2001(2) ALL MR 335
IN THE HIGH COURT OF JUDICATURE AT BOMBAY

D.Y. CHANDRACHUD, J.

Shree Rajasthan Syntex Limited. Vs. Kirloskar Oil Engines Limited & Anr.

Appeal from Order No.774 of 2000,Special Civil Suit No.1005 of 2000

8th November, 2000

Petitioner Counsel: Mr.R.M.KADAM , Mr.CHRISTOPHER D'SOUZA , Mr.R.K.MEHTA
Respondent Counsel: Mr.S.G.ANEY, Mr.S.V.PITRE, Mr.S.S.SHETYE

Contract Act (1872), S.126 - Bank guarantee - Invocation or encashment - Court should not grant injunction unless a case of fraud is made out.

Injunctions restraining the invocation or encashment of Bank Guarantees should not be granted unless a case of established fraud is made out or a case where irretrievable injustice is likely to be caused unless an injunction were to be granted. Trial Courts have to exercise a degree of circumspection while passing ex parte orders. This is all the more so when what is sought is an injunction against the invocation of a Bank Guarantee. In the present case, the Court proceeded to pass an order of status-quo in relation to the invocation of the Bank Guarantee in question, an order which has in substance the effect of operating as an order of restraint and injunction on the encashment of the Bank Guarantee involved in the case. This order was passed by the Trial Court in the absence of the Defendant, though he had filed a Caveat. [Para 2]

The Bank Guarantee, it is a well settled principle of law, is an independent contract between the Bank and the beneficiary; independent in the sense of it being independent of the underlying contract between the beneficiary and the contracting partner. The Bank Guarantee does not contain a restrictive condition. In the present case, what is furnished was a performance Bank Guarantee which was liable to be invoked in the event of a breach of the terms and conditions of the purchase order. Upon such breach leading to loss, damage, costs, charges and expenses being suffered by the party in terms of this Bank Guarantee he has lodged its demand. The notice of invocation specifies that the Guarantee was being invoked "towards the losses, damages, costs, charges and expenses caused to and suffered by the company due to non performance and breach by the Vendor of the terms and conditions contained in the Purchase Order". The invocation is in accordance with the terms of the Guarantee. The existence of disputes between the parties or the offer to compensate the Appellant for the loss sustained does not make out a case of established fraud, irretrievable injustice or special equities. In the circumstances, the order of the Trial Court for maintaining status quo was not called for. It is liable to be quashed. [Para 15,16,19]

Cases Cited:
Delhi Development Authority vs. Skipper Construction Co.(P) Ltd., AIR 1996 SC 2005 [Para 11]
Sopan Maruti Thopte vs. Pune Municipal Corporation, 1996(2) ALL MR 383=AIR 1996 Bombay 304 [Para 12]
Morgan Stanley Mutual Fund vs. Kartick Das, (1994) 4 SCC 225 : 1994 AIR SCW 2801 [Para 12]
Hindustan Construction Co.Ltd vs. State of Bihar, (1999) 8 SCC 436 [Para 14]
Dwarikesh Sugar Industries Ltd vs. Prem Heavy Engineering Works (P) Ltd, (1997) 6 SCC 450 [Para 16]
Svenska Handelsbanken vs. Indian Charge Chrome, (1994) 1 SCC 502 [Para 16]


JUDGMENT

JUDGMENT :- Admit. Learned Counsel for the parties waive service. By consent heard and disposed of at final hearing.

