Delhi High Court
Access Maritime Corporation vs Syndicate Bank on 17 May, 1999
Equivalent citations: 79(1999)DLT657, 1999(50)DRJ46
ORDER C.M. Nayar, J.
1. This petition has been filed for issuance of a writ of mandamus against respondent no.1 to encash the unconditional Bank Guarantee No.009100197 dated 15th July, 1997 in favour of the petitioner and for an Order declaring the decision of the respondent Bank contained in its letter dated 18th November, 1997 as illegal.
2. The petitioner is vessel owner engaged in the business of carriage by sea. Its principal place of business is at 34, Possidonos Avenue, 174 55 Alimos, Athens, Greece. The petitioner entered into a Charter Party Agreement with M/s Lucky Exports, respondent no. 2 herein, for the purpose of transporting rice from Visakhapatnam Port in India to Novorrissk, a Port in Russia, abroad "DANUBE TRADER", a vessel belonging to the petitioner herein. As per the terms of the Charter Party Agreement M/s Lucky Exports were to furnish the petitioner with an irrevocable Bank Guarantee. Pursuant to the said agreement the Syndicate Bank executed an irrevocable and unconditional Bank Guarantee numbering 009100197 for the sum of US $ 52,500 in favour of the petitioner. The said Bank Guarantee was to be paid on tender of first demand along with an invoice towards demurrage, a copy of the notice of readiness, statement of facts giving lay time and time sheet calculations duly authenticated by the bankers of the petitioner. The said Bank Guarantee as extended was valid upto 15th October, 1997. On 25th September, 1997 the petitioner submitted to the Charterers a demurrage invoice for a sum of US $ 53,265.63 on the basis of the time sheet calculations. This was contested by M/s Lucky Exports, respondent no.2 who vide their letter dated 27th September, 1997 contended that as per their calculations the vessel had only incurred demurrage for a period of 4 days, 9 hours and 52 minutes. On failure of respondent no.2 to pay the demurrage the petitioner were constrained to invoke the Bank Guarantee vide letter dated 6th October, 1997 for the entire amount of US $ 52,500 in terms of the guarantee itself read with the terms of the Charter Party Agreement. The petitioner approached the respondent Bank and vide letter dated 6th October, 1997 asked for invocation of the Bank Guarantee.
The respondent Bank addressed a letter to the petitioner dated 8th October, 1997 which reads as follows:-
"M/s Access Maritime Corpn., 34,Possidonos Ave, 17455 Alimos Athens, GREECE Dear Sir, Reg : mv DENUBE TRADER Lucky Export Ltd.C/P Our FBG No.0091001/97 dated 15.7.97 Please refer to your Fax dated 07.10.97 on the above subject.
We hereby confirm:
1. that the message will be treated as 3 days notice tender.
2. that you will return the original Bank Guarantee after receipt of the Claim by you from our end.
3. It is to further inform you that your Claim is under process and you will be informed about it in due course.
Yours faithfully, Sd/- MANAGER."
3. The Bank further wrote another communication dated 10th October, 1997 which makes the following reading:-
"REF.NO.FXBR/ADV/4464/97/GS DATED : 10th October, 1997 M/s Access Maritime Corpn., 34, Possidonos Ave, 17455, Alimos Athens, Greece.
Dear Sirs, Reg :- mv Denube Trader Lucky Exports Ltd.C/P Our FBG no.0091001/97 dated 15.07.1997 Please refer to your Fax dated 7thinstant on the subject matter claiming the demurrage in consideration of the above Bank Guarantee. On perusal, we find the following deviations in the method of calculation of the demurrage as per the terms of the Bank Guarantee and the Agreement of the charter party.
1. Calculation of free time should be calculated from the date of acceptance of notice of the readiness, i.e. 26th August, 1997 8 hrs, as per the copy of the NOR, and the demurrage will start from the lapse of free time period as per the BG terms.
