SVENSKA HANDELSBANKEN v. MIS INDIAN CHARGE CHROME AND ORS.

G The Judgment of the Court was delivered by

YOGESHWAR DAYAL, J. Special leave granted. Heard.

This is an appeal by M/s. Svenska Handelsbanken (defendant No. 4) against the judgment and order dated 11th October, 1991 of the High H Court of Orissa in Misc. Appeal No. 370 of 1991 whereby the Single Judge

HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 333

of the High Court accepted the appeal filed on behalf of the plaintiff while injuncting defendant Nos. 4 to 12 from encashing the bank guarantee furnished by Industrial Development Bank of India (defendant No. 12) in favour of defendant Nos. 4 to 11 for a period of 2 years of till the disposal of the suit whichever is earlier and set side an order passed by the Subordinate Judge. Cuttack dated 14th August, 1991 vacating an order of ad interim injunction dated 25th April, 1991 and dismissing the application of ad interim injunction (Misc. Case No. 143 of 1991) against defendants 4 to 12.

We find it convenient to refer to the parties as they were described in the suit. c .The suit out of which the present appeal arises was filed by the plaintiff (hereinafter referred to as the 'borrower') before the Subordinate Judge, Cuttack, inter alia for a declaration that the guarantees executed by Industrial Development Bank of India India, defendant No. 12 (hereinafter referred to as the 'guarantor') in favour of defendant Nos. 4 D and 5 to 11 (hereinafter referred to as the 'lenders') are void and for an order of injunction restraining the guarantor from making payments under the guarantees to the 'lenders'.

For appreciating the submissions make on behalf of the parties the facts shortly stated, leading to the filing of the present appeals are as E follows:

Since 85% of the foreign exchange portion of the total price of the project was to be financed, discussions were held between the borrower and defendant No. 4 (one of the lenders) for finalising the terms and conditions of the loans. Discussions were also held between the borrower H

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

A and the suppliers in regard to the terms and conditions of the loans so as to ensure that the credit agreements would be in accordance with the Swedish Law and regulations for sul?sidiscd export credit facilities.

The borrower made extensive investigation itself over a period of about two years into the details of the proposed plant. B On or about 28th September, 1984 contracts were entered into between the borrower (plaintift) and the suppliers for setting up 'the power plant and for supplying the machinery and other equipments for the plant to the borrower. c Defendant No. 4 (one of the lenders) formed a consortium of banks i.e. defendants 5 to 11 (Swedish Banks) (lenders) and an American Bank for financing the project. The American Bank subsequently assigned its interest in favour of one of the defendant Bank (lender). The lenders entered into two credit agreements dated 30th October, 1984 with the borrower. The credit agreements were entered into by defendant No. 4 for itself and on behalf of defendant 5 to 11 under which the lenders agreed to lend 85% of the foreign exchange portion of the cost of the project to the borrower by way of certain credit facilities. A third credit agreement dated 15th November, 1984 between the borrower and defendant No. 4 (lender) in its individual capacity was entered into. The first two credit agreements were for the 'loans of the U.S. Dollars equivalent of Swedish 1<roner 370, 855,000 and 239,700,000 and the third was for the loan of the sum of U.S. Dollars 1,754,000. Two additional credit agreements were also entered into between the borrower and the lenders supplemental to the first and second credit agreements on 23rd December, 1987 providing for additional loans of 10% of the original loans which the borrower required to finance cost escalations caused by delay. These two additional credit agreements were for U.S. Dollars equivalent of Swedish Kroner 37,085,000 · and 23,970,000. All the credit agreements inter alia purported to provide payments by the lenders to the suppliers on various documents, as provided in the credit agreements; being presented to the lenders and also against G a notice of drawdown by the borrower. In relation to the third credit agreement the disbursements to be m:i.de directly to the lenders in respect of the financial cost payable by the borrower upon notice of drawdown by the borrower.

The loans were required to be re-paid by twenty (subsequently amended to eighteen) equal semi-annual (six monthly) consecutive instal-

HANDELSB'ANKEN v. CHARGE CHROME [DAYAL, J.) 335

ments. The number of instalments and date of commencement of the instalments being separately provided for under each credit agreement. Repayments we!e required by the borrower to be made without demand or notice. It W-as specifically provided in the credit agreements that :

"Any amounts payable by the Borrower shall be paid without set-off or counter claim. The liability of the Borrower to effect any payment under this Agreement is thus unconditional and shall not in any way be dependent upon the performance of the Contracts i.e. the agreements between the Borrower and the suppliers-Ex- porters or be affected by any other claim which the Borrower may have against the Exporters or against any other party (natural or le~al) collaborating with the Exporters.

(These are the actual words of the relevant clause in each credit agreement.)"

The credit agreements also provided : D "All disputes arising from the provisions of this Agreement or its performance shall be finally settled by arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with these E rules. Arbitration shall take place in rules. Arbitration shall take place in Stockholm and be conducted in the English language. The award of the arbitral tribunal is final and obligatory for the parties without any right for a further appeal or contestation of its fulfil- ment. The Borrower hereby expressly submits to the jurisdiction of the above mentioned arbitration tribunal. F (These are the actual words of the relevant clause in each Credit Agreement.)"

The credit agreements also provided that the borrower shall furnish guarantees in favour of the lenders as security for the loans covering 100% G of each of the loans plus interest, costs and fees payable under the credit agreements. As quoted above, the agreements also contained an arbitration clause which contemplates disputes arising from the agreements to be finally settled by arbitration under the rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators appoints . H

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

A in accordance with these rules. The arbitration is provided to take place at Stockholm.

It is thus prim a f acie clear from the aforesaid terms of the credit agreements with the borrower that the lenders are, as a matter of law and express agreement, in no way connected or related to or dependent upon the contracts e~tered into between the borrower and the suppliers. At the instance of defendant No. 4, defendant No. 12 provided the bank guarantee for the payments to be made by lenders to the suppliers. In order to ensure that the guarantor would be liable in all circumstances in the event of the borrower failing to carry out its obligations, the lenders insisted that the c guarantees very clearly made express provision to be unconditional first demand guarantees which we are insulated from any possible dispute between the borrower and the suppliers and even the borrower and the len~ers. In fact the form of guarantee was itself enclosed as all Appendix to each credit agreement. .o . The terms of payment contained in the contracts between the bor- rower and defendant~ 1 and 2 (supplier) which deals with disbursement of last 5% of the respective contract price reads thus :

"5% of the contract price at the date of the purchasers' taking over of the Power Plant against presentation of a taking over certificate, E issued by the purchaser, however, not later than 35 months after the date this contract has come into force unless the date of taking over is delayed due to reasons for which the supplier is respon- sible."

F Defendant No. 4 (lender) was to disburse the balance 5% payment to defendants 1 & 2.

On 24th June, 1989 the plaintiff (borrower) took over the plant and on 25th June, 1989 issued a taking over -::ertificate. On 28th July, 1989 the plaintiff authorised defendant No. 4 to disburse the balance 5% of the payment to defendant No. 3 well.