2. The law in relation to the grant of injunctions in respect of Bank Guarantees especially unconditional and irrevocable Bank Guarantees is, indeed, well settled. In a long line of decisions, the Supreme Court has held that injunctions restraining the invocation or encashment of Bank Guarantees should not be granted unless a case of established fraud is made out or a case where irretrievable injustice is likely to be caused unless an injunction were to be granted. Trial Courts have to exercise a degree of circumspection while passing ex parte orders. This is all the more so when what is sought is an injunction against the invocation of a Bank Guarantee. In the present case, the Learned Civil Judge, Senior Division, Pune proceeded to pass an order of status-quo in relation to the invocation of the Bank Guarantee in question, an order which has in substance the effect of operating as an order of restraint and injunction on the encashment of the Bank Guarantee involved in the case. This order was passed by the Trial Court in the absence of the Appellant herein, the Original First Defendant, though the Appellant had filed a Caveat. The Trial Court was of the view that despite the Caveat, an order of injunction was called for because if an injunction was not to be granted, it would cause irreparable loss to the First Respondent. Upon the grant of the order of status-quo on 30th October, 2000, the matter was adjourned to 9th November, 2000. A reading of the order passed by the Trial Court, ex-facie, would demonstrate that the Learned Trial Judge has completely failed to have regard to the well established tests which have been laid down by the Supreme Court and by this Court in respect of the circumstances in which the invocation or encashment of a Bank Guarantee can be injuncted. Ordinarily, in view of the fact that the Trial Court has adjourned the hearing of the matter upon the grant of the ad-interim order to 9th November, 2000, this Court would have been inclined to relegate the parties to contest the matter on merits before the Trial Court. However, having considered the issue carefully, I am of the view that the matter involves a question of principle. Passing of exparte orders in the manner in which it has been done in the present case, particularly in matters relating to the invocation or encashment of Bank Guarantees, is a mater of serious prejudice to parties against whom such orders are passed. The object and purpose of furnishing an unconditional Bank Guarantee is to ensure that obligations which are assumed by the Bank will be duly fulfilled. Therefore, the passing of an ex-parte order, as has been done in the present case, which operates to restrain the encashment of the Bank Guarantee without even a bare application of mind to the question as to whether a case for the grant of injunction was made out in terms of the law laid down by the Supreme Court, is something which has to be set right in the wider interests of maintaining the probity of the process.

3. The brief facts leading to the present case are that a contract was entered into on 21st July, 1998 by which the Appellant agreed to purchase a Fuel Diesel Generating set together with related accessories, auxiliaries, spares and tools from the First Respondent. Under the terms of the contract, a performance Bank Guarantee was to be furnished of a nationalised Bank in favour of the Appellant which was the purchaser. Clause 11(ii) of the contract made the following provisions in this regard :

"(ii) Performance Guarantee:

The Performance Guarantee shall be of Nationalised Bank. However, for the value and period both SRSL and KOEL shall decide separately. The Proforma of the Bank Guarantee will be approved by SRSL. The Performance Guarantee should cover output (power generation) as well as Fuel and Lub Oil consumption."

Two other Agreements were entered into between the Appellant and the First Respondent, the first dated 21st July, 1998 being a contract for erection and commissioning of the DG set and the second contract dated 6th August, 1998 for operation and maintenance of the DG set. The contract providing for operation and maintenance also contained a requirement of furnishing a performance Bank Guarantee.

4. In pursuance of the contracts which had been entered into between the parties, a Bank Guarantee was furnished by the Second Respondent in favour of the Appellant on 30th January, 1998. The Bank Guarantee provided that in accordance with the terms and conditions of the purchase order, the First Respondent had to provide a Bank Guarantee in the amount of Rs.371 lacs "for the due and faithful performance of the terms and conditions of the purchase order". The Bank provided in the guarantee that in consideration of the aforesaid provisions, the Bank guaranteed "the faithful performance and observance by the vendor of the terms and conditions of the purchase order". The material clause of the Bank Guarantee was thus:

"In consideration of the foregoing, the bank hereby guarantees the faithful performance and observance by the Vendor of the terms and conditions of the PURCHASE ORDER and undertakes irrevocably to be responsible to the PURCHASER as surety for the vendor for the due performance of the contractual terms and further agrees to indemnify and keeps the PURCHASER indemnified to the extent of Rs.371 lacs against any loss or damage, costs, charges and expenses caused to or suffered by the PURCHASER by reason of any breach of the Vendor of any of the terms and conditions contained in THE PURCHASE ORDER and to pay to the PURCHASER from time to time within three days of the receipt by the Bank of a notice of demand from the PURCHASER without protest or demur and without recourse to the Vendor such amount or amounts as may be claimed by the PURCHASER provided that the total of the amounts to be so paid by the Bank shall not exceed Rs.371 lacs."

