Kerala High Court
Regional Science Centre And Anr. vs Varghese K. Pulayath And Co. And Anr. on 4 August, 1993
Equivalent citations: [1998]91COMPCAS227(KER)
JUDGMENT Varghese Kalliath, J.
1. Defendants Nos. 2 and 3 are the appellants. The suit was one for injunction restraining the first defendant from encashing or parting with any amount under bank guarantee Nos. 31/30, dated January 9, 1991, and 31/23 dated October 20, 1990, furnished to the second and third defendants pursuant to the demand of the third defendant in his letter dated November 2, 1992, and for an order of injunction restraining the second and third defendants and their officers from pressing the demand for encashing the bank guarantee or recovering any loss without a fiat from a competent court. The plaintiff filed I. A. No. 5930 of 1992, for an order of temporary injunction restraining the first defendant-bank from parting with any amount under bank guarantee Nos. 31/ 30, dated January 9. 1991, and 31/23, dated October 20, 1990, issued by the first defendant to the third defendant, pending disposal of the suit. In this I. A. defendants Nos. 2 and 3 were parties. The court below passed an ad interim order of temporary "injunction against encashing BG" (bank guarantee) and also ordered "In and Notice".
2. This order of interim injunction was made absolute by the impugned order in this appeal. Now, the facts :
For the purpose of constructing buildings for the Regional Science Centre at Kozhikode, the first appellant invited tenders. The estimated cost of the work was Rs. 55 lakhs. Time for carrying out the work was 12 months from the date of issue of letter of intent with an additional period of three months for piling work. The plaintiff was one of the tenderers pursuant to the invitation for tenders. The plaintiff's tender was accepted. By exhibit "B-36", an agreement was executed between the plaintiff and the National Council of Science Museum through the second defendant on January 4, 1991. Exhibit "A-2" is the notice inviting tenders. One of the conditions in the notice is that the tenderers should furnish, among others, an earnest money deposit amounting to Rs. 1,10.000 in cash/bank draft/bank guarantee bond from a nationalised bank. By exhibit "A-1", letter of intent the plaintiff had to execute an agreement on a stamp paper, avail of mobilisation advance of 10 per cent, of the tender amount on furnishing a bank guarantee recoverable from running bills at the rate of 10 per cent. Exhibit "A-3" is the bank guarantee furnished by the plaintiff pursuant to exhibit "A-1" letter of intent and exhibit "A-4" is the bank guarantee furnished by the plaintiff pursuant to exhibit "A-2" notice inviting tenders.
3. The construction work carried out by the plaintiff was found to be not up to the expectation of defendants Nos. 2 and 3. Exhibit "B-33" letter dated October 11, 1992, was issued to the plaintiff informing him that the plaintiff has neither the capacity nor the infrastructure to complete the work and, therefore, the stipulation of the contract provision would have to be operated upon. The third defendant, by exhibit "B-1" letter dated November 2, 1992 (addressed to the first defendant) invoked the two bank guarantees, exhibits "A-3" and "A-4", and demanded of the bank, the amounts due under the bank guarantee.
4. The bank did not reply to exhibit "B-1" and so, a reminder was sent on November 18, 1992. In exhibit "B-1(a)" it was pointed out that more than a fortnight has elapsed after the request was made in exhibit "B-1" invoking the Bank Guarantees No. 31/30, dated January 9, 1991, extended up to January 9, 1993, and 31/23, dated October 20, 1990, extended up to January 20, 1993, respectively, amounting to Rs. 6,28,746 and that they have neither received the requisite demand draft nor any official communication, Further, it was noted that the matter is urgent and so, the bank was asked to forward the necessary crossed demand draft drawn in favour of the National Council of Science Museum, payable at Calcutta, immediately in terms of the subject bank guarantees.
5. The bank informed defendants Nos. 2 and 3 that the plaintiff has filed a suit, O. S. No. 910 of 1992 and in I. A. No. 5930 of 1992 an order of injunction was passed by the court on April 10, 1992, restraining the bank from encashing the bank guarantee. It is stated that appellants-defendants Nos. 2 and 3 came to know about the impugned order when the bank informed about the order. Immediately, defendants Nos. 2 and 3 moved the court for vacating the order. The court, after hearing the plaintiff and defendants, made the order of injunction absolute. This order of injunction is now challenged in this C.M.A.
6. Counsel for the appellants submitted that the order of injunction is the result of a wrong appreciation of the facts and law on the subject and also a wrong exercise of the discretionary power to grant injunctions. He contended that the plaintiff has no prima facie case or balance of convenience in his favour to obtain an order of temporary injunction. The only question that has to be considered in this case is whether the court below has exercised properly the power to issue injunction in the circumstances and facts disclosed in the case.
7. Now, we turn to investigate the question. To investigate the question, a format of certain central axial facts has to be focused. Exhibit "A-2" is the notice inviting tenders, for the construction of the buildings. Exhibit "A-1" is the letter of intent given by the second defendant to the plaintiff. In exhibit "A-1", letter of intent, the second defendant has stated that defendants Nos. 2 and 3 intend to award the work at the tendered amount of Rs. 51,87,466.88, to the plaintiff. Further, it is stated that the plaintiff has to sign an agreement as per standard format already printed in the tender documents and requested the plaintiff to send a non-judicial stamp paper of appropriate value for preparing the contract agreement within a week from the date of exhibit "A-1" letter. It is pointed out in exhibit "A-1" that the plaintiff may avail of 15 days mobilisation lime from the date of issue of exhihit "A-1" for mobilising men, material and other necessary resources for the construction. Further, the plaintiff is requested to study all the drawings and designs and the bar-chart enclosed with exhibit "A-1" and obtain clarifications from the architect. The plaintiff was told by the letter of intent that he can avail of mobilisation advance to the extent of 10 per cent, of the tendered amount against submission of bank guarantee of equivalent amount which shall be recovered from every running bill at the rate of 10 per cent. It is significant to note that exhibit "A-1" letter of intent made it clear that the time of completion of the project shall be three months for the pile foundation work and 12 months for the super structure work on which mobilisation time period of 15 days is also included. In exhibit "A-2" tender notice it is provided as one of the terms that time for carrying out the work will be 12 (twelve) months from the date of issue of letter of intent plus three months for piling work.