2. Calculation of demurrage taking under consideration the notice of readiness and the weather report comes to 4 days 9 hours 32 minutes and as per the above FBG terms, comes to USD 15700.00.
Please confirm your acceptance to the amount of USD 15700.00. We will remit the amount of USD 15700.00 as soon as we receive the confirmation from your end.
Thanking you, Yours faithfully, Sd/- Asstt.General Manager."
4. The respondent Bank, however, did not pay any money to the petitioner nor acceded to the request for invocation of the Bank Guarantee. In the meanwhile respondent no. 2, the Charterer filed a suit being Suit No. 2262/97 against the petitioner and the respondent Bank praying for a decree for perpetual injunction restraining the petitioner from encashing the Bank Guarantee and restraining the respondent Bank from releasing the payment. Respondent no.2 also moved interim application being I.A.No. 10449/97 for grant of ad-interim injunction restraining the respondent Bank from releasing payment. The matter came up for hearing before D.K.Jain,J. on the Original Side who vide detailed judgment dated 4th November, 1997 rejected the pleas of respondent no.2 and dismissed the interim application. It may be relevant to reproduce the operative part of the judgment as below:-
"From the above it is evident that what is accepted by the agent of the plaintiff is that the vessel had arrived at the discharge port on 20 August 1997 at a particular time and was ready to loaddischarge cargo as per charter party and nothing more. Once the notice of readiness is accepted without protest, it is axiomatic that it relates back to the date when the vessel's readiness is intimated and the date of so called acceptance loses its significance. Obviously, the date of acceptance would be material if the readiness of the vessel is doubted and a note to that effect is appended by the party accepting it. Therefore, prima facie, the submission of learned counsel for the plaintiff that the lay time/free time has to commence from the date of acceptance is devoid of substance. Having critically examined the clause pertaining to the determination of lay time, there appears to be not much force in the argument that for determining the total period for which the demurrage is payable, the lay period of 13 days and 12 hours as stipulated in the agreement, has to be excluded from the total period from the date of readiness to the date of sailing of the vessel, irrespective of the fact whether there has been delay in berthing/discharge on account of port congestion or bad weather or for some other reason. I say no more lest it may cause prejudice to either of the parties in the final trial of the suit or in adjudication proceedings before the arbitrator. Same would be the position on the question whether the delay in berthing or discharge was on account of port congestion or bad weather, as alleged by the plaintiff. All these are triable issues. Having regard to the material placed on record by the plaintiff, I have no hesitation in coming to the conclusion that the plaintiff has failed to make out even a prima facie case that the invocation of bank guarantee in question is vitiated by any fraud - much less an established fraud, warranting interference by this Court in its encashment. The decision of the Supreme Court in Larsen & Toubro's case (supra), relied upon by learned counsel for the plaintiff is clearly distinguishable on facts and is not applicable to the facts of the present case. In that case one of the bank guarantees, the encashment whereof was interdicted by the Court, was a conditional guarantee and was to be good for payment till successful completion of trial operations.
The Apex Court found that from the material on record, including the communications between the party at whose instance the bank guarantee was furnished and the beneficiary, it was clear that the stipulations or the conditions mentioned in the underlying agreement, had been successfully fulfillled and the plant was admittedly taken over by the beneficiary and, therefore, there was no occasion to invoke the bank guarantee and thus, it was not encashable on its terms and in order to prevent irretrievable injustice, its encashment had to be injuncted, which is not the case here. In the present case, the purpose for which the bank guarantee was furnished had not elapsed when it was sought to be invoked and infact is still alive.