(emphasis supplied).

Clause 2 of the Guarantee provided thus :

"2. That the PURCHASER shall be the sole Judge to determine whether the Vendor has committed any breach or breaches of any of the terms and conditions of the PURCHASE ORDER and the extent of loss, damages, cost, charges and expenses suffered or incurred by the PURCHASER on account thereof and decision of the PURCHASER in that regard shall be final and binding on the bank."

The Bank Guarantee was thereafter extended on 25th February, 2000 upto 28th February, 2001 and by a further amendment it was stipulated that any claim under the Bank Guarantee was required to be filed on or before 30th May, 2001.

5. The Appellant invoked the Bank Guarantee by a letter dated 26th October, 2000 addressed to the Second Respondent. By the letter of invocation, the Appellant gave a notice of demand requiring the Second Respondent to pay an amount of Rs.250 lacs towards "the loss, damage, costs, charges and expenses caused to or suffered by the Appellant" due to non performance and breach of the vendor: of the terms and conditions contained in the purchase order", within three days of the receipt of notice of invocation. The Bank appears to have regarded the letter of invocation as a valid invocation in terms of the conditions of the Bank Guarantee, because by a letter dated 27th October, 2000 addressed to the First Respondent, the bank intimated the First Respondent that in accordance with the terms and conditions of the Bank Guarantee the Bank would be making the payment of Rs.250 lacs to the Appellant. The First Respondent was consequently required to fund its account with the Bank in the aforesaid amount.

6. The First Respondent instituted a suit on 30th October, 2000 in the Court of the Learned Civil Judge, Senor Division, at Pune. In para 10 of the plaint, the First Respondent sought to contend that (i) the performance guarantee only related to output, fuel and lub oil; (ii) the invocation of a Guarantee was conditional only upon loss, damage, costs, charges and expenses, caused to, or suffered by the Appellant; (iii) the notice invoking the Bank Guarantee ought to have stated the amount which was demanded and the nature of breach; (iv) the amount under the Bank Guarantee was only a maximum and that the payment of smaller amounts was also contemplated and (v) the intention was merely to compensate the Appellant for the loss or damage which was caused to or suffered by the Appellant. In para 14 of the Plaint, the First Respondent averred that it had, compensated the Appellant in respect of the loss which had been caused to the Appellant in the past and that it was ready and willing to pay to the Appellant the compensation for the loss which had been caused to it. In the circumstances, in para 19 of the Plaint, it was stated that the First Defendant was ready and willing to make payment of "lawful amount of compensation" to the Appellant and the Bank Guarantee could be invoked only if the compensation which was calculated and the paid under the contract for operation and maintenance was not paid by the First Respondent.

7. Significantly there is no averment in the Plaint that the invocation or encashment of the Bank Guarantee was fraudulent. There was no averment that the invocation of the Bank Guarantee would cause irretrievable injustice within the meaning of that expression as laid down in several judgments of the Supreme Court. The Plaint contained a laconic averment in para 23 that the Appellant had not given any justification and details about the losses and was invoking the Bank Guarantee "arbitrarily and malafide".

8. The Appellant had filed a Caveat, this being common ground between the parties. On 30th October, 2000 the Learned Civil Judge, Senior Division, was moved in a proceeding ex-parte and on the application of the First Respondent, the Trial Court directed the parties to maintain status-quo till further orders. Notice was directed to be issued to the Appellant which was returnable on 9th November, 2000. The Trial Court recorded in its order that it was brought to its notice that the First Respondent herein had filed a similar suit, being Special Civil Suit No.1004 of 2000, on 25th October, 2000 against the same parties in which an ex-parte injunction had been granted by the Court of the Civil Judge, Senior Division. The Trial Court held that though the Appellant had filed a Caveat, if the application for injunction was not granted it would cause irreparable loss to the First Respondent. The Trial Judge noted that he had gone through the judgment of the Supreme Court reported in 1999 (8) SCC 436. Therefore, "in order to avoid further complications", the Learned Trial Judge was of the view that an order of status-quo was called for.

