Deepthi Enterprises vs The Tamilnadu Agro Industries Corporation Limited and Another

S.S. Ahmad, C.J.—This appeal is directed against the judgment of the learned Single Judge of this Court by which the writ petition of the appellant for a direction to the State Bank of Mysore (second respondent) not to pay the amount covered by the bank guarantee to the Tamilnadu Agro-Industries Corporation Limited (first respondent) was dismissed.

From the facts set out in the petition it appears that the Tamilnadu Agro Industries Corporation Limited, Madras, had advertised in 1988 for engaging active and interested firms in promoting the sales of their sunflower Refined Oil, under the Brand name "Sunola", in the State of Andhra Pradesh. The petitioner was appointed as Forwarding and Clearing Agent of the respondent on and with effect from 21-10-1988 for a period of five years under a written agreement, one of the conditions of which was that the petitioner would execute an irrevocable continuing bank guarantee in the sum of Rs. 3,00,000/- in favour of the first respondent, which was duly furnished by the petitioner, and at his instance the Bank, namely, State Bank of Mysore, provided bank guarantee in favour of the first respondent. It is further stated in the petition that subsequently the petitioner was also appointed as Consignment Stockist on a fixed commission which was subsequently raised to 5% of the basic value of the stock supplied. In respect of the second agreement also a bank guarantee was furnished in the sum of Rs. 2,00,000/-. This bank guarantee is dated 17-9-1990 which was available upto 17-9-1994.

3.The first respondent invoked the bank guarantee and required the State Bank of Mysore to make payment of the amount due under the bank guarantee to the first respondent, and it was at this stage that the petitioner filed the writ petition which, as pointed out above, has been dismissed by the learned single Judge.

Whether a Court can interfere with the autonomy of a bank guarantee and prevent its invocation by an order of injunction is a question which has already been decided by the Supreme Court in a number of cases. In Tarapore and Co. Vs. V/O Tractoroexport and Another, , it was observed that a letter of credit, which also is a form of guarantee, was a mechanism of great importance in international trade and any interference with that mechanism was bound to have serious repercussions on the international trade of this country. lt was laid down that the autonomy of an irrevocable letter of credit was entitled to protection and except in very exceptional circumstances Courts should not interfere with that autonomy.

It may be pointed out that the above observations of the Supreme Court made with regard to irrevocable letter of credit were applied to bank guarantees in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., . In this case the Supreme Court had relied upon the observation of Mr. Justice Kerr in R.D. Harbottle (Mercantile) Limited v. National Westminister Bank Limited, 1977 (2) All England Reports 862 to the following effect:-

"(i) Only in exceptional cases would the Courts interfere with the machinery of irrevocable obligations assumed by banks. In the case of a confirmed letter of credit, the bank was only concerned to ensure that the terms of its mandate and confirmation had been complied with and was in no way concerned with any contractual disputes which might have arisen between the buyers and sellers. Accordingly, since demands for. payment had been made by the buyers under the guarantees and the palintiffs had not established that the demands were fraudulent or other special circumstances, there were no grounds for continuing the injunctions....."

and observed that the aforesaid represents the correct state of law.

In another case, viz., United Commercial Bank Vs. Bank of India and Others, . the above view was reiterated with the observation that the Courts usually refrain from granting injunction to restrain the performance of contractual obligations arising out of a letter of credit or a bank guarantee.

The principle was again reiterated in Centax (India) Ltd. Vs. Vinmar Impex Inc. and Others, , wherein it was held that the Court should not interfere in a transaction between a banker and a beneficiary of a letter of guarantee or indemnity. That was a case in which enforcement of the banker''s letter of indemnity was sought to be restrained by way of an injunction.

The aforesaid cases were considered by the Supreme Court in U.P. Cooperative Federation Limited v. Singh Consultants and Engineers Private Limited, (2 supra), and it was laid down that commitments of banks must be honoured free from interference by the Courts and it is only in exceptional cases, that is to say, in case of fraud or in case of irretrievable injustice that the Court should interfere.

U.P. Co-operative Federation Limited v. Singh Constultants and Engineers Private Limited (2 supra), was again considered and followed by the Supreme Court in General Electric Technical Services Company Inc. Vs. M/s. Punj Sons (P) Ltd. and another, . It was laid down that on the terms of the bank guarantee, the bank could not be restrained by Court from making payment as per the undertaking given by it.

The learned Counsel for the appellant stated that in the instant case it was not open to the first respondent to invoke the bank guarantee as nothing was due from the appellant and the first respondent itself was at fault in not making supply of the stocks to the appellant. He contended that it was a case of fraud and, therefore, second respondent-bank should be restrained from making payment of the amount covered by the bank-guarantee to the first respondent.

We have gone through the writ petition. In paras 8,9 and 10 the appellant itself has pleaded as under:-

"8. I submit that there was stiff competition in the market of Sun Flower Oil and suddenly the Sun Drop product marketed by I.T.C. Limited picked up due to extravagant advertisement and displays and cheaper price, there was slump in the marketing of the petitioner firm''s sales consequent to which the Marketing Officer of the 1st respondent Corporation stationed at Vijayawada addressed a letter dt. 25-4-1993 to the 1st respondent Corporation explaining all aspects and difficulties. I submit that despite the above slump the first respondent kept on dumping the material which got stagnated without any free flow into. the market and therefore the petitioner firm could not immediately make good the payments.

I submit that thereafter the 1st respondent did not despatch the stocks in the appropriate time when the market picked up on the ground that the petitioner firm did not make good the earlier payments. I submit that the petitioner firm tried to clear the outstanding balance by marketing the existing stocks and succeeded in its endeavour for bringing down the outstanding balance from Rs. 13,00,000/- to about Rs. 7,00,000/-duringtheperiod between April 1993 to December, 1993. I submit that the petitioner firm would have succeeded much more in reducing the outstanding balance had the 1st respondent Corporation continued to send the stocks but only due to the non-receipt of the stocks the outstanding amount remained at Rs. 7,00,000/- and on the contrary the first respondent was benefited by the sales made by the petitioner firm but the petitioner firm is left high and dry without any profit and without any working capital as the entire amounts received from sales were directed back to the first respondent Corporation to clear the outstanding balance.

I submit that despite the tremendous work of promotion of sales and marketing by the petitioner firm competing with giants like ITC Ltd., Lipton India Ltd., and M/s. Bombay Oils Ltd., which products Sun Drop, Flora and Sweekar respectively which were severe competitors, the petitioner firm could succeed in its endeavour in marketing the 1st respondent''s product."

In Para 11 of the petition, it was stated "that this petty balance too had accumulated due to the irregular and non-supply of the products to the petitioner firm in time", indicating that there was some amount due from the petitioner (appellant).

In Para 12 of the petition it is stated that respondent No.l in collusion with respondent No. 2 is trying to realize the amount due under the first bank guarantee, viz., the bank guarantee relating to the contract of Clearing and Forwarding Agency.

Except the plea set out in Para 12, there is no other pleading which could be said to constitute fraud or collusion. Even what is stated in Para 12 does not amount to a clear and specific pleading of fraud, nor have the details been given. Viewed in the background of what is pleaded in earlier Paras of the writ petition which have been extracted in the earlier part of the judgment, it is obvious that quite an amount was shown to be due.

In view of the above, we decline to interfere in the matter, especially with regard to the payment of the amount by the second respondent to the first respondent under the bank guarantee in question with the observation that should the appellant approach the civil Court for determination of contractual liabilities, the matter would be decided on its own merits.

The writ appeal is accordingly dismissed.