# SVENSKA HANDELSBANKEN v. MIS INDIAN CHARGE CHROME AND ORS

- **Citation:** [1993] Supp. 3 S.C.R. 323
- **Court:** Supreme Court of India
- **Decided:** 1993-10-15
- **Case number:** Civil Appeal No. 5433 of 1993
- **Bench:** J.S. Verma, Yogeshwar Dayal, B.P. Jeevan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/svenska-handelsbanken-v-mis-indian-charge-chrome-and-ors-12019
- **Pages:** 45

## Headnote

Civil Procedure Code, 1908-0rder 39, Rule I-Bank Guarantee-Injunction against encashment of-Principles of-Proof of prima f acie case of
fraud and i"etrievable injury.
Civil Procedure Code, 190~Section 96-Appeal -Duty of Appellate
Court.
A
B
c
Sale of Goods Act, 1930-Sections 12(3), 59-Breach of wa"anty-Right to claim for damages.
D
Evidence Act, 1872-Section 92-Written contract-Court deba"ed
from looking into oral evidenc~ceptions.
In 1982, defendant No. 13, a company, issued a global tender for
setting up a captive power plant, viz, a coal-fired steam power plant. The E
tender indicated that credit by the supplier will be preferred. Defendants
1 to 3, the suppliers submitted their tenders. They approached defendant
No. 4, one of the lenders to finance the project. Enquires were made to find
out the possibilities for financial assistance by the Swedish Government
in the form of interest at subsidised rates. Since 85% of the foreign F
exchange portion of the total price of the project was to be financed,
discussions were held between the borrower and defendant No. 4 for
finalising the terms an conditions of the loans and between the borrower
and the suppliers regard to the terms and conditions of the loans so as to
ensure that the credit agreements would be in accordance with the Swedish G
law and regulations for subsidised export credit facilities. Subsequently ·
contracts were entered into between the borrower, plaintiff and the suppliers for setting up the power plant and for supplying the machinery and
other equipments for the plant to the borrower.
Defendant No. 4 formed a consortium of banks i.e. defendants 5 to H
323
..
324
SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.
A
11, Swedish Banks for financing the project. These lenders entered into
credit agreements with the borrower. The credit agreements were entered
into by defendant No. 4 for itself and on behalf of defendants 5 to 11 under
which the lenders agreed to lend 85% of the foreign exchange portion of
the cost of the project to the borrower by way of certain credit facilities.
B
c
All c~edit agreements inter alia purported to provide payments by the
lenders to the suppliers on various documents, as provided in the credit
agreements being presented to the lenders and also against a notice of
drawdown by the borrower. The loans were required to be repaid by equal
semi-annual consecutive instalments. Repayments were required by the
borrower to be made without demand or notice. It was specifically provided
in the credit agreements that the liability of the borrower to effect any
payment under the Agreement was unconditional and not dependent upon
the performance of the contracts between the borrower and the supplier.
The credit agreements also provided that the borrower shall furnish
guarantees in favour of the lenders as security of the loans covering 100%
D of each of the loans plus if!-terest, costs and fees payable under the credit
agreements. The agreements also contained an arbitration clause. The
lenders were, as a matter of law and express agreement, in no way connected or related to or dependent upon the contracts entered into between
the borrower and the suppliers. At the instance of defendant No. 4,
E
F
G
Industrial Development Bank of India, defendant No. 12 provided the bank
guarantee for the payments to be made by lenders to the suppliers. In
order to ensure that the guarantor would be liable in all circumstances in
. the event of the borrower failing to carry out its obligations, .the lenders
insisted that the guarantees very clearly made express provision to ·be
unconditional which were insulated from any possible dispute between the
borrower and the suppliers and even the borrower and the lenders.
In the year 1989 the plaintiff took over the plant and issued a taking
over certificate. Defendant No. 4, lender was to disburse the balance 5% of
the payment to defendants 1 and 2. the plaintiff authorised defendant No.
4 to disburse the balance 5% of the pa

## Text

_Characters 0–39,974 of 113,090. This is a partial read: ask again with offset=39974 for what follows._

