Mak Impex Chemicals P. Ltd. And ... vs Union Of India (Uoi) And Ors.
2002 Latest Caselaw 1063 Bom

JUDGMENT

V.C. Daga, J.

1. In these petitions, the petitioners are seeking to restrain the respondents from enforcing the terms of Bank guarantee furnished in favour of respondent No. 1 (Union of India).

2. Parties are different but issues involved in these petitions are identical based on common facts, so this single judgment will dispose of both these petitions. As the principle arguments were advanced in writ petition No. 2809 of 1989 Gill & Co. v. Union of India, for the sake of convenience, the relevant facts are taken from the said petition.

Facts in brief.

4. The petitioners are inter alia engaged in the business as Importers and Exporters of diverse quantities of cotton including Extra Long Staple Cotton for several years. The respondent No. 1 is the Union of India, The respondent No. 2 is the Textile Commissioner--Cotton) appointed by the respondent No. 1 and inter alia: was in charge of export promotion of cotton and textile goods. Respondent No. 3 is the Banking Corporation carrying on its business in banking and other activities.

5. The Textile Commissioner had issued a Notification No. 1-1-89--Cotton dated 20-8-1989 declaring the policy of the Central Government allowing private traders to export 15000 of Extra Long Staple Cotton bales. Pursuant to the said notification petitioners entered into negotiations with M/s. Rompetrol and finalised 4 contracts for sale of cotton bales. The said contracts were supported by performance Bank Guarantee submitted to respondent No. 2. In turn, the respondent No. 2 issued allotment order dated 25-4-1989 in ail aggregating to 3750 bales, out of which 3 export contracts were for 1000 bales and one contract was for 750 bales, of 170 kg. each with shipment period from April 1989 to August 1989.

6. The petitioners furnished 4 bank guarantee, guaranteeing performance of the contracts. One of the Bank Guarantees furnished was OGL No. 22747 dated 4-4-1989 for Rs. 5, 10.000/- issued on Union Bank of India, B. S. Marg. Mumbai, against the Export Contract No. Exp-5/88-89 for 1000 bales which was provisionally registered vide allotment letter No. 2/211/88-89/Cotton/ 1711 dated 25-4-1989 copy of which is annexed to the petition as Ex. B. in respect of which petitioners have raised a dispute in the present petition.

7. In pursuance of the order dated 20-3-1989 the petitioners were required to furnish an irrevocable letter of credit within 15 days of the date of allocation of quota and the same was furnished by the petitioners valid upto 21-9-1989. Petitioners had submitted a Bank Guarantee of Rs. 5,10,000/- along with the application against which the allotment letter dated 25-4-1989 for 1000 bales was issued by respondent No. 2. The said bank guarantee was valid upto 15-11-1989, with a further claim period of a months i.e. upto 15-2-1990. The petitioners were given 4 months and 5 days to fulfil their export obligation. As the petitioners failed to fulfil their export obligation within the shipment period granted upto 31-8-1989, the respondents invoked the said bank guarantee vide letter No. 2/211/89/Cotton/STP dated 19-9-1989, and requested the bank to remit amount of guarantee amounting to Rs. 5,10,000/-.

8. The petitioners being aggrieved by the above action of the respondents preferred this writ petition under Article 226 of the Constitution of India and obtained interim relief restraining the respondents from enforcing the bank guarantee.

The Arguments :

9. The aforesaid act of enforcing terms of the Bank Guarantee has given rise to the present petition, on the contention that the petitioners did not commit breach of the contracts. The contention raised by the petitioners is that one United Bags (Maharashtra) Pvt. Ltd. had obtained order of injunction on 29-5-1989 in writ petition No. 1515 of 1989. The said interim order dated 29-5-1989 was made applicable to the 15000 bales of extra long staple cotton meant for export during 1988-89 by private cotton traders. In view of the interim order, respondent No. 2 had refused to issue necessary certificate which was necessary for fulfilling export obligation, as a result of which the petitioners could not fulfil export obligations and/or were unable to comply with the custom formalities. Since they were precluded or prevented from fulfilling obligations due to order dated 29-5-1989 passed by the learned single Judge of this Court, the petitioners contended that breach of the contract was committed by the respondent No. 2 and not by the petitioners as such respondents were not justified in invoking bank guarantee.

