* HIGH COURT OF DELHI : NEW DELHI IA No. 10266/2008 in CS(OS) No.1780/2008 % Judgment reserved on: 16 th January 2008 Judgment pronounced on: 1 st July, 2009 Sainath Enterprises Plaintiff Through: Mr. Valmiki Mehta and Mr. Siddharth Luthra, Sr. Advs. with Mr.Vaibhav Gaggar, Mr. Ankur Mittal and Mr. Maninder Singh Charak, Advs. Vs. National Building Construction Corporation Ltd & others. Defendants Through: Mr. Neeraj Kishal Kaul, Sr. Adv with Manoj Kumar Das, Adv. Coram: HON'BLE MR. JUSTICE MANMOHAN SINGH 1. Whether the Reporters of local papers may be allowed to see the judgment? Yes 2. To be referred to Reporter or not? Yes 3. Whether the judgment should be reported Yes in the Digest? MANMOHAN SINGH, J. 1. By this order, I shall dispose of the plaintiff s application under Order 39 Rules 1 & 2 read with Section 151 CPC being I.A.No. 10529/08 in CS(OS) No.1780/08. 2. The brief facts are that the plaintiff has filed the suit for declaration and mandatory injunction. By means of the present application, the plaintiff has sought injunction against Defendant No.2 restraining it from making payment to Defendant No.1 or its officers, CS (OS) No.1780/2008 Page 1 of 21
agents, employees, representatives and successors etc on the basis of invocation letter dated 7 th March 2008, 12 th March 2008, 30 th April 2008 and 29 th August 2008 in respect of Bank Guarantee No. BOL-1254/BG- 24/2005-06 dated 29 th April 1995 for Rs.1,12,91,755/-. Alternatively a prayer is sought against Defendant No.2 restraining it from making payment to Defendant No.1 on the basis of invocation letters as well as bank guarantee. 3. The plaintiff is a sole proprietorship concern which claims to be duly recognized and government approved civil contractor firm which has carried out successfully a number of housing projects over the years. The Defendant No.1 is a Public Limited Company incorporated in 1960s and functions under the aegis of Ministry of Urban Development with the sole object, inter-alia, of execution of civil engineering projects, running project management service and development of real estate projects. 4. Defendant No.2 is the Bank of Maharashtra who stood as guarantor for the plaintiff and executed the performance and mobilisation guarantee on behalf of the plaintiff. 5. Defendant Nos. 3,4 and 5 are the Assistant Manager (Finance), Additional General Manager (Engineering) and Project Manager of Defendant No.1 Company. 6. The Defendant No.6 is the joint venture company which has been given the contract to finish the remaining work of the plaintiff qua the contract granted by defendant No.1 to the plaintiff. The Ministry of Defence, Government of India with an intention to provide CS (OS) No.1780/2008 Page 2 of 21
married accommodation to the Armed Forces as part of Married Accommodation Project (MAP) at various stations including at Nasik wanted to construct dwelling units of various categories on the Defence lands. 7. The plaintiff was awarded the contract by Defendant No.1 on 28 th March, 2005 for about Rs.22.58 crores and an agreement was entered on 24 th April, 2005. The total contract price was fixed at Rs.22,58,35,492.33. As per the contract, the time was the essence of the contract and completion period of the work was 25 months expiring on 7 th May, 2007 (date of completion). 8. The letter of intend was issued to the plaintiff by Defendant No.1 on 29 th March, 2005. However, as per plaintiff, the clearance to commence work at the site was given only on 30 th April, 2005. 9. According to the plaintiff, the plaintiff has complied all the conditions of the contract, deposited security amount as well as given performance bank guarantee from Bank of Maharashtra, defendant No.2 for an amount of Rs.1,12,91,775/- to the Defendant No.1 on 29 th April, 2005 which was extended from time to time. 10. The plaintiff s case is that from the very beginning the defendant No.3 and 4 were antagonistic towards the plaintiff as they wanted their own persons/agents to take over the contract and they deliberately and malafidely started creating difficulties qua the execution of the project to ensure that the plaintiff did not meet its target in time. Defendant No.1,3, 4 and 5 in order to ensure that the plaintiff did not execute the work in time created many problems for the plaintiff. CS (OS) No.1780/2008 Page 3 of 21
