Delhi High Court
Bhandari Engineers & Builders vs Vijaya Bank & Ors. on 20 January, 2010
Author: Vikramajit Sen
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ RFA(OS) No.34/2008
Bhandari Engineers & Builders
Pvt. Ltd. .....Appellant through
Mr. Raju Ramachandran,
Sr. Adv. with Mr. S.S.
Jauhar & Ms. Prabhjot
Jauhar, Advs.
versus
Vijaya Bank & Ors. .....Respondent through
Mr. Ashwini K. Mata, Sr.
Adv. with Mr. Raja Balal &
Ms. Manmeet Sethi, Advs.
for Respondent No.1
% Date of Hearing: January 12, 2010
Date of Decision: January 20, 2010
CORAM:
* HON'BLE MR. JUSTICE VIKRAMAJIT SEN
HON'BLE MR. JUSTICE MANMOHAN SINGH
1. Whether reporters of local papers may be
allowed to see the Judgment? No
2. To be referred to the Reporter or not? Yes
3. Whether the Judgment should be reported
in the Digest? Yes
VIKRAMAJIT SEN, J.
1. The Appellant, namely, Bhandari Engineers & Builders
Pvt. Ltd. (hereinafter compendiously referred as ‗BEBP' or
Plaintiff/Appellant) assails the Judgment dated 8.5.2008 of the
learned Single Judge whereby its Suit for Declaration and
Permanent Injunction came to be dismissed. The
Plaintiff/Appellant had arrayed Vijaya Bank as Defendant No.1;
Saudi Hollandi Bank as Defendant No.2 and Civil Works
Company Limited, Saudi Arabia (CWC Saudi Arabia) as
Defendant No.3. There has been no representation on behalf of
Defendants No.2 and 3 before the learned Single Judge. It
appears that notice has not been issued to Defendants No.2 and
3 in this Appeal. However, since the matter has been argued at
great length, and keeping in perspective the conclusion that we
have arrived at, we think it unnecessary to delay the disposal of
the Appeal by insisting on service of notice on Defendant Nos.2
and 3.
2. It is evident from the impugned Judgment that the learned
Single Judge was of the opinion that the Plaintiff had made
serious misrepresentations to the Court. After a detailed
discussion on the facts of the case it was found that the Plaintiff
was not entitled for any interim relief. Secondly, the learned
Single Judge has returned the finding that Courts in India do not
possess territorial jurisdiction to adjudicate upon the said case.
Hence, the Suit was also dismissed as not maintainable.
3. We shall first deal with the question whether this Court
possesses territorial jurisdiction to adjudicate over the dispute.
Order VII Rule 10 of the Code of Civil Procedure, 1908 (‗CPC'
for short) immediately becomes relevant. It stipulates that if the
Court is of the opinion that it does not possess territorial
jurisdiction, it must return the plaint for filing in the appropriate
Court. It does not postulate the dismissal of the suit. Since it is
clear that the dismissal of the suit was not predicated only on
the absence of territorial jurisdiction, we shall desist from
making any further observations. This is for the reason that a
suit can also be dismissed under Rule 11 of the said Order VII of
the CPC which, inter alia, states that a plaint can be rejected
where it does not disclose a cause of action or appears, from the
statement in the Plaint, to be barred by any law.
4. The Prayers made in the Plaint read thus:-
43. (a) pass a decree of Declaration in favour of the
Plaintiff and against the Defendant No.1 declaring that
the counter guarantee No.FBG/RFC/01/105 in favour
of Saudi Hollandi Bank, Riyadh, Saudi Arabia,the
Defendant No.2 is void;
(b) pass a decree of declaration in favour of the
Plaintiff and against the Defendants declaring that the
performance guarantee No.050119IS721CA dated 19th
January, 2005 issued by Saudi Hollandi Bank,
Defendant No.2 herein in favour of Defendant No.3 for
a sum of Rs.SAR 12.50 million valid for a period of 45
months beginning 18th January, 2005 and ending on
18th October, 2008, is void;
(c) a Decree Permanent Injunction in favour of the
Plaintiff and against the Defendant No.3 restraining
the said Defendant, its representatives, officers,
representatives or assigns from encashing the
performance bank guarantee No. 050119IS721CA
dated 19th January, 2005 issued by Saudi Hollandi
Bank, Defendant No.2 herein in favour of Defendant
No.3 for a sum of Rs.SAR 12.50 million valid for a
period of 45 months beginning 18th January, 2005 and
ending on 18th October, 2008;
(d) Decree of Permanent injunction in favour of
restraining Defendant No.1, its representatives,
officers, representatives or assigns from making any
payment against the counter guarantee
No.FBG/RFC/01/05 in favour of the Saudi Hollandi
Bank, Riyadh, Saudi Arabia and Defendant No.2 from
demanding any sum against the said counter
guarantee.;
(e) A decree of permanent injunction restraining the
Defendant No.2 from making any payment to
Defendant No.3 against performance bank guarantee
No. 050119IS721CA dated 19th January, 2005 issued
by Saudi Hollandi Bank, Defendant No.2 herein in
favour of Defendant No.3 for a sum of Rs.SAR 12.50
million valid for a period of 45 months beginning 18th
January, 2005 and ending on 18th October, 2008;
(f) Award the costs of the suit in favour of the Plaintiff
and against the Defendant No.3;
(g) Pass such other and further orders as this Hon'ble
Court may deem fit and proper in the facts and
circumstances of the present case.
5. In the present case, so far as relief of injunction is
concerned, the Plaintiff seeks a restraint order against the
Defendant from encashing the subject Performance Bank
Guarantee. There can be no gainsaying that in the event that an
interim or temporary injunction is declined, the suit, so far as
this relief is concerned, would be rendered infructuous. Where
the injunction is for interdicting the encashment of a Bank
Guarantee as soon as payment against the Bank Guarantee is
made the suit ceases to have any relevance or efficacy.
Secondly, an injunctory relief is essentially discretionary and
equitable in nature. It is trite that if a material
misrepresentation has been made by the Plaintiff, it disentitles
itself from the grant of relief since it has transgressed equity
while seeking it; having approached the Court with unclean
hands it is not entitled to an injunction. Accordingly, once a
Court arrives at the conclusion that a deliberate and significant
misrepresentation has occurred, it is within its powers to
dismiss the suit itself.
6. In fairness to Mr. Mata, learned Senior Counsel for Vijaya
Bank, he does not support the finding that this Court does not
possess territorial jurisdiction. In ABC Laminart -vs- A.P.