As regards the contention that the invocation of the bank guarantee as sought to be done vide defendant No.1's letter dated 6 October 1997 is not in its terms inasmuch as the amount claimed by the first defendant is towards "accrued demurrage", related to the demurrage accrued due to delay in unloading of the goods and not on account of delay in berthing on account of port congestion, I, prima facie, feel that in the light of the precise details furnished by the first defendant to the guarantor bank, there is hardly any scope for such an argument. In any event, as noticed above, it is a highly debatable issue, touching upon the merits of the claim, with which the bank has no concern and has rightly not raised any objection to that effect. In terms of the guarantee whatever information/document was required to be furnished by the first defendant to the bank, for the purpose of invoking the bank guarantee, was furnished and the bank was obligated to honour its commitment under the guarantee. As noted above, the bank chose to keep quiet on the subject. Since the bank is not represented before me, it may not be fair to comment on its conduct but the facts speak for themselves. To say the least, the conduct of the bank in sitting tight over the demand made by the first defendant vide its letter dated 6 October 1997 cannot be commeded. Having regard to the language of the bank guarantee, I do not find any force in the plea of improper invocation raised by the plaintiff.
As regards the question of irretrievable injustice to the plaintiff, as noted above, the charter party agreement provides for adjudication of disputes by arbitration and if the plaintiff feels that the amount under the bank guarantee has been wrongly recovered by the first defendant, it is open to it to prefer a claim before the arbitrators. Thus it cannot be said that there is no possibility of recovery of the amount, which may be remitted by the bank underthe guarantee, from the beneficiary by way of restitution.
For the foregoing reasons I am of the considered view that the plaintiff has failed to make out a prima facie case in its favour for grant of ad interim injunction, restraining the first defendant from encashing the bank guarantee in question. The balance of convenience also does not lie in its favour. Accordingly, the application, being devoid of merit, is dismissed.
Needless to say that the view expressed above, is tentative for the limited purpose of decision in this application and shall not be construed as expression of opinion on the merits of the controversy between the parties."
5. Respondent no.2 impugned the above said Order of the learned Single Judge on the Original Side and filed FAO(OS) No.257/97 before the Division Bench which was listed for the first time on November 10, 1997 when it was adjourned to 2nd December, 1997 on request of the counsel. In the meanwhile a communication dated 18th November, 1997 from respondent no.1 was received by the petitioner declining to honour the Bank Guarantee. This letter reads as follows:-
"REF.NO.FXA.4720-97-SCE DATED : 18.11.97 M/s Access Maritime Corpn. 17455, ALIMOS ATHENS, GREECE.
Dear Sirs, Reg: BG No.009100/97 dated 15.07.97 for USD 52,500/- issued on behalf of M/s Lucky Exports in your favour.
With reference to the various correspondence resting in respect of the FBG issued by us on behalf of our client M/s Lucky Exports.
We draw attention to the first paragraph of the BG wherein it has been clearly stated that the Bank Guarantee is required for USD 52,500/- being demurrage payable for delay in berthing on account of port congestion at the discharge ports demurrage period to start after the expiry of free time of 13 days 12 hours.
The demurrage claimed by you is to be in accordance with the above and accompanied by a statement of fact authenticated but your bankers as is required in para 2 of the BG. Kindly note that there has been no delay in berthing and the above requirements have thus not been fulfillled. Hence, your claim cannot be entertained.
Yours faithfully, Sd/-
ASSTT.GEN.MANAGER."
6. Respondent no.2 obviously would be aware of the communication and on December 2, 1997 sought leave of the Division Bench to withdraw the appeal which was dismissed accordingly. The petitioner addressed representation to the Reserve Bank of India dated 25th November, 1997 complaining about the conduct of the respondent Bank as the said respondent refused to accede to the demand of the petitioner. This petition was filed for the necessary reliefs. The basic objection which is taken by learned counsel for the respondents is that the Order of the learned single Judge on the Original Side dated 4th November, 1997 cannot be enforced in the present writ petition as writ petition to enforce contractual obligation is not maintainable. Reference is made to the judgments reported as Suganmal Vs. State of Madhya Pradesh and others ; M/s Mohan Meakin Breweries Ltd.
