TMI Blog2010 (9) TMI 1288X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of the respondent. There is no doubt that in view of the cancellation of the contract, the petitioner would be liable to recover expenses/liability in terms of the contract from the respondent. Looking into the high cost (around Rs.27 lac) of maintenance of bank guarantee of Rs.16,60,80,000/- and that the petitioner has staked a claim of Rs.28 crores, I consider it would be appropriate that the petitioner instead of giving a bank guarantee of full amount of Rs.16,60,80,000/- gives a bank guarantee of Rs.9 crore so as to reduce the expenses of the petitioner. .. The respondent shall not encash this bank guarantee till further orders. The interim order passed is conditional on furnishing fresh bank guarantee . By the impugned Order dated 4.8.2010, the succeeding learned Single Judge has been pleased to dismiss the present petition and direct the petitioner to provide further bank guarantee in the sum of Rs. 7,60,80,000/- within a period of four weeks from today on the same terms and conditions on which the petitioner‟s earlier bank guarantee were provided. The bank guarantee of Rs.9 crores furnished by the petitioner and the additional bank guarantee shall be kept alive ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bank‟, which expression shall unless repugnant to the context or meaning thereof mean and include its successors in interest, executors, administrators and permitted assigns), at the request of the Supplier, hereby irrevocably and unconditionally guarantee and undertake to pay you, Dalmia Cement Ventures Ltd., the Purchaser, without demur, dispute or delay, on your first written demand, an amount or amounts not exceeding a total sum of Rs.14,10,80,000/- (INR Fourteen Crores Ten Lacs and Eighty Thousands only), provided that you confirm to us at the same time in writing, that the Supplier has not fulfilled all or any of his Contractual Obligations as stipulated in the Contract including but not limited to delivery of the agreed quantity and/or the shipment of the Product on the date agreed upon with the Purchaser. The liability of the Bank as contained herein shall automatically get reduced proportionately to the value of such parts of the Product (including all machinery and equipment) that may have been successfully delivered as certified by the Purchaser based on which the advance or on account amount paid by the Purchaser have been adjusted in the corresponding invoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the seller, either directly or through another bank in the seller's country known as the correspondent or negotiating bank, to accept drafts drawn upon it for the price of the goods, against tender by the seller of the shipping documents. The contractual relationship between the issuing bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract thus created between the seller and the bank is separate from, although ancillary to, the original contract between the buyer and the seller, by reason of the bank's undertaking to the seller, which is absolute. Thus the bank is not entitled to rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the goods and to refuse payment therefor; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffected by opening in favour of the defendants of two confirmed letters of credit with the Midland Bank Ltd., in London, one in respect of each instalment. The letters of credit were duly opened and the first was realised by the defendants on the delivery of the first instalment. The plaintiffs complained that that instalment was defective and sought an injunction to bar the defendants from realizing the second letter of credit. Donovan, J., the Trial Judge refused the application. In appeal Jenkins, Sellers and Pearce L., JJ. Confirmed the decision of the Trial Judge. In the course of his judgment Jenkins, L.J., who spoke for the Court observed thus: We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of credit from Seattle First National Bank. As desired by Marco Polo this letter of credit was opened in favour of one Sica. The defendant-bankers confirmed that letter of credit. The credit stipulated for payment against (1) a receipt of Sica for the amount of the credit and (2) a notification of Seattle Bank to the defendants that the plaintiffs had negotiated documents evidencing the shipment of the goods. Sica tendered the stipulated receipt and Seattle Bank informed the defendants that the Dulien had negotiated documentary drafts. Meanwhile after further negotiations between the plaintiffs and the vendees the price of the goods sold was reduced and consequently the commission payable to Marco Polo stood reduced but the defendants were not informed of this fact. Only after notifying the defendants about the negotiation of the drafts drawn under the contract of sale, the Seattle Bank informed the defendants about the changes underlying the transaction and asked them not to pay Sica the full amount of the credit. The defendants were also informed that Sica was merely a nominee of Marco Polo and has no rights of his own to the sum of the credit. Sica, however, claimed payment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical terms, even though the goods differently described in the two documents are, in fact, the same. It is the description of the goods that is all important and if the description is not identical it is the paying bank's duty to refuse payment. 9. The Respondent has placed reliance on U.P. Coop. Federation vs- Singh Consultants Engineers (P) Ltd., (1988) 1 SCC 174 which also enunciates the law on this subject. The Lordships opined thus:- 45. The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods prior to their delivery. The Bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) received payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction. 