Agencies Ltd., AIR 1989 SC 1239 the Supreme Court has
clarified that exclusion of jurisdiction should never be lightly
inferred. It should be manifestly and unequivocally clear that
the parties had excluded the jurisdiction of a particular Court,
and only then should that Court decline to exercise jurisdiction.
At the instance and request of the Appellant made in New Delhi
to Vijaya Bank, Saudi Hollandi Bank had furnished a
Performance Guarantee to CWC, one of the terms of which is
that ―any dispute with respect to this Guarantee shall be
resolved by the competent authorities in the Kingdom of Saudi
Arabia and according to the Regulations, Decisions and
Instructions‖. Keeping in perspective the ratio of ABC
Laminart, we are unable to subscribe to the view that this
Clause categorically stipulates that disputes between the parties
must only be adjudicated in Saudi Arabia, to the exclusion of all
other Courts which, by virtue of the CPC, have been empowered
to decide disputes. A reference to the recent case of Laxman
Prasad -vs- Prodigy Electronics Ltd.,(2008) 1 SCC 618, which
relied on ABC Laminart will be apposite for our discussion on
this issue of Jurisdiction. In this case, there was a similar Clause
in the Agreement between the parties which stipulated
interpretation of the terms and conditions of the Contract in
accordance to the laws of the Hong Kong Special Administrative
Region. The Hon'ble Court after considering this Clause held
thus:
29. According to the appellant, since the terms and
conditions in the agreement have to be interpreted in
accordance with the laws of Hong Kong, no court in
any country other than a court in Hong Kong shall have
jurisdiction to entertain a suit, petition, application or
any other proceeding. The submission of the
respondent Company, on the other hand, is that what
was agreed upon was not territorial jurisdiction of a
court but applicability of laws. Clause 18 deals with the
second eventuality and declares that terms and
conditions of the agreement would be interpreted in
accordance with the laws of Hong Kong.
30. We find considerable force in the submission of the
learned counsel for the respondent Company. In our
view, ―cause of action‖ and ―applicability of law‖ are
two distinct, different and independent things and one
cannot be confused with the other. The expression
―cause of action‖ has not been defined in the Code. It
is, however, settled law that every suit presupposes the
existence of a cause of action. If there is no cause of
action, the plaint has to be rejected [Rule 11(a) of
Order 7]. Stated simply, ―cause of action‖ means a
right to sue. It consists of material facts which are
imperative for the plaintiff to allege and prove to
succeed in the suit. The classic definition of the
expression (―cause of action‖) is found in the
observations of Lord Brett in Cooke v. Gill. His
Lordship stated:
―Cause of action means every fact which it would be
necessary for the plaintiff to prove, if traversed, in
order to support his right to the judgment of the court.‖
31. In A.B.C. Laminart (P) Ltd. v. A.P. Agencies this
Court said: (SCC p. 170, para 12)
―12. A cause of action means every fact, which if
traversed, it would be necessary for the plaintiff to
prove in order to support his right to a judgment of
the court. In other words, it is a bundle of facts which
taken with the law applicable to them gives the
plaintiff a right to relief against the defendant. It
must include some act done by the defendant since in
the absence of such an act no cause of action can
possibly accrue. It is not limited to the actual
infringement of the right sued on but includes all the
material facts on which it is founded. It does not
comprise evidence necessary to prove such facts, but
every fact necessary for the plaintiff to prove to
enable him to obtain a decree. Everything which if
not proved would give the defendant a right to
immediate judgment must be part of the cause of
action. But it has no relation whatever to the defence
which may be set up by the defendant nor does it
depend upon the character of the relief prayed for by
the plaintiff.‖ (emphasis supplied)
32. Now, Sections 16 to 20 of the Code deal with
territorial jurisdiction of a court (place of suing).
Whereas Sections 16 to 18 relate to immovable
property, suits for compensation for wrongs to persons
or movables have been dealt with under Section 19.
Section 20 of the Code is a residuary provision and
covers all cases not falling under Sections 16 to 19.
33. The relevant part of Section 20 reads thus:
―20. Other suits to be instituted where defendants
reside or cause of action arises.--Subject to the
limitations aforesaid, every suit shall be instituted in a
court within the local limits of whose jurisdiction--
(a) the defendant, or each of the defendants where
there are more than one, at the time of the
commencement of the suit, actually and voluntarily
resides, or carries on business, or personally works for
gain; or
(b) any of the defendants, where there are more
than one, at the time of the commencement of the suit,
actually and voluntarily resides, or carries on business,
or personally works for gain, provided that in such case
either the leave of the court is given, or the defendants
who do not reside, or carry on business, or personally
work for gain, as aforesaid, acquiesce in such
institution; or
(c) the cause of action, wholly or in part, arises.‖
34. Bare reading of Clause (c) leaves no room for doubt
that a suit would lie in a court within the local limits of
whose jurisdiction the cause of action has arisen,
wholly or partly.
35. Section 20 has been designed to secure that justice
might be brought as near as possible to every man's
hearthstone and that the defendant should not be put
to the trouble and expense of travelling long distances
in order to defend himself.
36. According to the plaintiff Company, a suit instituted
on the Original Side of the High Court of Delhi is
maintainable since a part of cause of action had
accrued within the territorial jurisdiction of the Delhi
court (breach of agreement by the defendant).
37. The argument of the defendant that the agreement
was executed in Hong Kong and hence suit could have
been instituted only in that country is, in our opinion,
not well founded. It is no doubt true that the suit could
have been instituted in Hong Kong as well. That,
however, does not take away the jurisdiction of the
Delhi court where a part of cause of action has arisen.
In the plaint, it was specifically alleged by the plaintiff
Company that the defendant committed breach of
terms and conditions of agreement during the trade
fair in February 2005 held in Pragati Maidan, Delhi. It
was, therefore, open to the plaintiff Company to
institute a suit in a competent court within the
jurisdiction of Delhi and that is how the suit is filed in
the High Court on its Original Side.
38. In our considered opinion, therefore, the contention
of the appellant-defendant that the agreement was
executed in a foreign country or the defendant was a
resident of Ghaziabad (Uttar Pradesh) cannot take
away, exclude or oust the jurisdiction of the Delhi court
in view of the averment made in the plaint that a part
of cause of action had arisen within the local limits of
Delhi.