Vs. Union of India and others ; M/s Radhakrishna Agarwal and others Vs. State of Bihar and others ;
United Commercial Bank Vs. Bank of India and others ; Mrs. Sheela Thomas and others Vs. The State of Kerala and another ; State of U.P. and others Vs. Bridge & Roof Company (India) Ltd.
and Visakhapatnam Port Trust and another Vs. Ram Bahadur Thakur Pvt. Ltd. and others
7. Reference may now be briefly made to some of the judgments referred to above. In the case of Suganmal (supra) the Court reiterated the proposition that mandamus cannot be issued solely for refund of tax already paid. Paragraph 6 of this judgment reads as follows:-
"(6).On the first point, we are of opinion that though the High Courts have power to pass any appropriate order in the exercise of the powers conferred under Art.226 of the Constitution, such a petition solely praying for the issue of a writ of mandamus directing the State to refund the money is not ordinarily maintainable for the simple reason that a claim for such a refund can always be made in a suit against the authority which had illegally collected the money as a tax. We have been referred to cases in which orders had been issued directing the State to refund taxes illegally collected, but all such cases had been those in which the petitions challenged the validity of the assessment and for consequential relief for the return of the tax illegally collected. We have not been referred to any case in which the Courts were moved by a petition under Art.226 simply for the purpose of obtaining refund of money due from the State on account of its having made illegal exactions. We do not consider it proper to extend the principle justifying the consequential order directing the refund of amounts illegally realised, when the order under which the amounts had been collected has been set aside, to cases in which only orders for the refund of money are sought. The parties had the right to question the illegal assessment orders on the ground of their illegality or unconstitutionality and, therefore, could take action under Art.226 for the protection of their fundamental right and the Courts, on setting aside the assessment orders, exercised their jurisdiction in proper circumstances to order the consequential relief for the refund of the tax illegally realised. We do not find any good reason to extend this principle and, therefore, hold that no petition for the issue of a writ of mandamus will be normally entertained for the purpose of merely ordering a refund of money to the return of which the petitioner claims a right."
8. The Full Bench of this Court in M/s Mohan Meakin Breweries Ltd. (supra) reiterated the proposition that disputed claim of money arising out of the contract can only be considered in a civil suit or as per arbitration clause in the contract and the High Court normally does not entertain petition under Article 226 to enforce a civil liability arising out of a breach of contract to pay amount of money to the claimant and where the rights and obligations of the parties are purely contractual and not statutory the validity of a disputed claim for money based on an alleged breach of contract can be canvased in an ordinary civil proceeding or by resorting to arbitration where there is an arbitration clause in the agreement and will not be entertained in a writ proceeding.
9. Strong reliance is placed on the judgment of United Commercial Bank (supra) to reiterate that it was not obligatory on the part of the respondent Bank to accept the demand of the petitioner for invocation and encashment of Bank Guarantee. Paragraphs 27, 28, 31, 33,38, 39, 40, 41 and 42 of this judgment read as follows:-
"27. The main point in controversy is; Whether the 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/indemnity at the instance of the beneficiary? Another question also arises as to whether the Court should not in a matter like this, depart from its normal practice, and refuse to interfere with an interlocutory order under Article 136 of the Constitution.
28. The nature of the contractual obligations flowing from a banker's letter of irrevocable credit and more particularly, the rights of the seller as the accredited party or beneficiary of the credit, against the issuing and drawee bank was dealt with by this Court in Tarapore & Co. Madras Vs. Tractors Export Moscow, . It was held that the opening of a confirmed letter of credit constitutes a bargain between the banker and the seller of the goods which imposes on the banker an absolute obligation to pay. It was, however, pointed out relying on a passage in "Chalmers' Bills of Exchange" that it can hardly be over-emphasised that `the banker is not bound or entitled to honour the bills of exchange drawn by the seller unless they, and such accompanying documents as may be required thereunder, are in exact compliance with the terms of the credit.' Such documents must be scrutinised with meticulous care. If the seller has complied with the terms of the letter of credit, however, there is an absolute obligation upon the banker to pay irrespective of any disputes there may be between the buyer and the seller as to whether the goods are up to contract or not. The Court relied upon the two decisions in Hamzeh Malas & Sons Vs. British Imex Industries Ltd. (1958) 2 QB 127 and Urguhart Lindsay & Co. Ltd. Vs. Eastern Bank Ltd., (1922) 1 KB 318 and observed at p.930 of the Report, that the refusal of the bank to honour the bills of exchange drawn by the seller on presentation of the proper documents constituted a repudiation of the contract as a whole, and the sellers were entitled to damages arising from such a breach.