8. Exhibit "A-4" is the bank guarantee (bank guarantee No. 31/23) for the earnest money deposit of Rs. 1,10,000. It is dated October 20, 1990. Exhibit "A-3" is the bank guarantee (Bank Guarantee No. 31/30) for Rs. 5,18,746 for the mobilisation advance. It is dated January 9, 1991. The bank guarantees were given initially for a period of one year. Exhibit "A-4" was initially for the period expiring on January 20, 1991, and exhibit "A-3" was valid till April 9, 1992. The time for both the guarantees was extended. Admittedly, the bank guarantees were in force when exhibit "B-1" letter invoking the bank guarantees was issued to the bank by the second defendant. Both sides agreed that now the bank guarantee is not in force.
9. Counsel for the appellant submitted that in the matter of bank guarantee the court must always keep in mind that it is an autonomous and independent contract and when the court was called upon to issue an injunction restraining the defendant-bank from encashing the bank guarantee, the well settled principles laid down by precedential law governing the contract between the bank and the person to whom the guarantee, is given has to be carefully kept in mind. The well settled principle that has been laid down in R. D. Ilarbottie (Mercantile) Ltd. v. National Westminster Banh Ltd. [1977] 2 All ER 8(52 ; [1977] 3 WLR 752 (QB) and followed by the Supreme Court is that "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 above passage is from the judgment of Kerr J. in R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd. [1977] 3 WLR 752 (at page 701).
10. Emphasis was given by the Supreme Court to the portion underlined in the above passage. It is also to be noted that the observations of Kerr J. have been cited with approval by Lord Denning M. R. in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1977] 3 WLR 764 (CA). From the above quote it is clear that only in exceptional cases the court's interference is called for in the mailer of enforcement of a performance guarantee given by a bank.
11. In United Commercial Bank v. Bank of India, AIR 1981 SC 1426 ; [1982] 52 Comp Cas 186, A. P. Sen J., speaking for the court, referring to the decision, Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyd's List Law Reports 495 (CA), observed that Lord Denning M. R., while refusing to grant an injunction, stated (page 207) :
". . . . 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 Molds v. British Imex Industries Ltd. [1958] 2 QB 127 (CA). But that is not an absolute rule. Circumstances may arise such as to warrant interference by an injunction."
12. Counsel for the appellants and counsel for the respondents relied on the decision in United Commercial Bank v. Bank of India, AIR 1981 SC 1426 ;' [1982] 52 Comp Cas 186. While counsel for the appellants submitted that the case at hand is not an exceptional case which would warrant the interference of this court interdicting the performance of the guarantee by an order of injunction, counsel for the respondent relying on the passage that interference by way of injunction to prevent the due implementation of the bank guarantee though is a rare exception, submitted that non-interference is not an absolute rule. Counsel for the respondents contended that the case at hand warranted interference and the court below has granted the injunction and that this court should not interfere with the order passed by the court below.
13. In U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P.I Ltd. [1988] 1 SCC 174 ; [1989] 65 Comp Cas 283, the Supreme Court has made it clear under what circumstances a court can interfere by an order of injunction in the matter of implementation of a performance guarantee given by a bank. The facts of the case have to be cleanly dissected and analysed to take stock of whether the exceptional circumstances envisaged are present in the case. We shall now advert to the circumstances contemplated by the Supreme Court, which would invite the interference of the court by way of an injunction from implementing the performance guarantee. Shortly stated, a bank guarantee cannot be interfered with except in the case of fraud or in the case of genuine apprehension of irretrievable injustice. This is the well settled principle of English law. This principle is followed in India.
14. In U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. [1988] 1 SCC 174 ; [1989] 05 Comp Cas 283, the Supreme Court frowned upon the approach made by the learned judge of the court below who has proceeded on the basis that the injunction bought was not against the bank but was sought against the appellant. The court said, the net effect of the injunction is to restrain the bank from performing the bank guarantee and that cannot be done. One cannot do indirectly what one is not free to do directly and said that 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. Here in this case though in the suit an injunction was sought against defendants Nos. 2 and 3 and the first defendant-bank, in the application for temporary injunction, injunction was sought only against the bank but the appellant, defendants Nos. 2 and 3 were made parties to the petition. The court passed an order of temporary injunction against encashing bank guarantee and injunction. Referring to a House of Lords decision in United City Merchants (Investments) Ltd. v. Royal Bank of Canada [1982] 2 All ER 720 (HL), the Supreme Court observed that (page 294) : "The bank's duty to the seller was vitiated only if there was fraud on the part of the seller, and the bank remained under a duty to pay the amount of the credit to the seller even if the documents presented, although conforming on their face with the terms of the credit, nevertheless contained a statement of material fact that was not accurate." The principles relating to letters of credit should apply in cases of performance guarantee given by banks.
15. It is important to note that in order to restrain the operation 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 to the party approaching the court. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised.
16. In Tarapore and Co. v. Tractoroexport, Moscow [1969] 2 SCR 920 ; [1970] 40 Comp Cas 447, the Supreme Court observed that it was a mechanism of great importance in international trade and any interference with that mechanism was bound to have serious repercussions on the international trade of the country. The court reiterated that the autonomy of an irrevocable letter of credit was entitled to protection and except in very exceptional circumstances courts should not interfere with that autonomy. In United Commercial Bank v. Bank of India [1981] 3 SCR 300 ; [1982] 52 Comp Cas 186 the Supreme Court made it clear and plain that usually courts refrain from granting injunction restraining the performance of contractual obligations arising out of a letter of credit. This is because upon bank guarantees revolve many of the internal trade transactions in the country. In paragraph 34 of the decision reported as U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers P. Ltd. [1988] 1 SCC 174 ; [1989] 65 Cornp Cas 283, Sabyasachi Mukharji observed (page 297) : "I reiterate that commitments of hanks 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 cases of fraud or in case of irretrievable injustice be done, the court should interfere."
17. General Electric Technical Services Co. Inc. v. Punj Sons (P.) Ltd., AIR 1991 SC 1994 ; [1992] 74 Comp Cas 624 is a case where a bank guarantee was obtained to secure the mobilisation advance of 25 per cent, of the contract value. On failure of the sub-contractor to execute the work as per required specifications within the stipulated time the contractor sought to encash the bank guarantee. The court found that the bank could not be restrained from making payment as per undertaking given by it in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. It is pertinent to note that in this case the court has observed that the encashment of the bank guarantee could not be refused on the ground that the contractor has failed to make a reference to mobilisation advance in the letter seeking encashment of the bank guarantee and it amounted to suppression of material facts, in the sense that the mobilisation advance was under the contract to be recovered from the running bills. The nature of the fraud that the courts consider in cases relating to bank guarantee is fraud of an egregious nature as to vitiate the entire underlying transaction. It is fraud of the beneficiary, not the fraud of somebody else. General Electric Technical Services Co. Inc. v. Punj Sons (P.) Ltd., AIR 1991 SC 1994 ; [1992] 74 Comp Cas 624 is also a case in which a sub-contractor at whose instance a performance guarantee was given to the contractor (sic). The Supreme Court said that no injunction can be granted when the bank has to pay and the bank was willing to pay as per the undertaking. It is pertinent to note the observation that (page G50) :
"The High Court in the absence of prima facie case on such matters has committed an error in restraining the bank from honouring its commitment under the bank guarantee."