10. In Hindustan Steel Works Construction Ltd. vsTarapore Co., AIR 1996 SC 2268 : (1996) 5 SCC 34, the following observations are to be found: We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere. In this case fraud has not been pleaded and the relief for injunction was sought by the contractor/Respondent 1 on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach of the contract, that the contractor has a counter-claim against the appellant, that the disputes between the parties have been referred to the arbitrators an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country. The two grounds are not necessarily connected, though both may coexist in some cases. ....... 14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corpn. case, 566 Fed Supp 1210. In that case an exporter in USA entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an Americ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties to the underlying contract cannot settle the disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause of action for the same is independent of enforcement of the guarantee. 13. Reference may also be made by Mr. Bhushan to the observations of B.N.Kirpal, J. (as the Chief Justice of India then was) in Dwarikesh, and the terse deprecation contained therein to the Courts' interdicting the normal operation of Bank Guarantees and Letters of Credit. 21. Numerous decisions of this Court rendered over a span of nearly two decades have laid down and reiterated the principles which the courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the more recent pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v. Indian Charge Chrome, Larsen Toubro Ltd. v. Maharashtra SEB, Hindustan Steel Workers Construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged. The aforesaid passage was approved and followed by this Court in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. 22. The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and it must be proved to the satisfaction of the court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution. 28. Coming to the allegation of fraud, it is an admitted fact that in the plaint itself, there was no such allegation. It was initially only in the first application for the grant of injunction that in a paragraph it has been mentioned that the appellant herein had invoked the bank guarantee arbitrarily. This application contains no facts or particulars in support of the allegation of fraud. A similar bald averment alleging fraud is also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se circumstances that the aforesaid clause would operate and the whole of the amount covered by the mobilisation advance would become payable on demand. The bank guarantee thus could be invoked only in the circumstances referred to in clause 9 whereunder the amount would become payable only if the obligations are not fulfilled or there is misappropriation. That being so, the bank guarantee could not be said to be unconditional or unequivocal in terms so that the defendants could be said to have had an unfettered right to invoke that guarantee and demand immediate payment thereof from the Bank. This aspect of the matter was wholly ignored by the High Court and it unnecessarily interfered with the order of injunction, granted by the Single Judge, by which the defendants were restrained from invoking the bank guarantee. .. 22. We have scrutinised the facts pleaded by the parties in respect of both the bank guarantees as also the documents filed before us and we are, prima facie, of the opinion that the lapse was on the part of the defendants who were not possessed of sufficient funds for completion of the work. The allegation of the defendants that HCCL itself had abandoned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adumbrated the law on this subject in the following passage: It is settled law that a contract of guarantee is a complete and separate contract by itself. The law regarding enforcement of an on- demand bank guarantee is very clear. If the enforcement is in terms of the guarantee, then courts must not interfere with the enforcement of bank guarantee. The court can only interfere if the invocation is against the terms of the guarantee of if there is any fraud. Courts cannot restrain invocation of an on-demand guarantee in accordance with its terms by looking at terms of the underlying contract. The existence or nonexistence of an underlying contract becomes irrelevant when the invocation is in terms of the bank guarantee. The bank guarantee stipulated that if the bid was withdrawn within 120 days or if the performance security was not given or if an agreement was not signed, the guarantee could be enforced. The bank guarantee was enforced because the bid was withdrawn within 120 days. Therefore, it could not be said that the invocation of the bank guarantee was against the terms of the bank guarantee. If it was in terms of the bank guarantee, one fails to understand as to how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may become so because of subsequent events or circumstances. We see no good reason why the courts should not restrain a person making such a fraudulent demand from enforcing a bank guarantee. Predicated on this paragraph, it is posited that fraud throughout the dealings between the parties is relevant and there is no basis or justification for restricting fraud only to the opening of the Bank Guarantee, as Mr. Bhushan has sought to contend. Having carefully cogitated upon the contrary contentions, our understanding of the law is that any fraud committed at any stage of the dealings between the parties is a relevant factor to be kept in perspective before granting or declining an injunction against the invocation of the Bank Guarantee. Of course, the fraud must be of egregious proportions so as to warrant the exceptional and extraordinary interference with the contractual obligations resting on a Bank Guarantee. It must be borne in mind that in almost all cases only the beneficiary and the banker are privy to an unconditional Bank Guarantee. We are mindful of the fact that it is Respondent No.1 who had put an end to a part of a contract and kept another part in abeyance. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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