7. The compact with regard to the Bank Guarantee
originated at New Delhi. Consequent upon the Plaintiff
approaching Vijaya Bank in their Branch Office at New Delhi,
and on the request of the Plaintiff, Vijaya Bank furnished the
subject Bank Guarantee. The cause of action, therefore, had
squarely and indubitably arisen in New Delhi. We are mindful of
the fact that Defendant Nos.2 and 3 do not actually and
voluntarily reside or carry on business in Delhi. Since the cause
of action has arisen in Delhi and since the exclusion Clause in
the Bank Guarantee (reproduced above) does not completely
oust the jurisdiction of Courts at Delhi, we are unable to sustain
this finding of the learned Single Judge. As we have recorded,
Mr. Mata has not supported this aspect of the Judgment. We
may observe that it causes avoidable confusion where the Court
opines that it does not have jurisdiction and yet enters on the
merits of the case.
8. Coming to the issue of grant of injunction against
invocation of Bank Guarantee, the Hon'ble Supreme Court has
crystalized the law regarding invocation/encashment of Letter of
Credit and Bank Guarantee in its pronouncements such that it
admits of no debate or doubt. As far back as in 1970, the Court
had in Tarapore and Co., Madras -vs- V.O Tractors Export
Moscow, AIR 1970 SC 891 elaborately and perspicuously
explained the scope and ambit of judicial interference in matters
concerning Letters of Credit and Bank Guarantees in these
words--
The scope of an irrevocable letter of credit is
explained thus in Halsbury's Laws of England
(Vol.34, Paragraph 319 at page 185):
―It is often made a condition of a mercantile
contract that the buyer shall pay for the goods
by means of a confirmed credit, and it is then
the duty of the buyer to procure his bank,
known as the issuing or originating bank, to
issue an irrevocable credit in favour of the seller
by which the bank undertakes to the seller,
either directly or through another bank in the
seller's country known as the correspondent or
negotiating bank, to accept drafts drawn upon it
for the price of the goods, against tender by the
seller of the shipping documents. The
contractual relationship between the issuing
bank and the buyer is defined by the terms of
the agreement between them under which the
letter opening the credit is issued; and as
between the seller and the bank, the issue of
the credit duly notified to the seller creates a
new contractual nexus and renders the bank
directly liable to the seller to pay the purchase
price or to accept the bill of exchange upon
tender of the documents. The contract thus
created between the seller and the bank is
separate from, although ancillary to, the
original contract between the buyer and the
seller, by reason of the bank's undertaking to
the seller, which is absolute. Thus the bank is
not entitled to rely upon terms of the contract
between the buyer and the seller which might
permit the buyer to reject the goods and to
refuse payment therefor; and, conversely, the
buyer is not entitled to an injunction restraining
the seller from dealing with the letter of credit
if the goods are defective.‖
Chalmers on ―Bills of Exchange‖ explains the legal
position in these words
―The modern commercial credit serves to
interpose between a buyer and seller a third
person of un-questioned solvency, almost
invariably a banker of international repute; the
banker on the instructions of the buyer issues
the letter of credit and thereby undertakes to
act as paymaster upon the seller performing the
conditions set out in it. A letter of credit may be
in any one of a number of specialised forms and
contains the undertaking of the banker to
honour all bills of exchange drawn thereunder.
It can hardly be over-emphasised that the
banker is not bound or entitled to honour such
bills of exchange unless they, and such
accompanying documents as may be required
thereunder, are in exact compliance with the
terms of the credit. Such documents must be
scrutanised with meticulous care, the maxim de
minimis non curat lex cannot be invoked where
payment is made by the letter of credit. If the
seller has complied with the terms of the letter
of credit, however, there is an absolute
obligation upon the banker to pay irrespective
of any disputes there may be between the buyer
and the seller as to whether the goods are up to
contract or not‖
Similar are the views expressed in `Practice and
Law of Banking' by H.B. Sheldon, ―the Law of
Bankers Commercial Credits‖ by H.C.
Gutteridge,―the Law relating to Commercial
Letters of Credit‖ by A.G. Devis' ―the Law Relating
to Bankers' Letters of Credit‖ by B.C. Mitra and in
several other text books read to us by Mr. Mohan
Kumaramangalam, learned Counsel for the
Russian Firm. The legal position as set out above
was not controverted by Mr. M.C. Satalvad,
learned Counsel for the Indian Firm. So far as the
Bank of India is concerned it admitted its liability
to honour the letter of credit and expressed its
willingness to abide by its terms. It took the same
position before the High Court.
........
10. A case somewhat similar to the one before us
came up for consideration before the Queens
Bench Division in England in Hamzeh Walas and
Sons v. British Imex Industries Ltd., 1958-2 QB
127. Therein the plaintiffs, a Jordanian firm
contracted to purchase from the defendants, a
British firm, a large quantity of reinforced steel
rods, to be delivered in two instalments. Payment
was to be effected by opening in favour of the
defendants of two confirmed letters of credit with
the Midland Bank Ltd., in London, one in respect
of each instalment. The letters of credit were duly
opened and the first was realised by the
defendants on the delivery of the first instalment.
The plaintiffs complained that that instalment was
defective and sought an injunction to bar the
defendants from realizing the second letter of
credit. Donovan, J., the Trial Judge refused the
application. In appeal Jenkins, Sellers and Pearce
L., JJ. Confirmed the decision of the Trial Judge. In
the course of his judgment Jenkins, L.J., who
spoke for the Court observed thus:
―We have been referred to a number of
authorities, and it seems to be plain enough that
the opening of a confirmed letter of credit
constitutes a bargain between the banker and
the vendor of the goods, which imposes upon the
banker an absolute obligation to pay,
irrespective of any dispute there may be
between the parties as to whether the goods are
up to contract or not. An elaborate commercial
system has been built up on the footing that
bankers' confirmed credits are of that character,
and, in my judgment, it would be wrong for this
Court in the present case to interfere with that
established practice.
There is this to be remembered, too. A vendor of
goods selling against a confirmed letter of credit
is selling under the assurance that nothing will
prevent him from receiving the price. That is of
no mean advantage when goods manufactured in
one country are being sold in another. It is,
furthermore, to be observed that vendors are
often reselling goods bought from third parties.