It is common case that the amounts due to the suppliers were paid by the lenders on instructions from the borrower, plaintiff and the suppliers have been paid in full by the lenders. After the issuance of the take over certificate by the plaintiff, three instalments of payments were made by the

HANDELSBANKENv. CHARGECHROME(DAYAL,J.] 337

guarantor on behalf of the plaintiff as per their instructions vide payments dated 31st October, 1989, 30th April, 1990 and 31st October; 1990 under the first two credit agreements of the sum of US Dollars 9,033,324.47, 8,810,563.87 and 8,681,062.40 towards principal plus interest.

Again the three instalments were paid by the IDBI/guarantor under the third agreement on 15th October, 1989, 15th May, 1990 and 15 Novem~ B ber, 1990 amounting to US Dollars 301,339.99, 278,468.14 and 270,778.54 towards principal plus interest.

It was on or about April 28, 1991 that the present suit was filed by the plaintiff for : (a) a declaration that the taking over certificate dated C 25th June, 1989 is void/voidable instrument and the same may be delivered and cancelled, (b) it be further declared that the plaintiff is entitled to dimunition/extinction of price towards the power plant as mentioned in Annexure 'A' to the plaint, in the alternative, if the court finds, that any amount is payable to defendants 1 to 11 jointly or severally, the saine be directed to be paid as per reschedule of payment to the calculated on the D basis of a cash flow basis on actual generation as determined on enquiry, (c) a decree of declaration that the guarantees obtained from defendants 12 and 13 by defendants 1 to 11 are void/voidable instruments and ought to be delivered and cancelled, (d) a decree of perpetual injunction restrain- ing defendants 12 and 13 from making payments dated 30th April and payments falling due on subsequent dates under any guarantee to defen- E dant No. 4 and/or defendant Nos. 4 to 11, and (e) a decree of perpetual injunction restraining defendants 4 to 11 from recalling the loan and/or taking any s~eps from recovering the said loan either in full or in part, etc. ct~ .

- The basis of the plaintiffs claim against defendants 1 to 12 was that defendant Nos. 1 to 3 had promised to supply the captive power plant of the capacity of 108 M.W. worked with talcher coal whereas on working, the plant was found to be of the capacity of 60 M.W. The case of the plaintiff further· was that all the agreements between the borrower and the suppliers and borrower and lenders are inter-connected and constituted one transaction and are vitated by fraud committed by defendants 1 to 4. It was pleaded that the plaintiff was fraudulently led into entering of contracts with the suppliers by fraud of the suppliers and defendant No. 4, lender. The suppliers were not competent enough to manufacture 108 M.W. plant. They fraudulently persuaded the plaintiff to go in for a 'stoker H

338 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R..

A · fired' boiler instead of a 'pulverised fuel' boiler inspite of the recommen- dations of the Central Electricity Authority to the contrary. The repre- sentatives of the consortium/suppliers visited Bhubaneshwar and Choudwar in the second week of March, 1983 and during discussions represented to the plaintiff that the recommendations of the Central B Electricity Authority were not coi:rect and that their vast experience in this field had shown that 'stoker fired' boilers were preferable over 'pulverised fuel' boiler in the instant case, with talcher coal as the basic raw material. The defendants 1 to. 3 further represented that they had arranged credit facility for the proposed captive power plant through defendant No. 4 at a L very law interest rate and specifically indicated that their offer was limited C to the setting up of only 'stoker fired' boiler. It was further alleged in the plaint that the plaintiff relying on the judgment, representation and advice given by the suppliers decided to go ahead with setting up of the power plant although Central Electricity authority and other advisors had ex- pressed reservations that the boilers of the size as suggested by the sup- D pliers would be less effective. Since the plaintiff had never undertaken and were unaware of the technology/expertise required for the setting up the captive power plant they had no other option/alternative but to rely totally upon the skill of the suppliers in this regard. It was further pleaded that subsequently in August, 1983 with a view to further induce the plaintiff to . act on the representations made by consortium that the suppliers were E .capable of setting up a 108 M.W. plant with 'stoker fired' boiler, the defendant No. 4 on behalf of itself and defendants 5 to 11 approached the plaintiff directly and represented that the said defendant No. 4 would finance the project of setting up the captive power plant at a very low interest rate if the plaintiff accepted the offer of suppliers for supply, p erection and commission of the said plant with a 'stoker fired' boilers. It was alleged that defendant No. 4 further represented to the plaintiff that the supplier are the valued clients of defendant No. 4 and that defendant No. 4 were aware of the background and experience of the suppliers.

It was pleaded that defendant No. 4 alongwith defendant Nos. 1 to G 3 prepared a feasibility report for setting up 108 M.W. plant. The feasibility report was prepared on the assumptions - (a) a 108 M.W. plant shall be established guaranteeing a minimum generation of 700 million units of electricity per year and (b) raw material used will be talcher coal. The feasibility report specifically enumerated and set out a cash flow statement which was based on an assumption that 700 million units would be H

HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 339

generated each year. Based on this assumption a cash flow statement was A prepared on the basis of generation of a minimum of 700 million units per year which was with the knowledge of defendants 1 to 4 and the plaintiff was informed that generation at 700 million units per annum would be the basis of the repayment schedule to be adopted for defraying the proposed loans to be given by defendant No. 4 on behalf of defendant Nos.⁴ to 11 in twenty (which was later reduced to eighteen) half yearly instalments. B It was further pleaded' that defendant No. 4, in fact, acted as repre- sentative or agent of defendant Nos. 1 to 3. It was also pleaded that in fact the supply of the plant and financing thereof through deferred credit was one composite transaction in which defendant No. 4 was integrally involved and inter-connected as defendant Nos. 1 to 3. It was pleaded that the plaintiff relying upon the representations made by defendants 1 to 3 and 4 entered into three separate contracts with the suppliers on 28th September, 1984 for erection and commissioning of the captive power plant.

It is not necessary at stage to elaborately refer to '•he terms and conditions of the suppliers' agreements with the borrower except to men- tion that - under the first contract, defendant No. 1 has agreed to supply turbine and other accessories for a total consideration of Swedish Kroner 432 million; under the second contract between the borrower and defen- dant No. 2, defendant No. 2 had agreed to supply 4 chain grate stoker fired boilers with other accessories and under the third contract defendant No. E 3 agreed to erect and commission the captive power plant. The third agreement in clauses 12.1, 12.2, 12.7 and 13.1 provided as under:

"12.1. Taking over. The plant shall be deemed to have been taken over by the purchaser at the time when the Tests on completion- show that the Plant has the operational characteristics which, in accordance with the Agreement, it should have at the time of taking over, and when the Contractor has fulfilled all other obligations to be performed by him under the terms of the Agreement before taking over the Plant.

12.2. Taking-over The purchaser shall issue a certificate to confirm Certificate. taking over in accordance with Clause 12.1. H

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A 12.7. Taking over of Plant as above does not relieve the Performance Contractor from carrying out Performance Testing Testing in accordance with Section 13.

13.1 Time point Determination of whether the Plant has the "Perfor- B for determi- mance and other characteristics as guaranteed in nation of the agreement shall be done when the plant under- . performance goes Performance Testing."

That an agreement was also signed on 28th September, 1984 between C the plaintiff and defendant No. 3 wherein it was specifically guaranteed that the said plant would be 108 M.W. plant and capable of producing a minimum of 1400 million units of electricity over a period of 2 years. The loan was .required to be re-paid as per the agreement by 20 equal semi-an- nual consecutive instalments, the first six month after the taking over date, but in no case later than February 1, 1988.. (Later on changed to October, D 1988 and instalments reduced to 18 half yearly instalments.)

