Independent Television Co. (P) ... vs Monica Electronics Ltd.
1995 Latest Caselaw 987 Del

JUDGMENT

Anil Dev Singh, J.

(1) This is an appeal against the order of the learned Single Judge dated August 24, 1995, in I.A. No. 4088/91 in Suit No. 1230/91. Brief facts leading to the appeal are as under:

(2) The appellant company, which was the plaintiff in the suit, placed two orders with respondent No.1 (defendant in the suit) for supply of Onida blank video cassettes. Under order dated February 12, 1991, the respondent was required to supply 2400 video cassettes with TDK/SKC tape of 75 minutes duration each and 700 cassettes of 90 minutes duration each. By another order dated February 25, 1991, placed by the appellant on the respondent the latter was required to supply 950 cassettes of 75 minutes duration each and 550 cassettes of 90 minutes duration each. The parties had agreed that the outers of the video cassettes shall be of G3 or equivalent quality. It was further stipulated that any cassette with manufacturing defect was liable to be returned to respondent No.1 within 30 days from the date of receipt of the same. Under the agreement, the appellant was required to furnish irrevocable and confirmed Letters of Credit, which they duly established. The details of these Letters of Credit are as follows :-

1.Letter of Credit No. Ap 03/91 dated February 22, 1991, for a sum of Rs.2 lakhs drawn on Indian Bank, Hauz Khas, New Delhi.

2.Letter of Credit No. 04/91 dated February 25, 1991, for a sum of Rs.l lakh drawn on India Bank, Hauz Khas, New Delhi.

(3) It is not disputed that the requisite number of cassettes were supplied by the said respondent to the appellant. However, there is a dispute between the parties with regard to the quality of the cassettes and the time schedule within which the delivery had to be made. It is asserted by the appellant that the first respondent neither adhered to the quality specifications nor to the time schedule fixed in the agreement. It is also claimed that some cassettes were returned to the first respondent for rectifying the defects and the same were subsequently sent back without rectifying the defects as a result of which the appellant suffered not only loss of business but its reputation in the market was also injured. It seems that the parties took part in the negotiations but no tangible results followed. On April 2, 1991, the appellant served a notice to the first respondent but received no reply from the latter. Thereafter the appellant instituted a suit against the first respondent for injunction and recovery of a sum of Rs. 15 lakhs for loss sustained by it due to poor quality of the video cassettes supplied by the first respondent. Along with the suit the appellant filed an application under Order 39 Rules I and 2 of the Code of Civil Procedure for restraining the second respondent Indian Bank, Hauz Khas, New Delhi, from releasing any amount to the first respondent on account of the said Letters of Credit and for restraining the first respondent from withdrawing any amount against the said Letters of Credit opened with the second respondent. The learned Single Judge refused to grant the interim order as prayed for by the appellant. It is this order dated August 24, 1995, of the learned Single Judge which has been challenged before us.

(4) We have heard learned counsel for the parties. Learned counsel for the appellant submitted that the cassettes supplied by the first respondent were defective and were not of the quality which was stipulated in the agreement. It was submitted that as a result of the poor quality of the cassettes the appellant suffered huge monetary loss and had also to face humiliation and loss of reputation in the market. He drew our attention to the fact that 960 cassettes were accepted by the first respondent for rectification of the defects. In the circumstances, he submitted that the first respondent should not be allowed to invoke the bank guarantee as it was guilty of perpetrating fraud on the appellant.

(5) We have considered the submissions of learned counsel for the appellants. It is well settled that normally a bank guarantee or a letter of credit must be honoured. It is only in exceptional circumstances that a person can he relieved of the obligations which he had undertaken to comply with under the bank guarantee or a letter of credit. An irrevocable commitment in the form of a bank guarantee or irrevocable letter of credit can be interfered with only if the following conditions are satisfied :-

1.When there is a friable strong prima facie case of fraud which vitiates the underlying contract; and

2.When irretrievable injury and balance of convenience would be in favor of issuing injunction to prevent irremediable injury.

(6) In so far as the first condition is concerned, fraud should be of an egregious nature committed in the execution of the contract of guarantee or irrevocable letter of credit. It is the fraud of the beneficiary and not fraud of somebody else, and it should be perpetrated at the time of execution of the contract. It is this fraud which vitiates the entire underlying transaction. A fraud which is committed after the execution of the bank guarantee or the irrevocable letter of credit is not the fraud which is contemplated for vitiating the underlying contract. This has been made clear in the decision of the Supreme Court in State Trading Corporation of India Ltd. v. Jainsons Clothing Corporation and another, . In that case the Supreme Court noted that it was not claimed that there was any fraud committed by the appellant in entering into contract with the respondent, nor was there any fraud committed in formation or execution of bank guarantee. In the circumstances, relying upon its earlier decision in U.P. Coop. Federation Ltd. v. Singh Consultants and Engineers, the Supreme Court held as follows:- "THEREIN this Court after elaborate consideration of all the decisions, held in para 34 that on the basis of these principles the commitments of bank guarantee must be honoured free from interference by the court. Otherwise, trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases, that is to say, in case of fraud or in case of irretrievable injustice, the court would interfere.

(7) While elaborating the plea of fraud, in the concurrent judgment Jagannatha Shetty, J. had it elaborately dealt with it and quoting Sir John Donaldson, M.R., in Bolivinter Oil Sa v. Chae Manhattan Bank, (1984) I All Er 351, 352, he strated that :

"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 I he 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 lime which must elapse between the granting of such an injunction and an application by the bank to have it discharged."

UNDER those circumstances, it was also held that the plea of fraud must be of an egregious nature as to vitiate the entire underlying transaction of the bank guarantee. It is fraud of that beneficiary and not the fraud of somebody else that would make the court to grant the order of injunction as asked for. If the hank detects with the minimal investigation of the fraudulent action of the seller, the payment could be refused is not a fraud as contemplated under the guarantee. We respectfully agree with the above ratio.

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 practice arc not left with no remedy. In the event of the dispule in the main contract ends in the party's favor, he/it is entitled to damages or other consequential reliefs."

(8) In the present case, the appellant has not set up any case to the effect that any fraud was committed by the respondent at the time of entering into contract or there was any fraud in execution of the Letters of Credit. The disputes in the performance of the contract may have arisen between the parties but that docs not give rise to any basis for preventing the enforcement of the Letters of Credit.

(9) In so far as second condition is concerned, there does not seem to be any merit in the contention of the learned counsel for the appellant that his client would suffer irretrievable injury if the invocation of Letters of Credit is not stayed. We fail to see how refusal to stay invocation of the bank guarantee would result in irretrievable injury. In case the appellant succeeds in the suit it would he entitled to recover the amount which is subject- mailer of the Letters of Credit. The appellant, therefore, is not left without any remedy for recovering the amounts which it will have to pay under the Letters of Credit.

(10) For the foregoing reasons we do not find any force in the appeal and the same is dismissed but with no order as to costs.