When they are doing that, and when they are
being paid by a confirmed letter of credit, their
practice is - and I think it was followed by the
defendants in this case--to finance the payments
necessary to be made to their suppliers against
the letter of credit. That system of financing
these operations, as I see it, would break down
completely if a dispute as between the vendor
and the purchaser was to have the effect of
―freezing‖ if I may use that expression the sum
in respect of which the letter of credit was
opened.‖
In Urquhart Lindsay and Co. Ltd. v. Eastern Bank
Ltd., 1922-1 KB 318 the King's Bench held that
the refusal of the defendants bank to take and pay
for the particular bills on presentation of the
proper documents constituted a repudiation of the
contract as a whole and that the plaintiffs were
entitled to damages arising from such a breach. It
may be noted that in that case the price quoted in
the invoices was objected to by the buyer and he
had notified his objection to the bank. But under
the terms of the letter of credit the bank was
required to make payments on the basis of the
invoices tendered by the seller. The court held
that if the buyers had an enforceable claim that
adjustment must be made by way of refund by the
seller and not by the way of retention by the
buyer.
11. Similar opinions have been expressed by the
American Courts. The leading American case on the
subject is Dulien Steel Products Inc., of Washington
v. Bankers Trust Co., Federal Reporter 2nd Series,
298 p.836. The facts of that case are as follows:
The plaintiffs, Dulien Steel Products Inc., of
Washington, contracted to sell steel scrap to the
European Iron and Steel Company. The
transaction was put through M/s. Marco Polo
Group Project, Ltd. who were entitled to
commission for arranging the transaction. For the
payment of the the commission to Marco Polo,
plaintiffs procured an irrevocable letter of credit
from Seattle First National Bank. As desired by
Marco Polo this letter of credit was opened in
favour of one Sica. The defendant-bankers
confirmed that letter of credit. The credit
stipulated for payment against (1) a receipt of
Sica for the amount of the credit and (2) a
notification of Seattle Bank to the defendants that
the plaintiffs had negotiated documents
evidencing the shipment of the goods. Sica
tendered the stipulated receipt and Seattle Bank
informed the defendants that the Dulien had
negotiated documentary drafts. Meanwhile after
further negotiations between the plaintiffs and
the vendees the price of the goods sold was
reduced and consequently the commission
payable to Marco Polo stood reduced but the
defendants were not informed of this fact. Only
after notifying the defendants about the
negotiation of the drafts drawn under the
contract of sale, the Seattle Bank informed the
defendants about the changes underlying the
transaction and asked them not to pay Sica the
full amount of the credit. The defendants were
also informed that Sica was merely a nominee of
Marco Polo and has no rights of his own to the
sum of the credit. Sica, however, claimed
payment of the full amount of the credit. The
defendants asked further instructions from
Seattle Bank but despite Seattle Bank's
instructions decided to comply with Sica's
request. After informing Seattle Bank of their
intention, they paid Sica the full amount of the
credit. Plaintiffs thereupon brought an action in
the District Court of New York for the recovery of
the moneys paid to Sica. The action was
dismissed by the trial Court and that decision was
affirmed by the Court of Appeals. That decision
establishes the well known principle that the
letter of credit is independent of and unqualified
by the contract of sale or underlying transaction.
The autonomy of an irrevocable letter of credit is
entitled to protection. As a rule Courts refrain
from interfering with that autonomy.
9. In United Commercial Bank -vs- Bank of India, (1981) 2
SCC 766:AIR 1981 SC 1426 the Apex Court has reiterated that
Courts ought not to grant injunctions restraining the
performance of the contractual obligations flowing out of a
Letter of Credit or a Bank Guarantee between one Bank and
another. It observed that -
The opening of a confirmed letter of credit
constitutes a bargain between the banker and
the vendor of the goods which imposes on the
banker an absolute obligation to pay. A banker
issuing or confirming an irrevocable credit
usually undertakes to honour drafts
negotiated, or to reimburse in respect of drafts
paid, by the paying or negotiating
intermediate banker and the credit is thus in
the hands of the beneficiary binding against
the banker. A letter of credit constitute the
sole contract with the banker and a bank
issuing or confirming a letter of credit is not
concerned with the underlying contract
between the buyer an seller. Duties of a bank
under a letter of credit are created by the
document itself, but in any case it has the
power and is subject to the limitations which
are given or imposed by it, in the absence of
the appropriate provisions in the letter of
credit. The banker owes a duty to the buyer to
ensure that the documents tendered by the
sellers under a credit are complied with those
for which the credit calls and which are
embodied in terms of paying or negotiating
bank The description of the goods in the
relative bill of exchange must be the same
description in the letter of credit, that it, the
goods themselves must in each be described in
identical terms, even though the goods
differently described in the two documents
are, in fact, the same. It is the description of
the goods that is all important and if the
description is not identical it is the paying
bank's duty to refuse payment.
10. A study of U.P. Coop. Federation -vs- Singh Consultants &
Engineers (P) Ltd., (1988) 1 SCC 174 is extremely instructive.
The Hon'ble Supreme Court again spoke in these words-
45. The letter of credit has been developed over
hundreds of years of international trade. It was
most commonly used in conjunction with the
sale of goods between geographically distant
parties. It was intended to facilitate the transfer
of goods between distant and unfamiliar buyer
and seller. It was found difficult for the seller to
rely upon the credit of an unknown customer. It
was also found difficult for a buyer to pay for
goods prior to their delivery. The Bank's letter
of credit came into existence to bridge this gap.
In such transactions, the seller (beneficiary)
received payment from issuing bank when he
presents a demand as per terms of the
documents. The bank must pay if the
documents are in order and the terms of credit
are satisfied. The bank, however, was not
allowed to determine whether the seller had
actually shipped the goods or whether the
goods conformed to the requirements of the
contract. Any dispute between the buyer and
the seller must be settled between themselves.
The courts, however, carved out an exception to
this rule of absolute independence. The courts
held that if there has been fraud in the
transaction the bank could dishonour
beneficiary's demand for payment. The courts
have generally permitted dishonour only on the
fraud of the beneficiary, not the fraud of
somebody else.
46. It was perhaps for the first time the said
exception of fraud to the rule of absolute
independence of the letter of credit has been
applied by Shientag, J. in the American case of
Sztejn v. J.Henry Schroder Banking Corporation
(31 NYS 2d 631). Mr.Sztejn wanted to buy some
bristles from India and so he entered into a deal
with an Indian seller to sell him a quantity. The
issuing Bank issued a letter of credit to the
Indian seller that provided that, upon receipt of
appropriate documents, the bank would pay for
the shipment. Somehow, Mr.Sztejn discovered
that the shipment made was not crates of
bristles, but creates of worthless material and
rubbish. He went to his bank which probably
informed him that the letter of credit was an
independent undertaking of the bank and it
must pay.