They delayed issuance of clearance certificate, design and drawings, bills, change of location of the laboratories, non supply of copies of drawings, non appointment of authorised officer and many other problems were created by them. The plaintiff states that the defendant No.1 extended the time for six months vide letter dated 9 th February 2008 appreciating the difficulties faced by the plaintiff. 11. At the same time due to non clearance of various bills, the details of which are mentioned in Paras 21 to 23 of the plaint, which was with-held by defendant No.1 without any reason, the progress of the work was adversely affected and it was the malafide, arbitrary and illegal motive by defendants 1,3, 4 and 5 to prevent the plaintiff from not completing the work within time. 12. Correspondences were exchanged between the parties pertaining to the completion of work, non payment of the bills raised by the plaintiff and a letter was issued to the plaintiff recommending termination of the entire contract between the parties. 13. The plaintiff submitted that the dishonest and fraudulent act of defendant No.4 in collusion with defendant No.3,5 and 6 is apparent from the fact that the letter dated 26 th February 2008 threatening termination of contract by the plaintiff was issued within 15 days of the defendant No.1 granting six months extension to the plaintiff. 14. The contract was terminated vide letter dated 7 th March 2008 causing the performance bank guarantee bearing No.BOM-1254/BG 24/2005-06 to be fraudulently invoked contrary to the terms of the contract. CS (OS) No.1780/2008 Page 4 of 21
15. The plaintiff submits that the defendants 3 to 5 without any authority and competence and contrary to the terms of the contract of bank guarantee through written communication to the Chief Manager of Defendant No.2 invoked the bank guarantee dated 29 th April 2005 for Rs. 1,12,91,775/- furnished by the plaintiff while entering into the contract. 16. The plaintiff submits that the invocation of bank guarantee by the notice seeking to invoke the same did not even mention the breach by the plaintiff, let alone giving reasons for invoking the same and the same was invoked only in order to cause damage to the plaintiff and the notice seeking to invoke the same was patently illegal and insufficient and it was violative of the contract between the defendant No.1 and 2 in respect of the bank guarantee. 17. Therefore, the defendant No.2 bank was/is not authorised or permitted to make the payment under the bank guarantee. The fraudulent attempt on the part of defendant No.3 and 4 to encash the performance bank guarantee once again caused letters dated 12 th March 2008 and 5 th June 2008 to be issued to the bank to invoke the performance bank guarantee dated 29 th April 2005. In view of the above facts and circumstances the present suit has been filed. 18. In view of the decisions cited by learned Senior counsel for the plaintiff, he submits that the plaintiff is entitled for interim injunction as prayed for. The learned counsel for the defendant has also cited various judgments in support of its submission. 19. The suit as well as the present application under Order 39 CS (OS) No.1780/2008 Page 5 of 21
Rules 1 & 2 CPC came up before the court on 27 th August 2008 when the summons and notices were issued. Upon service on 1 st September 2008, a statement was made by the plaintiff before the court that the bank guarantee in question was invoked by defendants on 4 th June 2008 and the same has not been encashed as defendant No.1 has not taken any steps in this regard. 20. Counsel for the defendant disputed the said position and sought leave to file reply to the application. Considering the above mentioned circumstances, the court passed the status quo order in respect of the bank guaranee. CONTENTION OF THE DEFENDANTS 21. The contention of the defendants, interalia, is that the progress of the work by the plaintiff was very slow from the very beginning till the termination of the contract on 4 th June 2008 as the plaintiff did not possess adequate infrastructure facilities and resource mobilization at the site by executing the project of this value of magnitude. The main areas of concern were inadequacy of manpower both skilled and unskilled, non procurement of construction material and even after the defendant reminded the project periodically through numerous correspondence as well as the meetings and discussions, the plaintiff was never ready to improve upon their system and style of functioning and to streamline the activities. 22. It is contended by the defendant that despite all possible assistance and cooperation, the plaintiff was not willing to take any remedial measures and concrete action to resolve the stalemate and there CS (OS) No.1780/2008 Page 6 of 21
