M/s. Ashok Cab. Con. Industries vs Rajasthan State Electricity Board

T.S. Doabia, J.

The trial Court granted induction restraining the defendant Bank from giving effect to two Bank guarantees issued by it at the instance of the plaintiff in favour of Rajasthan State Electricity Board. This order was in operation for almost 3 years and was vacated by the Trial Court on 18th April, 1994. An appeal has been preferred against the said order.

Before adverting to notice various factual submissions, it would be appropriate to notice that the system of confirmed letter of credit which has now been judicially equated with Bank guarantee is to be allowed to have full sway and there has to be minimum most interference by the Courts. This legal principle was held to be a great importance by the Supreme Court in the case of Tarapore & Company Mad. v. Tractor Export Moscow, 1969 (1) SC 891 . It was observed that this system is the life and blood of international trade. It was observed that if interference is permitted in the matter of enforcement of these banking transactions then this would have serious repercussions jeopardizing the international trade. What was found to be great significance and importance in the matter of International Trade was found to be equally important in the matter of conducting internal trade in this country. The Courts have reiterated that the autonomy of an irrevocable letter of credit was entitled to full protection and except in very rare and exceptional circumstances. Courts should not interfere with this autonomy. What was said with regard to International Trade would "fortiori apply to a Bank guarantees because around bank guarantee revolves majority of the internal trade transactions in this country. This view was reaffirmed by the Supreme Court in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd.,

It is in the background of the above legal position factual submissions made in this case are being noticed.

The factual position is as under.

The respondent Rajasthan State Electricity Board Jaipur placed an order with the appellant firm for the supply of 500 Kms. ACSR squirrel and 500 Kins ACSR weasel conductors. The order was placed on 5th October, 1987. The State Bank of Indore, Hazira Branch. Gwalior furnished two bank guarantees. One was a performance guarantee and the other was a security deposit guarantee. According to the appellant the Board was to make the payment alongwith the supply of the conductors and there had to be a prior inspection in the factory premises. It is submitted that a bill was sent on 18th March, 1968 for squirrel conductors for a sum of Rs. 5,20,775.60. ''Another bill was sent for weasel conductors for a sum of Rs. 11,33,279.35 p. According to the plaintiff the payment was not made in spite of several reminders having been sent. It is stated that the Bank guarantees have been wrongly enforced. A counter claim claiming Rs. 70,000/- has also been lodged against the Board.

The appellant was to furnish a performance bank guarantee as per condition No. 6 of the Purchaser Order. This clause reads as under :-

Performance Bank Guarantee. -

(a) As 100% payment shall be made to you. You shall furnish a performance bank guarantee for an amount equivalent to 5% (five per cent) of the contract value to fulfill your obligations under clause No. 14 entitled ''Guarantee'' of the ''General Condition of Contract'' immediately on receipt of this order. The Bank Guarantee (s) shall be valid for a period of 9 (nine) months from the dale of dispatch of the last consignment.

(b) The bank guarantee (s) shall be furnished in the manner as detailed in sub-clause (b) of clause No. 15 entitled ''Mode of Guarantee'' of General Conditions of Contract to the Sr. Accounts Officer (Proc. I) RSEB, New Hotel Building Jaipur enabling him to convey acceptance on receipt of which the accounts officers (CPC) RSEB Jaipur shall retire the documents for 100% payments in absence of which only 95% payment shall be admissible. The proforma for performance bank guarantee is enclosed at annexure IV.

The appellant was also to furnish a guarantee equivalent to an amount representing 2% of the contract value. This was so provided in condition No. 5 This condition reads as under :-

Security deposit. - The provisions of clause No. 5 of General Conditions of Contract shall he applicable. The proforma of security hank guarantee is enclosed at annexure III. The Bank guarantee shall he furnished for an amount equivalent to 2% (two per cent) of the contract value immediately on receipt of the purchase order to the Sr. Accounts Officer (Proc. I) Rajasthan Sate Electricity Board, New Hotel Building Jaipur enabling him to convey the acceptance in time to the Accounts Officer (CPC) failing which the amount of security deposit shall he deducted by the Accounts Officer (CPC) from your supply hill.

