Laxmi Marketing Corporation vs Karnataka State Electronics Development Corporation Ltd. and another

V.P. Mohan Kumar, J.—The plaintiff is the appellant. The suit is one for permanent injunction restraining the first defendant from enforcing a bank guarantee executed by the second defendant. Along with the suit, a temporary injunction application was also moved. This application was dismissed and the plaintiff has come up in appeal.

The plaint allegations, in brief, are as follows :

The plaintiff, a registered partnership firm, was appointed as a dealer of the first defendant-company to sell television sets in Karnataka. Since the first defendant demanded bank guarantee, the bank, the second defendant herein, executed an irrevocable bank guarantee for an amount of Rs. 5,00,000. It is alleged by the plaintiff that the first defendant supplied 100 television sets, out of which 90 were defective. The plaintiff had paid Rs. 1,78,000 but did not release the balance since the first defendant did not rectify the defective television sets. The plaintiff undertook to release the balance amount if the television sets are set right. At that stage, the plaintiff came to know that the first defendant has approached the second defendant to encash the bank guarantee, whereupon the suit was filed.

The first defendant denied the contention of the plaintiff and contended that the plaintiff had taken delivery of goods worth Rs. 5,12,149.40, that he was to pay a balance sum of Rs. 3,80,615, that despite several demands, the balance was not paid and that it is, thereafter, that the first defendant informed the plaintiff that they will enforce the bank guarantee. It was pointed out that the bank guarantee executed was irrevocable and, therefore, the plaintiff cannot seek for the relief now prayed for in the suit and in the I. A.

The trial court, after consideration of the respective contentions of the parties, vacated the injunction granted by it earlier against enforcement of the bank guarantee.

Sri Shekar Shetty, learned counsel for the appellant, has argued at length on the maintainability of the relief of injunction sought. On the other hand, Sri L. S. Harsha Kumar Gowda, learned counsel for respondent No. 1 has opposed the prayer.

The bank guarantee executed by the second defendant is an irrevocable bank guarantee. As can be seen from the document, it is a contract between the first defendant and the second defendant. When the first defendant seeks its enforcement, the second defendant shall honour the same without contest, demur or protest and without questioning the legal relationship existing between the first defendant and plaintiff. Prima facie, therefore, the plaintiff on whose behalf the bank guarantee was executed, cannot maintain any action restraining the first defendant from enforcing the contract.

Sri Shekar Shetty, learned counsel for the appellant, brought to my notice that in the event the action of the first defendant in encasing the bank guarantee is vitiated by fraud and it is shown that it will cause irretrievable injury to the plaintiff, then, the civil court is competent to grant the relief of injunction. I have been taken through the averments in the plaint. The plaintiff has not made out any allegation as required under Order 6, rule 4 of the Civil Procedure Code, to attract the plea of fraud. As rightly noticed by the court below, the plaintiff has not pleaded anywhere that the first defendant has committed a fraud on him. Nor does there exist any irretrievable injury that the plaintiff might suffer. According to the plaintiff, the first defendant has supplied defective television sets and has not taken steps to set right the same. Such conduct cannot be said to cause "irretrievable" injury to the plaintiff. First of all the allegations have to be proved. Mere recital thereof does not take us anywhere.

This takes us to the decision of the Supreme Court in Svenska Handelsbanken Vs. M/s. Indian Charge Chrome and others, The following passage will clearly illustrate the above position. While considering the case of fraud and irretrievable injury that may be suffered by enforcing the bank guarantee, the Supreme Court stated as follows 79 Comp Cas 624

"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 the bank guarantee by the suppliers has to show a prima facie case of established fraud and an irretrievable injury. Irretrievable injury is of the nature as noticed in the case of Itek Corporation (UNDCEM 566 FS 1210)...."

As regards irretrievable injury, the Supreme Court deals thus (at page 620) :

"Mr. Venugopal, learned counsel for the borrower, referred us to the decision in Itek Corporation v. First National Bank of Boston, by the United States District Court, Massachusetts reported in 566 Federal Supplement 1210, particularly observations at page 1217, which reads 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 harms are not speculative, but genuine and immediate, I am satisfied that Itek will suffer irreparable harm if the requested relief is not granted.''"

The materials on record do not disclose established fraud. It is also not demonstrated what is the irreparable harm that the plaintiff will suffer. It is also not shown that the plaintiff has not other remedy except the one now pursued. The apprehension expressed by the appellant is speculative and not real.

The following observations of the Supreme Court in the decision in General Electric Technical Services Company Inc. Vs. M/s. Punj Sons (P) Ltd. and another, would also highlight the above aspect 74 Comp Cas 648

"The question is whether the court was justified in restraining the bank from paying to General Electric Technical Services Company under the bank guarantee at the instance of respondent No. 1 The law as to the contractual obligations under the bank guarantee has been well settled in a catena of cases. Almost all such cases have been considered in a recent judgment of this court in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., wherein Sabyasachi Mukherji J., as he then was, observed 65 Comp Cas 295 ''that in order to restrain the operation either of an irrevocable letter of credit or of a confirmed letter of credit or of a bank guarantee, there should be a serious dispute and there should be a good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operations will get jeopardised''. It was further observed that the bank must honour the bank guarantee free from any interference by courts. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases, that is to say, in cases of fraud or in cases of irretrievable injustice, the court should interfere, In the concurring opinion, one of us (K. Jagannatha Shetty. J.) has observed that, whether it is a traditional bond or performance guarantee, the obligation of the bank appears to be the same. If the documentary credits are irrevocable and independent, the bank must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The bank''s obligations of course should not be extended to protect the unscrupulous party, that is, the party who is responsible for the fraud. But the banker must be sure of has ground before declining to pay. The nature of fraud that the courts talk about is fraud of an ''egregious nature so as to vitiate the entire underlying transaction.'' It is fraud of the beneficiary, not the fraud of somebody else."

Counsel for the appellant then contended that the bank guarantee was executed as a condition for being appointed as a dealer and it has no relation to the value of the goods supplied or purchased. If there is any default in paying the bill, the first defendant can claim only interest on the delayed payment. In this behalf the following clause in the order appointing the plaintiff as the dealer may be noticed :

"2. You will arrange for a bank guarantee for Rs. 5 lakhs based on the value."

The expression "based on the value" means the value of the goods purchased. Therefore, the bank guarantee executed is for the value of the goods purchased. Admittedly, the plaintiff has taken delivery of 100 television sets and has not paid its full value. There are disputes regarding this aspect of the case, but nevertheless the fact remains that money is due to the first defendant on this head. If so, clearly the bank guarantee executed represents the value of the articles thus supplied. Therefore, prima facie, there is no force in the contention of the plaintiff that the bank guarantee was executed by way of condition for appointing as a dealer and in default of payment of value of goods supplied, it cannot be enforced.

The plaintiff has highlighted the fact that the first defendant has instituted a suit as O. S. No. 6146 of 1989 for recovery of the value of the above referred 100 television sets. The suit is allegedly pending. May be in that suit the plaintiff herein can move for any appropriate order to safeguard his interests. But that question need not be and cannot be gone into here. All that I need say is that the disposal of the present I. A. and the appeal will not disable the plaintiff from seeking appropriate relief in that suit if he is otherwise legally entitled.

There are no merits in this appeal. The same is dismissed, but without costs.