10. The respondent in reply contended that the order dated 28th March 1989 (Clause 2 (j), provided that in case of the Applicant (Petitioners herein) who failed to fulfil their commitments for export in part or in full against any application/contract, the related Bank Guarantee furnished by the Exporter (petitioners herein) may be forfeited entirely, without prejudice to any action that may be taken against both the exporter and the importer under the provisions of relevant laws and rules for the time being in force. The petitioners could not fulfil their export obligations due to recession in the international market and the interim order dated 29-5-1989 passed by the learned single Judge of this Court is being used as shield to avoid the consequences of the breach of the contract committed by the petitioners. It is alleged that the petitioners did export the cotton bales even during the period when stay was in operation. It is, therefore, contended that stay granted by this Court did not obstruct export in any manner. The factual reason for non-shipment of bales and failure to fulfil export obligation was recession in the international market. The reason was altogether different than the reason given in the petition. It was, therefore, submitted that the petition deserved to be dismissed with costs.

11. The aforesaid rival contentions have given rise to the following issue.

The issue :

In the facts and circumstances of the case, can there be a permanent restrain by an order of Injunction restraining the respondents from enforcing bank guarantee ?

Legal Scenario

12. Before proceeding to consider the above issue in the light of the rival contentions, it would be proper to notice the settled legal scenario in the matter of enforcement of bank guarantee. Numerous decisions rendered over a span of nearly two decades have laid down and reiterated the principles which the Courts must apply while considering the question whether to grant an injunction which has the effect of restraining the encashment of a bank guarantee. We do not think it necessary to burden this judgment by referring to all of them. Some of the pronouncements on this point where the earlier decisions have been considered and reiterated are Svenska Handelsbanken v. Indian Charge Chrome.

, Larsen & Toubro Ltd. v. Maharashtra SEB , Hindustan Steel Workers Construction Ltd. v. G.S. Atwal and Co. (Engineers) (P) Ltd., and U. P. State Sugar Corpn. v. Sumao International Ltd., . The general principle which has been laid down by the Apex Court has been summarised in the case of U.P. State Sugar Corporation (Supra) as follows (SCC. P. 574. para 12) (at Page 1647 of AIR) :

"The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The Courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The Courts have carved out only two exceptions. A fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence, if there is such a fraud of which the beneficiary seeks to take the advantage, he can be restrained from doing so. The second exception relates to cases where allowing of the encashment of an unconditional bank guarantee would result in irretrievable harm of injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customers at whose instance the guarantee is given, the harm or injustice contemplated under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country."

Dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M. R. in Bolivinter Oil SA v. Chase Manhattan Bank, (1994) 1 All ER 351. CA are apposite :

".... .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 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."

The aforesaid passage was approved and followed by the Apex Court in U.P. Co-op. Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. .

Consideration

13. In all these petitions it is not in dispute that the petitioners did enter into contract in question and had agreed to export cotton textiles in terms of the contract note as per the terms and conditions prescribed in the order dated 20-3-1989 issued by the Government of India. Ministry of Textiles, Office of the Textile Commissioner. It is also not in dispute that the petitioners could not fulfil their obligation as contracted. It is also not in dispute that all the petitioners had furnished bank guarantee of different banks guaranteeing their obligations to export in full in accordance with the contract. The bank guarantees are in the nature of performance guarantees. The relevant clauses of the various bank guarantees, which are more or less common, read as under :

"Our liability under this Guarantee shall

fall due immediately on failure by the exporter to fulfil the above obligations within the prescribed period and notwithstanding any dispute or objection raised by the exporter regarding their liability to pay for non-performance of the commitments made by the said exporter. We do hereby undertake and promise to pay on demand by the Textile Commissioner, Bombay, the sum of Rs. 5, 10,000/- (Rupees Five Lakhs Ten Thousand only) in respect of which the said exporter fails to fulfil this commitments and that such claim will be restricted upto the full value of this guarantee i.e. Rs. 5,10,000/ - (Rupees Five Lakhs Ten Thousand only), if the shipment is not completed in Full."