9. In assailing the correctness of the order which has been passed by the Trial Court, the learned Counsel appearing on behalf of the Appellant has submitted that (i) the Bank Guarantee in the present case was un conditional and irrevocable, (ii) in view of the well settled principles of law laid down by the Supreme Court, no case for the grant of injunction was made out even if the Court were to proceed exclusively on the basis of the averments in the Plaint which had been filed in the Civil Suit, (iii) that in any event there was no reason to grant an exparte order particularly when the Appellant had filed a Caveat and (iv) the impugned order was passed on a misrepresentation of fact by the First Respondent including the submission that in a similar matter between the parties, an injunction had been granted by the Trial Court. The submission was that the terms of the Bank Guarantee in the other case were completely different and a copy of the Bank Guarantee in that case was produced for the perusal of the Court.

10. In reply, the Learned Counsel appearing on behalf of the First Respondent submitted that clause 11 of the Contract postulated that the performance Bank Guarantee should cover Output (power generation) as well as Fuel and Lub Oil consumption. In other words, the submission was that the guarantee in question was not an unconditional Bank Guarantee and that the conditions of clause 11(ii) of the contract should be read as forming an implicit part of the Bank Guarantee. On this basis the submission was that the invocation of the Bank Guarantee was improper and was not in accordance with the tenor of the Bank Guarantee.

11. Having heard the Learned Counsel for the parties including the Second Respondent Bank, I am of the view that the impugned order passed by the Trial Court is clearly unsustainable. In several judgments in the recent past, the Supreme Court as well as this Court have sounded a note of caution to the Trial Courts against the grant of interim orders and injunctions in a mechanical manner. The Supreme Court had occasion to make the following observations in its judgment delivered in Delhi Development Authority vs. Skipper Construction Co.(P) Ltd. reported in AIR 1996 Supreme Court 2005 where Mr.Justice B.P.Jeevan Reddy, speaking for the court, held thus :-

"On this occasion, we must refer to the mechanical manner in which some of the Courts have been granting interim orders injunctions and stay orders without realising the harm such mechanical orders cause to the other side and in some cases to public interest. It is no answer to say that "let us make the order and if the other side is aggrieved, let it come and apply for vacating it". With respect, this is not a correct attitude. Before making the order, the Court must be satisfied that it is a case which calls for such an order."

12. A Division Bench of this Court consisting of the Learned Chief Justice, Mr.Justice M.B.Shah and Mr.Justice A.V.Savant, as the Learned Judges then were, considered the matter in Sopan Maruti Thopte Vs. Pune Municipal Corporation reported in AIR 1996 Bombay 304 : (1996(2) ALL MR 383). This Court while cautioning against the grant of exparte orders of injunction and stay, noted that this should be only in exceptional circumstances and that recording of reasons is not an empty formality. While holding this, this Court relied upon the judgment of the Supreme Court in Morgan Stanley Mutual Fund v. Kartick Das reported in (1994) 4 SCC 225. In para 23 of its judgment, the Division Bench of this Court held thus :-

"It has come to our notice that in many cases subordinate Courts are granting ad interim reliefs without following the mandate of Rule 3 of Order XXXIX of the Code of Civil Procedure. Only under exceptional circumstances exparte stay order or interim relief is required to be granted by recording reasons. But recording of reasons should not be an empty formality, such as by mentioning that the record is seen and the plaintiff establishes prima facie case. The Courts should bear in mind the following principles enunciated in the case of Morgan Stanley Mutual Fund v. Kartic Das, reported in (1994) 4 SCC 225: (1994 AIR SCW 2801):

"36. As a principle, ex parte injunctions could be granted only under exceptional circumstances. The factors which should weigh with the Court in the grant of ex parte injunction are -

(a) whether irreparable or serious mischief will enure to the plaintiff.

(b) whether the refusal of ex parte injunction would involve greater injustice than the grant of it would involve.

