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Judgment
Petitioner is the plaintiff in O.S. 163 of 1982 on the file of the Sub Court, Gobichettipalayam. It filed the suit against respondents herein, for
grant of a permanent injunction restraining them from recovering the sum of Rs. 85,639-89 from the State Bank of India, Gobichettipalayam
branch till they establish their claim against the plaintiff in a court of law. Pending disposal of the suit, in I.A. 737 of 1982, it sought for grant of a
temporary injunction under 0. 39 R. I and S. 151 C.P.C. restraining respondents from realising the said amount by enforcing the bank guarantee till
the disposal of the suit. Courts below having rejected the relief, this civil revision petition is preferred.
The plaintiff claimed as follows. The first defendant manufactures Nitrogenous and other chemical fertilisers. The plaintiff was appointed as a
dealer under Ex. B 25 dt. 25-9-1980 for the sale and distribution of its products in certain territories of TamilNadu. As and when plaintiff informs
second defendant specifying the requirements, allocation would be made by issue of delivery notes to the concerned warehouse and thereafter,
plaintiff will receive the supply. Second defendant issues invoices, whereupon plaintiff makes payments. In order to assure prompt payment of
invoices, plaintiff was directed to furnish bank guarantee, and, it had furnished two bank guarantees totaling Rs. 1 lakh under Exs. B l3 and B 14dt.
17-6-1979for Rs 50,000 each issued by State Bank of India, Gobichettipalayam. Though plaintiff was prompt in payment of invoices, it
understands that some of the officials of second defendant, supplied products to retailers and other parties closely known to them, and to avoid
detection, for record Purposes they bring those transactions under any one of the recognised dealers in a clandestine manner, and so long as
payments are received within time from such clandestine purchasers, there was no trouble. But when -it finds, the officials in order to exculpate
themselves demand payments from authorised dealers, and that was how, a demand for Rs. 1,261,183-69 was made on the plaintiff by letter dt.
17-7-1982 (Ex.. A. 4) Defendants having threatened to invoke the bank guarantee, in default of payment of the amount so claimed, it sent a reply
on 1-8-1982 (Ex. A. 5) requesting for, details to be furnished. But second defendant had not chosen to give any reply so far. Out of the claim
made, plaintiff admits liability only for Rs. 43,543-50 and has already paid a sum of Rs. 20,735 on 29-7-1982, and is prepared to pay the balance
at any time. It disputes liability only for Rs. 85,639-89. In para 7 of the plaint, it refers to certain communications, to show how the demand made
by the second defendant was fraudulent. When the product was not actually supplied, the bank, as the surety, is also not liable to pay the amount
as per the terms in Exts. B. 13 and B. 14, Bank guarantees have been invoked only to save the skin of the officers of the defendants, who have
committed fraud, and hence, the suit had been filed.
Second defendant in the written statement had repudiated this claim, stating that, when irrevocable bank guarantees had been furnished, a
demand having been made by letter dt. 1- 10-1982 for payment of a sum of Rs. 1,29,183-69, plaintiff had unjustly intercepted it by filing the suit.
The Bank had violated the terms of the bank guarantee. It is due to inability to pay debts, in spite of taking delivery of goods, the suit had been
filed on false grounds. After referring to the procedure adopted in selling goods, the allegations made in paras 6 to 9 of the plaint have been denied
In the light of a decision in United Commercial Bank Vs. Bank of India and Others, the Bank has no other option than to honour the bank
guarantee.
The trial. court held that documents produced by defendants show that there could not have been clandestine sale of products to third parties,
and hence the plaintiff has not made out a ''prima facie case of fraud. Relying upon Tarapore and Co. Vs. V/O Tractoroexport and Another, , it
held that it is only under extraordinary circumstances, courts would injunct the Bank guarantee from being invoked. The appellate court also
concurred with these findings.
