SVENSKA HANDELSBANKEN v. MIS INDIAN CHARGE CHROME AND ORS.

A terms of the bank guarantee and the nature of the inter se rights of the parties under the contact. It was on the question whether the amount was due under the terms and conditions of the bank guarantee that the learned Judge speaking for the Court observed tha~ in the absence of prima facie case on such matters the High Court committed error in restraining the bank fi~m honouring its commitment under the bank guarantee. B Shetty, J. speaking for the Bench noticed the earlier observations of Mukharji, J. in the case of U.P. Co-operative Federation Ltd. (supra) and stated that the nature of the fraud that the courts talk about is fraud of an "egregious nature as to vitiate the entire underlying transaction". It is fraud of the beneficiary, not the fraud of somebody else.

Again in this very judgment Shetty, J. referred to the observations of Mukharji, J. that there should be prima facie case of fraud and special equaties in the form of preventing irretrievable injustice between the parties. Mere irretrievable injustice without prima facie case of established fraud is of no consequence in restraining the encashment of b'ank guaran- tee.

Mr. Venugopal, learned counsel for the borrower referred us to the decision in Itek Corporation v. The First National Bank etc., by the United E States District Court, Massachusetts reported in 566 Federal Supplement 1210, particularly observations at page 1217, which read thus :

"Because I find that Itek has demonstrated that it has no adequate remedy at law, and because I find that the allegations of irreparable harin are not speculative, but genuine and immediate, I am satis- F fied that Itek will suffer irreparable harm if the requested relief is not granted."

The facts in that case were that the exporter in U.S.A entered into an agreement with Imperial Government of Iran has brought action seeking order terminating its liability on standby letters of credit issued by American Bank in favour of Iranian Bank as part of the contract. The learned District Court held that the contractor was entitled to issuance of preliminary injunction.

It will be noticed that this judgment is on peculiar facts of its own and the situation created after the Iranian Revolution and the American

HANDELSBANKEN v. CHARGE CHROME (DAYAL, J.] 363

-. Government cancelled the export licence in relation to Iran as if related to high technology. As the American Government had cancelled the export licence in view of revolution in Iran and the Iranian Government had forcible taken 52 American citizens as hostages and the President Carter by Executive order blocked all Iranian assets subject to the jurisdiction of the United States and also cancelled the export contracts, the plaintiff informed the importer in Iran invoking force majeure but the Iranian B importer inspite of it resorted to encashment of the bank guarantee. The court was of the view that even if claim for damages is decreed by the American courts situation in Iran was such that the decree will not be executable in Iran. It was no these facts that the court felt that it was a case where the plaintiff had demonstrated that it has no adequate remedy at law and the allegations of irreparable harm are not speculative but genuine and immediate and the plaintiff would suffer irreparable harm if the requested relief is not granted. the court also found as a fact at page 1217 itself that "the uncontested facts in the record, if proved at trial, appear to make out a prim a f acie case of fraud within the meaning of Section 5-114(2)(b) and held that under these circumstances, any demand on the guarantees or letter~ of credit by Iran importer in March, 1980 would necessarily have been fraudulent".

It is thus clear that this judgment is based on peculiar facts, par- ticularly of situation in the Government of Iran which came into power after the revolution in Iran and its relation with the United States of E America and in any case on the prim a f acie finding of fraud being given by the learned court read within finding of irreparable harm which could not be avoided by adequate remedy at law due to peculiar situation in Iran.

It will be noticed that the plea of the plaintiff was that the contract F will get frustrated due to restrictions imposed for import and export by the American Government. Alongwith it the plea was of irretrievable injury which was explained in the judgment also as to what it meant.

Mr. Venugopal then referred us to the decision of Berger, J. in Handerson v. Candian Imperial Bank of Commerce and Peat Marwick Ltd., G 40 British Columbia Law Report 318. Here again the facts were peculiar. The plaintiff arranged an irrevocable letter of credit to fulfill his obligation to purchase 20 episodes of two television shows from a production com- pany. Although the shows w~re never produced and the production com- pany went into bankruptcy, the receiver of the seller made demand upon H

364 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R.

A the bank for payment under the letter of credit anCI the plaintiff brought an application for an interlocutory injunction to stop the bank from making payment. The Court granted the interim injunction and held that the letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agreed to pay upon presentation of documents, not goods there is an exception to this rule; the bank should not pay under the credit where it knows that the request for payment is made fraudulently in circumstances when there is no right to payment. The case fell within this exception. The bank had been put in knowledge of the fact that the shows had not been produced and, therefore, the receiver was not entitled to the proceeds. It will be noticed that this decision is based on obvious fraud and this view was given. by Berger, J. after considering the case of Sztejn v. /. Henry Schroder Banking Corp., (1941), 31 N.Y. Supp. 2{d) 631 at 633.