It is the above two guarantees which are being invoked by the respondent Board. The performance guarantee is of the value of Rs. 1,4.1,100 and the security deposit guarantee is of the value of Rs. 57,240/- .

The case of the plaintiff is that the respondent Board was remiss in his obligation to fulfill the conditions stipulated in the purchase order. This has however been controverted by the Board. In para No. 4 of the written statement tiled by the Board the stand taken is that the averment made in the plaint that the payment towards the supply was belated is incorrect. It is stated that payment of bill 87-88/07 amount to Rs, 5,20,757.60 paise was made on 3rd May, 1988 and payment of bill No. 87-88/06 amounting to Rs. ft, 12,504.29 paise was made on 4th June 1988. It is further stated in para No. 9 that the appellant had not made the supplies in pursuance of the purchase order and a request was made to extend the term of the guarantee. As the term of the Bank guarantee was not extended the Board was left with no alternative except to invoke the Bank guarantee.

In the plaint there is no plea that any fraud has been practiced by any of the parties. Again there is no reference in the suit making any claim to get the matter referred to arbitration.

In this appeal the plaintiff has contended that the Board has not fulfilled its obligations. It has been pleaded that there is increase in the price of the raw materials, the plaintiffs being a small scale unit is unable to perform the contractual obligations. A counter claim to the extent of Rs. 70,000/- has also been lodged.

The claim of the plaintiff that they are entitled to an injunction is being examined in the light of above factual background.

The legal position is as under :-

A banker issuing or confirming an irrevocable credit duly undertakes to honour drafts negotiated or to reimburse in respect of draft paid by the paying or negotiating intermediate Banker and the credit is thus in the hands of the beneficiary binding against the Banker. The credit contract is independent of the sales contract is in some measure incorporated:- Uniform Customs and Practices for Documentary Credits. It is further clear that a seller of goods relying on an instrument creating Bank''s liability believes that he has the direct obligation of issuing Bank running in his favour enforceable by hint against that Bank, that it will pay his draft if drawn in compliance with the terms of letter of credit. Banks are not concerned with the Sales Contract or the Goods if it were otherwise, credit business would be impossible. See Gmtterudge & Megraj''s law of Bankers Commercial Credit 6th Edn., page 21.

The rights of a Banker as described in Halsburys'' Laws as of England 4th Edn. Volume 111 para 142 page No. 106. It thus becomes clear that

(i) unless documents tendered under a credit arc; in accordance with those for which the credit calls and which are embodied in the promise of the paying or negotiating banker, the beneficiary cannot claim against the paying banker''s duty to refuse payment.

(ii) The documents must be those called for and not documents which are almost the same or which will be just as well.

(iii) The banker is not called upon to know or interpret trade customs and terms. It has been held that where a mandate is ambiguous and a paying banker acts in a reasonable way in pursuance of it, he may he protected. But this general rule cannot be stretched so far as to protect a banker who pays against documents describing goods in terms which are similar to, but not exactly the same as those stipulated in the credit.

(iv) The description of the goods in the relative bill of lading must be the same as the description in the letter of credit. That is the goods themselves must, in each case, be described in identical terms, even though the goods differently described in the two documents are in fact, the same. It is the description of the goods that is all important. The reason for this requirement is staled in Davis Law Relating to Commercial Letters of Credit 2nd Edn. p. 76. Thus a letter of credit constitutes the sole contract with the Banker and the bank issuing the letter of credit has no concern with any question that may arise between the seller and the purchaser of the goods. See English Scottish & Australian Bank Ltd. v. Bank of South Africa, 1922 (13) LI LR 21.

The obligation of the Bank is absolute and when documents are presented the Bank has to accept the same. That is the commercial meaning of it. The fulfillment of the term of the sales contract is a matter for the seller and the buyer alone. See Stein v. Hambro''s Bank of Northern Commerce. 1922 (10) LI L Rep 529 (CA). Again the hanker must accept and pay for the document irrespective of any defence which there may be to a claim under the contract of sale and that such a defence is solely a matter to be sorted out between the buyer and the seller. See Urguhart, Lindsay and Company Ltd. v. Eastern Bank Ltd., 1922 (1) KB 318.