The borrower also undertook to furnish to defendant No. 4 the guarantee in favour of the lenders as security for the loan covering 100 % of the loan. As mentiQned earlier the plaintiff furnished the guarantee of defendant No. 12 to defendant No. 4 ( clefendant No. 4 acting for itself and on behalf of defendants 5 to 11) to guarantee repayment of loans given by defendant Nos. 4 to 11. Defendant No. 12 in turn was provided a guarantee by defendant No. 13.

We may mention that defendant No. 12 furnished the guarantees as per directions of this Court on a writ petition being filed by the plaintiff to direct defendant No. 12 to furnish the guarantees in relation to the aforesaid contracts. The guarantor made payment of 15% of the contract immediately and as stated earlier made some payments to the lenders before and after the taking over certificate.

G It was further pleaded in the plaint that defendants 1 to 3 on 29th May, 1989 conducted a test on completion of the captive plant using Australian coal. Defendant Nos. 1 to 3 wrongfully, fraudulently and illegally began to insist that the said test on completion was in terms of the contract and that the plaintiff should give a 'take over certificate' of the captive power plant to enable the defendant No. 3 to receive the final 5 % payment H from defendant No. 4. It was pleaded that the attempt of the consortium

HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 341

was to deceive the plaintiff that they had supplied, erected and commis- A sioned a plant having 108 M.W. capacity which would run with talcher coal. It was pleaded that the plaintiff was not satisfied with the plant and expressed its unwillingness to give a take over certificate. The plaintiff pointed out to def~ndants 1 to 3 that talcher coal was going to be used and the plant should be made ready to accept the same. It was pleaded that defendants 1 to 3/suppliers threatened the plaintiff that if it did not take over plant immediately, they would shut down 50 % of the plant as they had be then already received 100 % of the payment. Further to induce the plaintiff to issue take over certificate, the suppliers offered a 'package deal' if the plaintiff gave a taking over certification to the suppliers. Under the 'package deal' the defendant Nos. 1 to 3 offered that if the take over certificate was given by the plaintiff the suppliers would rectify all the defects of the plant and increase the defect liability period. Although the plaintiff was not satisfied by the test on completion which was specifically communicated to the suppliers but in view of the threat of the suppliers and on the basis of the offer of 'package deal' which was accepted by the plaintiff, the plaintiff give a conditional taking over certificate on 25th June, D 1989 with effect form 24th June, 1989. The said take over certificate was a part of the 'package deal' it was pleaded. It was also pleaded that when the plant was operated on talcher coal the plaintiff came to know that the defendants had not supplied the plant as per the specifications envisaged under the contracts and that the plant was not or 108 M.W. It was pleaded that defendant Nos. 1 to 3 have committed a fundamental breach E of the contracts. ·

It was on these allegations that the plaintiff pleaded that the conduct of defendants 1 to 4 clearly shows that they made fraudulent repre~ sentations to the plaintiff which were false to the knowledge of defendants F 1 to 4 to induce the plaintiff to enter into agreements with the suppliers and defendants 4 to 11 when the defendants 1 to 4 knew that the plaintiff would suffer because of an under capacity over-rated plant. It was pleaded that defendants 1 to 4 were aware that the captive power plant is not of the specifications as contracted for and the ~uppliers by their letters dated 3rd July, 1989 and 23rd August, 1989 intentionally terminated the 'package G deals' with a view to perpetuate fraud.

In paragraph 52 of the plaint it was specifically pleaded thus :

"52. That the cause of action arose in favour of th~ plaintiff on 25th H

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

A June, 1989 when the defendants 1 to 4 fraudulently mis-repre- sented to the plaintiff regarding their intention to supply the goods as per the description and requirement of the plaintiff. The cause of action again arose on the various dates when the representatives of defendants 1 to 4 met the representatives of plaintiff and induced the plaintiff by their fraudulently misrepresentations to B enter into an agreement with the plaintiff. The cause of action also arose on 29th and 3 lst May, 1990 when the plaintiff for the first time became aware of the fraud perpetuated by the defendants on the plaintiff. The cause of action also arose on March 1990 the plaintiff discovered the fundamental breach committed by the consortium. c The cause of action for this suit also arose when the defendant No. 4 as agent on behalf of defendants No. 4 to 11 called upon the plaintiff by telex dated 4th March, 1991 tt> pay the sum of US$ ·8.40 million by 30th April, 1991. Furthermore defendant No. 12 has also called upon the plaintiff to make a sum of 8.40 million payable by 30th April, 1991. The cause of action is continuous and D no part of it is barred by law of limitation."

We have already noticed that defendant No. 12, on instructions from the plaintiff, made payments to the lenders on 31st October, 1989 and again on 15th November, 1990. E On receipt of summons in the suit and notice on the application for interim injunction filed by the plaintiff, defendant Nos. 1·to 3 did not enter appearance. Defendant No. 4 entered appearance specifically in Misc. Case No. 143 or 1991 i.e. in relation to the application for ad interim injunction and specifically denied the case of fraud against the lenders. It F also challenged the jurisdiction of the trial court to entertain the suit as well as the miscellaneous application in view of the provision for arbitration under the rules of conciliation and Arbitration of the International Cham- ber of Commerce. It was pleaded that separate loan agreements were executed between the plaintiff and the lenders. All the loan agreements were governed by Swedish Law. All three loan agreements were separately guaranteed by defendant No. 12 primary obliger and not as a surety and _ the amount is payable by defendant No. 12 upon first demand. It was. pleaded that the liability of the borrower is unconditional and shall not in any way be dependent upon t.he performance of the contracts for supply of power plant and the payment to the lenders is not in any way affected by any other· claim. which the borrower may have against the suppliers. It

HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 343

was also pleaded that all disbursements and payments under · the loan agreements were made by defendant No. 4 to defendant Nos. 1 to 3 Sweden and they have been paid in full and it is only the lenders, who had to be paid by the borrower and in view of such express provision in the loan agreements the Indian Courts have no jurisdiction to entertain the suit or the miscellaneous case as against the lenders. It was pleaded that if the order for injunction is vacated no irreparable loss would be caused to the plaintiff because the amount could always be recovered from the banks, if any amount is declared repayable by them. It was pleaded that the lenders are large and reputable banks. That the plaintiff has no prim a f acie case nor the balance of convenience is in its favour. The loan agreements provided a complete answer to the claim of the plaintiff. It was pleaded that the plaintiff attempted to allege fraud but the lenders had nothing to do with the negotiations or agreements or subsequent performance of the project and there is no question of fraud as alleged against the lenders. It was pleaded that there might have some misrepresentations or fraud on the part of the suppliers which is not to their knowledge. The lenders have no concern with the suppliers with regard to the alleged fraud. It was pleaded that the plaintiff had waited nearly seven years since the signing of the loan agreements and three years or commissioning of the plant before raising such spurious assertions and this would show that there is no prima f acie in favour of the plaintiff. ·