.......
53. Whether it is a traditional letter of credit or
a new device like performance bond or
performance guarantee, the obligation of banks
appears to be the same. If documentary credits
are irrevocable and independent, the banks
must pay when demand is made. Since the bank
pledges its own credit involving its reputation,
it has no defence except in the case of fraud.
The bank's obligations of course should not be
extended to protect the unscrupulous seller,
that is, the seller who is responsible for the
fraud. But, the banker must be sure of his
ground before declining to pay. The nature of
the fraud that the courts talk about is fraud of
an egregious nature as to vitiate the entire
underlying transaction. It is fraud of the
beneficiary, not the fraud of somebody else. If
the bank detects with a minimal investigation
the fraudulent action of the seller, the payment
could be refused. The bank cannot be
compelled to honour the credit in such cases.
But it may be very difficult for the bank to take
a decision on the alleged fraudulent action. In
such cases, it would be proper for the bank to
ask the buyer to approach the court for an
injunction.
11. In Hindustan Steel Works Construction Ltd. -vs- Tarapore
& Co., AIR 1996 SC2268:(1996) 5 SCC 34, the following
observations have been made:
We are, therefore, of the opinion that the correct
position of law is that commitment of banks must
be honoured free from interference by the courts
and it is only in exceptional cases, that is to say,
in case of fraud or in a case where
irretrievable injustice would be done if bank
guarantee is allowed to be encashed, the
court should interfere. In this case fraud has
not been pleaded and the relief for injunction was
sought by the contractor/Respondent 1 on the
ground that special equities or the special
circumstances of the case required it. The special
circumstances and/or special equities which have
been pleaded in this case are that there is a
serious dispute on the question as to who has
committed breach of the contract, that the
contractor has a counter-claim against the
appellant, that the disputes between the parties
have been referred to the arbitrators and that no
amount can be said to be due and payable by the
contractor to the appellant till the arbitrators
declare their award. In our opinion, these factors
are not sufficient to make this case an exceptional
case justifying interference by restraining the
appellant from enforcing the bank guarantees.
The High Court was, therefore, not right in
restraining the appellant from enforcing the bank
guarantees.
12. In U.P. State Sugar Corporation -vs-. Sumac International
Limited, AIR 1997 SC 1644:(1997) 1 SCC 568 the
circumstances in which the invocation of a Bank Guarantee or
payments made pursuant thereto could be interdicted, had been
Restated. While spelling out the essentials of fraud and/or
irretrievable injustice in this context, the Apex Court had
recorded the following observations:-
12. 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 it as per 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 advantage,
he can be restrained from doing so. The second
exception relates to cases where allowing the
encashment of an unconditional bank guarantee
would result in irretrievable harm or 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 customer 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. The two grounds are not necessarily
connected, though both may coexist in some
cases.
.......
14. On the question of irretrievable injury which
is the second exception to the rule against
granting of injunctions when unconditional bank
guarantees are sought to be realised the court
said in the above case that the irretrievable
injury must be of the kind which was the
subject-matter of the decision in the Itek Corpn.
case, 566 Fed Supp 1210. In that case an
exporter in USA entered into an agreement with
the Imperial Government of Iran and sought an
order terminating its liability on stand by letters
of credit issued by an American Bank in favour
of an Iranian Bank as part of the contract. The
relief was sought on account of the situation
created after the Iranian revolution when the
American Government cancelled the export
licences in relation to Iran and the Iranian
Government had forcibly taken 52 American
citizens as hostages. The US Government had
blocked all Iranian assets under the jurisdiction
of United States and had cancelled the export
contract. The Court upheld the contention of the
exporter that any claim for damages against the
purchaser if decreed by the American Courts
would not be executable in Iran under these
circumstances and realisation of the bank
guarantee/letters of credit would cause
irreparable harm to the plaintiff. This
contention was upheld. To avail of this
exception, therefore, exceptional circumstances
which make it impossible for the guarantor to
reimburse himself if he ultimately succeeds, will
have to be decisively established. Clearly, a
mere apprehension that the other party will not
be able to pay, is not enough. In Itek case
(supra) there was a certainty on this issue.
Secondly, there was good reason, in that case
for the Court to be prima facie satisfied that the
guarantors i.e. the bank and its customer would
be found entitled to receive the amount paid
under the guarantee.
15. Our attention was invited to a number of
decisions on this issue -- among them, to Larsen
& Toubro Ltd. v. Maharashtra SEB, (1995) 6
SCC 68 and Hindustan Steel Workers
Construction Ltd. v. G.S. Atwal & Co.
(Engineers) (P) Ltd., (1995) 6 SCC 76 as also to
National Thermal Power Corpn. Ltd. v.
Flowmore (P) Ltd., (1995) 4 SCC 515. The latest
decision is in the case of State of Maharashtra
v. National Construction Co., (1996) 1 SCC 735
where this Court has summed up the position by
stating:
"The rule is well established that a bank
issuing a guarantee is not concerned with
the underlying contract between the
parties to the contract. The duty of the
bank under a performance guarantee is
created by the document itself. Once the
documents are in order the bank giving the
guarantee must honour the same and make
payment ordinarily unless there is an
allegation of fraud or the like. The courts
will not interfere directly or indirectly to
withhold payment, otherwise trust in
commerce internal and international would
be irreparably damaged. But that does not
mean that the parties to the underlying
contract cannot settle the disputes with
respect to allegations of breach by
resorting to litigation or arbitration as
stipulated in the contract. The remedy
arising ex contractu is not barred and the
cause of action for the same is
independent of enforcement of the
guarantee."
13. Reference may also be made to the observations of
B.N.Kirpal, J. (as his Lordship then was) in Dwarikesh Sugar
Industries Ltd. -vs- Prem Heavy Engineering Works (P) Ltd.,
(1997) 6 Supreme Court Cases 450, and the terse deprecation
contained therein to the Courts' interdicting the normal
operation of Bank Guarantees and Letters of Credit.
21. Numerous decisions of this Court
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 more recent 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 & Co. (Engineers) (P) Ltd. and
U.P. State Sugar Corpn. v. Sumac
International Ltd. The general principle
which has been laid down by this Court has
been summarised in the case of U.P. State
Sugar Corpn. As follows: (SCC p.574, para
12)
―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 it as
per 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 the encashment of
an unconditional bank guarantee
would result in irretrievable harm
or 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 customer 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 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 this Court in U.P. Coop.