By now it is well settled by judicial precedent and commercial conventions that an elaborate commercial system has been built upon the footing that a confirmed letter of credit constitute a bargain between the banker and vendor of the goods. The bargain imposes upon the Banker an absolute obligation to pay irrespective of any dispute there might be between the parties whether or not the goods were upto contract. 11 is also settled that the commercial trading must go on solemn guarantee either based on a latter of credit or bank guarantee irrespective of any dispute between the contracting parties. It is immaterial whether or not the goods were upto contract and the fact remains that the banks cannot be absolved of their responsibility to meet the obligations. See Hamzeh Hulas & Sons v. British Imax Industries Ltd. 1958 (2) QB 127.

Again it is an accepted principle that only in exceptional cases the Court is to interfere with the machinery of irrevocable obligations assumed by Banks. As a matter of fact in confirmed letter of credit the Banks are only concerned to ensure that the terms of its mandate and confirmation has been complied with and it in no way concerned with any contractual dispute which might have arisen between the buyers and sellers. See R.D. Harbottle (Mercantile) Ltd. v. National West Minister Bank Ltd. 1977 (2) All ER 862.

A performance guarantee is similar to a confirmed letter of credit and therefore, where a Bank has given a performance guarantee it was required to honour the guarantee according to the terms and was not concerned whether either party to the contract which underlay the guarantee was in default. See Edward Owen Engineering Ltd. v. Barclays Bank International Ltd, 1977 (3) WLR 764.

The whole commercial purpose for which the system of confirmed irrevocable documentary credit have been developed in international trade was to give the seller of goods an assured right to be paid before they parted with the control of goods without risk of payment being refused or reduced because of a dispute with the buyer. See United City Merchants Investment Ltd. v. Royal Bank of Canada, 1982 (2) All England Reporters 720.

The above principles apply in the case of Bank guarantees in internal trade within the country. The principles of law applicable to letter of credit apply to Bank guarantee because it is around Bank guarantee involves many of the internal trades and transactions in the country. In modem commercial transactions, various devices are used to ensure performance by the contracting parties. The traditional letter of credit has taken a new meaning. They are also known as stand by letters of credits. Performance bond and guarantee bond are other devices increasingly adopted in commercial transactions. The Courts have treated such documents as analogous to letter of credit See U.P.C.F''s case (supra), United Commercial Bank v. Bank of India, AIR 1981 SC I426 and General Electric Technical Services Company Inc. Vs. M/s. Punj Sons (P) Ltd. and another,

Thus the general principle is that a banker is bound to honour a letter of credit, stand by letters of credit performance bond and bank guarantees on their face value. The exceptions to the above rule are few and may be noticed.

Then exceptions arise when there is a fraud or when there is failure to comply with the letter of credit or when the documents are defective. The Bank''s duty to the seller is vitiated if there is fraud on the part of the seller otherwise the Bank remains under a duty to pay the amount of the credit to the seller even if the documents presented although confirming on their lace with the terms of the credit nevertheless contained in a statement of material fact that was not accrued. See United City Merchants Investment Ltd. case (supra). Again unless documents tendered under a credit are in accordance with those for which a credit (sic) and which are embodied in the promise of intermediary or issuing banker, the beneficiary cannot claim against him (sic) is the Banker''s duty to refuse payment. The Banker may not be bound or obliged to honour the bills of exchange drawn by the seller if they not in exact compliance with the terms of credit. See Centax (India) Ltd. Vs. Vinmar Impex Inc. and Others,

Thus an exception to the general rule is that the Bank should not pay under the letter of credit or similar documents where it knows that the request for payment is made fraudulently or in circumstances when there is no right to payment. Injunction may be granted in the case of obvious fraud. The above concept is based on the elementary principle that a person who ships in reliance on a letter of credit must do so in exact compliance with the term. It is also elementary to say that Bank in not bound to honour drafts presented to it under a letter of credit unless those drafts with the accompanying documents are in strict accord with the credit as opened.

It is both common ground and common sense that in such a transaction the accepting Bank can only indemnify if the conditions on which it is authorised to accept are in the matter of accompanying documents strictly observed. See English Scottish & Australian Rank Ltd. ''s case (supra).

