Gujarat High Court
Aquafil Polymesr Company Private ... vs Shyam Steel Industries Limited & on 11 June, 2014
Author: S.H.Vora
Bench: S.H.Vora
C/AO/466/2012 CAV JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
APPEAL FROM ORDER NO. 466 of 2012
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE S.H.VORA
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1 Whether Reporters of Local Papers may be allowed to see
the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law as
to the interpretation of the Constitution of India, 1950 or any
order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
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AQUAFIL POLYMESR COMPANY PRIVATE LIMITED....Appellant(s)
Versus
SHYAM STEEL INDUSTRIES LIMITED & 1....Respondent(s)
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Appearance:
MR DHAVAL DAVE SR.ADV. FOR MR MITUL K SHELAT, ADVOCATE for the
Appellant(s) No. 1
MR TEJAS KARIA FOR A & M & S SHROFF CO., ADVOCATE for the
Respondent(s) No. 1
RULE SERVED for the Respondent(s) No. 2
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CORAM: HONOURABLE MR.JUSTICE S.H.VORA
Date : 11/06/2014
Page 1 of 25
C/AO/466/2012 CAV JUDGMENT
CAV JUDGMENT
1. Challenge in this appeal is the order dated 30.10.2012 passed by the learned Chamber Judge, Court No.15, City Civil Court, Ahmedabad below Notice of Motion Exh.6/7 in Civil Suit No.1420 of 2012 whereby, the learned trial Judge refused the Notice of Motion taken out by the plaintiff under the provisions of Order 39 Rule 1 and 2 of the Code of Civil Procedure (for short, the 'Code') to prevent the respondent - original defendant No.1 from encashing the Bank Guarantee Nos.0505411BG0011406 and 0505411BG0011421 amounting to Rs.12,10,917/- and Rs.2,11,383/- respectively (for short, the said 'Bank Guarantees') issued by the respondent No.2 - State Bank of India and further to restrain respondent No.2 - State Bank of India from permitting respondent - original defendant No.1 from encashing the said Bank Guarantees pending final disposal of the suit.
2. The parties to the present proceedings will be referred to as per their original status in the plaint for convenience.
3. The dispute between the parties i.e. plaintiff and defendant No.1 relates to invocation of the said Bank Guarantees furnished by the plaintiff amounting to Rs.14,22,300/- through its banker - State Bank of India. The plaintiff is a private limited company and as it was in need of Steel bars for its project of Raw Water Treatment Plant for Phase-III refinery project - MRPL (Manglore Refinery and Petrochemicals Ltd.), Manglore, it has inquired with the defendant No.1 - M/s.Shyam Steel Industries Ltd., which is one Page 2 of 25 C/AO/466/2012 CAV JUDGMENT of the major manufacturers of steel in India. It is the case of the plaintiff that it was required to place an order of steel, popularly known as TMT bars, with the above TMT manufacturer as desired by MRPL. Accordingly, the defendant No.1 submitted its quotation from time to time containing terms and conditions of supply of TMT bars to be made to the plaintiff for its MRPL project as per the standard and specification approved by the MRPL. It is the case of the plaintiff that it has placed two firm purchase orders dated 07.02.2012 worth Rs.6,98,603/- and order dated 27.03.2012 worth Rs.6,67,206/- with the defendant No.1 and as per the agreed terms, it furnished the said Bank Guarantees. It is the case of the plaintiff that it has made payment to the defendant No.1 as regards purchase order dated 07.02.2012 upon receipt of the goods by MRPL. However, the plaintiff did not make payment of purchase order dated 27.03.2012 as the goods failed in the test conducted by MRPL. Since TMT bars manufactured and supplied by the defendant No.1 failed in its quality test conducted by MRPL through its Agency - Engineers India Limited in Civil Aid Bangalore, the plaintiff was requested by MRPL to withdraw the entire lot and remove the same from its site. Accordingly, it is the case of the plaintiff that it received back the TMT bars supplied to the MRPL by the defendant No.1 under said two purchase orders. It is the specific case of the plaintiff that the plaintiff did not receive any payment from MRPL as goods were not accepted. It is the case of the plaintiff that it informed the defendant No.1 as regards rejection of the TMT bars as they did not comply with the quality standards and defendant No.1, in turn, informed the plaintiff that it will issue credit note of equal amount of the said two purchase orders. Relying upon such assurance and Page 3 of 25 C/AO/466/2012 CAV JUDGMENT plaintiff being frequent buyer, it accepted the said suggestion.