was hardly any progress and the work was inordinately delayed by about one year. 23. The defendants submit that the correspondence exchanged between the parties proves the same. It is further contended that there was no work at all at the site from October 2006 to December 2006. The defendants raised the mobilization advance to Rs.1.60 crores to the plaintiff but the plaintiff failed to execute sufficient work as a result of which the mobilization advance could not be recovered from the bills. On the other hand, the plaintiff from time to time had given assurances in various meetings to fully mobilize the work and to take remedial measures to increase the work progress etc and to complete the same. 24. Since the plaintiff failed to complete the work as on stipulated date i.e. 7 th May 2007 and had sought extension of time, the provisional extension of time was given to the plaintiff till June 2007. The total work till termination of contract dated 4 th June 2008 was done only to the extent of Rs.9.80 crores (41% against the total work of Rs.22.58 crores) within a span of 36 months as per the admitted case of the parties. 25. It is also the contention of the defendants that the plaintiff unilaterally stopped the whole work till January 2008wihout any reason and subsequently in a joint meeting dated 5 th February 2008 the plaintiff agreed to commence the work but it did not start the work despite letters dated 26 th February 2008 and 7 th March 2008 of the defendants. 26. The defendant through officer issued a show cause notice dated 30 th April 2008 for recession of the contract. The plaintiff vide CS (OS) No.1780/2008 Page 7 of 21
letter dated 1 st May 2008 sought 60 days time to restart the work in full mobilization of the man and material at site. The defendants vide letter dated 2 nd June 2008 did not accede to unjustified request as the defendants found that the plaintiff was not interested in the project or its completion. 27. Finally, the defendant No.1 terminated the contract on 4 th June 2008 in accordance with clause 71 and 72 of the contract due to non performance of the plaintiff. The defendant has referred to various letters in Para 8 of the written statement in order to prove its stand taken in the written statement. 28. The stand of the defendant No.2 bank is that the plaintiff has approached for issuance of bank guarantee for Rs. 1,12,91,775/- in favour of defendant No.1. The defendant No.2 has received a letter of invocation of bank guarantee for the said amount from defendants 3 and 4 to provide the original bank guarantee. On receiving the original bank guarantee on 8 th July 2008, it issued DD No. 976530 for Rs.1,12,91,775/- on 1 st September 2008. 29. The main contention of the learned counsel for the plaintiff is that the bank guarantee was invoked contrary to the terms of the contract furnished by the plaintiff. It is argued that the bank guarantee could only have been invoked by defendant No.1 in terms of the contract of bank guarantee and the contract, interalia, in connection with the execution of and performance of the work inclusive of any loss, damages, charges, expenses and costs suffered by or which would be caused to or suffered by defendant No.1 by reason of (a) any breach by CS (OS) No.1780/2008 Page 8 of 21
plaintiff of any terms and conditions contained in the notice of demand, if any, made by defendant No.1 to defendant No.2 and (b) by satisfaction the sine qua non for invocation of the bank guarantee which required there to be a breach of contract by the plaintiff and the clear statement by defendant No.1 specifying the alleged breach. 30. Learned counsel for the Plaintiff has argued that the invocation letter does not clearly fulfil the requirement agreed in the bank guarantee for invoking the same and as such the bank guarantee has not been validly invoked. He further argued that in the invocation letter, the defendant has not clearly stated the terms and conditions of the bank guarantee as also the fact whether they have suffered any loss and damage and, if so, to what extent. He submits that as per well settled law, the invocation of the bank guarantee must be according to the terms of the bank guarantee. He has also referred the relevant clauses of the bank guarantee as well as the invocation letter in support of his submission. Lastly, he argued that the averment mentioned in the letter of invocation is not in consonance with the terms of the bank guarantee and under these circumstances, the said invocation is defective and consequently the bank guarantee cannot be invoked by defendant No.3 and 4 acting on behalf of defendant No.1. 31. It has been argued by plaintiff that the bank guarantee has been invoked by defendant No.1 acting through defendant No.3 and 4 fraudulently against the plaintiff and it did not satisfy the sine qua non for invoking the bank guarantee since the notice sent to invoke the same did not mention the breach by the plaintiff. It is further argued that the CS (OS) No.1780/2008 Page 9 of 21