The refusal to pay when the bill of lading did not describe the goods in those terms in which they were specified were held to be valid in Raymer v. Hambros Bank Ltd. 1943 (1) KB 27.

Where the documents accepted were defective the liability under the letter of credit may not be there. See Bank Melli Iran v. Barclays Bank, 1951 (2) LI LR 367 and Lamboni v. Lake Shore Banking Company, 1921, 196 AD. 504.

A party who is entitled to draft against a letter of credit must strictly observe the terms and conditions under which the credit is to become available and if he does not the Bank can refuse to honour his draft. In these circumstances, there may be no cause of action against the Bank. The Bank has the power and is subject to the limitation which are given and imposed by the customers authority. See Laudasi v. American Exchange Bank, 1924 239 NY

The special equities represents a situation where the rum grant of injunction would lead to a situation which could not he retrieved. See Ilium & Rabbath v. Matsas & Matsas, 1966 (2) Lyoyds List Law Reports 495. As cited above the another exception in the rule is where fraud by one of the parties to the underlying contract has been established and the Bank has noticed of the Fraud. See Edward Owen Eng. Ltd''s case (supra), and UCPF''s case (supra).

In the absence of special equities arising out of a particular situation which might entitle the parties on whose behalf guarantee is given to an injunction restraining the Bank in performance of Bank guarantee and in the absence of clear fraud the Bank must pay to the party in whose favour the guarantee is given on demand if so stipulated and whether the terms are such have to be found out from the performance guarantee as such. A fraud like any other charge of a criminal proceeding must be established beyond reasonable doubt. A finding as to fraud cannot be based on suspicion and conjectures. See AIR 1941 93 (Privy Council) GEC Tech Services Company Inc.''s case (supra), and Texmaco Ltd. Vs. State Bank of India and Others,

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 lite beneficiary and not fraud of somebody else. The Bank cannot be compelled to honour the credit in such cases. An irrevocable commitment either in the form of confirmed Bank guarantee or irrevocable letter of credit cannot be interfered with except if a ease of fraud or a case of irretrievable injustice has been made out. This is the well sealed principle of law, and in order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or a bank guarantee, there should be serious dispute and a good prima facie case of fraud and special equities in the form of presenting irretrievable injustice between the parties otherwise, the very purpose of Bank guarantee would he negatived and the fabric of trading operation would be jeopardized. The commitments of the Banks must be honored free from interference by the Courts otherwise trust in commerce internal and international would be irreparably damaged. These principles have been clearly laid down by the Supreme Court in UPCF''s case (supra).

The facts of the case may now be noticed. The plaintiffs failed to supply the material in pursuance of the purchase order. It again failed to renew the performance guarantee. An option was given in this regard by the respondent Board There is no plea of fraud. Only argument addressed was that for resolving the dispute between plaintiff and the Board, there is an arbitration clause. This clause has not been invoked. There is not equity in favour of the plaintiff. The plaintiff is thus not entitled to any relief. The order passed by the trial Court calls for no interference.

To be fair to the Learned Counsel for the plaintiff the decision cited by hint may also be noticed. He has placed reliance on M/s V.K. Constructions Works Ltd. v. The Bank of Rajasthan & Others, 1992 (II) Banking Cases 344. In this case, there were six independent contracts between the parties. There were two sets of bank guarantees: one for due repayment of mobilization advance and other was for performance guarantees. Notice of revocation of mobilisation guarantee merely stated that there was default on the pan of the plaintiff. The contention of the plaintiff was that the notice must he precise and must indicate the extent of defect. It was held that the extent of default has to he averred and the Bank guarantee is encashable to that extent. It was in these circumstances the injunction was granted. The reason given was that the beneficiary cannot merely say that default has been committed. He has to specify as to what default is and to what extent encashment of bank guarantee is permissible. It was held that the hank guarantee can only he encashed as per its terms. This is not the case in the present litigation. It is admitted by the plaintiff/appellant that the contract has not been fully performed.

Learned Counsel has again placed reliance on a decision given by the Delhi High Court in Bhasin Associates Ltd. 1991 (3) DL 43. This decision is again not helpful. As noticed above, the law is well settled that the terms of a bank guarantee enjoys a position of primacy in deciding any question relating to encashment of the bank guarantee. The language of the bank guarantee is the sole guiding factor and the manner and validity of invocation of a bank guarantee will have to be only with reference to the language of the hank guarantee.