4. Again on 19.05.2012, the plaintiff placed third order in pursuance of the quotation from defendant No.1 dated 17.05.2012 for Rs.6,57,012/- on the same terms and conditions as of earlier orders. Since the defendant No.1 did not issue credit note of amount equal to the order dated 07.02.2012, which was rejected by the MRPL, the plaintiff informed the defendant No.1 to adjust the amount of purchase order dated 19.05.2012 against issuance of said credit note and further, informed the defendant No.1 to issue balance credit note. However, the defendant No.1 without informing the plaintiff wrote a letter dated 11.06.2012 to the defendant No.2 - State Bank of India invoking the said Bank Guarantees though there was no outstanding due and payable to the defendant No.1 by the plaintiff. It is the case of the plaintiff that even as per the terms of purchase order, defendant No.1 cannot invoke the Bank Guarantees unless first 30 days + 15 days grace credit are expired. On these broad facts, it is the case of the plaintiff that defendant No.1 is already blacklisted by MRPL as its recognized supplier and MRPL has stopped to purchase steel from the defendant No.1 as he failed to adhere to strict standard of quality. In light of these factual aspects, it is the case of the plaintiff that defendant No.1 has played fraud by issuing false and fabricated test certificate though goods supplied by the defendant No.1 were not as per standard and not as per the specification of purchase orders and, therefore, the defendant No.1 is not entitled to receive any payment of such goods supplied. It is further the case of the plaintiff that it has already made payment of purchase order of the moths of February and March 2012 and thus, there is an excess Page 4 of 25 C/AO/466/2012 CAV JUDGMENT payment made by the plaintiff to the defendant No.1 and, therefore, act of invocation of the said Bank Guarantees is nothing but a fraud upon plaintiff. Therefore, the defendant No.1 cannot be allowed to take advantage and it required to be restrained from doing so.
5. Per contra, the defendant No.1 contended before the trial Court that the plaintiff placed purchase order on 07.02.2012 with the defendant No.1 for supply of 16MT of TMT steel bars (being combination of 8mm, 10mm and 25mm nominal dia TMT bars) for a total amount of Rs.6,98,603/-. The plaintiff failed to make payment which was due on the said purchase order within due date but finally made payment on 08.05.2012. It is contended by the defendant No.1 that on 27.03.2012, the plaintiff placed another purchase order with the defendant No.1 for supply of 14MT of TMT steel bars (being combination of 8mm, 10mm, 12mm and 25mm nominal dia TMT bars) for an amount of Rs.6,67,206/-. It is contended that the defendant No.1 raised invoice on 03.04.2012 and such amount remains due and payable. It is the case of the defendant No.1 that on 18.05.2012, the plaintiff placed another purchase order for supply of 14MT (being combination of 8mm, 10mm and 12mm normal dia TMT bars) for an amount of Rs.6,57,012/-. It is specific case of the defendant No.1 that the payment terms were same as agreed in respect of purchase order of the months of February and March, 2012. It is contended by the defendant No.1 that on 21.05.2012, invoice for an amount of Rs.6,65,128/- was raised and the said payment remained due and payable. It is contended by the defendant No.1 that the plaintiff forwarded a copy of certificate dated 24.04.2012 issued by Civil Aid which is procured and/or Page 5 of 25 C/AO/466/2012 CAV JUDGMENT based on erroneous testing standard as the test certificate based on testing of samples (being 16mm and 20mm TMT steel bars) which were not supplied by the defendant No.1 under any purchase order. It is specifically denied that the goods supplied were not as per standard and specification agreed. It is alleged by the defendant No.1 that the plaintiff has never intention to make payment of the goods supplied pursuant to the purchase orders of March and May, 2012. Not only that, though the defendant No.1 requested the plaintiff to return the alleged non-confirming TMT bars, the plaintiff failed to do so and, therefore, conduct of the plaintiff smacks of malafide intention and it is clear that the plaintiff has perpetrated a massive fraud on the defendant No.1. Therefore, the defendant No.1 contended that it has rightly invoked said Bank Guarantees which were initially valid till 22.02.2012 and even ultimately, extended upto 10.07.2012. Lastly, it is contended that the said Bank Guarantees are unconditional Bank Guarantees and the defendant No.2 is bound to pay to defendant No.1 upon its invocation notwithstanding any dispute raised by the plaintiff in the suit. According to defendant No.1, the said Bank Guarantees were submitted to the defendant No.2 on 16.06.2012 with a request to encash the same and accordingly, defendant No.2 issued a Demand Draft dated 21.06.2012 against the said Bank Guarantees which were received by the defendant No.1 on 27.06.2012. The defendant No.1 could not encash the said Demand Draft due to stay order granted by the Court. On these factual grounds, defendant No.1 urged before the trial Court to reject the Notice of Motion taken out by the plaintiff as no case is made out to prevent defendant No.1 from encashing the said Bank Guarantees.