Mr. S. Gopalaratnam, learned counsel for the petitioner, submits that it will not be his endeavour to claim that a court can in a light hearted
manner grant interim injunctions, preventing a bank guarantee or a letter of credit being honoured on time. He has taken considerable pains to
analyse the decisions hereunder referred to, to show that the correct view to be taken is to proceed on the basis that a bank guarantee or a letter
of credit and the like, must be allowed to be effective instruments so as to secure payment, irrespective of whatever be the disputes raised between
the seller and the buyer, and that only in extraordinary circumstances, an injunction could issue. With fraudulent intention if a party to the contract
invokes a bank guarantee, no court could allow an illegality being committed, merely because the relief claimed is in respect of a bank guarantee or
letter of credit. He respectfully submits that, in spite of specific instances adverted to by plaintiff to show that fraud had been committed, this
essential factor had been evasively dealt with by courts below, and that by continuing to keep the bank guarantees alive, during the pendency of the
proceedings, defendants would not, in any manner, be prejudiced.
As to what should be the approach made by courts when bank guarantees are Invoked, after referring to Ss. 126, 128, 133, 140 and 145 of
the Indian Contract Act, dealing with indemnity and guarantee, he refers to United Commercial Bank Vs. Bank of India and Others, , wherein it
was held that it is a well established rule that a Bank issuing or confirming a letter of credit, is rot concerned With the underlying contract between
the buyer and the seller. After referring to the decision in Harbottle Ltd. v. National Westminster Bank Ltd., (1977) 3 WLR 752, it is stated
therein as follows -
We would like to adopt a passage from his judgment at page 761: it is only in exceptional cases that the Courts will interfere with the machinery of
irreovable obligations assumed by bank3"".
Dealing with the scope of 0. 39 Rr. I and 2, it was held that, unless plaintiff establishes that there was a bona fide connection between the parties,
or a serious question to be tried and balance of convenience is taken into account, an interim injunction would be wholly unwarranted. In para 41 it
is stated.
A letter of credit sometimes resembles and is analogous to a contract of guarantee ........ to warrant interference by injunction.
Counsel for defendants also relies upon the same decision to plead that courts cannot intercept Bank guarantees being invoked, and that inter se
disputes between contracting parties cannot be taken into account by the Bank.
The contention of Mr. S. Gopalaratnam, learned counsel, is that, the decisions of the Supreme Court in Tarapore and Co. Vs. V/O
Tractoroexport and Another, , and United Commercial Bank Vs. Bank of India and Others, , are to the effect that usually courts should refrain
from granting injunctions to restrain performance of the contractual obligations arising out of a letter of credit or a bank guarantee. But there is no
absolute bar against courts granting interim injunction, under 0. 39 Rr. 1 and 2 and S. 151 C.P.C. if circumstances warrant. He would point out,
that in none of the decisions, it had ever been held that courts are powerless to injunct the invocation of letter of credit or bank guarantees. He
submits that the courts below misconstrued, that this matter does not fall within the exception contemplated in the said decisions. Before
proceeding further, he points out that the observation in Elian v. Matsas (1966) 2 Lloyed''s Rep. 495, to the effect that a letter of credit sometimes
resembles and is analogous to a contract of guarantee, overlooks the fact that a letter of credit could not come within the definition of S. 126 of the
Contract Act, and hence, in so far as India is concerned, the bank guarantee like the one issued in the present matter, cannot be equated to a letter
of credit. He points out that, even in the said decision, no analysis had been made anywhere as to how a bank guarantee could be equated to that
of a letter of credit, and that it is only a passing reference made in the course of the judgment. He pleads that the emphasis laid in Tarapore and
Co. Vs. V/O Tractoroexport and Another, , cannot be imported to the same extent, when bank guarantees are involved. At this juncture, he refers
to Sreenivasa General Traders and Others Vs. State of Andhra Pradesh and Others, wherein it was held that, ''A case is an authority only for what
it actually decides and not for what may logically follow from it every judgment must be read as applicable to the particular facts proved, or
assumed to be proved, since the generality of the expressions which may be found there, are not intended to be expositions of the whole law but
governed or qualified by the particular facts of the case in which such expressions are to be found. Observations in the judgment which were really
not necessary for the purposes of the decision and go beyond the occasion have no binding authority and merely have persuasive value"". Hence it
is rightly contended that by referring to the decision of Lord Denning in United Commercial Bank Vs. Bank of India and Others, it would not mean
that a bank guarantee and a letter of credit, are equitable. In view of what has been stated in Sreenivasa General Traders and Others Vs. State of
Andhra Pradesh and Others, , no difficulty exists in understanding the correct legal principles to be followed, when bank guarantees are involved.