18. We may also refer to Syndicate Bank v. Vijay Kumar [1992] 74 Comp Cas 597 ; AIR 1992 SC 1066, wherein the court has reiterated that the bank guarantee is an autonomous contract and imposes an absolute obligation on the bank to fulfil the terms, and the payment in the bank guarantee becomes due on the happening of a contingency on the occurrence of which the guarantee becomes enforceable. For stopping payment under a bank guarantee to the beneficiary by the bank, at the instance of the person for whom the bank has stood guarantee, the prima facie case that has to be considered is prima facie case of fraud committed by the beneficiary or the irretrievable injustice to the suitor. We have now brought to our mind the major guiding principles to face the path of enquiry cleanly and clearly.
19. Counsel for the respondents submitted that the bank is bound to honour a bank guarantee strictly if it is in compliance with the terms of the bank guarantee. The case of the respondents before us was mainly on the basis that the bank is not obliged to honour the bank guarantee unless and until the enforcement of the bank guarantee is strictly in terms of the bank guarantee. To emphasise this aspect of the matter, counsel for the respondents referred us to the decisions in United Commercial Bank v. Bank of India, AIR 1981 SC 1426 ; [1982] 52 Comp Gas 186 and U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers P. Ltd. [1988] 1 SCC 174 ; [1989] 65 Comp Cas 283. In paragraph 28 of the decision in United Commercial Bank v. Bank of India, AIR 1981 SC 1426 ; [1982] 52 Comp Cas 186, the Supreme Court observed referring to Tarapore's case, AIR 1970 SC 891; [1970] 40 Comp Cas 447 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 overemphasised 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. Counsel wanted this court to take particular note about the phraseology used by the Supreme Court "accompanying documents as may be required thereunder, are in exact compliance with the terms of the credit" and also that "such documents must be scrutinised with meticulous care." Counsel for the respondents invited our attention to the rigor and sharpness of that condition of exact compliance with the terms of the credit and the meticulous scrutiny of the documents. The case of counsel for the respondents is that exhibit "B-1", the letter invoking the bank guarantee, is not in exact compliance with the terms of the bank guarantee.
20. Counsel for the appellant submitted that the case, United Commercial Bank v. Bank of India [1982] 52 Comp Cas 186 (SC) is a case relating to a letter of credit which guaranteed payment of bills which required that certain documents be tendered for the purpose of honouring the bills in terms of the letter of credit and in that context, the court held that the documents have to be scrutinised meticulously and that the documents required to be accompanied should be in exact compliance with the terms of the credit. In this context, we may refer to paragraph 32B of the decision in United Commercial Bank v. Bank of India, AIR 1981 SC 1426 ; [1982] 52 Comp Cas 186 (page 203) wherein the Supreme Court has observed that there is also no lack of judicial authority which lay down the necessity of strict compliance both by the seller with the letter of credit and by the banker with his customer's instructions. It has to be noted that in regard to honouring bills on the basis of a letter of credit, the Supreme Court held that it is also elementary to say that a bank is not bound or indeed entitled to honour drafts presented to it under a letter of credit unless those drafts with the accompanying documents are in strict accord with the credit as opened. Counsel for the respondents again referred to paragraph 33 of the same decision (page 203 of 52 Comp Cas), where the Supreme Court has referred to the decision in Equitable Trust Co. of New York v. Dawson Partners Ltd. [1927] 27 LIL Rep 49 (HL), wherein Lord Sumner said, approving the dictum of Bailhache J., thus : "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." Counsel referred us to paragraph 36 (page 204) in that decision wherein the Supreme Court has said that the bank has the power and is subject to the limitations which are given and imposed by (the customer's) authority. If it keeps within the powers conferred it is protected in the payment of the draft. If it transgresses those limitations, it pays at its peril.
21. In Halsbury's Laws of England, 4th edition, volume 3, 3rd para 141 at page 106, the requirement of exact compliance to the letter of credit is explained thus : "Unless documents tendered under a credit are in accordance with those for which the credit calls and which are embodied in the promise of the paying or negotiating banker, the beneficiary cannot claim against the paying banker, and it is the paying banker's duty to refuse payment. The documents must be those called for, and not documents which are almost the same or which will do just as well."
22. In paragraph 16 (page 290) of U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers P. Ltd, [1988] 1 SCC 174 ; [1989] 65 Comp Cas 283 the Supreme Court has referred to a case from the Court of Appeal in England in Elian and Rabbath v. Matsas and Matsas [1966] 2 Lloyd's List Law Reports 495. It is a case where an injunction was granted to prevent irretrievable injustice. The Supreme Court said that the facts are peculiar. "In that case, the first defendants' Greek Motor Vessel Flora M, was chartered by Lebanese charterers for carriage of the plaintiffs' cargo (consigned to Hungary) from Beirut to Rijeka. Discharge was delayed at Rijeka and the shipowners exercised a lien on cargo in respect of demurrage. The third defendant-bank put up guarantee in London in favour of the second defendants (first defendants' London agents) to secure release of the cargo. There was a claim by Yugoslavians to distraint on goods, involving the ship in further delay and the master of Flora M, on lifting the original lien, immediately exercised another lien in respect of extra delay (which was raised when Hungarian buyers put up 2000). Two years later, the shipowners claimed arbitration with the charterers to assess demurrage for which first lien was exercised and claimed to enforce guarantee. The plaintiff claimed a declaration that guarantee was not valid and an injunction to restrain the shipowners or their agents from enforcing the guarantee. The first and second defendants appealed against the granting of injunction by Blain J. It was held by the Court of Appeal that it was a special case in which the court should grant an injunction to prevent what might be irretrievable injustice. Lord Denning M. R. observed that although the shippers were not parties to the bank guarantee, nevertheless they had a most important interest in it. If the Midland Bank Ltd. paid under this guarantee, they would claim against the Lebanese Bank, who in turn would claim against the shippers. The shippers would certainly be debited with the amount. On being so debited, they would have to sue the shipowners for breach of their promise, express or implied, to release the goods. Lord Denning M. R. further posed the question, were the shippers to be forced to take that course ? Or can they short-circuit the dispute by suing the ship owners al once for an injunction ? He further observed at page 497 of the report that this was a special case in which an injunction should be granted. Lord Denning M. R., went on to observe that there was a prima facie ground for saying that, on the telex messages which passed (and indeed, on the first three lines of the guarantee) the shipowners promised that, if the bank guarantee was given, they would release the goods. He further observed that the only lien they had in mind at that time was the lien for demurrage. But would anyone suppose that the goods would be held for another lien ? It can well be argued that the guarantee was given on the understanding that the lien was raised and no further lien imposed : and that when the shipowners, in breach of that understanding, imposed a further lien, they were disabled from acting on the guarantee. But, as mentioned, hereinbefore, this was a very special case and I shall notice that Lord Denning M. R. treated this as a very special case and in a later decision, he expressed his views on this matter."