Page 6 of 25 C/AO/466/2012 CAV JUDGMENT6. I have heard submissions of learned Senior Counsel Mr.Dhaval Dave appearing for learned advocate Mr.Mitul K. Shelat for the plaintiff and learned advocate Mr.Tejas Karia appearing for A & M & S Shroff Co. for the defendant No.1. Both the learned advocates made elaborate submissions in light of their respective case before the trial Court and I have also considered their submissions made during the course of hearing of the present appeal.
7. To appreciate the rival contentions and submissions made before this Court, relevant common clauses of Bank Guarantees are required to be reproduced so as to deal with the controversy involved in the present appeal in a batter manner. The relevant common clauses being Clause Nos.2 to 4 of the said Bank Guarantees read as under:-
"2. We, State Bank of India, Madhupura Br., Ahmedabad, do hereby undertake to pay the amounts due and payable under this Guarantee without any demur merely on a demand from the seller stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Seller by reason of breach, by the said Buyer of any of the terms and conditions contained in the said Agreement or by reason of the Buyer's failure to perform the said Agreement. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the Bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs.12,10,917.00 (Rupees Twelve lacs Ten Thousand Nine Hundred Seventeen Only).
3. We, State Bank of India, Madhupura Br. Ahmedabad, do hereby undertake to pay the Seller any money so demanded notwithstanding any dispute raised by the Buyer in any suit or proceeding pending before any Court or Tribunal or Arbitrator relating Page 7 of 25 C/AO/466/2012 CAV JUDGMENT thereto our liability under this present being absolute and unequivocal. The payment so made by us under this bond shall be valid discharge of our liability of payment thereunder and the buyer shall have no claim against us for making such payment.
4. We, State Bank of India, Madhupura Br. Ahmedabad, further agree that the guarantees herein contained shall remain in full force and effect during the period that would be taken for the performance of the said Agreement and that it shall continue to be enforceable till all the dues of the Seller under or by virtus of the said Agreement have been fully paid and its claims satisfied or discharged or till the seller certifies that the terms and conditions of the said agreement have been fully and properly carried out by the said Buyer and accordingly discharge this guarantee. Unless a demand or claim under this agreement is made on us in writing on or before date 21.02.2012, we shall be discharged from all liability under this guarantee thereafter."
8. Law relating to invocation of Bank Guarantee is by now well settled by catena of decisions of the Hon'ble Supreme Court. The Bank Guarantee which provides that they are payable by the guarantor on demand is considered to be an unconditional Bank Guarantee. So, when in the course of commercial transaction/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.
