seller moved the High
Court for the grant of an ex parte ad interim injunction
restraining the appellant from recalling or receiving the
amount due from the respondent bank which was granted. A
Single Judge of the High Court made a temporary injunction
till the disposal of the suit filed by the seller on the
view that the appellant was not entitled under the terms of
the letter of credit to unilaterally impose a condition of
the payment “under reserve” or refuse to pay 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 Rs 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)
520
“[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, 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.”

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 finallyfailed to complete the work within the
stipulated time. The appellant invokedthe 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
521
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
primafacie 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.”

522

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
523
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)

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
MatsaS4. 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 demurrage due to delay in discharge of cargo.
The third defendant-bank put up a guarantee in London in
favour of the second defendants, who were first defendants’
London agents, to secure release of cargo. There was a
claim by Yugoslavians to distrain upon goods, involving the
ship in further delay and master of the ship, on lifting
original lien, immediately exercised another lien, in
respect of extra delay. Original lien was raised when
Hungarian buyers put up 2000 Pounds. Two years later the
shipowners claimed arbitration with charterers to assess
demurrage for which the first lien was exercised and claimed
to enforce guarantee. Plaintiff claimed declaration that
guarantee was not valid (as the original lien had been
lifted) and an injunction to restrain shipowners or their
agents from enforcing guarantee. The shipowners and their
London agents as 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
court should
4 (1966) 2 Lloyd’s Rep 495
524
grant injunction to prevent what might be irretrievable
injustice. Lord Denning observed that although the shippers
were not parties to the bank guarantee, nevertheless they
had a most important interest in it. If the Midland Bank
Ltd., paid under this guarantee, they would claim against
the Lebanese Bank, who in turn would claim against the
shippers. The shippers would certainly be debited with the
account. On being so debited, they would have to sue the
shipowners for breach of their promise express or implied to
release the goods. Lord Denning posed the question: “Were
the shippers to be forced to take that course?” Or can they
short-circuit the dispute by suing the shipowners at once
for an injunction? Lord Denning observed that it was a
special case in which injunction should be granted and went
on to observe that there was a prima facie ground for saying
that the shipowners promised that, if the bank guarantee was
given, they would release the goods. He further went on to
observe that the only lien they had in mind at that time was
the lien for demurrage. But would anyone suppose that the
goods would be held for another lien in respect of extra
delay. His Lordship observed that “it can well be argued
that the guarantee was given on the understanding that the
lien was raised and no further lien imposed, and that when
the shipowners, in breach of that understanding imposed a
further lien, they were disabled from acting on the
guarantee”. If we closely 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.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.

5 (1991) 4 SCC 230: (1991) 3 SCR 412
525

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 allowedthe 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)
526
“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.3 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.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.

527

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.6 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.

6 566 Fed Supp 1210, 1217
528

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
7 40 British Columbia LR 318
8 (1941) 31 NY Supp 2d 631, 633
9 14 UCC Reporting Services 1427
529
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
530
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
531
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.

532