23. Counsel for the respondent was not successful in persuading us to be convinced that the case at hand should be considered on the basis that the beneficiary under the bank guarantee, viz., the appellants before us have committed a fraud in invoking the bank guarantee. Further, counsel was not able to satisfy us that there will be irretrievable injustice if no injunction is granted. Counsel for the respondent did not seriously put forth a case of fraud. Nevertheless, counsel submitted that since the plaintiff is vitally interested in the matter of encashing the bank guarantee and if it is not done strictly in compliance with the terms of the guarantee he has got a cause of action to interdict the bank honouring the bank guarantee on the letter of invocation of the beneficiary. The case of irretrievable injustice is founded on the simple fact that if no injunction is granted, the respondent will be put to the trouble of seeking other remedies by way of suit or arbitration proceedings. Certainly the respondent is not remedyless. The facts stated will not constitute an exceptional circumstance leading to irretrievable injustice. In fact, U is difficult for counsel for the respondents to convince us that the case involved a question of irretrievable injustice.
24. Now, we shall examine the two bank guarantees, their terms and exhibit "B-1", the letter by the second defendant to encash the bank guarantee. It has to be remembered that the bank guarantee is given to offset the loss of the beneficiary in respect of an underlying contract. The case of the contract of guarantee is that the bank is prepared to pay the loss or damage caused to the beneficiary on demand to the extent of the amount guaranteed in the guarantee without reference to any dispute as to whether loss has been sustained or not on the underlying contract between the beneficiary under the bank guarantee and the plaintiff at whose instance the bank guarantee has been given. The bank guarantee makes it clear that the decision as to the default of the contractor and the quantum of damage or loss is completely left to the beneficiary of the bank guarantee.
25. Counsel submits that the bank guarantee, exhibit "A-4", provides that a statement has to be made by the beneficiary to invoke the bank guarantee wherein the beneficiary has to state that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the employer National Council of Science Museums by reason of any breach by the said contractors of any of the terms or conditions contained in the notice inviting tender or by reason of the contractor's failure to perform the said notice inviting tender. In the first paragraph of exhibit "A4", the bank has undertaken to pay to the employer (defendants Nos. 2 and 3) an amount riot, exceeding Rs. 1,10,000 against any loss or damage caused to or suffered or would be caused to or suffered by the contractor of any of the terms or conditions contained in the said NIT. Counsel for the respondents submitted that in the same way exhibit "A-3" bank guarantee also specifies that the invocation should contain a statement that the loss or damage sustained by the beneficiary is by reason of any breach by the contractor of any of the terms or conditions contained in the letter of intent or the contractors' failure to perform the letter of intent.
26. In exhibit "A-3" bank guarantee, the bank has undertaken to pay to the employer (defendants Nos. 2 and 3) an amount not exceeding Rs. 5,18,746 against any loss or damage caused to or suffered or would be caused to or suffered by the employer by reason of any breach by the said contractor of any of the terms and conditions contained in the letter of intent. In paragraph 2 of exhibit "A-3", the bank has undertaken to make the payment aforesaid without any demur merely on a demand from the employer stating that the amount claimed is due by way of loss or damage caused to or suffered by the employer under National Council of Science Museums by reason of any breach by the said contractor of any of the terms or conditions contained in the said letter of intent or by reason of the contractor's failure to perform the letter of intent. It is significant to note that in paragraph 3 in exhibit "A-3" the bank has further agreed "that the guarantee given shall remain in full force and effect during the period as mentioned in the last para of the letter of intent or the period that would be taken for the performance of the said agreement and that it shall continue to be enforceable till the dues of the employer under or by virtue of the said letter of intent have been fully paid and its claims satisfied or discharged or the employer certifies that the terms and conditions of the said letter of intent have been fully and properly carried out by the said contractor and accordingly discharges the guarantee". It is provided in para 2 of the guarantee that "any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee". In exhibit "A-4", the bank has agreed that the guarantee, exhibit "A-4" shall remain in full force and effect during the period as mentioned in clause 21 of the said NIT and that it shall continue to be enforceable till the dues of the employer under or by virtue of the said NIT has been fully paid and its claims satisfied or discharged or the employer certifies that the terms and conditions of the said NIT have been fully and properly carried out by the said contractors and accordingly, discharges the guarantee.
27. We have given all the details of the guarantees given by the bank for the reason that counsel for the respondents very stoutly argued that exhibit "B-1" demand for payment due under the guarantee is not strictly in terms of exhibits "A-3" and "A-4" bank guarantees. We have already referred to the letter of intent, exhibit "A-1". It has to be noted that in exhibit "A-1" it is stated that the completion of the project shall be three months for the pile foundation work and twelve months for the superstructure work in which mobilisation time period of 15 days is also included. The notice of tender, exhibit "A-2" also fixes a time limit for completion of the construction work. There is no dispute that the work has not been completed within the period allowed to the plaintiff for the completion of the work. The plaintiff has got a case that the Superintending Engineer of defendants Nos. 1 and 2 wrote a letter on July 25, 1992, stating that the plaintiff was expected to complete the work within November 20, 1992, and that the Superintending Engineer sent a letter to the third defendant recommending extension of time. But the fact remains that no extension has been given. Of course, when the plaintiff filed the suit, there was termination of the contract.