(c) The Court will also consider the time at which the plaintiff first had notice of the act complained so that the making of improper order against a party in his absence is prevented.

(d) The Court will consider whether the plaintiff had acquiesced for sometime and in such circumstances it will not grant ex parte injunction.

(e) The Court would expect a party applying for ex parte injunction to show utmost good faith in making the application.

(f) Even if granted, the ex parte injunction would be for a limited period of time.

(g) General principles like prima facie case, balance of convenience and irreparable loss would also be considered by the Court."

The Division Bench was of the view that passing of interim orders without due application of mind tended "to lower the Court s prestige and clearly undermines the Rule of Law". The circumstances which have been adverted to by the Supreme Court in its judgment in the Delhi Development Authority case and by the Division Bench of this court in the Pune Municipal Corporation case apply a fortiorari in matters relating to Bank Guarantees. The object of contractual partners in making stipulations for the provision of unconditional Bank Guarantees is to facilitate the channels of trade and commerce. Bank Guarantees fulfill an important role as instruments of trade, commerce and business. Unconditional obligations assumed by Banks must be allowed to be fulfilled in accordance with their tenor. The underlying confidence in the fulfillment of unconditional obligations which are assumed by Banks will be seriously shaken if these obligations were allowed to be detracted from unless an exceptional case of fraud, irretrievable injustice or special equities within the parameters established by the Supreme Court is made out. Unfortunately those parameters have not been applied to the facts and circumstances of this case by the Trial Court, for, if that were to be done, the grant of an order of status-quo was clearly not called for.

13. The Bank Guarantee which was furnished in the present case was an unconditional and irrevocable Bank Guarantee. The Bank guaranteed the faithful performance and observance by the First Respondent of the terms and conditions of the purchase order. The Bank undertook irrevocably to be responsible to the Appellant as surety for the due performance of the contractual terms and agreed to keep the Appellant indemnified to the extent of Rs.371 lacs against any loss, damage, costs, charges and expenses caused to or suffered by the Appellant by reason of any breach by the First respondent of the terms and conditions of the purchase order. The Bank guaranteed to pay the amounts claimed under a notice of demand by the Appellant without protest or demur or without recourse to the First Respondent. Clause (2) of the Bank Guarantee makes the Appellant the sole Judge to determine whether the First Respondent has committed any breach of the terms and conditions of the purchase order and of the extent of loss, damages, cost, charges and expenses suffered or incurred by the Appellant. A determination of the Appellant in this regard will be final and binding on the Bank. The letter of invocation is, prima facie, in accordance with the terms and conditions of the Bank Guarantee. In the letter of invocation, the Appellant specifies that there was a nonperformance and a breach by the First Respondent of the terms and conditions of the purchase order. The Appellant claimed an amount of Rs.2.50 crores towards the loss, damage, costs, charges and expenses caused to or suffered by it on account of this breach. The claim or demand made by the Appellant is binding upon the Second Respondent and is conclusive in so far as the Second Respondent is concerned.

14. The Learned Counsel appearing on behalf of the First Respondent relied upon a Judgment of the Supreme Court reported in Hindustan Construction Co. Ltd Vs. State of Bihar reported in (1999) 8 Supreme Court Cases 436. This was a case where clause 9 of the contractual agreement provided that the advance which had been granted to the contractor should be used exclusively for mobilisation expenditure. The advance was liable to be repaid forth with if the contractor were to misappropriate any portion of the advance loan. The Bank Guarantee which was issued expressly provided that it had been furnished in terms of clause (9) of the contract. The Guarantee stipulated that it was liable to be invoked in the event that the obligations expressed in clause 9 were not fulfilled by the contractors giving the right to claim to the employer for the recovery of the whole or part of the advance mobilisation loan. It was in this context that the Supreme Court held in para 14 of its judgment that the Bank Guarantee could be invoked only in the circumstances referred to in clause (9) of the contract. The Bank Guarantee was, therefore, held not to be an unconditional Bank Guarantee. Thus in the case before the Supreme Court, the Bank Guarantee expressly provided that it was issued in accordance with clause 9 of the contract and the condition in which it would be invoked namely, a breach of clause 9 of the contract. Hence, unless those conditions were fulfilled the invocation would be improper.