31. In Gutteridge & Megrah's Law of Bankers' Commercial Credits, Sixth Edn. p.21; the nature of the obligation created by a banker's commercial credit is succinctly stated. A seller of goods relying on such an instrument believes that he has 'the direct obligation of the issuing bank running in his favour, enforceable by him against that bank, that it will pay his drafts if drawn in compliance with the terms of the letter of credit'. Banks are not concerned with the sales contract or the goods; if it were otherwise credit business would be impossible.
33. As Lord Sumner said in Equitable Trust Co. of New York Vs. Dawson Partners Ltd. (1927) 27 Ll LR 49, approving the dictum of Bailhache,J.: It is both common ground and commonsense that in such a transaction the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of the accompanying documents strictly observed.There is no room for documents which are almost the same or which will do just as well. Business could not proceed securely on any other lines.
38. In the light of these principles, the rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit.
39. It is somewhat unfortunate that the High Court should have granted a temporary injunction, as it has done in this case, to restrain the appellant from making a recall of the amount of Rs.85,84,456/- from the Bank of India in terms of the letter of guarantee or indemnity executed by it. The Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another. If such temporary injunctions were to be granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail.
40. In view of the banker's obligation under an irrevocable letter of credit to pay, his buyer-customer cannot instruct him not to pay. In Hamzeh Malas Vs. British Imex Industries Ltd. (1958) 2 QB 127, the plaintiffs, the buyers, applied for an injunction restraining the sellers, the defendants, from drawing under the credit established by the buyer's bankers. This was refused, Jenkins, L.J., stating at p.129 that:
... the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute oblige to pay....and that this was not a case in which the Court ought to exercise its discretion and grant the injunction. the same considerations apply to a bank gurantee.
41. A letter of credit sometimes resembles and is analogous to a contract of guarantee. In Elian Vs. Matsas, (1966) 2 Ll LR 495, Lord Denning, M.R.,while refusing to grant an injunction stated:
...... a bank guarantee is very much like a letter of credit. The courts will do their utmost to enforce it according to its terms. They will not, in the ordinary course of things, interfere by way of injunction to prevent its due implementation. Thus they refused in Malas Vs. British Imex Industries Ltd. But that is not an absolute rule. Circumstances may arise such as to warrant interference by injunction.
A bank which gives a performance guarantee must honour that guarantee according to its terms. In R.D. Harbottle (Mercantile) Ltd. Vs. National Westminster Bank Ltd., (1977) 3 WLR 752, Kerr. J. considered the position in principle. We would like to adopt a passage from his judgment at p.761:
It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the life blood of international commerce. Such obligations are regarded as collateral to the underlying rights and obligations between the merchants at either end of the banking chain. Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these are risks which the merchants take. In this case the plaintiffs took the risk of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise trust in international commerce could be irreparably damaged. The observations of Kerr, J.have been cited with approval by Lord Denning M.R. in Edward Owen Engineering Ltd. Vs. Barclays Bank International Ltd. (1977) 3 WLR 764.