28. Now, we shall turn to exhibit "B-1". It is dated November 2, 1992. There it is stated that as per the condition of the agreement, time is the essence of the contract and the contractor is supposed to complete the work strictly according to the agreed CPM/Part Bar Chart. The bar chart is part of the letter of intent. The contractor has not been adhering to this condition and has been delaying the construction work from the very beginning and that in spite of repeated requests, reminders and personal persuasion the contractor failed and neglected to carry out the work according to the time schedule and thus caused considerable loss to the council. Further, it is stated that in view of the very slow progress of the construction work and the heavy loss incurred by the council on account of the sheer neglect of the contractor in completing the construction of the building in time, this council is constrained to invoke the bank guarantee Issue No. 31/30 for Rs. 5,18,746 and Issue No. 31/23 for Rs. 1,10,000. In exhibit "B-1", it is also mentioned that the contractor failed to adhere to the terms and conditions set out in the notice inviting tender and so defendant No. 3 demands the bank to pay a sum of Rs. 6,28,746 guaranteed by the bank by invoking the bank guarantee Issue No. 31/30 and Issue No. 31/23. Admittedly, exhibit "B-1" demand invoking the bank guarantee was issued during the currency of the bank guarantee. In paragraph 2 of exhibit "B-1", the third defendant has made it clear that defendants Nos. 2 and 3 have sustained loss on account of the plaintiff's failure and neglect to carry out the work according to the time schedule.
29. Since there was no response to exhibit "B-1", exhibit "B-1(a)" was sent by the third defendant. It is dated November 18, 1992. Exhibit "B-1(a)" refers to the bank guarantees and the demand made by exhibit "B-1". It is stated in exhibit "B-1(a)" that although more than a fortnight has elapsed after the request for invocation of the bank guarantees the defendants have not received the requisite demand draft and have not received any official communication in connection with the invocation of the bank guarantees. The urgency of the matter also has been referred to in exhibit "B-1(a)". After obtaining exhibit "B-1(a)", the third defendant-bank sent exhibit "B-1(b)", dated November 19, 1992. In exhibit "B-1(b)", the bank informed that an injunction order has been served on them by the court and hence "the matter is pending, awaiting further orders from the court". In between exhibit "B-1" and exhibit "B-1(b)", there are two documents of significance : they are exhibits "A-1Q" and "A-1l". Exhibit "A-10" is dated November 5, 1992. It is a letter from the third defendant/bank to the plaintiff with reference to the invocation of the bank guarantee by the third defendant. The bank has informed the plaintiff by exhibit "A-10" that the bank has received exhibit "B-1" invocation from the second defendant and that "since the guarantees are to invoke and payment to the beneficiary is to be made immediately", the plaintiff is requested to provide funds to meet the obligation immediately. A copy of the invocation letter exhibit "B-1" was enclosed along with exhibit "A-10". The plaintiff, on November 7, 1992, issued a lawyer notice, exhibit "A-1l". In exhibit "A-1l", it is stated that defendants Nos. 2 and 3 have recovered an amount of Rs. 2,20,000 which has not been disclosed to the bank and that the director of the council has been playing fraud on the bank, since the very bank guarantee itself was furnished by the bank only for mobilisation advance made available to the plaintiff. Of course, it is stated in the notice that "the very letter of demand is not in compliance with the terms of the bank guarantees issued, and it is well settled law that a bank shall not part with any bank guarantee unless the limitations and prescriptions therein are fully satisfied while invoking the bank guarantee. After stating thus, the notice proceeds to say that the plaintiff maintains that they have not caused any loss or damage to the council and that the work is still going on and it has never been terminated. Further, it is pointed out that it is only on account of want of facilities to be given by the council, the plaintiff could not complete the work in time and that defendants Nos. 2 and 3 had agreed for grant of further time for completion of the work and referred to the recommendation made by the Superintending Engineer for extension of time. It is further stated in exhibit "A-11" that the plaintiff's version that the director has played fraud on the bank seems to be correct, in view of the fact that they have already re-paid a substantial amount and since the invocation of the very bank guarantee is not according to the terms thereof". On the above basis, the plaintiff directed the bank not to part with any amount under the bank guarantee pursuant to the demand, exhibit "B-1". As usual, it is stated that if the bank parts with any amount in regard to the bank guarantees, the same shall be at the bank's risk as to costs and consequences. The notice was not sent by post, but it was delivered personally to avoid possible delay. It is to be noted that exhibit "A-11" notice did not say that the invocation is defective on account of not referring to the letter of intent. Immediately the present suit was instituted on November 9, 1992, with I. A. No. 5930 of 1992 for temporary injunction.
30. The question as to the validity of exhibit "B-1" invocation has to be considered on the format of facts now we have adverted to. At this moment, we would like to focus our attention to the fact that the bank after obtaining exhibit "B-1" invocation was prepared to honour the demand and to pay the amount due under the bank guarantees and obviously for the purpose, the bank issued exhibit "A-10". Exhibit "A-10" clearly shows that the bank was satisfied with exhibit "B-1" invocation for effecting payment of the amount under the bank guarantee. Further, it has to be noted that the bank did not respond to exhibit "B-1" for a considerable time, and only after exhibit "B-1(a)" dated November 18, 1992, the bank informed the second defendant by exhibit "B-1(b)" dated November 19, 1992, that the bank is prevented by an order of injunction in making the payment due under the bank guarantee.
31. The bank has filed a counter-affidavit in answer to the application for temporary injunction, in the counter-affidavit, the bank has not taken a ground that the invocation is inadequate or not in strict conformity with the terms of the bank guarantees. Further, the counter-affidavit of the bank reveals that on receipt of exhibit "B-1", the bank contacted the plaintiff to make sufficient funds available for payment of the amounts due under the guarantees and that the plaintiff promised to call on the first defendant/bank on November 5, 1992, and, thereafter, the plaintiff issued the lawyer notice to the bank, exhibit "A-11", directing the bank not to pay the amount of the bank guarantees to the third defendant. It is very significant to note that the bank which has got a primary obligation to honour the bank guarantee did not choose to object to the invocation on the ground that it is not in accordance with the terms and conditions of the bank guarantee. It is pertinent to note in this context that in paragraph 19 of the plaint, the plaintiff has said that though the plaintiff has enlightened the bank on the illegality of the letter of invocation, the bank has expressed its desire to encash and part with the amount due thereunder. It is also significant to note that the bank did not respond to exhibit "B-1" dated November 2, 1992, till exhibit "B-1(b)" was sent on November 19, 1992.