Defendant No. 12, the guarantor, also filed objections to the applica- E tion for interim injunction with regard to the guarantee executed by defen- dant No. 12 in favour of defendants 4 to 11. It was pleaded that the plaintiff itself had filed Writ Petition Nos. 5218 and 5219 and this Court (Supreme Court) by order dated 5th June, 1985 directed the defendant No. 12 to make 5th June, 1985 disbursements prior to 15th June, 1985 of the first down payment of 15 % of the loan amount and to issue guarantee as per F the letter of intent dated 27th October, 1984. Even no application filed before the Supreme Court by defendant No. 12 for modification of the order the Supreme Court directed by order dated 17th June, 1985 that the earlier order directing down payment of 15 % of the loan amount and issue of guarantee are to be carried out by defendant No. 12 on or before 25th G June, 1985. In pursuance of the aforesaid direction the Plaintiff executed necessary documents in favour of defendants 4 to 11 and in turn defendant No. 12 executed the necessary guarantee in favour of defendants 4 to 11 and defendant No. 4 as agent of defendant 5 to 11. It was pleaded that under clause 5.2 action or proceedings against the guarantor in respect of - '~tt

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A the loan agreements or loans may be br_ought in the High Court of Justice in England or in some other Court in United States or in the court of Sweden or indian as the lenders or any of them may determine. It was pleaded that in view of the aforesaid provisions under the guarantee executed by defendant No. 12 no proceeding arising out of the loan guarantees or. the loans can be brought in any Court in India and the jurisdiction of the Indian Courts is expressly ousted. It was also pleaded that under clause 1.2 of the payment guarantee, the guarantee shall not be impaired by any dispute or claim with regard the borrower and the sellers or between the borrower and the lenders. Under clause 2.1 if the borrower does not pay any amount when due, the guarantor shall forthwith without any protest of any kind pay the full amount due and payable under the agreements on first demand. It was pleaded that the alleged dispute of the plaintiff with the suppliers does not affect the liability of obligation of defendant No. 12. It was also pleaded that in case defendant No. 12 is restrained from honouring its obligation under the payment guarantee executed by it, this will seriously affect its image and financial reputation in international market and the objects of defendant No. 12 for develop- ment of industries in the country shall be frustrated and the defendant No. 12 may be dragged into litigation in Swedish Court in view of the guarantee I ··executed by it. It was also pleaded that defendant No. 12 is neither aware ~, nor concerned with any fraud.

E On these averments, the trail court held (1) that defendant No. 12 has not committed any fraud nor it has any knowledge of it on the material produced; (2) that the project report was not prepared by defendant Np. 4; (3) that the defendant No. 4 made the payments to the suppliers only on instructions and notice issued by the plaintiff/borrowers as per the credit agreements; (4) that there is no direct allegation of fraud against F defendant Nos. 4 to 11 and the allegation of fraud are based on suspicion; (5) that the allegations of fraud against defendant Nos. 4 to 11 "is practi- cally without substance"; (6) that after the execution of the agreements only the agreements are to be looked into and there is no allegation of the plaintiff that defendant Nos. 4 to 11 have breached any terms and condi- G tions of agreements executed between the plaintiff and defendants 4 to 11; (7) that the agreements executed by defendants 4 to 11 are not incidental to the designing, manufacturing, erection and fabrication of the project and defendant No. 4 being a banker has no concerned with the agreements executed betweent the plaintiff and suppliers; (8) that the rights and obligations of the parties flow from the agreements and therefore the H

HANDELSBANKEN i·. CHARGE CHROME (DAY AL. J. J 345

agreements should be based for deciding the issue and (9) that the dues of the lenders as per clause' 10.07 of the agreements between the plaintiff and the lenders provide that all amounts payable by the borrower under the agreements shall be paid without set off or counter claim and liability of the borrower to effect any payment under these agreements is uncondi- tional and is not in any way dependent on the performance of the contracts or be affected by the other claim which the borrower may have against the suppliers or against any other party collaborating with the suppliers. This being so no adjustments can be made so far as the repayment of the loans that of the claim of the plaintiff against defendants 1 to 3 which is yet to be adjudicated and defendants 4 to 11 are entitled to the repayment of the loans advanced by them notwithstanding any claim of the plaintiff against the suppliers that is defendants 1 to 3; (10) that the bank guarantee had been issued by defendant No.12 in favour of the lenders on the writ petitions filed by the plaintiff itself and defendant No. 13 and direction issued by the Supreme Court and, therefore, no fraud has been played in execution of the bank guarantee; (11) that the breach of terms between the plaintiff and defendants 1 to 3 does not prim a f acie give rise to any cause D .... of action against defendants 4 to 11 and for breach of contracts by defendants 1 to 3' remedies are available to the plaintiff; (12) that the bank ·guarantee in question is independent of the contracts between the plaintiff and the suppliers and the same can be enforced without reference to any claim or counter claim arising from the main contracts between the plaintiff and defendants 1 to 3; (13) that the plaintiff has failed to establish prima E facie case of established fraud, therefore, in the absence of clear and established fraud against defendants 4 to 11 there is no prima facie case in favour of the plaintiff and. (14) that the plaintiff will not suffer any irreparable foss and the balance of convenience is also against the plaintiff and in favour of defendants 4 to 11. F On these findings, as stated earlier, the trial court vacated the ad interim injunction and dismissed the application for interim relief.

The plaintiff being dissatisfied went up in appeal to the High Court (Miscellaneous Appeal No. 370 of 1991). It appears that when the appeal G was listed for admission before the High Court defendants 4 and 12 entered appearance and since the matter was urgent in nature, it was heard finally without issue of notice to defendant Nos. 1 to 3 and 5 to 11 who had not entered appearance in the trial court.

The High Court noticed that defendant No. 4 has already paid to the H

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

A suppliers. The defendant Nos. 5 to 11 are npt directly connected with the captive power plant and defendant No. 4 islI their agent. Since defendants 5 to 11 are not concerned and defendants' 1 to 3 have already received payments, there is no question of any resb'aint on them. It was noticed by the H_igh Court that defendant No. 4 is the lender and the plaintiff is the borrower. The High Court observed that Principles of guarantee would be strictly applicable to it. General principles of Injunction on lender would alone be applicable. The High Court examined the terms of clause 2.1 of the guarantee given by defendant No. 12 in favour of defendants 4 to 11 and took the view that this clause the guarantee agreement creates an obligation on defendant No. 12 to pay to defendant No. 4 upon first demand if the plaintiff does not pay any amount when due or the loan is declared default. There is neither any demand nor a declaration of default. Much before the same the suit had been filed alleging fraud in the kans- , action. On the receipt of the plaint the defendant No. 12 •Was required to make investigation whether there was a fraud and how defendant No. 4 is connected there with. Defendant No. 12 without making any enquiry ought not to have entered appearance to contest the claim of the plaintiff and ·'Slllll ought to have waited till the order of the court. Instead it has contested the claim which may give rise to suspicion that it is anxious to pay to defendant No. 4 in terms of U.S. Dollars which is DOW precious for our republic. If ·defendant 'No. 12 which gave the guarantee direction of the E .Supreme court was not happy about the filing of the suit by the plaintiff it could have approached the Supreme Court, which gave· the direction, to «-- get an order to discharge its obligation to defendant No. 4 and ought to have acted upon such direction; The High Court also notice that the fraud is alleged against defendant Nos. 1 to 4 and, therefore, it thought it fit to examine whether the prima facie allegation of fraud against defendant Nos. 1 to 4 has been made out by the plaintiff.