Though in Tarapore and Co. Vs. V/O Tractoroexport and Another, it was in respect of a letter of credit, in United Commercial Bank v. Bank of
India AIR 1961 SC 1426, as to how a bank guarantee should be dealt with having been well laid down, what further requires to be considered is,
whether plaintiff''s case would be an exceptional case warranting interference by court. That there can be exceptional cases was recognised in R.
D. Harboicle Ltd. v. National Westminster Bank Ltd., (1977) 3 NN LR 752 and this view having found approval by the Supreme Court, it is not
as if, in no case a bank guarantee could be intercepted from being honoured. Even in Ellian v. Matsas (1966) 2 Lloyed''s Rep. 495, it is stated that
circumstances may arise such as to warrant interference by injunction'' and it was a case'' wherein the Court granted injunction, treating it as a
special case, because the ship owners in breach of the undertaking, imposed a further fee, and hence, they have disabled themselves from acting on
the guarantee.
To show that extraordinary or exceptional or special cases would arise wherein courts would be inclined to injunct the invocation of bank
guarantees,UCM Investments)v.Royal Bank of Canada (1982)2 All ER 720 is relied upon, wherein it was held that the system of confirmed
irrevocable documentary credits had been developed in international trade to give the seller an assured right to be paid before he parted with
control of the goods and that does not permit of any disputes with the buyer as to the performance of the contract of sale to be used as a ground
for non-payment or reduction or deferment of payment, but to this general statement ofprinciple as to the contractual obligations of the confirming
bank to the seller, there is one established exception; that is where the seller, for the purpose of drawing on the credit, fraudulently presents to the
confirming bank documents that contain, expressly or by implication, material representations of facts which to his knowledge are untrue, The
exception for fraud, on the part of the beneficiary seeking to avail himself of the credit, is a clear application of the maxim exturpi causa non oritur
actio or, if plain English is to be preferred ""fraud unravels all"". The Courts will not allow their process to be used, by a dishonest person to carry
out a fraud. In R. D. Harbottle v. National Westminster Bank (1977) 2 All ER 862, also it was held that only in exceptional cases would the courts
interfere with the machinery of irrevocable obligations assumed by banks, and that courts have a discretion to grant interlocutory injunctions,
whenever it is just or convenient to do so. In Maharashtra State Electricity Board, Bombay Vs. Official Liquidator, High Court, Ernakulam and
Another, , it was held that a bank issuing a guarantee cannot raise the plea that it is liable only to the extent of any loss that may have been
sustained by the party, on whose behalf it has issued bank guarantee and not for the whole amount, arid that the liability is absolute and
unconditional. B.S. Aujla Company Pvt. Ltd. Vs. Kaluram Mahadeo Prosad and Others, , is to the effect that in the absence of a clear case of
fraud to the knowledge of the bank, it is a well settled principle of balance of convenience that a court should not grant injunction restraining
payment in terms of the letter of credit. An injunction would issue under 0. 39 Rr. 1 and 2, only if the plaintiff establishes that he has a prima facie
case, meaning thereby that there was a bona fide contention between the parties, or a serious question to be tried. On behalf of defendants, apart
from relying upon Tarapore and Co. Vs. V/O Tractoroexport and Another, and United Commercial Bank Vs. Bank of India and Others,
reference is also made to UCM (Investments) v. Royal Bank of Canada (1982) 2 All ER 720 and Vinay Engineering v. Neyveli Lignite
Corporation (1983) 96 MLW 61.