9. In case of U.P. State Sugar Corporation Vs. Sumac International Ltd. reported in (1997) 1 SCC 568, the Hon'ble Supreme Court in para No.12 observed as under:
"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 Page 8 of 25 C/AO/466/2012 CAV JUDGMENT 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 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. The two grounds are not necessarily connected, though both may coexist in some cases. In the case of U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. (988 [1] SCC 174), which was the case of works contract where the performance guarantee given under the contract was sought to be invoked, this Court, after referring extensively to English and Indian cases on the subject, said that the guarantee must be honoured in accordance with its terms. The bank which gives the guarantee is not concerned in the least with the relations between the supplier and the customer; nor with the question whether the suppler has performed his contractual obligation or not, nor with the question whether the supplier is in default or not. The bank must pay according to the tenor of its guarantee on demand without proof or condition. There are only two exceptions to this rule. The first exception is a case when there is a clear fraud of which the bank has notice. The fraud must be of an agregious nature such as to vitiate the entire underlying transaction. Explaining the kind of fraud that may absolve a bank from honouring its guarantee, this Court in the above case quoted with Page 9 of 25 C/AO/466/2012 CAV JUDGMENT approval the observations of Sir John Donaldson, M.R. in Bolivinter Oil SA v. Chase Manhattan Bank NA (1984 [1] AER 351 at 352):
"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 charged".
This Court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee."
10. It is equally well settled in law that Bank Guarantee is an independent contract between the bank and the beneficiary thereof. The bank is always obliged to honour its guarantee as long as it is unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance, the bank has given guarantee is immaterial and of no consequence. In case of BSES Limited Vs. Fenner India Ltd. reported in 2006 (2) SCC 726, the Hon'ble Supreme Court in para 10, observed as under:
"10. There are, however, two exceptions to this Rule. The first is when there is a clear fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The fraud must be of an egregious nature as to vitiate the entire underlying transaction. The second exception to the general rule of nonintervention is when there are special equities in favour of injunction, such as when irretrievable injury or irretrievable injustice would occur if such an injunction were not granted. The general rule and Page 10 of 25 C/AO/466/2012 CAV JUDGMENT its exceptions has been reiterated in so many judgments of this court, that in U.P. State Sugar Corpn. V. Sumac International Ltd. (1997) 1 SCC 568 (hereinafter U.P. State Sugar Corpn) this Court, correctly declare that the law was settled.
11. In Himadri Chemicals Industries Ltd. V. Coal Tar Refining Company reported in (2007) 8 SCC 110, the Hon'ble Supreme Court summarized the principles for grant or refusal to grant of injunction to restrain the enforcement of a bank guarantee or a letter of credit, in para No.14, which reads as under:
"(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a Letter of Credit.
(iv) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned"Page 11 of 25 C/AO/466/2012 CAV JUDGMENT
12. Undisputedly, the Bank Guarantee in question on the face of it reading, it appears that it is unconditional and irrevocable and therefore, the appellant cannot be allowed to raise any dispute and prevent the respondent No.1 from encashing the Bank Guarantee.
13. The fraud, if any, must be of a serious nature as to vitiate the entire underlying transaction. The learned trial Judge and also this Court minutely examined the pleadings, more particularly, the averments made in plaint paras 10 to 12 in which factual foundation has been led in support of allegation of fraud. On perusal of the averments made in plaint paras 10 to 12, it is quite evident that there is no proper allegation of any fraud as such and, in fact, whole case of the plaintiff centers around the allegation of fraud with regard to failure of quality of the goods supplied by the defendant No.1 in the quality test conducted by MRPL through its Agency - Engineers India Limited in Civil Aid Bangalore. Surprisingly, as per plaintiff's own case, it withdrawn the entire goods supplied by the defendant No.1 under the purchased orders of February and March, 2012 from the site of MRPL as it failed in quality test. Had it been so than there was no reason on the part of the plaintiff for not returning such rejected goods to the defendant No.1 immediately. No efforts have been made to return the goods to the defendant No.1 on one hand and on the other hand, the defendant No.1 chosen to withhold the amount on the ground that the goods are rejected. This conduct of the plaintiff itself is doubtful and strange to the commercial dealings.
Page 12 of 25 C/AO/466/2012 CAV JUDGMENT14. The learned trial Judge further observed that the test report of Engineers India Limited dated 19.05.2012 along with test report dated 25.04.2012 indicate that the tested samples having size of 8mm, 10mm, 12mm, 16mm and 20mm, do not confirm to IS: 1786-2008 requirements for Fe-500 Grade. Whereas, TMT bars, which were supplied by the defendant No.1 under purchase orders of February and March, 2012, were of the size of 8mm, 10mm and 25mm. Meaning thereby, the defendant No.1 has not supplied TMT bars having size of 12mm, 16mm and 20mm and, therefore, the samples sent by MRPL/Engineers India Limited cannot be said that they represent the goods supplied by the defendant No.1 alone. No explanation was furnished by learned Senior Counsel Mr.Dhaval Dave about this discrepancy and under these circumstances, no reliance can be placed upon such testing reports which do not represent some of the goods of the defendant No.1. Under these circumstances, plea of fraud in the plaintiff's words as asserted in plaint paras 10 to 12 is vague in nature and, therefore, it does not satisfy the requirement in law constituting any fraud much less a fraud of a serious nature as to vitiate the entire transaction.