42. The appellant was under a duty to its Constituent the Bihar orporation, to scrutinize the documents, and could not be compelled to make payment particularly when the description in the documents did not tally with that in the letter of credit. It was fully entitled to exercise its judgment for its own protection. When the appellant against the first lot of 20 documents refused to make payment except 'under reserve' and against the second lot of 27 documents even 'under reserve' the remedy of the plaintiffs was to approach the 'openers', i.e. the Bihar Corporation, to instruct the appellant to effect a change in the description of the goods from 'Sizola Brand Pure Mustard Oil' to 'Sizola Brand Pure Mustard Oil 'Unrefined' in the letter of credit. Instead of adopting that course, the irregularity in the description in the documents tendered for payment was sought to be got over by the plaintiffs by instructing their bankers, the Bank of India, to execute a letter of guarantee or indemnity. When the bills of exchange tendered to the Bihar Corporation were dishonoured when presented on August 3, 1978, the legal consequences must follow as between the appellant and the Bank of India. There was the inevitable chain of events which could not be prevented by the grant of an injunction."
10. The judgment of the Kerala High Court in Mrs.Sheela Thomas and others (supra) merely deals with the refund of interest paid at enhanced rate and the Court declined to interfere in a writ petition under Article 226 of the Constitution of India on the basis of facts as stated in the judgment.
11. In State of U.P. and others (supra) the Supreme Court dealt with the question in paragraph 18 which reads as follows:-
"18. Accordingly, it must be held that the writ petition filed by the respondent for the issuance of a writ of mandamus restraining the Government from deducting or withholding a particular sum, which according to the respondent is payable to it under the contract, was wholly misconceived and was not maintainable in law. (See the decision of this Court in Asstt. Excise Commr. v. Issac Peter where the law on the subject has been discussed fully.) The writ petition ought to have been dismissed on this ground alone."
12. In Visakhapatnam Port Trust and another (supra) the law was reiterated that where highly disputed questions of fact arise for decision, civil suit instead of writ petition would be an appropriate action.
13. The facts of the present case as referred to in the earlier part of the judgment may now be considered. Respondent no.2 on its own filed a suit in this Court and moved an application for interim injunction for issuance of a restraint order against respondent Bank from encashing the Bank Guarantee in the sum of US $ 52,500 issued by respondent no.1 Syndicate Bank in favour of the petitioner. The matter was contested and argued at length and the learned Judge while relying on the settled law as laid down by the Supreme Court rejected the contentions of respondent no.2 and dismissed the application for interim injunction as devoid of merit and reflected on the conduct of the respondent Bank as not commendable. Respondent no.2 felt aggrieved by the judgment of this Court and filed FAO(OS) No.257/97 but at the same time prevailed upon the respondent Bank not to accede to the demand of the petitioner and when the Bank issued a letter rejecting the claim of the petitioner the learned counsel appearing before the Division Bench sought leave to withdraw the appeal. In this background it cannot be stated that writ petition is not maintainable in enforcing the Order of this Court as it was imperative on the part of the respondent Bank to accept the same and act in pursuance thereto. On the contrary no action was taken and the Order of the learned Judge on the Original Side remained unimplemented. While dealing with the plea of irretrievable injustice to respondent no.2, it was held as follows:-
"As regards the question of irretrievable injustice to the plaintiff, as noted above, the charter party agreement provides for adjudication of disputes by arbitration and if the plaintiff feels that the amount under the bank guarantee has been wrongly recovered by the first defendant, it is open to it to prefer a claim before the arbitrators. Thus it cannot be said that there is no possibility of recovery of the amount, which may be remitted by the bank under the guarantee, from the beneficiary by way of restitution."
14. The law is well settled that except in cases of fraud it will not be open for the Bank to refuse to accept the invocation of the Bank Guarantee. The Supreme Court in the judgment reported as U.P.Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd. clearly lays down that proposition. Paragraphs 21, 28, 30 and 34 of this judgment may be reproduced as follows:-
"21. In the instant case, the learned Judge has proceeded on the basis that this was not an injunction sought against the bank but this was the injunction sought against the appellant. But the net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is not free to do directly. But a maltreated man in such circumstances is not remedyless. The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages. In this case, there cannot be any basis for apprehension that irretrievable damages would be caused, if any. I am of the opinion that this is 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 in case of fraud or in case of question of apprehension of irretrievable injustice has been made out. This is the well settled principle of the law in England. This is also a well settled principle of law in India, as I shall presently notice from some of the decisions of the High Court and decisions of this Court.