"We, Union Bank of India, 66/80, B.S. Marg, Bombay--23, further agree that the Textile Commissioner's decision as to the default on the part of the exporter and the amount payable by us shall be final and binding on us and on demand made by the Textile Commissioner, we shall immediately within 10 days pay the same to the Government of India."

Reading of the above clauses of the bank guarantee leaves no manner of doubt that in the event, of any breach for any reason the respondents were to be entitled to encash bank guarantee. Now it is a settled law that the contract of bank guarantee is an independent contract. The bank giving such a guarantee is bound to honour its terms irrespective of the dispute raised by its customer. The Apex Court time and again warned that the Courts should be slow in granting injunction to restrain the realisation of such a bank guarantee. The Apex Court has carved out only two exceptions i.e. a fraud in connection with such a bank guarantee which vitiates the very foundation of such a bank guarantee. If there is a fraud of which the beneficiary seeks to take advantage, he could be restrained from doing so. Secondly, if allowing of the encashment of an unconditional bank guarantee is likely to result in irretrievable harm or injustice to one of the parties concerned. Therefore, it is clear that in wholly exceptional cases, the injunction can be granted.

Findings :

14. Turning to the facts of the present case, the petitioners tried to raise some dispute with respect to the refusal on the part of the Textile Commissioner to issue certificates in view of the stay order granted by the learned single Judge of this Court which operated for about 28 days. The respondents have disputed the reason sought to be put forth by the petitioners and brought to our notice that even during the period of operation of the interim relief, the goods were shipped on 8-6-1989, 21-6-1989, 2-7-1989, 14-7-1989 and 2-8-1989. According to the respondents, the real reason for non-fulfilment of the export obligations by the petitioners is altogether different than the reason pressed into service by the petitioner. The reason sought to be put forth and tried to be justified by the respondents is a commercial decision taken by the petitioners considering the depressed price of Extra Long Staple Cotton in the international market. The allegations and counter allegations leading to the reasons of breach of contract, being disputed questions of fact, cannot be gone into in the writ jurisdiction of this Court. The contract of guarantee being independent contract, we do not propose to go into the aspect as to who committed breach of contract. We, therefore, propose to confine ourselves to the terms of guarantee which unequivocally, cast duty on the petitioners to discharge their obligations under export contract and in no uncertain terms undertakes to remit the amount of bank guarantee on demand by the beneficiary. Once it is brought to the notice of the bank by the Textile Commissioner that the customer of the bank has committed default in fulfilling the export obligations within the prescribed period, notwithstanding any dispute or objections 'raised by the exporters regarding its liability to pay for non-performance of the commitments made by them, the bank is under an obligation to fulfil its obligations by remitting an amount of bank guarantee. The demand made by the Textile Commissioner in this behalf is binding on the bank. There is absolutely no dispute so far as terms and conditions of the bank guarantee are concerned. Under these circumstances, in the light of the facts enumerated hereinabove and the law laid down by the Apex Court and followed by the High Courts during he span of nearly two decades, we are of the confirmed view that the respondents cannot be restrained from enforcing the terms of the bank guarantee. Therefore, in our opinion, all these petitions must fail.

15. At this juncture, it will not be out of place to mention that in view of the interim order passed in all these cases, the bank guarantees have been kept alive and the same are in operation in all these petitions. Under these circumstances, we direct the Prothonotary and Senior Master to encash the bank guarantees in all these petitions on behalf of the respondents, which the respondents shall be entitled to withdraw upon receipts of the proceeds of the bank guarantees from the respective banks. It is needless to mention that the petitioners shall be free to set up their independent claims for damages, if any, against the respondents in accordance with law, since we are not adjudicating upon the issue or dispute as to who has committed breach of the export contract. Encashment of the bank guarantees and the observations made in the present judgment shall not come in the way of the petitioners in the event of action for damages at the instance of the petitioners. In that event, the authorities and/or the competent Courts shall decide the same on its own merits in accordance with law.

In the result, the petitions are dismissed. Rule stands discharged in all these petitions.

At this stage, the learned counsel for the petitioners prays for stay of this judgment so as to enable the petitioners to approach the Apex Court. We do not see any reason to grant interim relief since our judgment is based on the law laid down by the Apex Court. Prayer for stay is, therefore, rejected.