The High Court in paragraph 14 of its order took the view as under:

"14. Defendant No. 13 issued a global tender for execution of work of captive power plant. Defendant No. 2 on basis of such global tender offered to defendant No. 1 by telex on 5.10.82. On 19.1.1983 defendant No.⁴ addressed a letter by defendant No. 13 offering financial assistance referring to defendant No. 2's arrangement for 'easy terms. On 31.³.83 defendant No. 4 described the credit facilities which can be give by defendant No. 4. Inspite of the fact

HANDELSbANKENv. CHARGECHROME[DAYAL,J.) 347

that each party entered into separate agreements, the facts con- A tained therein gives a clear idea that defendant No. 4 had knowledge of the nature o( work to be executed by defendant Nos. 1 to 3. Thus, there was collaboration with such links that agreement of defendant No. 4 cannot be separately read at this stage while ' considering the question of injunction." B Though no notice wao; issued defendant 1 to 3 in the appeal, the High Court observed :

"......... It shall be sufficient to shortly state that I carry an impression on reading the documents filed that defendant Nos. 1 to 3 had no C capacity to execut the work of 108 MW captive power plant. Even if they had capacity, the execution was not prefect. They had knowledge that the power plant is to be commissioned based on Talcher Coal. They, however, Commissioned the same on Australian Coal. All these were within their knowledges. Defen- D dant No. 4 was linked with them in such manner that for the purposes of considering the question of injunction, defendant No. 4 ought not to be delinked and treated separately."

The High Court also held that it is true that the plaintiff failed to bring to the notice of defendant No. 4 about its grievances and about the nature of work executed by defendants 1 to 3. If the same would have been brought to the notice of defendant No. 4 and in spite of it defendant No. 4 would have paid to defendants 1 to 3 basing upon clearance given by the plaintiff, a strongprima facie case of fraud by defendant No. 4 could have been out. However, on the facts as presented at this stage it cannot be said that defendant No. 4 is as innocent as it claims to be. The High Court to.ok the view that the inference of fraud is to be drawn not from individual event and such event by itself may not be sufficient for drawing inference of fraud. Totality of the events cumulatively have the effect of fraud and in this case, if the facts and circumstances from the stage of global render till the suit is filed are considered together, a clear impression of fraud in the transaction of captive power plant by defendants 1 to 3 is created and defendant No. 4 cannot be fully disassociated from it. On balance of convenience the High Court took the view that if the injunction is granted, payinent to defendant No. 4 would be delayed and if no injunction is granted, defendant No. 12 would pay to defendant No. 4 periodically on H

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

A demand and fall back on the plaintiff to pay the dues. the plaintiff is to pay on cash flow basis as per the project and feasibility report. On account of generation of electrical energy which is far less than the assured units, there is no scope for payment on cash flow basis. It has to divert its capital for payment of loans and in what process becomes owner of a sick industry. While on account of delayed payment defendant No. 4 may have some B effect on its goodwill whereas the plaintiff will have to sacrifice its entire goodwill Therefore, the basis balance of convenience is in favour of the plaintiff. The High Court then considered the nature of injunction that would be granted by it. For this it issued a direction to defendant No. 4 not to insist defendant No. 12 for payment for two years till the end of 1993 C and a direction to defendant No. 12 n9t to pay defendant No. 4 till that perioct;on the basis of guarantee or till the disposal of the suit whichever is earlier-and for this period of deferred payment the plaintiff shall pay interest althe rate of 18% instead of subsidised interest for amount due during this {>eriod. D Before we examine the respective contentions of learned counsel for the parties we very much regret the observation made by the High Court against IDBI, defendant No. 12. It is true that the guarantee was given as per the order of this Court. In the order of this Court the guarantee culminated into the accepted agreements between the lenders and IDBI. E There was no question of defendant No. 12 approaching this Court for taking direction as to what it should do while meeting its won contractual obligations as an apex organisation of the Government in helping the industralisation of the country. The remarks against defendant No. 12 are wholly uncalled for. Defendant No. 12 is party to th~ suit. It is entitled to enter appearance on its behalf and to take the pleas open to it on facts F and in law. It has to maintain its credibility and not merely be guided by the loss to our citizens. It has also to maintain its international credibility. Credibility is the most important thing for any banking institution. If the credibility goes the bank cannot survive. The bank in its working has to be most upright and honest in dealing with its customers. G Coming to the merits of the case itself it appears to us that the High Court totally misdirected itself in assuming that the present application of interim relief against the enforcement of bank guarantee is not to be decided strictly on principles of injunction in relation to bank guarantee H but general principles of injunction on lenders would be applicable and on

HANDELSBANKENv. CHARGECHROME(DAYAL,J.] 349

that basis proceeded to decide the matter. A

Whenever an appeal is heard it is the duty of the appellate court examine the finding of the trial court and if the findings of the trial court are not correct. to deal with. What we much in the present case that the High Court did not even appear to have noticed the findings of the trial B Court much less any attempt being made to meet them. We have noticed earlier the. findings which were recorded by the trial court. One of the basic findings of the trial court was that there is no material of established fraud against defendant No. 4 nor the defendant No. 4 has any knowledge of any fraud having committed by defendant Nos. 1 to 3. The allegation of fraud against defendant No. 4 has been made on suspicion. Another important finding given by the trial court was that one has to look at the actual agreements executed between the parties and defendants 4 to 11 have not committed any breach of agreements with the plaintiff. Another finding given by the trial court was that the agreements executed by defendants 4 to 11 are not incidental to the designing, manufacturing, erection and fabrication of the project and defendant No. 4 being a banker has no concern with the agreement executed between the plaintiff and the sup- pliers. The other finding recorded by the trial court was that the rights and obligation of the parties flow from the agreements and, therefore, the agreements should be basis for deciding the issue. Again the trial court bad very specifically held that in view of the agreements between the lenders and borrower, breach, if any, of the agreements by defendants 1 to 3 and claim, if any, of the plaintiff against defendants 1 to 3 would be of no effect on the agreements between the borrower and lenders. None of these findings are either noticed or met by the High Court. On the other hand the High Court after noticing that the agreements between the borrower and suppliers are separate from the agreements between the lenders and borrower it jumped to the conclusion that "the facts contained therein gives a clear idea that defendant No. 4 had knowledge of the nature of the work to be executed by defendants 1 to 3. Thus there was collaboration with such links that agreement of defendant No. 4 cannot be separately read at this stage while considering the question of injunction." G ' '

With all due respect to the learned Judge, we fail to understand this reasoning. Section 92 of the Evidence Act debars court from looking into oral evidence once the contract is executed in writing except as provided fc, in six provisos thereof. H

350 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A Again it appears the High Court found a st,rong prim a f acie case against defendant No. 4 merely on reading the plaint. pleadings make only allegation or averments of facts. Merely pleadings do not make a strong case of p1i111a facie fraud. The material and evidence has to show it. No material whatsoever is referred to by the High Court.