32. Certainly a bank guarantee is equated to a letter of credit in several decisions of the Supreme Court and High Courts and it has been held that the terms and conditions of the letter of credit have to be complied with strictly to fasten the obligation on the bank to honour the credit. In the matter of letter of credit, usually certain documents have to be tendered under the credit and unless the documents tendered under the credit are those for which the credit calls, the beneficiary cannot claim against the intermediary or issuing banker ; and that the documents must be those called for and not documents which are almost the same or which might do just as well--see Lamborn v. Lake Shore Banking and Trust Co. [1921] 196 Appl Div 504 ; 188 NYS 162, Equitable Trust Co. of New York v. Dawson Partners Ltd. [1927] 27 LIL Rep 49 (HL), Kydon Compania Naviera SA v. National Westminster Bank (The Lena) [1981] 1 Lloyd's Rep 68, Skandinaviska Kreditaktiebolaget v. Barclays [1925] 22 LIL Rep 523 and United Commercial Bank v. Bank of India [1982] 52 Comp Cas 186 ; AIR 1981 SC 1426. But it has to be noted that the English decisions are taking the view that where a mandate is ambiguous and a paying banker acts in a reasonable way in pursuance of it he may be protected. The decisions are Equitable Trust Co. of New York v. Dawson Partners Ltd. [1927] 27 LIL Rep 49 (HL), Samuel Montagu and Co. v. Banco de Portugal [1924] 19 LIL Rep 99 (HL), Ireland v. Livingston [1862] LR 5 395 (HL), Miles v. Haslehurst and Co. [1906] 23 TLR 142 and M. A. Sasnotm and Sons Ltd. v. International Banking Corporation [1927] AC 711 (PC). The same proposition of law is seen stated in Halsbury's Laws of England, 4th edition, volume IV, para 141, at page 106. The passage in Halsbury's Laws of England has been referred to in the decision in United Commercial Bank v. Bank of India [1982J 52 Comp Cas 186 ; AIR 1981 SC 1426.
33. There was a controversy as to how far strict compliance or reconcilability between documents and credit was a condition of a good tender --see J. H. Rayner and Co. Ltd. v. Hambros Bank Ltd. [1943] KB 37 ; [1942] 2 All ER 694 (CA), Bank MeUin Iran v. Barclays Bank (Dominion, Colonial and Overseas) [1951] 2 Lloyd's Rep 367. The controversy has been laid to rest by the decision of Delvin J. in Midland Bank Ltd. v. Seymour [1955] 2 Lloyd's Rep 147. It has to be noted that at one time it was thought that the bill of lading must conform strictly to the credit :is regards description of the goods also, though in Guaranty Trust of New York v. Van Den Berghs Ltd. [1925] 22 LIL Rep 447 Scrutton L. J. thought that : "the bill of lading and the certificate of origin together complied with the letter of credit". We feel that it is apposite to quote the passage from Paget's Law of Banking on this aspect of the matter :
"Much depends upon the circumstances. The credit asked for documents covering Manila Coconut Oil, whereas the documents were for coconut oil simply, the missing link being supplied by the certificate of origin. Where a credit called for bills covering a shipment of Manila hemp and the bank paid against documents for 'general merchandise contents unknown', it was held in America that the bank could recover in respect of that part of the shipment only which consisted of Manila hemp. Where a bank refused to pay against bills of lading covering 'machine-shelled ground nut kernels' under a credit calling for 'Coromandcl ground nuts', its refusal was upheld, though in the trade the two expressions seemed to be synonymous. Where also a bank paid against documents in respect of trucks described as 'in new condition' and 'new, good', under a credit calling for 'new' trucks, it was saved only by the fact that the banker issuing the credit was held to have ratified the irregular payments.
However, the impossibility! often, of the bill of lading containing all the descriptive terms of the credit is evident and providing the bill of lading describes the goods in general terms and identifies them and that there is no conflict between that description and the credit description, the bill is a good tender under a credit. This view has now received the sanction of Devlin J. in Midland Bank Ltd. v. Seymour [1955] 2 Lloyd's Rep 147 :
... all the documents between thern that is the set of documents--must contain all the particulars. That, of course, is subject to this obvious qualification that each document (if it is not to contain all the particulars) must contain enough to make it a valid document'.
he said later that 'the documents must be consistent between themselves', which, it is submitted, can be taken to mean that there must be no conflict and in the light of earlier decisions, no apparent conflict."
34. The position in law in India is the same as in England and it has been made clear in the decision of the Supreme Court in United Commercial Bank v. Bank of India [1982] 52 Comp Cas 186, 204 ; AIR 1981 SC 1426. The Supreme Court referred to the decision in Lamborn v. Lake Shore Banking and Trust Co. [1921] 196 Appl. Div 504 wherein Smith J. said thus "A party who is entitled to draw against a letter of credit must strictly observe the terms and conditions under which the credit is to become available, and, if he does not, and the bank refuses to honour his draft, he has no cause of action against the bank". We feel that we may go wrong if we parallelise a letter of invocation to documents to be tendered under a credit. We say so because in a letter of credit which specifies certain documents to be tendered for honouring the bills the documents should certainly strictly conform to the description given in the credit. A banker considering payment against documents is not expected to have a knowledge of market terms and descriptions. But in the case of a letter of invocation, the beneficiary himself is making the decision to invoke the guarantee and in that context, it is difficult for us to equate in all cases the letter of invocation to the documents to be tendered under a letter of credit. Usually in a letter of credit, the description of the goods in the relative bills is important though it is stated that where a mandate is ambiguous and a paying banker acts in a reasonable way in pursuance of it, he may be protected. Certainly this rule cannot be stretched so far as to protect a banker who pays against documents describing goods in terms which are similar to, but not exactly the same as those stipulated in the credit.
35. The defect of exhibit "B-1" is that there is no reference to the letter of intent when the beneficiary has invoked the bank guarantee, though he has mentioned that his loss was occasioned on account of the contractor not executing the work within the prescribed time. The time for completion of work is prescribed in the letter of intent in the notice inviting tenders and the agreement.
36. The paying bank was prepared to accept the letter of invocation and to honour the bank guarantee. There are decisions which have taken the view that a reasonable construction of the letter of invocation is more needed considering the commercial nature of the transaction. Almost in a similar case, General Electric Technical Services Company Inc. v. Punj Sons (P.) Ltd., AIR 1991 SC 1994 ; [1992] 74 Comp Cas 624, 649, the Supreme Court observed that : "The liability of the bank remained intact irrespective of the recovery of the mobilisation advance or the non-payment under the running bills. The failure on the part of GETSCO to specify the remaining mobilisation advance in the letter for encashment of bank guarantee is of little consequence to the liability of the bank under the guarantee. The demand by GETSCO is under the bank guarantee and as per the terms thereof. The bank has to pay and the bank was willing to pay as per the undertaking. The bank cannot be interdicted by the court at the instance of respondent No. 1 in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties". The willingness of the bank to make payment on the letter of invocation even if it is defective is a detracting factor when a court is called upon to exercise its discretionary power to injunct the bank at the instance of the contractors not to make the payment, when there is absence of fraud or special equities attracting prevention of irretrievable injustice between the parties.