bank guarantee was sought to be fraudulently invoked by defendants only in order to cause damage to the plaintiff and a notice seeking to invoke the same was illegal and was in violation of the contract between defendant No.1 and 2 in respect of the guarantee contract, therefore, the bank was not legally authorised or permitted to make the payment under the said bank guarantee. 32. It is further argued by the defendant that there was no breach committed by the plaintiff nor the same has been alleged by defendant No.1 while invoking the bank guarantee and, therefore, it was a clear violation of the terms of the contract and the plaintiff is entitled for interim injunction as prayed for. 33. Learned counsel for the plaintiff has referred various judgments in support of his submission including the decision in the case of Hindustan Construction Co. Ltd vs. State of Harayana, 1999(8) SCC 436 Para 21, AIR 1980 174 and Harprasad & Co. Ltd vs.sudershan Steel Mills & Ors, AIR 1961 SC 990 wherein it was observed that :- There is a distinction between absolute liability as when the money under the bank guarantee is payable on demand like a promissory note and the absolute liability which arises after the terms of the bank guarantee are fulfilled. In the instant case the intention of the parties according to the language of the bank guarantee was that the absolute liability should arise only after the terms of the bank guarantee are fulfilled. The duty of the beneficiary in making the demand on the bank is like the duty of the plaintiff to disclose the cause of action in the plaint. Just as a plaint is liable to be rejected for non-disclosure of the cause of action, a demand by the beneficiary of the bank guarantee is liable to be rejected by the bank if it does not state the facts showing that the conditions of the bank guarantee have been fulfilled. It is only after this obligation is performed by the beneficiary CS (OS) No.1780/2008 Page 10 of 21
that the liability of the bank becomes absolute. The terms of the bank guarantee having not been fulfilled the amount under the bank guarantee has not become due for payment to the beneficiary. 34. Learned counsel for the plaintiff has also referred Ansal Properties and Industries Ltd vs. Union of India, 1994 (54) DLT 307 Para 11 which lays down that it is thus clear that the invocation of the bank guarantee must be in accordance with the terms of bank guarantee. In another case reported in Puri International Pvt Ltd vs. NBCC, 66(1997) DLT 698 and 67(1997) DLT 231, it is held that the invocation letter does not fulfill the requirements agreed in the bank guarantee for invoking the same and as such this performance bank guarantee has not been validly invoked. 35. The next question before this Court is as to whether the present case falls under any of or both the exceptions, namely, whether there is a clear fraud of which the Bank has notice and a fruad of the beneficairy from which it seeks to benefit and another exception whether there are any special equities in favour of granting injunction. 36. Before referring the judgments cited by the learned Senior counsel for the defendants, it would be appropriate to refer to the relevant clause of the bank guarantee involved in the matter. The clause of bank guarantee dated 29 th April 2005 reads as under:- We, Bank of Maharashtra, having its registered office at Lok Mangal, 1501, Shivajinagar, Pune- 411005 and the branch office at Mahalaxmi Branch, Mumbai (hereinafter called the Bank ) do hereby unconditionally and irrevocably undertake to pay NBCC immediately on demand in writing and without protest/or demur all moneys payable by the CS (OS) No.1780/2008 Page 11 of 21
contractor to NBCC in connection with the execution and performance of the works inclusive of any loss, damages, charges, expenses and costs caused to be or suffered by NBCC by reason of any breach by the contractor of any of the terms and conditions contained in the contract as specified in the notice of demand made by NBCC to the bank. Any such payment made by NBCC or the bank shall be conclusive evidence of the amount due and payable by the bank under this guarantee. However, the bank s liability under this guarantee shall be limited to Rs.1,12,91,775/- (Rs.One crore twelve lacs ninety one thousand seven hundred and seventy fine only) in the aggregate. 37. Similarly, the operative portion of the letter of invocation dated 5 th June 2008 written by defendant No.1 to defendant No.2 reads as under:- We would like to inform you that the above mentioned bank guarantee executed by you in our favour on behalf of M/s.Sainath Enterprises, Nashik has expired on 28 th April 2009. M/s.Sainath Enterprises have, however, not yet completed all their obligations under the terms of the contract so the above contract terminated by competent authority vide letter No. NBCC/GM/RBG(W & I) Deolati/2008 dated 4 th June 2008 against which the above bank guarantee was executed by you and the said bank guarantee is required for encashment. You are, therefore, requested to encash the above bank guarantee on the existing terms and conditions. If for any reason whatsoever such encashment before the expiry of existing validity i.e. has to be done immediately, please treat this letter as our invocation notice of this guarantee in terms of clause of the said bank guarantee and remit to us a sum of Rs.1,12,91,775/-, bank guarantee balance amount treating this as our final notice of demand as the Corporation would otherwise suffer a loss consequent on the non performance of the contractual obligation by the contractor in terms of the contract. 38. Learned counsel has referred the letter of invocation which CS (OS) No.1780/2008 Page 12 of 21