B In A.L.N. Narayanan Chettiyar and another v. Official Assignee, High Court Rangoon and another, 28 A.LR. (1941) Privy Council 93 the privy Council held that "fraud like any charge of a criminal proceedings, must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjecture". c Mr. Venugopal, learned counsel for the plaintiff, took us through the entire correspondence exchanged between the supplier (defendant No.2) and the holding company of the plaintiff (defendant No. 13) including the letters dated 5th October, 1982, 7th January, 1983, 31st March, 1983, 14th April, 1983, Project Report .dated 12th August, 1983, the financial pattern D as well as various proposals made by defendants 1 to 3 defendant No. 13; draft agreements and other documents till the culmination of contracts with defendant No. 1 to 3. Learned counsel also took us to the various letters dated 7th April, 1989; 20th April, 1989, 22-24 May, 1989 from the plaintiff to defendant Nos. 1 to 3 and other documents including letter dated 6th E October, 1989 from the plaintiff to defendant No. 3 and mass of other documents.

We are prima facie debarred from looking at various proposal, drafts, project reports, if any, before the contracts between the borrower and defendant Nos. 1 to 3 on one hand and the credit agreements between F 1 f. 1e borrower and the lenders having been executed later. Facts which come

within provisos 1 to 6 to Section °2 of the Evidence Act can be proved. The plaintiff could have resorted to proviso 1 to Section 92 of the Evidence Act. Section 92 with proviso 1 of the Evidence Act reads as follow :

"92. Exclusion of evidence of oral agreement - When the terms of any such contract, grant or other disposition of property, or any matter required by law to be reduced to the form of a document, have been proved accnrding to the last section, no evidence of any oral agreement or statement shall be. admitted, as between the parties to any such instrument or their representatives in interest, for the purpose of contradicting, varying adding to, or substracting

HANDELSBANKEN v. CHARGE CHROME [DAYAL, J.] 351

from, its terms : A Proviso (1) - Any fact may be proved which would i11validate any document, or which would entitle any person to any decree or order relating thereto; such as fraud, intimidation, illegality, want of due execution, want of capacity in any contracting party, went or failure of consideration, or mistake in fact or law." B

It is clear form the averments in the plaint that the plaintiff was not seeking cancellation of any of the agreements either with the suppliers or the lenders. We have already reproduced the substance of the prayers made in the plaint. J.n fact the plaintiff prayed for dimunition of the price towards the power plant by way of breach of contracts, goods being not of the specifications. The plaintiff prayed for avoidance of the take over .certificate. Viz-a-viz taking over certificate there is no allegation of coer- cion or fraud against defendant No. 4 at all.

The plea that the lenders were to be paid from the cash flow by sale of surplus electricity in the market is no where mentioned in any of the contracts between the borrower and the suppliers and the High Court without any prima f acie admissible material went on to rely on the bald averment in the pleadings. Again it is not known on what material the High Court got "the clear impression of fraud in the transaction of captive power plant by defendant Nos. 1 to 3 is created and defendant No. 4 cannot be fully disassociated from it". Neither the trial court nor the High Court was required to go into the question of fraud on behalf of defendants 1 to 3 as there was no interim relief being claimed against them. Even if we assume fraud by defendant 1 to 3 where was the material to associate defendant No. 4 with defendants 1 to 3. F Mr. Venugopal again stressed the fact that defendant No. 4 the lender was the agent of defendants 1 to 3, the suppliers. For this submission that is no material whatsoever except the suppliers' introducing defendant No. 4 as the formal channel for making the credit available. The com- munication of defendant No. 4 to the plaintiff mentioning the suppliers as G valuable clients of defendant No. 4 is again of no consequence. A banker has to deal with its_ customers every day. If the bank calls its customer a valuable client it only means the credit worthiness of the client. Nothing more nothing less. It made no mention of the professional capability of the suppliers. H

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

A United Commercial Ba11k v. Bank of India a11d others, (1981j 3 S.C.R. 300, as it appears from its title, was a case between two bankers i.e. United Commercial Bank and Bank of India. In that case appellant bank was a bank for the buyer whereas the respondent bank was bank for the seller. The facts were that respondent No. 2 entered into a contract to sell to respondent No. 3 the goods valued at approximately Rs. 86 lakhs pursuant B to which the buyer opened a letter of credit with the appellant bank. After despatching the goods to various destinations to which they were instructed to send, the seller presented 20 sets of documents in the first lot and 27 sets of documents in the second, the aggregate value of which ·was equivalent to the amount of the letter of credit. The appellant, who was c the buyer's bank refused to make payment "except under reserve" pointing to a discrepancy in the railway receipts as regard the description of goods. On instructions from the seller the respondent bank received the money in respect of the first lot of 20 documents "under reserve" and credited the amount to their account with a specific notation that the amount was paid D "under reserve" as a result of discrepancies between the railway receipts . and the instructions in the letter of credit."

In respect of the second lot, the appellant bank refused payment on the ground of discrepancies in the railway receipts as before as also on the· ground that some of the railway receipts were "stale". E In the meantime the appellant bank asked the respondent to refund the amount paid in respect of the first lot of documents under reserve because the bills were not acceptable to the buyer due to discrepancies. Some correspondence ensued between the parties and the bank; eventually on the faith of an undertaking given by the seller appellant bank paid the remainder amount in respect of the 27 bills as well "under reserve" so that the value in respect of both the sets of bills paid to the seller in two instalments was made "under reserve".

The seller filed the suit in the High Court. a few days thereafter the appellant bank served a letter of demand on the respondent bank for refund of the entire amount paid to it in respect of two sets of bills together with interest thereon because, according to it, the bills of exchange had not been retired by the buyer for the reasons that the railway receipts were stale; that the goods had not been supplied according to the terms of the agreement and that chemical analysis of the oil showed that it was not fit for human consumption.

HANDELSBANKENv. CHARGECHROME(DAYAL,J.] 353

The respondent bank in turn wrote lo the seller to refund the whole amount whereupon the seller moved the High Court for the grant of an ex partc ad interim injunction restrain in the appellant from recalling or n:cciving the amount due from the respondent bank which was granted. A Single .Judge of the High Court made a temporary injunction till the disposal of the suit filed by the seller on the view that the appellant was not entitled under the terms of the letter of credit to unilaterally impose a B condition of the payment "under reserve" or refuse to pay to the seller merely because of the alleged discrepancies.

On an appeal the Division Bench summarily dismissed the appellant's bank appeal with the result that the seller received the whole of the amount of the letter of credit as well as bought the whole lot of goods for Rs. 18.53 lakhs.

On the question whether the High Court should, in a transaction between a banker and-a banker, grant an injunction at the instance of the beneficiary of an irrevocable letter of credit restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank acting on behalf of the beneficiary against a document of guarantee at the instance of the beneficiary this Court held that "the High Court was wrong in granting the temporary injunction restraining the appellant bank from recalling the amount paid to the respondent bank. Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another. If such temporary injunctions were to be granted in a transactioq. between a banker and a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail."

In U.P. Co-operative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd., (1988] 1 SCR 1124, the facts were : -

The appellant, a State Government enterprise, on or about May 17, G 1983, entered into a contract with the respondent, a private limited com- pany, for the supply and installation of a vanaspati manufacturing plant at a place in the district of Nainital. The contract bond contemplated guaran- teed performance of the work at various stage in accordance with the time , schedule prescribed and provided for completion and commissioning of H

354 SUPREME COURT REPORTS IJ993) SUPP. 3 S.C.R.

A the plant after trial run by May .J5. 198.+. According to the appellant. the · time was essentially and mdisputahly. the essence of the rnntract.