Federation Ltd. v. Singh Consultants and
Engineers (P) Ltd.
22. The second exception to the rule of
granting injunction, i.e., the resulting of
irretrievable injury, has to be such a
circumstance which would make it
impossible for the guarantor to reimburse
himself, if he ultimately succeeds. This will
have to be decisively established and it must
be proved to the satisfaction of the court that
there would be no possibility whatsoever of
the recovery of the amount from the
beneficiary, by way of restitution.‖
14. It will be apposite to make a reference of Federal Bank
Limited -vs- V.M. Jog Engineering Limited, (2001) 1 SCC 663
the Apex Court had recorded the following enunciation of law --
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. The
bank is to honour the demand for
encashment if the seller prima facie complies
with the terms of bank guarantee or the
letter of credit, namely, if the seller produces
the documents enumerated in the bank
guarantee or the letter of credit. If the bank
is satisfied on the face of the documents that
they are in conformity with the list of
documents mentioned in the bank guarantee
or the letter of credit and there is no
discrepancy, it is bound to honour the
demand of the seller for encashment. While
doing so it must take reasonable care. It is
not permissible for the bank to refuse
payment on the ground that the buyer is
claiming that there is a breach of contract.
Nor can the bank try to decide this question
of breach at that stage and refuse payment
to the seller. Its obligation under the
document having nothing to do with any
dispute as to breach of contract between the
seller and the buyer.
15. It is evident that despite the clarity and consistency in the
decisions of the Hon'ble Supreme Court injunctions for the
encashment of Bank Guarantees and Letters of Credit are
nevertheless granted. Very recently in National Highways
Authority of India -vs- Ganga Enterprises, (2003) 7 Supreme
Court Cases 410, the Apex Court again adumbrated the law on
this subject in the following passage:
It is settled law that a contract of guarantee
is a complete and separate contract by itself.
The law regarding enforcement of an ―on-
demand bank guarantee‖ is very clear. If the
enforcement is in terms of the guarantee,
then courts must not interfere with the
enforcement of bank guarantee. The court
can only interfere if the invocation is against
the terms of the guarantee of if there is any
fraud. Courts cannot restrain invocation of
an ―on-demand guarantee‖ in accordance
with its terms by looking at terms of the
underlying contract. The existence or non-
existence of an underlying contract becomes
irrelevant when the invocation is in terms of
the bank guarantee. The bank guarantee
stipulated that if the bid was withdrawn
within 120 days or if the performance
security was not given or if an agreement
was not signed, the guarantee could be
enforced. The bank guarantee was enforced
because the bid was withdrawn within 120
days. Therefore, it could not be said that the
invocation of the bank guarantee was against
the terms of the bank guarantee. If it was in
terms of the bank guarantee, one fails to
understand as to how the High Court could
say that the guarantee could not have been
invoked. If the guarantee was rightly
invoked, there was no question of directing
refund as has been done by the High Court.
16. From the above discussion, it is manifestly clear that there
is no dispute that a Letter of Credit is an independent contract
and the Courts are not to interfere with the encashment of the
Letter of Credit unless the case falls within the purview of
exceptions laid down by the Apex Court. The first exception
which has been carved out by the Courts is that the fraud
perpetrated must be of egregious nature meaning that the said
fraud must be one of gross nature which shakes the conscience
of the Court and the said fraud must be known to the parties
including the party representing as well as the bank. Under the
said circumstances, if the said fraud is established, the Court
can interfere with the bank guarantee. In U.P. Cooperation
Federation Ltd. (Supra) also it was held that the fraud pleaded
must be of an 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.
17. So far as the facts of the present case are concerned, Mr.
Raju Ramachandran, learned Senior Counsel appearing for the
Plaintiff, has contended that the Plaintiff has responded and
reacted to a Letter of Intent (LoI) dated 12.12.2004 received by
it from CWC, Saudi Arabia. It is noteworthy that this document
does not postulate the furnishing of a Performance Bank
Guarantee. Indeed, the contract states that it would become
effective only upon the obtainment by the Plaintiff of the Final
License of Approval from the Saudi Authorities. The main plank
of the argument on behalf of the Plaintiff is that the subject
Bank Guarantee was furnished in anticipation of the award of
the contract covered by the LoI dated 12.12.2004 and since this
did not transpire, the Bank Guarantee became devoid of
consideration. Poignantly, the Plaint makes no mention of the
LoI dated 15.12.2004 between the CWC, Saudi Arabia and
Bhandari Engineers and Builders, Saudi Arabia (BEBSA) which
document, inter alia, stipulates -―The execution of this
agreement terms is subject to obtaining a 5% Performance Bond
of contract value specified in Item ‗Third' above valid for 45
months; delivered to Main Contractor(CWC) as a beneficiary
from a local Saudi Bank within 30 days from signing letter of
award and shall also depend on and be connected with signing
the final contracting between the parties in respect of assigning
of the execution of works, subject of agreement, after
completion of all official procedures and obtaining the related
required approval‖. Mr. Ramachandran has informed us, on
instructions, that sixty five per cent equity of BEBSA is held by
the Plaintiff; twenty five per cent by a Saudi National, Mr.
Mohammed Al-Ghadi and ten per cent by a non-resident Indian,
Mr. Udai Bhanu. The learned Single Judge has noted and has
expressed his disapproval on the Plaintiff's failure to mention
this LoI dated 15.12.2004 and the Contract that was entered
into was predicated thereon. Reacting to this conduct of the
Plaintiff, the learned Single Judge has found the Plaintiff to have
made material misrepresentations and willful concealment of
relevant facts. LoI dated 12.12.2004 did not fructify into the
emergency of any contractual relations between any of the
parties before us presumably because of the failure of the
Plaintiff to secure the requisite Licence. It is the LoI dated
15.12.2004 and the resultant Contract which records the
assigning of the execution of works of ―Branch Sewerage
Networks in Central District, Jedah‖ to CWC which, in turn, has
sub contracted forty per cent of the value of this work-order to
BEBSA. As clarified by the Annexure to the LoI dated
15.12.2004, the value of the work was SAR 770002029.5, forty
per cent thereof is SAR 308000811.8 which is the value of the
work sub-contracted by CWC to BEBSA. Of this, BEBSA has
further sub-contracted SAR 250 million to the Plaintiff which is
its sister concern and holding company.