15. Learned Senior Counsel Mr.Dave for the appellant-original plaintiff made a futile attempt to convenience this Court that the said Bank Guarantees were provided only with respect to the goods supplied under the purchase orders of February and March 2012 and on this count, the defendant No.1 has no right to invoke such Bank Guarantees for the amount due and payable under purchase order dated 19.05.2012. In fact, this contention/submission runs counter to the averments made in Page 13 of 25 C/AO/466/2012 CAV JUDGMENT plaint para 12 wherein, it is specifically stated by the plaintiff that it placed purchase order dated 19.05.2012 in pursuance of the quotation of defendant No.1 dated 17.05.2012 for Rs.6,57,012/- on the same terms and conditions of earlier orders. Meaning thereby, the third purchase order was governed as per the same terms and conditions which were agreed by and between the parties while placing order under purchase orders of February and March, 2012. Apart from it, the plaintiff itself while addressing communication dated 14.06.2012 to the defendant No.2 made a specific reference of all the three purchase orders in question while ventilating grievance of the quality of the goods. So, there is no substance in the said submission so as to say that the defendant No.1 has invoked the Bank Guarantees wrongly or the purchase orders not covered by the said Bank Guarantees.
16. Since there is no evidence or even averments made in the plaint as to fraud in connection with the said Bank Guarantees or purchase orders in question, the defendant No.1 is well within its rights to invoke the said Bank Guarantees as it being unconditional and independent to primary firm purchase orders. From the bare perusal of the Bank Guarantees, it is crystal clear that it is an independent contract and it is not linked with any of the firm purchase orders placed by the plaintiff in the months of February, March and May, 2012. Even in plaint para 22, the plaintiff has stated that the cause of action to file the present suit arose when the plaintiff placed two purchase orders in the months of February and March, 2012 with the defendant No.1 and when the defendant No.1 supplied false and frivolous test certificate about quality of the goods and further, when the goods supplied by the defendant Page 14 of 25 C/AO/466/2012 CAV JUDGMENT No.1 did not stand to specification and test carried out by the MRPL and lastly, when the defendant No.1 with malafide intention, illegally invoked the said bank Guarantees. In other words, there is no whisper about existence of any element of fraud which gave the plaintiff any cause of action to file the present suit for declaration and perpetual injunction. It is well settled that to maintain action qua encashment of the Bank Guarantees, the plaintiff shall bring its case under any of or both the exceptions, namely where there is a clear fraud and a fraud of beneficiary from which it seeks to benefit and another exception where there are any special equities in favour of granting injunction. In fact, existence of these two exceptions gives cause of action to any party to initiate any proceedings like the present one. So, in Court's considered opinion, the averments made in plaint paras 10 to 12 do not satisfy the requirement in law constituting any fraud much less fraud of a serious nature as to vitiate the entire transaction. Thus, case of the plaintiff does not fall within the first exception.
17. Coming to the second exception, whether encashment of said Bank Guarantees would cause any irretrievable harm or injustice to the plaintiff. In order to find out plaintiff's case in connection with second exception, I have minutely examined the plaint itself. There is no plea of any special equities made by the plaintiff in its favour. So far as plea of irretrievable injustice is concerned, the plaintiff in its plaint must show injury of the kind which was the subject matter of decision in the case of Itek Corporation v. The First National Bank of Boston etc. In the said case, it is observed as under:
Page 15 of 25 C/AO/466/2012 CAV JUDGMENT"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 Corporation case (supra). In that case an exporter in the U.S.A. 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 American bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The U.S. Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and relisation of the bank guarantee/Letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if the ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough."