As per thl.! terms and conditions of t.he contract bond, according to the appellant, the respondent was to furnish a performance bank guarantee for 16:5 lakhs and yet another bank guarantee for Rs. 33 lakhs as security B for the monies advanced by the appellant to the respondent for undertak- ing the work. Both these guarantees as also the contract bond entitled the appellant to invoke them and call for their realisation and encashment on the failure of the respondent to perform the obligations for which the appellant was made the sole 'judge. c It was alleged that the respondent defaulted at various stages and finally failed to complete the work within the stipulated time. The appellant invoked the two guarantees one after, the other, and thereafter proceeded to have the plant completed, etc. According to the appellant, the plant could actually by commissioned for commercial production in. July/August, D 1985.

The respondent, on August 4, 1986, filed an application under sec- tion 41 of the Arbitration Act, 1940 (The Act) in the court of the Civil Judge, praying for an injunction restraining the appellant from realising and encashing the bank guarantees. The Civil Judge dismissed the applica- tion. The respondent filed a revision petition before the High Court, which allowed the same, holding that the invocation of the performance guaran- tees was illegal, and the contentions of the appellant that the performance guarantees constituted independent and separate contracts between the · guarantor bank and the beneficiary and created independent rights, liabilities and obligations under the guarantee bounds themselves , as being "technical pleas". The High Court, however, directed the respondent to keep alive the bank guarantee during the ·pendency of the arbitration proceedings.

G The appellant then moved this Court' and this Court through Sabyasachi Mukharji and Shetty, JJ. allowed the appeal; at page 1138 of the report Mukharji, J. observed as under : ·

"Under the terms agreed to between the parties, the~e' is no scope of injunction. The High Court proceeded on the basis that this was not an injunction sought a~ainst the bank but against the appellant.

HANDELSBANKEN v. CHARGE CHROME [DAYAL.J.] 355

' But the net effect of the injunction is lo restrain the hank from performing the hank guarantee. Thal cannot he done. One cannot do indirectly what one is not free lo do directly. ,The respondent was not to suffer any injustice which was irretrievable. The respon- dent can sue the appellant for damages. There cannot be any basis in the case for apprehension that irretrievable damage would be caused, if any. His Lordship was of the opinion that this was not B a case in which injunction should be granted. An irrevocable commitment either in the f9rm of confirmed bank guarantee or irrevocable letter of credit cannot be interfered with except if a case of fraud or a case of a question of apprehension of irretriev- able injustice has been made out. This is the well-settled principle c of the law in England. This is also the well-settled principle of law in India. No fraud and no question of i"etrievable injustice was involved in the case. (emphasis supplied)

The learned Judge at pages 1141 and1142 held as under : D "In order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be a serious dispute and a good prima facie case of fraud and special equities in the form of preventing irretrievable injus- cice between the parties; otherwise, the very purpose of bank E guarantees would be negatived and the fabric of trading operation would be jeopardised. The co~mitm~nts of the banks must be honoured free from interference by the courts; otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases, that is, in cases of fraud or in cases of irretrievable injustic~ that the court should interfere. F This is not a case where irretrievable injustice would be done by enforcement of the bank guarantee. This is also not a case where a strong prima f acie case of fraud in entering into a transaction was made out. The High Court should 'not have interfered with the bank guarantee. The judgment and order of the High Court set G aside. The order of the Civil Judges restored."

Shetty, J. concurring with Mukharji, J. noticed the question involved at page 1143 of the report as under :

"Whether the obligation is similar to the one arising under a letter H

356 SUPREME COURT REPORTS [1993] SUPP. 3 S.C.R.

A of credit? Whether the Court could interfere in regard to such obligation, and if so, under what circumstances? These are the questions raised in the appeal."

The learned Judge at pages 1144 to 1145 observed :

B "The primary question for consideration is whether the High Court was justified in restraining the appellant from invoking the bank guarantees. The basic natur:e of the case relates to the obligations assumed by the bank under the guarantees given to the appellant. If under the law, the bank cannot be prevented by the respondent from hououring the credit guarantees the appellant also cannot be c restrained from invoking the guarantees. What applies to the bank must equally apply to the appellant. Therefore, the frame of the suit by not impleading the bank cannot make any difference in the position of law. Equally, it would be futile to contend that the court was justified in granting the injunction since it has found a prima D f acie case in favour of the respondent. The question of examining the prima f acie case or balance of convenience does not arise if the court cannot interfere with the unconditional commitment made by the bank in the guarantees in question. n

The learned Judges further at pages 1145, 1146 and 1148 observed : E 1 'The modern documentary credit had its origin from letters of credit. The letter of credit has developed over hundreds of years of international trade. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for a buyer and seller. It was found difficult for a buyer to pay for goods prior to their delivery. The bank's letter of credit came to bridge this gap. In such transactions, the seller

- (beneficiary) receives payment from the issuing bank when he presents a demand as per the terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the seller and the buye{ must be settled between them· selves. The Courts, however, in carving out an exception to this rule of absolute independence, held that if there has been a "fraud

HANDELSBANKEN v. CHARGE CHROME [DAY AL, J.] 357

in the transaction'~ the bank could dishonour beneficimy's demand for payment. The Courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else."

"In modern commercial transactions, various devices are used to ensure performance by the contracting parties. The traditional letter of credit has taken a new meaning. Stand-by letters of credit are also used in business circles. Performance bound and guaran- tee bond are also devices increasingly adopted1n transactions. The Courts have treated such documents as analogous to letf.er of credit."

Learned Judge at pages 1149 and 1150 again observed as under : c "Whether it is a traditional letter of credit or a new device, like performance bond or performance guarantee, the obligation of the bank appears to be the same. Since the bank pleadges its own credit, involving its reputation, it has no defence except in the case of fraud. The nature of the fraud that the courts talk about is the fraud of an "egregious nature as to vitiate the entire underlying transaction". It is the fraud of the benefichtry, no fraud of some- body else. The bank cannot be compelled to honour the credit in such cases. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction. The court, however, should not lightly interfere with the operation of ir- revocable documentary credit. In order to restrain the operation

- of irrevocable letter of credit, performance bound or guarantee, there should be a serious dispute to be tried and there should be a good prima facie act a fraud." F Learned Judge at page 1150 observed: \ "The sound banking system may, however, required niore caution in the issuance of irrevocable documentary credit. It would be for the banks to safeguard themselves by other means, and, generally, G not for the courts to come to their rescue with injunctions unless there is established fraud. The appeal must be allowed, and the order of the civil judge, restored."