18. Mr. Raju Ramachandran has endeavoured to explain the
existence of the two LoIs dated 12.12.2004 and 15.12.2004 by
contending that even though they make a mention of the entire
works of Branch Sewerage Networks in Central District, Jedah,
smaller sub-divisions of the work were in the contemplation of
CWC. If this was the position, we find no conceivable reason
why the LoI dated 15.12.2004 had not been filed by the Plaintiff.
It is palpably clear that the LoI dated 15.12.2004 had been
deliberately withheld in order to paint a picture that only one
LoI had been issued, that too to the Plaintiff, which LoI does not
lead to the award of any contract. Had the latter LoI dated
15.12.2004 been filed, we are in no manner of doubt that the
Court would have sought clarification on which one of the two
LoIs had fructified into a contract. It is nobody's case that the
contract with BEBSA did not come into existence. In our
opinion, the finding of the learned Single Judge to the effect that
there has been misrepresentation or concealment by the
Plaintiff is fully substantiated by the withholding of these
documents. It bears reiteration that the requirement of
furnishing a Bank Guarantee does not find articulation in the
LoI dated 12.12.2004, which indeed concerned the Plaintiff.
Significantly, the corresponding 7th Clause speaks of the need
for the obtainment of Final License Approval which is topical
because the Plaintiff/BEBP does not have a Saudi Licence
whereas BEBSA does.
19. The Defendant, Vijaya Bank, has placed on record a
photocopy of the letter dated 6.12.2004 addressed by CWC
Saudi Arabia to BEBSA, informing the latter that its Tender
relating to the said Works for a sum of SAR 380 million is
acceptable, subject to the deposit with CWC of a Performance
Bond amounting to SAR 15.4 million (that is, approximately five
per cent of the value of the sub-contract) in the form of a
Bankers Guarantee from an approved local bank. Learned
Senior Counsel has drawn attention to the documents
preparatory to the execution of the Bank Guarantee by Vijaya
Bank in which it has been mentioned that purpose of the
Guarantee is ―to secure work‖. We do not agree with Mr.
Ramachandran that the only deduction possible is that the
Plaintiff had its sight fastened on securing the contract for itself,
keeping in our mind the fact that BEBSA was a subsidiary/sister
concern of the Plaintiff. The sequence of events is that at the
instance of the Plaintiff Vijaya Bank requested, on 19.1.2005,
Saudi Hollandi Bank to furnish a Performance Guarantee to
CWC Saudi Arabia which the latter did on the very same date.
These transactions occurred in the wake of the failure of the
Plaintiff to secure the contract for itself, and the success of its
subsidiary BEBSA to obtain the subject sub-contract from CWC.
Attention has also been drawn to the notings of Vijay Bank to
the following effect:-
―The new contract work of laying Sewer System in
the city of Jeddah, kingdom of Saudi Arabia, is obtained
on sub contract basis from Civil Works Co. Ltd.
Dammam, Saudi Arabia, Riyadh and the aggregate
value is 1250 million Saudi Riyals, out of which 700
million SR is retained by the Principal and 300 million
SR is sub contracted to Bhandari Engineers and
Builders Saudi Arabia and 250 millions to Messrs
Bhandari Engineers and Builders Pvt. Ltd. who are the
applicant company. The Company is to furnish BG to
CWC Ltd. aggregating to 5% of 250 millions which
comes to around Rs.15.00 crores‖.
20. It is also uncontroverted that a contract was executed on
15.12.2004 between BEBSA and BEPB, which sub-contracted
Works of the value of SAR 250 million to the Plaintiff. It has
been explained by Mr. Mata, learned Senior Counsel, and not
denied by Mr. Raju Ramachandran, learned Senior Counsel for
the Plaintiff/Appellant, that the remainder portion of the Works
of the value of SAR 58 million was placed by BEBSA on Kunal
Traders (for the manufacture of manholes). Thus, BEBSA sub-
contracted the entire Works placed on it aggregating SAR 308
million. The contract between BEBSA and BEPB obligated BEBP
to issue a Performance Bond of a value of five per cent of the
total sub-contract which is exactly the sum mentioned in the
subject Bank Guarantee. This document has also been filed, not
by the Plaintiff, but by the Defendant Bank.
21. Learned Senior Counsel for the Appellant/Plaintiff/BEPB
places emphasis on a letter dated 24.10.2007 written by it to
Vijaya Bank mentioning therein that the Plaintiff could not get
Commercial Registration Certificate from the Ministry of
Commerce, Saudi Arabia and that without Commercial
Registration no company could operate a bank account in Saudi
Arabia or carry out any commercial transaction in Saudi Arabia.
This statement is correct and is obviously the reason why the
Plaintiff's face in Saudi Arabia, viz. BEBSA, secured the contract
and then passed it on to BEBP. ―Therefore, no work was done in
the name of BEBP in Saudi Arabia‖. This was followed by
another letter dated 1.10.2007 in which a mention was again
made only to the LoI dated 12.12.2004. The Plaintiff has
maintained in the said letter that under the belief that award of
contract to it would follow, the Plaintiff had requested Vijaya
Bank to issue Counter Bank Guarantee in favour of Saudi
Hollandi Bank for the benefit of CWC. ―However, no contract
was finalized because no contract was entered into‖. This is a
willful misstatement and suppression of the factual position. It
appears that Vijaya Bank had addressed a letter to Saudi
Hollandi Bank attempting to cancel the said Bank Guarantee of
SAR 12.5 million on the ground that no contract had been
entered into. This was immediately responded to by Saudi
Hollandi Bank (which had, in turn, furnished a Bank Guarantee
to CWC), stating that the Counter Guarantee by Vijaya Bank was
an independent contract for which Vijaya Bank would remain
liable.
22. Mr. Mata has explained that the stand taken by Vijaya
Bank was an abortive attempt to assist its constituent, BEBP
and should not be held against the Bank, as is patently apparent
on a reading of the Meeting of the Board of Directors of BEBP
held on 6.12.2004 which reads thus:-
Bank Guarantee from Vijaya Bank
The Chairman informed the Board that for the
Company has been offered a sub contract work by
Bhandari Engineers and Builders Saudi Arabia for
construction of Branch Sewerage Network in the North
Central District, Jeddah. For this it is necessary to
provide Non Fund Based Bank Guarantee Facility for
performance of the contract from a Bank. He suggested
approaching Vijaya Bank for availing banking facilities
from them. After discussion following resolution was
passed:
―RESOLVED THAT the company do request the Vijaya
Bank, for allowing the company the Non Fund Based
Foreign Bank Guarantee Facility to the extent of
Rs.12.50 million SAR equivalent to Rs.15.00 Crores
(Rupees Fifteen Crores only) representing 5% of 250
million SAR for performance of Branch Sewerage
Network in the North Central District, Jeddah Contract.