The decisions make it quite clear that there is no absolute rule prohibiting grant: of interim injunction relating to Bank guarantees and in
exceptional cases courts will interfere with the machinery of irrevocable obligations assumed by banks, and that the plaintiff must establish a prima
facie case, meaning thereby that there is a bona fide contention between the parties or serious question to be tried, and further the balance of
convenience is also a relevant factor. If the element of fraud exists, then courts step in to prevent one of the parties to the contract from deriving
unjust enrichment by invoking bank guarantee.
Hence, the primordial aspect to be considered is, whether there is a bona fide contention between the parties or a serious question to be tried,
so as to make out a prima facie case. The only contention of the plaintiff herein is, that defendants have practised fraud upon it and hence they
cannot invoke the bank guarantee. In paragraphs 6 and 7 of the plaint, the specific instances, relating to the alleged fraud, are placed. In the written
statement, except for a vague denial, not even a single instance had been explained away by reference to any of the documents. When a party to a
proceeding pleads fraud by referring to certain transactions and furnishes particulars to sustain the said contention and if the opposing party rests
content by general denials, the only course open to the court, at this stage of the matter, is to act upon the claims of the plaintiff, provided they are
plausible and seemingly worthy of belief. Even in the counteraffidavit filed to the I.A. except for stating the usual nature of transaction adopted
between the parties, and the decision in United Commercial Bank Vs. Bank of India and Others, , no particulars are furnished to show as to how
far the plea of fraud, as raised, is unsustainable. As for the trial courts, in para 6, it has simply catalogued in seriatim all the documents filed by
contesting parties. In para 7, it takes up the only point relating to forgery pleaded, regarding Ex. B 28. It compares the signature found therein with
that in Exs. B26 and B27, and states that on a superficial comparison, it is unable to make out forgery. No other factual claims made by the
petitioner, had been dealt with. Plaintiff filed 1. A. 46 of 1983, for sending Ex B 28 for opinion of a handwriting expert. But it was rejected, on
192-1983, holding that ""no finding need be given for the present to dispose of I.A. 7,37 of 1982"" and hence the petition was closed with liberty to
file a separate petition for the same prayer at the time of trial, if necessary. Having stated that no finding need be given for the present on the aspect
of forgery, it had proceeded to dispose of the matter only on the ground that plaintiff had failed to establish forgery. It has unjustly prevented
plaintiff from establishing an important factual claim, by refusing to send Ex B 28 to a handwriting expert to give his opinion as to its genuineness.
When a plea of fraud is made, by claiming that a particular document has been forged, the trial court ought not to have stood in the way of relevant
evidence being adduced, even at this stage of the matter. By preventing the plaintiff from adducing relevant evidence, and in spite of holding that no
finding need be given for the present on the aspect of forgery pleaded, it had erroneously proceeded to render the only finding that Ex. B 28 does
not appear to be forgery. It is on this sole ground it held that plaintiff had not made out a prima facie case.
As for the appellate court, in paragraph 6 alone it deals with the prima facie nature of the case. After referring to Exts. B25, 13, 14 and 10 it
holds that, when plaintiff had received four delivery orders and four invoices, it must naturally be taken that it had taken delivery of the goods
covered by the delivery orders from the warehouse: It further observes that, when signatures of the person who took delivery on behalf of the
plaintiff are found, Exts. B I to B8 go to show that all the goods covered by the invoices have in fact been supplied to the plaintiff, and hence there
is no warrant for the plaintiff''s contention, that the defendants have played fraud in supply of goods to strangers and making the invoices in the
name of the plaintiffs. Mr. S. Gopalaratnam learned counsel for the plaintiff, argued at great length, by referring to each one of the documents, to
show that lower appellate Court had relied on documents filed by defendants, without looking into the inherent discrepancies existing therein, and
hence the court had not applied its mind to the contents of these documents. Merely because four delivery orders and invoices exist, it had
proceeded on a presumption that plaintiff must have taken delivery of goods from the warehouse, when its main grievance is that, they are
documents brought into existence by the officials of the defendants in the clandestine dealings indulged in by them. This criticism is not without
substance, because, the appellate order does not deal with the points taken by the plaintiff, as to why such documents cannot be put against it and
of the discrepancies existing therein. Even the limited materials which plaintiff had referred to in para 7 of the plaint had not been dealt with by the
courts below, to show that there is no serious question to be tried between the parties. Though he has taken more than one point to show
discrepancies and obvious defects in the documents relied upon by defendants, only a few are dealt with hereunder, for the limited purpose of
finding out whether this case would come under the category of exceptional or special cases, as held by the Supreme Court.