18. Under these circumstances, the plea taken as regards "irretrievable injustice/loss" is again vague and not supported by any evidence. So, the plaintiff can always get relief provided it makes its case before the Court and there is no allegation that it would be difficult to realize the amount from the defendant No.1 in case the plaintiff succeeds before the Court. It is also fruitful to refer to observations recorded by the Hon'ble Supreme Court in case of Hindustan Steel Works Construction Limited Vs. Tarapore & Co. and another reported in (1996) 5 SCC 34 in para Nos.8 to 12 and 14.
8. With respect to an irrevocable letter of credit this Page 16 of 25 C/AO/466/2012 CAV JUDGMENT Court in the case of Tarapore & Co. vs. Tractors Export, Moscow 1969 (2) SCR 920 pointed out that such a contract between the banker and the beneficiary is independent of and unqualified by the contract of sale or other underlying transaction and quoted with approval the following observations made by Jenkins L.J. in Hamzeh Malas and Sons vs. British Imex Industries Ltd. 1958 (2) Q.B. 127:
"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 upon the footing that bankers' confirmed credits are of that character and in my judgment, it would be wrong for this court in the present case to interfere with that established practice."
9. In United Commercial Bank vs. Bank of India 1981 (3) SCR 300 this Court again emphasised that obligation of a Bank in such a case is absolute, as a letter of credit constitutes the sole contract with the banker and the bank issuing the letter of credit has no concern with any question that may arise between the seller and the purchaser of the goods. Therein the following passage from the judgment of Kerr. J. in R.D. Horbottle (Mercantile) Ltd. vs. National Westminster Bank Ltd. 1977 (3) W.L.R. 752 was quoted as a correct statement of law on the point:
"It is only in exceptional cases that the courts will interfere with the machinery of irrevocable obligations assumed by banks. They are the lifeblood 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. Expect possible 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 Page 17 of 25 C/AO/466/2012 CAV JUDGMENT claims; these are risks which these 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 different level. They must be allowed to be honoured free from interference by the courts. Otherwise, trust in international commerce could be irreparable damaged."
10. In United commercial Bank's case (supra) the High Court had granted a temporary injunction restraining the United Commercial Bank from making a recall of the amount paid by it under reserve against the relative bills of exchange drawn against the letter of credit issued by it from the Bank of India an in terms of the letter of guarantee or indemnity executed by that Bank. While allowing the appeal this court observed that the courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of letter of credit or bank guarantee between one bank and another.
11. In Centax (India ) Ltd (supra) it has been held in clear terms that a bank gurantee resembles and is analogous to a letter of credit and the same considerations which apply to a letter of credit in the matter of interference by the court should apply to a bank guarantee.
12. In U.P. Cooperative Federation Ltd. (supra) also Mukherji, J. n paragraph 21 of his judgment has observed as under:
"...An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with expect 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 will settled principle of law in India....."
14. The High Court also committed a grave error in restraining the appellant from invoking bank guarantees on the ground that on India only reasonable amount ca be awarded by way of damages even when the parties to the contract have provided for liquidated damages and that a term in a Page 18 of 25 C/AO/466/2012 CAV JUDGMENT bank guarantees making the beneficiary the sole judge on the question of breach of contract and the extent of loss or damages would be invalid and that no amount can be said to be due till and adjudication in that behalf is made either by a court on an arbitrator, as the case may be. In taking that view the High Court has overlooked the correct position that a bank guarantees is a independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the person at whose instance the bank guarantee is given and the beneficiary. What the High Court has observed would applicable only to the parties to the underlying transaction or the primary contract but can have no relevance to the bank guarantee given by the bank, as the transaction between the bank and the beneficiary is independent and of a different nature. In case of an unconditional bank guarantee the nature of obligation of the bank is absolute and not dependent upon any dispute or proceeding between the party at whose instance the bank guarantee is given and the beneficiary. The High Court thus called to appreciate the real object and nature of a bank guarantee. The distinction which the High Court has drawn between a guarantee for due performance of a works contract and guarantee given towards security deposit for that contract is also unwarranted. The said distinction appears to be the result of the same fallacy committed by the High Court of not appreciating the distinction between the primary contract between contract between