37. A meaningful and purposive construction of the letter of invocation is more needed to keep the probity, dependability and inviolability of the commercial potency and power pack involved in bank guarantee. Counsel for the appellant referred us to two decisions of the Calcutta High Court in Road Machines (India) Pvt. Ltd. v. Projects and Equipment Corporation of India Ltd., AIR 1983 Cal 91 and D. T. H. Construction (P.) Ltd. v. Steel Authority of India Ltd., AIR 1986 Cal 31. In Road Machines (India) Pvt. Ltd. v. Projects and Equipment Corporation of India Ltd., AIR 1983 Cal 91, after referring to the decision in United Commercial Bank v. Bank of India [1982] 52 Comp Cas 186 ; AIR 1981 SC 1426, the court observed thus (page 904) : "With great respect I am unable to accept the principles laid down by the Division Bench of the Delhi High Court in Harparshad and Co. Ltd. v. Sudarshan Steel Rolling Mills [1980] 50 Comp Cas 709 ; AIR 1980 Delhi 174, to the effect that a bank guarantee should be invoked in an exact and punctilious manner setting out the entire case of the beneficiary under the guarantee in the same way as setting out a cause of action in a plaint. A bank guarantee is a commercial document and is neither a statutory notice nor a pleading in a legal proceeding. In my view, a bank guarantee may be invoked in a commercial manner. The invocation would be sufficient and proper if the bank concerned understands that the guarantee is being invoked by the beneficiary in terms of the guarantee". In this case, the contention raised by the plaintiff is significant to understand the position of law referred to by the court in what we have quoted. In paragraph 19 of the decision the court observed that (page 95) : "The only point raised which needs consideration is that, in the letter of defendant No. 1 invoking the guarantee it has not been specifically stated that the plaintiff has failed to fulfil its obligations under the contract. All that is stated in the letter dated November 21, 1981, is that the plaintiff had defaulted in 'satisfactory execution of the above mentioned export contract'. This decision in Road Machines (India) Pvt Ltd. v. Projects and Equipment Corporation of India Ltd., AIR 1983 Cal 91, was referred to in D. T. H. Construction (P.) Ltd. v. Steel Authority of India Ltd., AIR 1986 Cal 31. The court observed that (headnote) : "If the notice of demand issued by the beneficiary of a bank guarantee is not strictly in accordance with the language of the bank guarantee that would not be an excuse for the bank for non-payment of the amount due under the guarantee. If the bank has understood the purport of the notice, then the bank cannot be heard to say that there has been no statement in the notice that the beneficiary has suffered loss and/or damages on account of the defaults committed by the person on whose behalf the guarantee was given. Even if the notice is bad that will not help the bank ultimately because the beneficiary can give a fresh notice strictly in compliance with the language and words of the guarantee to the bank. If there is substantial compliance with the terms of the guarantee in the notice that would be sufficient and if there be no defect in understanding the nature and purport of such notice by the bank, the bank is bound to honour its commitment under the guarantee". The decision in D. T. H. Construction (P.) Ltd. v. Steel Authority of India Ltd., AIR 1986 Cal 31, certainly takes the view that strict compliance is not necessary and only substantial compliance is necessary in the matter of letter of invocation. Tacitly the learned judge is taking the view that a letter of invocation cannot be equated to documents to be tendered for invoking a letter of credit and for that matter a bank guarantee. We say so since the learned judge has referred to the decision in United Commercial Bank v, Bank of India [1982] 52 Comp Gas 186 ; AIR 1981 SC 1426.
38. Counsel for the respondents referred us to Synthetic Foams Ltd. v. Simplex Concrete Piles (India) Pvt. Ltd., AIR 1988 Delhi 207 ; [1991] 70 Comp Cas 475. In this case, the court observed that the obligation of a bank under the bank guarantee is absolute, but such an absolute obligation arises only if the conditions of the bond are satisfied and if the demand made on the bank is in strict accord with its terms and there is no element of fraud, misrepresentation or suppression of material facts involved but where there are allegations of fraud, misrepresentation or suppression of facts made by the party against the beneficiary and there is prima facie evidence to suggest that there is some truth in these allegations then there would possibly be no absolute bar operating against the courts from granting ad interim injunction restraining the bank from making the payment on the basis of the bank guarantee. Similar would be the position where the demand made by the beneficiary is in violation of the conditions of the bond or is not in strict accord with its terms : keeping in view the nature of obligation of the bank the terms of the bank guarantee would have to be strictly construed in such cases. It has to be noted that what, is to be strictly construed is the terms of the bank guarantee and not the letter of invocation. In this case, Synthetic. Foams Ltd. v. Simplex Concrete Piles (India) Pvt. Ltd. [1991] 70 Comp Cas 475 ; AIR 1988 Delhi 207, in paragraph 13, it has been made clear that the bank guarantee was invoked by suppression of material facts which even borders on fraud in so far as it has not disclosed that the contract has been cancelled by the defendants without any fault or mistake of the plaintiff and rather on different grounds. It is further noticed in that case that it was due to technical reasons and also due to increase in price that the contract has been cancelled which means that it is not due to any default of the plaintiff. We do not think that this case, Synthetic Foams Ltd. v. Simplex Concrete Piles (India) Pvt, Ltd., AIR 1988 Delhi 207 ; [1991] 70 Comp Cas 475, may be of any assistance to decide the question raised in regard to the nature of the statement that has to be made for invoking the bank guarantee.
39. Counsel for the respondents submitted that the decision in Road Machines (India) Pvt. Ltd. v. Projects and Equipment Coloration of India Ltd., AIR 1983 Cal 91, has been considered in a later decision of the Calcutta High Court in G. S. Atwal and Co. Engineers (Pvt.) Ltd. v. Hindustan Steel Works Construction Ltd., AIR 1989 Cal 184 ; [1991] 71 Comp Cas 280. and the dictum which we have adverted to earlier, has been explained by the same court. According to counsel, the proposition of law laid down in Road Machines (India) Pvt Ltd. v. Projects and Equipment Corporation of India Ltd., AIR 1983 Cal 91, is not to the effect that the letter of invocation need not be in terms of the bank guarantee. Certainly, if it is patently not in terms of the bank guarantee, it will not be a proper invocation of the bank guarantee. In G. S. Atwal and Co. Engineers (Pvt.) Ltd. v. Hindustan Steel Works Construction Ltd., AIR 1989 Cal 184 ; [19911 71 Comp Cas 280, the court quoted a passage from the decision in Road Machines (India) Pvt. Ltd. v. Projects and Equipment Corporation of India Ltd., AIR 1983 Cal 91, which reads thus (at page 189) :
"In my opinion, a bank guarantee may be invoked in a commercial manner. The invocation would be sufficient and proper if the bank concerned understands that the guarantee is being invoked by the beneficiary in terms of the guarantee".