clearly contemplates that (a) the plaintiff has not yet completed all their obligations under the terms of the agreement and; (b) the details of termination of contract vide letter dated 6 th June 2008 against which the bank guarantee was executed by defendant No.2 and (c) that in case the bank guarantee is not invoked, the defendant would otherwise suffer a loss and consequent on the non performance of the contractual obligation by the contractor in terms of the agreement. 39. It is vehemently argued that there is no force in the submission of the plaintiff at all as the letter of invocation contains all the ingredients which are required as per terms and conditions of the bank guarantee and it has been rightly invoked. The defendant No.1 has given all the valid reasons. 40. The learned counsel has also argued that it is not necessary to specify the particular clause of the agreement or to quantify the extent of loss and damages in the letter invoking the bank guarantee. In support of his contention, the following judgments have been relied upon by learned counsel for the defendant. (i) In the case of Vinitec Electronics (P) Ltd. v. HCL Infosystems Ltd.,(2008) 1 SCC 544 in paras 25 to 28, it was held as under : 25. This Court in more than one decision took the view that fraud, if any, must be of an egregious nature as to vitiate the underlying transaction. We have meticulously examined the pleadings in the present case in which no factual foundation is laid in support of the allegation of fraud. There is not even a proper allegation of any fraud as such and in fact the whole case of the appellant centres around the allegation with regard to the alleged breach of contract by the respondent. The plea of fraud in the appellant s own words is to the following effect: CS (OS) No.1780/2008 Page 13 of 21
That despite the respondent HCL being in default of not making payment as stipulated in the bank guarantee, in perpetration of abject dishonesty and fraud, the respondent HCL fraudulently invoked the bank guarantee furnished by the applicant and sought remittance of the sums under the conditional bank guarantee from Oriental Bank of Commerce vide letter of invocation dated 16-12-2003. 26. In our considered opinion such vague and indefinite allegations made do not satisfy the requirement in law constituting any fraud much less the fraud of an egregious nature as to vitiate the entire transaction. The case, therefore does not fall within the first exception. 27. Whether encashment of the bank guarantee would cause any irretrievable injury or irretrievable injustice. There is no plea of any special equities by the appellant in its favour. So far as the plea of irretrievable injustice is concerned the appellant in its petition merely stated: That should the respondent be successful in implementing its evil design, the same would not only amount to fraud, cause irretrievable injustice to the applicant, and render the arbitration nugatory and infructuous but would permit the respondent to take an unfair advantage of their own wrong at the cost and extreme prejudice of the applicant. 28. The plea taken as regards irretrievable injustice is again vague and not supported by any evidence. (ii) In the case of Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co.,(2007) 8 SCC 110, in para 14 it was held as under : 14. From the discussions made hereinabove relating to the principles for grant or refusal to grant of injunction to restrain enforcement of a bank guarantee or a letter of credit, we find that the following principles should be noted in the matter of injunction to restrain the encashment of a bank guarantee or a letter of credit: (i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realise such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract. (ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. (iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit. (iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, CS (OS) No.1780/2008 Page 14 of 21