the parties and a bank guarantee and also the real object of a bank guarantee and the nature of bank's obligation thereunder. Whether the bank guarantee is towards security deposit or mobilisation advance or working funds or for due performance of the contract if the same is unconditional and if there is a stipulation in the bank guarantee that the bank should pay on demand without a demur and that the beneficiary shall be the sole judge not only on the question of breach of contract but also with respect to the amount of loss or damages, the obligation of the bank would remain the same and that obligation has to be discharged in the manner provided in the bank gurantee. In General Electric Technical Services Company Inc. vs. Punj Sons (p) Ltd. (1991 (4) SCC 230) while dealing with a case of bank guarantee given for securing mobilisation advance it Page 19 of 25 C/AO/466/2012 CAV JUDGMENT has been held that the right of a contractor to recover certain amounts under running bills would have no relevance to the liability of the bank under the guarantee given by In that case also the stipulations in the bank guarantee were that the bank had to pay on demand without a demur and that the beneficiary was to be the sole judge as regards the loss or damage caused to it. This Court held that notwithstanding the dispute between the contractor and the party giving the contract, the bank was under an obligation to discharge its liability as per the terms of the bank guarantee. Larsen and Toubro Limited vs. Maharashtra State Electricity Board (6) SCC 68 and Hindustan Steel Workers Construction Ltd. Vs. G.S. Atwal & Co (Engineers) Pvt. Ltd. 1995 (6) SCC 76 were also cases of work contracts wherein bank guarantees were given either towards advances or release of security deposits or for due, performance of the contract. In both those cases this Court held that the bank guarantees being irrevocable and unconditional and as the beneficiary was made the sole judge on the question of breach of performance of the contract and the extent of loss or damages an injunction restraining the beneficiary from invoking the bank guarantees could not have been granted. The above referred three subsequent decisions of this Court also go to show that the view taken by the High Court is clearly wrong."
19. In the case on hand, though it is not pleaded by the plaintiff that if the plaintiff succeeds in the suit, defendant No.1 will not be able to repay the amount of the said Bank Guarantees, still however, in the impugned order, the learned trial Judge has directed the defendant No.1 to furnish solvent surety of the bill amount. Under these circumstances, amount of the plaintiff realized under the said Bank Guarantees is secured by the learned trial Judge and, therefore also, it can be said that no irretrievable injustice/loss would cause to the plaintiff if at all it succeeds at the end of trial.
20. It has also come on record that said Bank Guarantees are Page 20 of 25 C/AO/466/2012 CAV JUDGMENT encashed and defendant No.1 has already obtained Demand Draft prior to filing of the suit and in light of this development, it can be said that the Notice of Motion has become infructuous. This is one more additional reason to refuse the present appeal.
21. Lastly, learned Senior Counsel Mr.Dave for the plaintiff placed reliance on the decision of this Court rendered in the case of Adani Exports Limited V/s. Marketing Service Incorporated and Others reported in 2005(2) G.L.H. 156 so as to demonstrate that if injunction restraining the defendant No.1 to encash the said Bank Guarantees is not granted then there is likelihood of irretrievable injustice to the plaintiff and, therefore, it would be in the interest of justice to continue the said Bank Guarantees in favour of the defendant No.1 till final disposal of the suit. Learned Senior Counsel Mr.Dave also shown willingness to proceed with the trial as expeditiously as possible and also to co-operate with the learned trial Judge to conclude the trial within stipulated time as may be fixed by this Court. The said decision rendered in the case of Adani Exports Limited (supra) is not helpful to the plaintiff in any manner for the simple reason that the plaintiff has failed to plead and prove fraud so as to say that the plaintiff has got prima facie case for interim relief and balance of convenience.
22. It is required to be kept in mind that the present Appeal from Order is filed under the provisions of Order 43 Rule 1(r) of the Code and challenge in this appeal is a discretionary order passed by the learned trial Judge under the provisions of Order 39 Rules 1 and 2 of the Code. In case of Matrix Telecom Pvt.Ltd. V/s. Matrix Cellular Services Pvt. Ltd. reported in Page 21 of 25 C/AO/466/2012 CAV JUDGMENT 2011(3) GLR 1951, this Court, in paras 6 and 6.1, observed as under:-
"6. Before proceeding further it is required to be noted that the present appeal is against the rejection of interim relief and the main suit is still pending. If this court elaborately deals with the matter on merits it is likely that the same would prejudice the case of either side. Therefore, it is well settled law that this Court is not required to go into the merits of the entire matter at this stage and what is required to be seen is whether the appellant-plaintiff has made out a prima facie case or not for grant of interim injunction.