The Learned Counsel has also placed reliance on the decision in Oswal Agro Mills Ltd. and Another Vs. Asstt. Collector of Central Excise, Division Ludhiana and Others, In this case, the Bank guarantee was furnished in pursuance to a Court order with regard to disputed excise duty. The assessee appellant was disputing the liability to pay the excise duty. The claim was allowed by the Supreme Court. The refund of bank guarantee claimed by the appellant therein was not dealt with by the excise authorities. The High Court directed the authorities to dispose of the claim and also directed to the appellant to have the bank guarantee extended. The Supreme Court observed that the hank guarantee being not the subject matter of the writ petition, the High Court erred in directing its renewal and respondents were directed to refund the amount.

Learned Counsel for the appellant has also relied on a decision given in Svenska Handelsbanken Vs. M/s. Indian Charge Chrome and others, In this case, it was observed that under this law relating to bank guarantees a person seeking injunction from encashing the bank guarantee by the supplier has to show a prima facie case of established fraud and an irretrievable in jury. The plaintiff, must show that he had no adequate remedy at law and the allegations of irreparable harm are not speculative but genuine and immediate and the plaintiff will suffer irreparable harm if the requisite relief is not granted. On the basis of these observations, it has been argued that in proper cases injunction can be grained in the matter of invoking bank guarantee and there is no absolute bar in litis regard. Again the observations made in this case go against the plaintiff.

Learned Counsel for lire appellant has also relied on the decision given in M/s Banerjee & Banerjee v. Hindustan Steel Works Constructions Ltd., AIR 1986 Cal. 174, wherein it was observed that where there is suppression of material facts by beneficiary while seeking enforcement of bank guarantee it gives special equity in favour of principal debtor to stop payment by Bank on the basis of demand letters. There is no such plea taken in this case. As a matter of tact, the Electricity Board wanted extension of performance guarantee, but the plaintiff refused to do so.

Learned Counsel for the appellant has also relied on Kally & Another v. Shivujiram & Another, 1987 JLJ 481, wherein the principles on the basis of which injunction can be granted were laid down. Where is no dispute with the principles so stated but these arc not helpful to the plaintiff.

Reliance has also been placed by the Learned Counsel for the appellant in Kudremukh Iron Ore Company Ltd. v. Korula Rubber Company (P) Ltd. & another. 1987 Bank j. 479. In this case, arbitration was pending between the parties. The argument is that when the dispute is referable to an arbitrator, it (finishes a good ground to seek injunction. This argument has no force. As a matter of fact, in Union of India v. Mina Steels Ltd. AIR 1965 All. 262 injunction was granted on the ground that the matter was to be referred to an arbitrator. This course adopted by the Allahabad High Court was not approved by the Supreme Court in UPCF''s case (supra).

In Arul Murugan Traders Vs. Rashtriya Chemicals and Fertilisers Ltd., Bombay and Another, it was held that there is no absolute bar in the matter of grant of interim injunction relating to hank guarantee and the Court can interfere with the machinery of irrevocable obligations assumed by bank in case the plaintiff established a prima facie case. No such case has been made out by the plaintiff in this ease.

In view of the above discussions, the plaintiff is not entitled to any relief. The order passed by the trial Court vacating the injunction is perfectly in accordance with law. There are no exceptional circumstance on the basis of which plaintiff can claim any relief. There are no equities in favour of the plaintiff. The appellant failed to renew the Bank guarantee even though contractual obligations were still pending. The plaintiff has failed to comply with the purchase order. The supplies remained incomplete. As a matter of fact the stress laid was that as there is an arbitration clause and the matter should he got resolved by first getting a decision from the arbitrator. The plaintiff has not sought any relief for the appointment of an arbitrator and even if it be presumed that such a prayer has been made, litis is no ground to grant an injunction. Merely because there exists an arbitration clause, it is no ground to grant injunction.

There is no merit in this appeal and the same is dismissed.

As the Board was at one stage agreeable to get the guarantees renewed the plaintiff may if so advised approach the Board. If such an offer is made, the Board may consider the same.