the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit. (v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation. (vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned. (iii) In the case of Tata Teleservices Ltd., Hughes Ispat and Essar Commvision Vs. Union of India, 1999 II AD(Delhi) 625, in para 16 it was held as under : 16. That there are disputes between the parties or for that matter allegations of breach of the contract and/or a plea that no amount is due and payable by the petitioner to the respondent are all matters relating to the main agreement and have no relation and relevance so far the agreement of bank guarantees are concerned. That there are serious disputes between the parties which might even go to the root of the contract and that there are breaches committed by the beneficiary are not matters which could come within the ambit of the special equities resulting into irretrievable injury.." (iv) In the case of U.P. State Sugar Corpn. v. Sumac International Ltd., (1997) 1 SCC 568 in para 16 it was held as under : 16. Clearly, therefore, the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be a fraud in connection with the bank guarantee. In the present case we fail to see any such fraud. The High Court seems to have come to the conclusion that the termination of the contract by the appellant and his claim that time was of the essence of the contract, are not based on the terms of the contract and, therefore, there is a fraud in the invocation of the bank guarantee. This is an erroneous view. The disputes between the parties relating to the termination of the contract cannot make invocation of the bank guarantees fraudulent. CS (OS) No.1780/2008 Page 15 of 21
(v) In the case of Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corpn. Ltd., (1996) 5 SCC 450, in para 4 it was held as under : 4. It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prima facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the bank, had arisen in performance of the contract or execution of the works undertaken in furtherance thereof. The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor. (vi) In the case of Federal Bank Ltd. v. V.M. Jog Engg. Ltd.,(2001) 1 SCC 663, in para 55 it was held as under : 55. In several judgments of this Court, it has been held that courts ought not to grant injunction to restrain encashment of bank guarantees or letters of credit. Two exceptions have been mentioned (i) fraud, and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the case comes within these two exceptions, temporary injunction under Order 39 Rule 1 CPC can be issued. It has also been held that the contract of the bank guarantee or the letter of credit is independent of the main contract between the seller and the buyer. This is also clear from Articles 3 and 4 of UCP (1983 Revision). In case of an irrevocable bank guarantee or letter of credit the buyer cannot obtain injunction against the banker on the ground that there was a breach of the contract by the seller. CS (OS) No.1780/2008 Page 16 of 21
(vii) In the case of Sikkim Subba Associates Vs. Union Bank of India and Anr., 1993(2) ARB LR 140 (Delhi), in para 11 it was held as under : 11. Elaborating his contentions, Mr. Parikh urges, qua the first ground, that the letter invoking the bank guarantee is very general in its terms as it neither spells -out the breach of the agreement committed by the petitioner, nor avers that respondent No.2 has suffered loss, nor does it quantify the loss caused or would be caused to the said respondent and ts, according to the counsel, invocation of the. bank guarantee is not in accordance with the terms of the guarantee and is, therefore, bad and the said respondent is not entitled to encash it. In support, reliance is placed on a judgment of this Court in M/s Mahalingam Shetty &. Co. Ltd. V. National Projects Construction Corporation Ltd. 1990 (3) Delhi lawyer 110. 41. Learned counsel for the defendants has argued that all the requirements mentioned in the contract as well as in the bank guarantee had been specified in the letter of invocation. According to him it is not necessary that each and every term is used in the letter of invocation in the same language. However, a clear substance has been mentioned in the letter of invocation dated 5 th June 2008 which is the crux of the dispute between the parties. Therefore, the contentions of the plaintiffs cannot be accepted and uncalled for as none of the decisions cited by the plaintiff are applicable to the facts and circumstances of the present case. 42. From the above discussion, it can be conveniently said that there is no res integra that the letter of credit is an independent contract and the courts are in trend of not to interfere with the encashment of the letter of credit unless the case falls within the purview of exceptions laid CS (OS) No.1780/2008 Page 17 of 21