A decision of New York Supreme Court in NMC Enterprises, Inc. v. D Columbia Broadcasting System. Inc., 14 UCC Reporting Service 1427 was also referred to by Mr. Venugopal. Here again Fein, J, observed that preliminary injunctive relief will be granted, restraining bank from honour- ing a letter of credit, where a prim a f acie showing has been made of fraud in the underline transaction and the plaintiff has further shown that it may be irreparably injured if the relief is not granted. E On the facts the Court had taken the view that the plaintiff had made a sufficient showing of fraud to justify an injunction against the honouring of the letter of credit covering the sale of stereo receivers and related equipment where it appeared by affidavit that at the time the contract was negotiated, the plaintiff was provided with brochures containing technical performance specifications for the receivers including their continuous power out put ratings; that the receivers did not comply with the repre- sentation as to continuous power out put thereby reducing their value; that an officer of the defendant had allegedly admitted that defendant was aware of the non-conformity prior to the execution of the contract and failed to distlose it to the plaintiff; and that if the letter of credit was drawn up or negotiated plaintiff might be forced into bankruptcy.

It will again be noticed that in this case the dispute was between the supplier and the purchaser and the decision is based on the facts found by . H the court for grant of preliminary injunction.

HANDELSBANKENv. CHARGECHROME[DAYAL,J.] 365

Halsbury Fourth Edition Volume 9 para 542 observes as follows : A

"542. Conditions and warranties. The predominant modern ap- proach is to consider the nature of the terms of the contract in order to decide whether those terms are conditions or warranties. Prime f acie a breach of condition entitles the innocent party to B rescind the contract and claim damages for any loss he may have suffered, whereas a breach of warranty only entitles him to damage."

Section 12 of the Sale of goods Act, 1930 provides the difference betv1een 'condition' and 'warranty' and reads as follows : C

"12. Condition and warranty - (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.

(2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.

(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.

(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract."

Again Section 13 of the Sale of Goods Act provides when 'condition' to be treated as 'warranty', relevant part of sub- sections (1) & (2) thereof reads as under : G "13. When condition to be treated as warranty - (1) Where a contract of"sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated. H

-- SUPREME COURT REPORTS (1993] SUPP. 3 S.C.R.

A (2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warrant and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied to that effect." B It will be noticed that in the present case prima f acie the provision for capacity of the power plant being of 108 M.W. was a condition. Therefore, the plaintiff could have repudiated the contract as provided in Section 12 (2) of the Sale of Goods Act or treated as a warranty by waiving the condition or elect to treat the breach of the condition as a breach of warranty and not_ as a ground for.treating the contract as repudiated.

In the present case the plaintiff has not repudiated the contract. In fact it is working with the power plant and, therefore, the breach of condition has been treated by the plaintiff as a breach of warranty and in view of Section 12(3) of the Sale of Goods Act, the breach of warranty gives a right to claim for damages but not to a right to reject the goods and treat the contract as repudiated. Even the prayer in the plaint if for dimunition of the price of the power plant and the relief is based on Section 59 of the Sale of Goods Act. E We have already held that the contracts between the lenders and the .borrower are not vitiated by any fraud much less established fraud and there is no question of irretrievable injury. therefore, there was no reason for the High Court to set aside the order of the trial court. ... F Against there is no case of any irretrievable injury either of the type as held in the case of Itek Corporation (supra) as there is no difficulty in the judgment of this country being executable in the courts in Sweden.

The High Court was not right in working on mere suspicion of fraud or merely going by the allegations in the plaint without prima f acie case of fraud being spelt out from the material on record.

The High Court was also in error in considering the question of balance of convenience. In law relating to bank guarantees:a party seeking injunction from encashing of bank guarantee by the suppliers has to show prima facie case of established fraud and an irretrievable injury. Irretriev-

HANDELSBANKENv. CHARGECHROME[DAYAL,J.] . 367

able injury is of the nature as noticed in the case of Itek C01poration A (supra). Here there is no such problem. Once the plaintiff is able to establish fraud against the suppliers or suppliers-cum-lenders and obtains any decree for damages or dimunition in price, there is no problem for affecting recoveries in a friendly country where the bankers and the sup- pliers are located. Nothing has been pointed out to show that the decree passed by the Indian courts could not be executable in Sweden.

The High Court totally ignored the irretrievable injury which will be caused to defendant No. 12 in not honouring the bank guarantee in international market which may cause grievous and irretrievable damage to the interest of the country as opposed to the loss of money to the borrower/plaintiff. There was no question of defendant No. 4 not making &.ny demand. The instalments for repayment of the loans had already been fixed and liable to be paid without demand by defendant No.4. Defendant No. 12 is under a duty to pay the instalments regularly on a fixed date without any demand to defendant No. 4. D We may make it clear that our views are only tentative and prima f acie for the purpose of the decision of the application for injunction and should not be construed as expression of opinion at all on the merits of the controversy between the plaintiff and the defendant.

For the reasons stated above the appeal is accepted; the judgment E and order of the High Court dated 11th October, 1991 is set aside and that of the trial court dated 14th August, 1991 is restored and the application of the borrower/plaintiff for interim injunction against the lenders is dis- missed with costs. F S.L.P. (C) No. 1530 of 1992.

YOGESHWAR DAYAL, J.

In view of the orders passed by us today in Civil Appeal arising out of Special Leave Petition {Civil) No. 421 of 1992, no orders are called for G on this petition.

R.A. Appeal allowed.