15. In the present case, the Bank Guarantee does not incorporate the conditions of clause 11 of the contractual agreement. The Bank Guarantee, it is a well settled principle of law, in an independent contract between the Bank and the beneficiary; independent in the sense of it being independent of the underlying contract between the beneficiary and the contracting partner. The Bank Guarantee does not contain a restrictive condition of the nature that the Bank Guarantee in the case before the Supreme Court in the aforesaid judgment contained. In the present case, what is furnished was a performance Bank Guarantee which was liable to be invoked in the event of a breach of the terms and conditions of the purchase order. Upon such breach leading to loss, damage, costs, charges and expenses being suffered by the Appellant in terms of this Bank Guarantee the Appellant has lodged its demand to the Second Respondent. The notice of invocation specifies that the Guarantee was being invoked "towards the losses, damages, costs, charges and expenses caused to and suffered by our company due to non performance and breach by the Vendor (M/s.Kirloskar Oil Engines Ltd.) (KOEL) of the terms and conditions contained in the Purchase Order". The invocation is in accordance with the terms of the Guarantee. The existence of disputes between the Appellant and the 1st Respondent or the offer of the 1st Respondent to compensate the Appellant for the loss sustained does not make out a case of established fraud, irretrievable injustice or special equities.

16. In the circumstances, I am of the view that the impugned order of status-quo was clearly not called for. The present case falls squarely outside the parameters laid down by the Supreme Court for the grant of injunctions in relation to unconditional Bank Guarantees. The law on the subject has been summarised in the recent judgment of the Supreme Court in Dwarikesh Sugar Industries Ltd. Vs. Prem Heavy Engineering Works (P) Ltd. reported in (1997) 6 Supreme Court Cases 450. There is no case made out in the present case that the invocation of the Bank Guarantee was vitiated by fraud. There is no case of irretrievable injustice within the meaning of that expression as elaborated by the Supreme Court in its judgment in Svenska Handelsbanken Vs. Indian Charge Chrome (1994) 1 SCC 502. From the impugned order it also appears that the submission was made before the Learned Judge that the Bank Guarantee in the instant case was similar to another one between the same parties where the Trial Court had granted an injunction. A perusal of the guarantee in the other case - that guarantee was produced before me - would show that its terms were materially different.

17. In these circumstances, the impugned order of the Trial Court is unsustainable and is liable to be quashed and set aside.

18. Before concluding, it must be stated that during the course of arguments and at the conclusion of the arguments, before judgment was delivered, a suggestion was made to the effect that the Appellant and the First Respondent may agree upon the impugned order being set aside by consent so that the question on merits as to the grant of interim injunction can be canvassed before the Trial Court afresh on the adjourned date of hearing without the expression of any view by this Court. Though the Appellant was agreeable to this course of action, the Learned Counsel for the First Respondent, upon seeking instructions, stated that the First Respondent would be willing to agree to the setting aside of the impugned order only if the Appellant made a statement that the encashment of the Bank Guarantee would not take place until the Trial Curt decides the issue. The Learned Counsel appearing on behalf of the Appellant, on instructions, stated that he was not in a position to make such a concession since it would have the effect of continuing the interim order which has been passed by the Trial Court exparte.

19. In these circumstances, the impugned order is quashed and set aside. The Trial court will hear and dispose of the application for the grant of interim relief which is pending before it in accordance with law. It is clarified that the observations contained in this order are confined only on the question as to whether the Trial Court was justified in granting an exparte ad-interim order and shall not affect the determination of the merits of the interim application by the Trial Court. The Trial Court shall do so uninfluenced by these observations. The Appeal From Order is accordingly allowed. There shall be, in the circumstances, no order as to costs.

The Learned Counsel for the First Respondent prays for stay of the operation of this judgment. Stay refused.

Parties to act on an ordinary copy of this order duly authenticated by the Personal Secretary of this Court.

Appeal allowed.