down by the Apex Court. Now, I shall go ahead with the discussion on exceptions which empowers the court to interfere on the encashment of letter of credit. 43. Therefore, as per various decisions it is determined that the court should, therefore, be slow in granting the injunction to restrain the realization of such a bank guarantee. As per well settled law there are only two exceptions i.e. (i) fraud in connection with such a bank guarantee that would vitiate the very foundation of such a bank guarantee and (ii) cases where allowing the encashment of unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Exceptions : Case of Fraud and Special Equities 44. The first exception which has been carved out by the courts are the case of fraud of egregious nature meaning thereby that the said fraud must be the fraud of gross nature which shakes the conscience of the court and the said fraud must be known to the parties including party representing as well as to the bank. Under the said circumstances, if the said fraud is established, the court can interfere with the bank guarantee. The legal proposition on the fraud has been laid down in the same case of UP Cooperative Federation Ltd (Supra) which has been elaborated by his Lordship Jagannath Shetty (as his Lordship then was) by stating the following: The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the fact of fraud and as to the bank's CS (OS) No.1780/2008 Page 18 of 21
knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it discharged. 45. Under those circumstances, it was also held that the plea of fraud must be of egregious nature so as to vitiate the entire underlying transaction of the bank guarantee. It is fraud of the beneficiary and not the fraud of somebody else that would make the Court to grant the order of injunction as asked for. If the bank detects with the minimal investigation, the fraudulent action of the seller, the payment could be refused. 46. The said legal proposition has been reiterated by the Supreme Court in the case of State Trading Corporation v. Jainsons Clothing Corporation, (1994) 6 SCC 597, the relevant paragraphs of the judgment are worth mentioning: 8. The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the court justified on that basis, to issue an injunction from enforcing the contract, i.e. bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the party's favour, he/it is entitled to damages or other consequential reliefs. 9. It is settled law that the Court, before issuing the injunction under Order 39, Rules 1 and 2, CPC should CS (OS) No.1780/2008 Page 19 of 21
prime face be satisfied that there is triable issue strong prima facie case of fraud or irretrievable injury and balance of convenience is in favour of issuing injunction to prevent irremediable injury. The court should normally insist upon enforcement of the bank guarantee and the court should not interfere with the enforcement of the contract of guarantee unless there is a specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract of the guarantee, but not the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud. 47. While going through the terms and conditions of the bank guarantee as well as the letter of invocation dated 5 th June 2008, it appears that the bank guarantee has been invoked substantially as per the terms and conditions of the agreement between the parties. In my view, it is not necessary to specify the particular clause of the agreement or use the exact language of the bank guarantee. In the present case, when terms and conditions of the bank guarantee and letter of credit are read together, it is clear that terms and conditions of the agreement have been referred in the letter of invocation. 48. After hearing learned counsel for the parties and having gone through the pleadings and the decisions referred by learned counsel for the parties and giving my careful consideration to the submissions made at the bar, I am of the considered opinion that the plaintiff is not entitled for injunction prayed for as the law relating to invocation of bank guarantee is by now well settled by a catena of decisions rendered by the Apex court. 49. I am of the view that the letter of credit has not violated the terms and conditions as stipulated in the agreement. It appears that all CS (OS) No.1780/2008 Page 20 of 21
the ingredients mentioned in the letter of credit are fully satisfied with the terms and conditions of the contract as well as the bank guarantee and there is no fraud proved by the plaintiff. Therefore, the plaintiff is not entitled for the interim injunction as prayed for. In view thereof, the plaintiff s application under Order XXXIX Rules 1 & 2 CPC is dismissed. The interim order granted on 1 st September, 2008 is vacated. No costs. JULY 01, 2009 SD MANMOHAN SINGH, J CS (OS) No.1780/2008 Page 21 of 21