We have referred to the observations of both Sabyasachi Mukharji H

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

A as well as She,tty, JJ. in extenso to emp~asise that in case of confirmed bank guarantees/irrevocable letters of credit, it cannot be interfered with unless there is fraud and irretrievable injustice involved in the case and fraud has to be an established fraud. The expression "to p~event irretrievable injus- tice" appears to have been taken from,the decisio!i.of the -Court of Appeal B in England in the case of Elian and Rabbath (Trading as Elian & Rabbath) v. Matsas and Matsas and others, [1966) 2 Lloyd's List Law Reports 495. The facts of that pse were peculiar. The fir~t defendant, vessel, was chartered by Lebanese charterers for carriage pf plaintiffs' cargo (con- signed to Hungary) from Beirut io Rijeka. Dis~harge of the cargo was delayed at Rijeka and the shipowners ex~rcised it~ lien on cargo in respect of demurrage due to delay in discharge of cargo. the third defendant-bank put up a guarantee in London in favour of the ~econd defendants, who were first defendants' London agents, to secure rekase of cargo. There was a claim by Yugoslavians to distrian on goods, involrmg ship in further delay and master of the ship, on lifting original lien,! immediately exercised another lien, respect of extra delay. Original lien ~aised when Hungarian buyers put up Pounds 2000. Two years later t~e shipowners claimed arbitration with charterers to assess demurrage for\ which the first lien was exercised and claimed to enforce guarantee. Plain~iff claimed declaration that guarantee was not valid (as the original lie~ had been lifted) and ·injunction to restrain shipowners or their agents frdm enforcing guarantee. E The shipowners and their Lon~on agents as first and second defendants appealed against granting of injunction by Blain, J. It was held by the Court · of Appeal that it was a special case in which court ~hould grant injunction to prevent what might be irretrievable injustice. IJord Denning observed that a although the shippers were not 'parties to the ~ank 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 account. On being so debited, they would have to sue the shipowners for breach of tqeir promise express or implied to release the goods. Lord Denning posed the question 'were the shippers to be forced to take that course'? Or ckn they short-circuit the dispute by suing the shipowners at once for an ibjunction? Lord Denning observed that it was a special case in which injunction should be granted and went on to observe that there a prim a f acie ground for saying that the shipowners promised that, if the bank guarantee was given, they would release the H

HANDELSBANKEN v. CHARGE CHROME [DAYAL, J.) 359

goods. He further went on to observe that the only lien they had in mind A at that time was the lien for demurrage. But would any one suppose that goods would be held for another lien in respect . of extra delay. His Lordship observed that "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 B further lien, they were disabled from acting on the guarantee". If we closely analyse the facts of that case, irretrievable injustice which was made for the basis for grant 'of injiirtction r·eally was on the ground that the guarantee was not encashable on its terms when the buyers had paid pounds 2000 to lift the original lien. c Another matter came before this hon'ble Court in General Electric Technical SelVices Company Inc. v. Punj Sons (P) Ltd. and another, [1991) 2 S.C.R. 412. Tlie facts of the case are as follows :

The appellant's contract with Indian Airlines included the construc- tion and fabrication of air craft testing centre/engine repair centre in Delhi. D For getting lhat work done, the appellant entered into a contract with the respondent-1.

As per the contract; respondent-1 was required to provide perfor- mance bond equal to 30 per cent of the total value of contract price, which was to be split up into two performance bonds partly to be released on E completion of the pr~ject, and the balance upon the expiration of the warranty, and to furnish a Bank guarantee to secure the mobilisation advance of 25 per cent of contract value.

Respondent-1, instead of furnishing the two performance bonds, wrote a letter for a revised proposal, which was accepted by the appellant. F

As the respondent-1 failed to complete the project within the stipu- lated time, as per contractual specifications, despite repeated oppor- tunities, the appellant terminated respondent-l's right to continue the project and sought for encashment of the Bank guarantee for Rs. G 1,06,12,500, which was issued to the appellant by the Bank.

The respondent-1 filed a suit for injunction against the appellant and the Bank in the High Court and obtained an ex-parte injunction from the Single Judge, restraining the Bank and the appellant from encashing the Bank guarantee. H

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

A When the ex-parte injunction was vacated, respondent-1 preferred an appeal to the Division Bench of the High Court. The Division Bench allowed the appeal, staying the encashment of the Bank guarantee till the disposal of the respondent's suit.

On the question, whether the Court was justified in restraining the B Bank from paying the appellant under the Bank guara:itee at the instance of respondent-1, allowing the appeal of the appellant-company, this Court held as under :

"In the instant case, the High Court has misconstrued the terms of c the Bank guarantee and the nature of the inter-rights of the parties under the contract. The mobilisation advance is required to be recovered by the appellant from the running bills submitted by the respondent. If the full mobilisation advance has not been recovered, it would be to the advantage of the respondent. Second- ly, the Bank is not concerned with the outstanding amount payable D by the appellant under the running bills. The right to recover the amount under the running bills has no relevance to the liability of the Bank under the guarantee. The liability of the Bankremained intact irrespective of the recovery of mobilisation advance or the non-payment under the running bills. The failure on the part of .E the appellant 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 the appellant is under the Bank guarantee and as per the terms thereof. The Bank has to pay and the Bank was willing to pay as F per the undertaking. The Bank cannot be interdicted by the Court at the instance of respondent- 1 in the absence of fraud or special equities in the form of preventing irretrievable injustice between the parties. 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." G One of the arguments in that case was that as per the terms of bank guarantee it could not be encashed at the stage. This Court at pages 416 to 418 noticed the terms and conditions of the first bank guarantee which was towards the performance of the project and to secure mobilisation H advance of 25 % of the contract value. Again at page 418 the Court noticed

HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 361

the replaced second composite bank guarantee dated 25th January, 1988 A keeping the other terms of the original bank guarantee dated 28th October, 1986 unchanged. The case of the plaintiff was that there was no proper demand for payment of balance of the mobilisation advance nor was it mentioned in the letter of demand to the bank. It was also the case of the respondent that on terms of the bank guarantee the stage had not reached to encash it. This Court noticed at pages 419-420 of the report as follows: B

"The second bank guarantee with which we are concerned makes a reference to the first guarantee. It states that the guarantee is a composite bank guarantee for mobilisation of advance and perfor- mance bond. It further states that all the other terms and condi- c tions of the original Guarantee will remain unchanged."

The Court first decided that all the terms of the first bank guarantee were there except that earlier guarantee was towards the mobilisation advance whereas the later guarantee was a composite bank guarantee for both -performance of the contract as well as for recovery of mobilisation advance. The Court noticed how the liability under the guarantee will get reduced from stage to stage by realisation from running bills towards mobilisation advance and under the first guarantee itself the bank had undertaken to pay to the appellant the amount guaranteed without any demur merely on demand stating that the amount is due by way of loss or damage caused to or would be caused to or suffered by any breach committed by the respondent on any of the terms or conditions contained in the agreement or by reason of respondent's failure to perform the agreement and that such demand shall be conclusive as regards the amount due and payable by the bank under the guarantee. The appellant had only p sought to enforce the bank guarantee for the balance amount of the mobilisation advance on a complaint that respondent No. 1 had failed to perform the contract as per terms and conditions. As mobilisation advance could be recovered earlier only from the running bills and since the contract had been terminated, the balance of mobilisation advance was sought to be recovered from the bank guarantee. The bank had undertaken G to pay this amount in fact the bank was prepared to pay the same. It was in these circumstances that the court accepted the appeal and observed that the law has been settled in the aforesaid case of U .P. Cooperative Federation Ltd. and again noticed the observations of Mukherji J. in that case and observed at page 421 that the High Court has misconstrued the H

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

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.