40. After quoting the above passage, the court observed that :
"A careful reading of the aforesaid observation will clearly show that the bank will not be liable to pay if the invocation is not in terms of the hank guarantee". But it has to be noted that in this decision itself G. S. Atwal and Co. Engineers (Put.) Ltd. v. Hindustan Steel Works Construction Ltd., AIR 1989 Cal 184 ; [1991] 71 Comp Cas 280, the court understood the quote as laying down the principle that it was not necessary that the letter of invocation should strictly reproduce the terms of the bank guarantee but it must substantially comply with the terms of the bank guarantee. This aspect is made clear by saying "A bank would not be entitled to hold that the invocation is in accordance with the terms of the guarantee when clearly it is not so ...." The phrase "commercial manner" does not empower the bank to act arbitrarily or whimsically. In this case, the bank guarantee required quantification of the loss or damage and since there was no assessment of damage, the claim was for unliquidated damages and the court observed that the bank guarantee has not been given for securing the claim for unliquidated damages. Further, the court observed that the letter of invocation of the bank guarantee "does not even substantially comply with the terms of this guarantee", .
41. We are of the opinion that what has been laid down in the decision in Road Machines (India) Pvt. Ltd. v. Projects and Equipment Corporation of India Ltd., AIR 1983 Cal 91, is applicable to the case at hand and we hold that from the facts unfolded in the case it cannot be said that the letter of invocation though not in the same language contemplated in paragraph 2 of the guarantees, is not in substance in terms of the bank guarantees.
42. We may also advert to another aspect ancillary to the question we are now discussing. Assuming that exhibit "B-1" letter of invocation is not strictly in compliance with the bank guarantees whether the conduct of the bank not repudiating the letter of invocation and not taking a decision whether the letter of invocation has to be repudiated or not will enable the beneficiary to insist that the bank honour the bank guarantees and resist successfully a suit for injunction by the contractor, Roche J. in Westminster Bank Ltd. v. Banco Nazionak di Credito [1928] 31 LIL Rep 306 was of the opinion that : "If parties keep documents which are sent them , . . in consequence of some mandate which they themselves have issued, and keep them for an unreasonable time, that may amount to a ratification of what has been done as being done within their mandate". In Bank Melli Iran v, Barclays Bank (Dominion, Colonial and Overseas) [1951] 2 TLR 1057, however, Barclays Bank had paid against documents which were not in accordance with the terms of the credit. Bank Melli delayed so long before repudiating the payment that McNair f. held that they must be taken to have ratified.
43. In this case, we have to note that exhibit "B-1" was issued on November 2, 1992, which has been received by the first defendant/bank on November 4, 1992. The bank did not respond till November 19, 1992, and only responded when a reminder was sent on November 18, 1992, and the response was to the effect that the bank has obtained an ad interim injunction which has been made absolute and is challenged in this appeal.
44. The court below has not approached the issues in the correct legal perspective. We are of the opinion that the court below has gone wrong in discussing the dispute with regard to the underlying contract and in not treating the performance guarantee as an autonomous and independent contract. We say so, since the court below has observed that : "As per the averments in the affidavit of the petitioner the contract was not terminated even today and the contractor is continuing his work at the site. Exhibit "B-1" series are the correspondences between the third defendant and the first defendant regarding encashment of bank guarantee. Exhibits "B-2" to "B-35" are the various correspondences between the parties regarding the construction work. On a perusal of the various correspondences, I could find that the plaintiff is finding fault with the defendants for the delay caused in carrying out the work whereas the defendants are finding fault with the plaintiff for the delay. Who is at fault for the. delay has to be determined after elaborate oral and documentary evidence. The only reason alleged for the encashment of the bank guarantee is due to the failure of the plaintiff to finish the work within the stipulated period. In fact the bank guarantee is sought to be encashed alleging that the defendants sustained damages. 77ie question whether the defendants sustained damages is also a matter to be adjudicated by a competent forum" . Further, the learned sub-judge has observed that even if exhibits "A-3" and "A-4" bank guarantees were furnished to secure mobilisation advance paid by the second defendant, a substantial portion of it was already recovered. Therefore, any demand made for the full amount could not be accepted or acted upon by the bank, . Of course, there is a reference to exhibit "B-1" and the court said that the third defendant has no plea in exhibit "B-1" that due to the failure to observe the terms and conditions in the notice inviting tender they have suffered any loss and so the first defendant/bank need not act upon such a demand. But after the above observation, the learned sub-judge held thus : "From the very letter of invocation it is clear that the third defendant has demanded encashment of bank guarantee towards the loss on account of breach of contract which has no legal sanction". The court below further has gone into the question of repayment of mobilisation advance and that also has weighed with the court in passing the order impugned. The court said that the respondents have recovered Rs. 2,20,000. There is no justification for them to demand the entire amount. But as per the terms of the bank guarantee there is no such provision to encash the bank guarantee to make up the mobilisation advance.
45. We are not repeating that the rule is well established that a bank issuing or confirming a letter of credit or a bank guarantee is not concerned with the underlying contract between the beneficiary under the guarantee and the person at whose instance the bank guarantee has been given. The duties of a bank under a bank guarantee are created by the guarantee document itself. We are of the opinion that the court below has not approached the issue in the light of the large volume of precedential law on the subject. Courts should not lightly interfere with the operation of bank guarantees or irrevocable documentary credit. We hold that in order to restrain the operation of an irrevocable letter of credit, performance bond or guarantees by the order of a court there should be good prima facie acts of fraud or irretrievable injustice.
46. We conclude our decision with a quote from the judgment of Sir John Donaldson M. R. in Bolivinter Oil SA v. Chase Manhattan Bank [1984] 1 All ER 351, 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 discharged".
47. In the result, we set aside the order impugned in this appeal and vacate the order of injunction passed by the court below on I. A. No. 5930 of 1992 in O. S. No. 910 of 1992. Appeal is allowed. No order as to costs.