28. I am, however, of the opinion that these observations enunciated. It is not the decision that there should be a prima facie case. In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised.
30. These observations a fortiori apply to a bank guarantee because upon bank guarantee revolves many of the internal trade and transactions in a country. In United Commercial Bank Vs. Bank of India, this Court was dealing with injunction restraining the bank in respect of letter of credit. This Court observed that the High Court was wrong in granting the temporary injunction restraining the appellant bank from recalling the amount paid to the respondent bank. The Court reiterated that 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 injunction were to be granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when payment was 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.
34. On the basis of these principles I reiterate that commitments of banks must be honoured free from interference by the courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the court should interfere."
15. Similarly it has been held in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd. and another with regard to the encashment of a bank guarantee as follows in paragraphs 21 and 22:-
"21. Numerous decisions of this Court rendered over a span of early 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 Vs. Indian Charge Chrome, Larsen & Toubro Ltd. Vs. Maharashtra SEB, Hindustan Steel Workers Construction Ltd. Vs. G.S.Atwal & Co. (Engineers) (P) Ltd. and U.P.State Sugar Corpn. Vs. Sumac International Ltd. The general principle which has been laid down by this Court has been summarised in the case of U.P. State Sugar Corpn. as follows: (SCC p.574, para 12) "The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts, should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if there is such a fraud of which the beneficiary seeks to take the advantage, he can be restrained from doing so. The second exception 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."
Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. in Bolivinter Oil SA Vs. Chase Manhattan Bank are apposite:
"...The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank'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. Vs. 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."
16. Respondent no.1 Bank accepted the invocation of Bank Guarantee and responded to the communication of the petitioner by stating in letter dated 8th October, 1997 that the claim was under process. Thereafter on 10th October, 1997 the Bank was willing to remit the amount of US $ 15,700 but completely changed its stand and outright rejected the claim of the petitioner by communication dated 18th November, 1997. This is clearly a malafide approach as the respondent Bank obviously acted on the initiative of respondent no.2 by declining to honour the Bank Guarantee which it had no jurisdiction in law to do. The respondents were also aware of the judgment of this Court in I.A.No.10449/97 in Suit No.2262/97 dated 4th November, 1997 wherein the conduct of the respondent Bank was criticised. The respondent could not in law refuse to honour the statutory obligations and deprive the petitioner of its right to invoke the Bank Guarantee on the basis of the settled law by the Supreme Court which has already been referred to. The plea that the Order passed by this Court on the Original Side was not required to be implemented and the petitioner was at liberty to take recourse to any other proceedings such as a suit to recover the amount is clearly misconceived and an abuse of the process of Court. The respondents having voluntarily invited a decision from this Court could not subsequently resile from the same and argue that the present petition is not maintainable.
17. Respondent no.1 is a Nationalised Bank and is an instrumentality of State and, therefore, amenable to writ jurisdiction. The conduct and functioning of the Bank which is a nationalised Institution must be above board and in public interest. The facts of the case will establish that the respondent Bank refused to accept the judgment of this Court and acted in collusion with respondent No.2. The conduct is reprehensible and cannot be appreciated.
18. For the aforesaid reasons this petition is allowed. Rule is made absolute. Respondent no.1 is directed to encash the Bank Guarantee No.009100197 dated 15th July, 1997 in favour of the petitioner forthwith. The learned Judge while passing an Order on 23rd July, 1998 in this petition had also clarified 'that in case the petition succeeds, the petitioner will be paid interest at an appropriate rate. The petitioner is, therefore, held entitled to interest at the rate of 12% per annum w.e.f. 8th October, 1997 i.e. the date on which the respondent Bank responded to the communication of the petitioner dated 6th October, 1997 requesting for invocation of Bank Guarantee. The petitioner is also entitled to costs which are quantified at Rs.20,000/-. The interest as well as the costs shall be shared by both the respondents in equal proportions.