Item No. 1 : Under Ex. A.5 dt. 21-31982, plaintiff asked defendants to furnish a copy of accounts till date from the beginning. Under Ex. A 2
dt. 21-5-1982, defendants informed the Bank that ""the party had settled fully their dues with us and as on date their debit balance is nil"". Plaintiff
states that in spite of it, under Ex. A. 4, dt. 17-7-1982, they state that the opening balance is Rs. 3279-79, but no explanation is forthcoming as to
how this amount became due.
Item 2: As for Ex A7, the invoice, admittedly there is no delivery challan issued.
Item 3 : Ex B 8 is the delivery challan for the invoice under Ex. B 9. This shows that G. R. Anantharaman (brother of G. R. Srinivasan, who is the
sole proprietor of the plaintiff firm) took delivery of 20 tons by lorry TMR9475 on 24-5-1982, whereas Ex. B12, the certificate produced by
defendants and issued by warehouse at Salem, discloses that 10 tons were delivered on 24-5-1982, and one ton on 1-6-1982, and 9 tons on 3-
6-1982, and the lorry numbers also vary. Hence, it is pleaded that Ex B 8 does not prove delivery of the goods covered by Ex. B9.
Item 4 : In Ex B2, an invoice, the word ''Dindigul'' is scored out and over written as ''Salem'' whereas in the two copies received by plaintiff, only
Dindigul warehouse is shown as the place from where delivery had been effected. When these copies of invoices were sought to be marked as
additional documents, the lower appellate Court has refused to receive that I.A. 95 of 1983 filed for additional documents to be received, was
dismissed on 30 -4-1983. Item 5 : As for Ex. B 1, a delivery challan, it, shows delivery by lorry TMT 4142, whereas Ex B 12 the concerned
invoice shows that the lorry number is TMT 4242, and here again, Dindigul had been scored out and Salem had been written.
Item 6 : In Ex. B 3, the name of the person to receive delivery is not filled up. But yet the second defendant has put his signature, as if he had
attested the signature of the person ''who is to take delivery''. The delivery had been made to one A. Govindaswami, who does not represent the
plaintiff. In respect of this consignment, Ex. B12, the certificate of the warehouse manager is to the effect that delivery was made through lorry
TNL 3579, and not TNL 4889 which is mentioned in the delivery challan. In Ex. B6 also, there is alternation regarding the warehouse from where
the goods are to be cleared.
Item 7 : In Ex. B5, the delivery challan, it shows that one V. Raman received delivery on 2-6-1982, in TNL 3579, whereas the corresponding
certificate of the warehouse manager (Ex. B12) shows that delivery was through lorry TNL 4889.
Item 8 : Ex. B7 is an invoice showing that the name of the warehouse had been corrected as Salem. But no delivery challan is produced. But still
Ex. B 12, written by Manager of Salem warehouse shows that delivery was effected under order No. 404517, dt. 19-6-1982, which cannot be
correct.
Item 9 : Under Ex. A. 5, dt. 3-8-1982, on plaintiff realising that clandestine transactions have been put through in his name, made a request for a
copy of the accounts to be furnished, but till date, defendants have not furnished the required particulars. Instead, within seven days, under Ex. A.