6.1. It is required to be noted that it is well settled law that the Appellate Court may not interfere with the exercise of discretion of the court of first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. An appeal against exercise of discretion is said to be an appeal on principle. The Appellate Court will not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by the court was reasonably possible on the material. The appellate court would normally not be justified in interfering with the exercise of discretion under appeal solely on the ground that if it had considered the matter at the trial stage it would have come to a contrary conclusion."
23. Similarly, in the case of Wonder Ltd. and another V/s. Antox India Pvt. Ltd. reported in 1990 (Supp.) SCC 727, the Hon'ble Supreme Court in para 9 of the said decision, after considering the scope of Order 43 Rule 1(r) of the Code in an appeal wherein, the discretionary order passed by the learned trial Court is under challenge, observed as under:-
"9. Usually, the prayer for grant of an interlocutory injunction is at a stage when the existence of the legal right asserted by the plaintiff and its alleged violation Page 22 of 25 C/AO/466/2012 CAV JUDGMENT are both contested and uncertain and remain uncertain till they are established at the trial on evidence. The court, at this stage, acts on certain well settled principles of administration of this form of interlocutory remedy which is both temporary and discretionary. The object of the interlocutory injunction, it is stated "...is to protect the plaintiff against injury by violation of his rights for which he could not adequately be compensated in damages recoverable in the action if the uncertainty were resolved in his favour at the trial. The need for such protection must be weighed against the corresponding need of the defendant to be protected against injury resulting from his having been prevented from exercising his own legal rights for which he could not be adequately compensated. The court must weigh one need against another and determine where the "balance of convenience lies".
The interlocutory remedy is intended to preserve in status quo, the rights of parties which may appear on a prima facie. The court also, in restraining a defendant from exercising what he considers his legal right but what the plaintiff would like to be prevented, puts into the scales, as a relevant consideration whether the defendant has yet to commence his enterprise or whether he has already been doing so in which latter case considerations somewhat different from those that apply to a case where the defendant is yet to commence his enterprise, are attracted."
24. So, in light of the limited powers of this Court, the Appellate Court can interfere with the discretionary order passed by the trial Court only in exceptional circumstances and the Appellate Court cannot interfere with the exercise of discretion of the Court of first instance and substitute its own discretion except, where the discretion has been shown to have been exercised arbitrarily, capriciously or perversely or where the Court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. In nutshell, an appeal against exercise of discretion is said to be an appeal on principle. To put it differently, the Appellate Court Page 23 of 25 C/AO/466/2012 CAV JUDGMENT cannot reassess the entire evidence so as to come to its own conclusion contrary to the conclusion arrived at by the trial Court, if two views are possible. In nutshell, whatever the dispute raised in the plaint before the trial Court is devoid of any merit inasmuch as the entire plaint on the face of it, does not prove existence of both the exceptions, namely, fraud and irretrievable injustice and, therefore, the learned trial Judge has rightly rejected the Notice of Motion taken out by the plaintiff and no ground has been made out to interfere with the findings recorded by the learned trial Judge while dismissing the Notice of Motion.
25. While parting with the order, it is clarified that this Court has examined the impugned order passed by the learned trial Judge within the limited scope of provisions of Order 43 Rule 1(r) of the Code, whereas the main controversy involved in the suit is at large before the trial Court to be adjudicated through full-fledge trial. Therefore, the learned trial Judge shall not be influenced by any observations recorded in the impugned order and observations recorded by this Court herein above while deciding the suit at the end of trial. The findings recorded either by the trial Court or by this Court at interlocutory stage of the suit are tentative in its nature and the learned trial Judge shall decide the case on its merit and as per evidence that may be led during the course of trial and in accordance with law.
26. The offshoot of the above discussion is such that there is no merit or substance in the present appeal and, therefore, the present appeal is required to be dismissed and is accordingly dismissed.
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