―FURTHER RESOLVED THAT the S. Amrik Singh
Bhandari, Chairman and Managing Director of the
company be and is hereby authorized to secure the said
facilities and to execute all documents and papers as
required by the said Bank and to affix common seal if
required and to do all such acts and deeds and things
as may be necessary to secure the above facilities‖.
23. The position that emerges is crystal clear. The Plaintiff
had, no doubt, received a LoI dated 12.12.2004. Meanwhile,
BEBSA, its subsidiary, came to receive an LoI dated 15.12.2004
in respect of the very same Works. It will not be sanguine to
presume that these events had become necessary because the
Plaintiff would not have received the contract directly from the
Government of Saudi Arabia and, therefore, coming to know of
this fact had projected and supported its subsidiary for the same
work. The subsidiary sub-contracted the entire work, majorly to
Plaintiff (SAR 250 million) with the remainder 58 million to
Kunal Traders. In conformity with the written obligations, the
Plaintiff had arranged the Bank Guarantee for SAR 12.5 million
(five per cent of its sub-contract) through Vijaya Bank, on the
strength of which Saudi Hollandi Bank had given a Performance
Bank Guarantee to CWC. This completely annihilates the case of
the Plaintiff to the effect that the Bank Guarantee had been
furnished in anticipation of the award of the contract to the
Plaintiff and that it was totally distinct to the contract awarded
to its subsidiary, BEBSA. In these circumstances, there was
complete consideration for the furnishing of the subject Bank
Guarantee by Vijaya Bank at the instance of the Plaintiff.
Therefore, we find no fraud whatsoever in the invocation of the
Bank Guarantee, leave alone egregious fraud or irretrievable
injury which must be evident for a Court to be persuaded to
restrain its encashment.
24. In the course of hearings, we had enquired as to whether
the contract has been completed. We have been informed that
there are some disputes between BEBSA and CWC. This
sequence of events explains the delay on the part of the Plaintiff
in seeking a cancellation of this Bank Guarantee as late as in
October, 2007. Obviously, the Plaintiff had become wise to the
fact that CWC would invoke the Bank Guarantee provided to it
by Saudi Hollandi Bank which would have the cascading
consequence of Saudi Hollandi Bank invoking the Bank
Guarantee provided to it by Vijaya Bank which, in turn, would
result in Vijaya Bank effecting recovery of its dues from the
Plaintiff. This position also emerged from a letter dated
24.9.2005 of the Plaintiff to Vijaya Bank mentioning, inter alia,
thus:-
4.1 The work was sub-contracted by Principal
Contractor, Civil Works Company Ltd., Damman to a
Registered Saudi Registered Company M/s. BEBSAL
with Regd. Office at P.O. Box 57382 Riyadh 11574, Flat
No.03, First Floor, Naghi Center, Near King Faisal
International Academy, Iman Saudi Bin Abdul Aziz, Bin
Mohammed Road, Riyadh, Kingdom of Saudi Arabia.
The Chairman of BEBSAL is Mr. Mohammed Al-Ghadi
and Managing Director is S. Ajit Singh Bhandari, a Non
Resident Indian and settled abroad. BEBSAL sub-
contracted to Bhandari Engineers & Builders Pvt. Ltd.,
New Delhi. On the basis of our proposal, your bank
issued Counter Guarantee in favour of Hollandi Bank,
Riyadh who issued an irrevocable guarantee to
Principal Contractor M/s. Civil Works Company Ltd.
...
4.3 We would like to add that the principal contractor
M/s. Civil Works Company Ltd. with whom the Bank
Guarantee was lodged threatened to encash the Bank
Guarantee unless the work is commenced immediately.
This project is of National Importance to Kingdom of
Saudi Arabia and His Royal Highness the King of Saudi
Arabia have formed a Special Team for monitoring the
Project. The Company would have been black-listed and
debarred from taking any work in Saudi Arabia in case
the work was not started in BEBSAL. Based on the
understanding, BE&BPL commended construction with
very limited resources in July/August, 2005.
25. The present case fails to meet the condition laid out in
first exception itself inasmuch as the pleadings do not contain
details of the alleged fraud nor it is stated anywhere and/or
elucidated that the fraud is of egregious nature. The alleged
fraud finds mention in paragraph 34 of the Plaint where it is
merely averred that ―The refusal by Defendant No. 3 to return
the performance Bank Guarantee and the retention by the
Defendant No. 3 of the Bank Guarantee tendered by Plaintiff is a
complete breach of trust and a fraud practiced by the Defendant
No. 3 on the Plaintiff.‖ In the face of absence of necessary
pleadings, and substantiated arguments with regard to the
commission of fraud, we are not satisfied with the submission of
the learned Counsel for the Plaintiff in this regard.
26. In these circumstances, we are of the opinion that the
Appeal is wholly devoid of merit. The learned Single Judge has
rightly concluded that the Plaintiff has failed to manifest any
egregious fraud in the invoking of the Bank Guarantee furnished
by Vijaya Bank. Further, the learned Single Judge is correct in
concluding that the Plaintiff was guilty of deliberate
misrepresentation of the factual position inasmuch as the case
of the Plaintiff that the subject Bank Guarantee was bereft of
consideration was contrary to the facts of the case. While the
Plaintiff may not have succeeded in obtaining the contract for
the execution of the works of Branch Sewerage Networks in
Central District, Jedah from CWC, it had actually received the
predominant share of the works awarded to BEBSA, that is, SAR
250 million out of the total of SAR 308 million awarded to
BEBSA. We are also of the opinion that since the Plaintiff had
approached the Court with unclean hands, it had disentitled
itself from any injunctory relief. Apart from the fact that on the
refusal to grant injunctory relief the main relief in the suit had
become infructuous, misrepresentation of facts is sufficient
reason for the dismissal of the suit itself.
27. The Appeal is dismissed. Since the Plaintiff/Appellant has
failed altogether in substantiating any of the grounds urged by
it, this is a fit case for awarding actual costs. We, however,
direct the Plaintiff/Appellant to pay costs of Rupees 20,000/- to
Vijaya Bank within four weeks from today.
28. Trial Court record be sent back.
( VIKRAMAJIT SEN )
JUDGE
( MANMOHAN SINGH )
January 20, 2010 JUDGE
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