6, dt. 11-8-1982, second defendant had addressed one Amirthalingam, stating that Kannan was being sent in connection with the settlement of
plaintiffs accounts amicably. Kannali had written on Ex. A6 stating that he could not meet Amirthalingam, and that there is urgency in settling the
accounts of the plaintiff. This bears the date 14-8-1982. Defendants rely upon Ex. B24, of the same date, to claim that Anantharaman had signed
on behalf of the plaintiff, stating that the goods covered by the four disputed delivery orders had been received. It is in respect of this document
plaintiff states, that it is a rank forgery. If such a letter had been sent to defendants, then in the ordinary course of business, the sea] of the
defendants must find a place therein.
Courts below have passed orders only on documents and not on any oral evidence. When so many discrepancies have been pointed out and
when plaintiff had relied upon them and was able to show that in sonic of the documents relevant lorry numbers are not there or concerned
signatures are not affixed, in the background of the claim made that officers of the respondents have indulged in clandestine dealings, and that,
under the disputed invoices, plaintiff had not received goods, t he courts below have miserably failed to look into the prima facie case pleaded by
the plaintiff. As for the claim made in para 7 of the plaint, defendants have Rot placed any material so far, as to how the claim made therein is beset
with any incorrectness or misconception of facts. The added feature is that when Ex. B 28 is claimed to be a forged document, the first endeavour
of the court ought to have been to secure the opinion of the handwriting expert, when plaintiff was prepared for such a course to be adopted. If it is
a forged document, then the element of fraud pleaded becomes relevant, and which would disentitle defendants from invoking the bank guarantee.
That was the main reason why they have opposed the application.
As already pointed out, in spite of the trial court stating that no finding need be given for the present on the genuineness of the document, it had
proceeded to hold that plaintiff had not made out a prima facie case only on the aspect of forgery, and on no other point raised by the plaintiff. As
for the lower appellate court, it would not refer -to a single document relied upon by the plaintiff. It has failed to analyse the contents of the
document marked by the defendants, but had proceeded on a surmise that when the delivery order and invoices are present, naturally it should
mean that the goods have been delivered, forgetting that the case of tRe plaintiff is that the goods covered by the said documents were not
delivered to it. If only courts below, which are duty bound to do this analysis, had done it, it would not have resulted '' in considerable judicial time
of this court being spent on a matter like this. Subordinate courts shall not avoid their d u ty, to analyse contents of documents, which are relevant
to find out the prima facie case.
On what is stated above, it is quite obvious that the suit involves serious questions to be tried, and particularly, relating to the plea of fraud, which
courts have invariably held as a significant factor to be taken into account, whenever a relief is claimed for interdicting the enforcement of a bank
guarantee.
On balance of convenience, in the plaint itself it is admitted that a sum of Rs. 43,543-50 is payable. The plaintiff being a small dealer, if bank
guarantees are invoked, in spite of a prima facie case having been made out, and compelled to part with a sum of Rs. 85,639-89, it would ruin its
business prospects. By allowing the bank- guarantee to be kept alive, defendants cannot be prejudiced.
Hence, the revision petition is allowed, subject to the following conditions -
(i) Plaintiff to deposit in the trial court a sum of Rs. 20,735, on or before 15-6-1984;
(ii) It must keep the two bank guarantees alive, during the pendency of the proceedings, by renewing them from time to time, 30 days before the
expiry of the periods of respective guarantees, failing which, it will be open to defendants to invoke the bank guarantees.
On behalf of the defendants it is stated that, when State Bank of India is not impleaded as a party, no relief as prayed for could be granted.
This would not be any impediment, because the relief asked for is to prevent defendants from invoking the bank guarantees. As per clause 4 of
Exts. B 13 and B 14, unless the amount claimed had become due by reason of buyer''s failure to pay the Corporation invoices, they cannot be
invoked. It is the claim of the plaintiffs that in the absence of supply of goods, the amount had not become due. Without the amount becoming due,
defendants cannot invoke the bank guarantees. That is the reason why the relief is confined only against the defendants, preventing them from
invoking Exts. B 13 and B 14 the bank guarantees. Hence, the civil revision petition is allowed with costs. Counsel''s fee Rs. 250.
Petition allowed.