SVENSKA HANDELSBANKEN
v.
MIS INDIAN CHARGE CHROME AND ORS.
OCTOBER 15, 1993
(J.S. VERMA, YOGESHWAR DAYAL AND
B.P. JEEVAN REDDY, JJ.)
Civil Procedure Code, 1908-0rder 39, Rule I-Bank Guarantee-Injunction against encashment of-Principles of-Proof of prima f acie case of
fraud and i"etrievable injury.
Civil Procedure Code, 190~Section 96-Appeal -Duty of Appellate
Court.
A
B
c
Sale of Goods Act, 1930-Sections 12(3), 59-Breach of wa"anty-Right to claim for damages.
D
Evidence Act, 1872-Section 92-Written contract-Court deba"ed
from looking into oral evidenc~ceptions.
In 1982, defendant No. 13, a company, issued a global tender for
setting up a captive power plant, viz, a coal-fired steam power plant. The E
tender indicated that credit by the supplier will be preferred. Defendants
1 to 3, the suppliers submitted their tenders. They approached defendant
No. 4, one of the lenders to finance the project. Enquires were made to find
out the possibilities for financial assistance by the Swedish Government
in the form of interest at subsidised rates. Since 85% of the foreign F
exchange portion of the total price of the project was to be financed,
discussions were held between the borrower and defendant No. 4 for
finalising the terms an conditions of the loans and between the borrower
and the suppliers regard to the terms and conditions of the loans so as to
ensure that the credit agreements would be in accordance with the Swedish G
law and regulations for subsidised export credit facilities. Subsequently ·
contracts were entered into between the borrower, plaintiff and the suppliers for setting up the power plant and for supplying the machinery and
other equipments for the plant to the borrower.
Defendant No. 4 formed a consortium of banks i.e. defendants 5 to H
323
..
324
SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.
A
11, Swedish Banks for financing the project. These lenders entered into
credit agreements with the borrower. The credit agreements were entered
into by defendant No. 4 for itself and on behalf of defendants 5 to 11 under
which the lenders agreed to lend 85% of the foreign exchange portion of
the cost of the project to the borrower by way of certain credit facilities.
B
c
All c~edit agreements inter alia purported to provide payments by the
lenders to the suppliers on various documents, as provided in the credit
agreements being presented to the lenders and also against a notice of
drawdown by the borrower. The loans were required to be repaid by equal
semi-annual consecutive instalments. Repayments were required by the
borrower to be made without demand or notice. It was specifically provided
in the credit agreements that the liability of the borrower to effect any
payment under the Agreement was unconditional and not dependent upon
the performance of the contracts between the borrower and the supplier.
The credit agreements also provided that the borrower shall furnish
guarantees in favour of the lenders as security of the loans covering 100%
D of each of the loans plus if!-terest, costs and fees payable under the credit
agreements. The agreements also contained an arbitration clause. The
lenders were, as a matter of law and express agreement, in no way connected or related to or dependent upon the contracts entered into between
the borrower and the suppliers. At the instance of defendant No. 4,
E
F
G
Industrial Development Bank of India, defendant No. 12 provided the bank
guarantee for the payments to be made by lenders to the suppliers. In
order to ensure that the guarantor would be liable in all circumstances in
. the event of the borrower failing to carry out its obligations, .the lenders
insisted that the guarantees very clearly made express provision to ·be
unconditional which were insulated from any possible dispute between the
borrower and the suppliers and even the borrower and the lenders.
In the year 1989 the plaintiff took over the plant and issued a taking
over certificate. Defendant No. 4, lender was to disburse the balance 5% of
the payment to defendants 1 and 2. the plaintiff authorised defendant No.
4 to disburse the balance 5% of the payment to defendant No.3 as well.
Amounts ~.ue to the suppliers were paid by the lenders on instruction from
the borrower, plain~iff and the suppliers had been paid in full by the
lenders. After the issuance of the take over certificate by the plaintiff, three
instalments of payments were made by the guarantor on behalf of the
plaintiff as per their instructions. In the year 1991, the plaintiff filed a civil
H . suit for a declaration that the taking over certificate dated 25th June, 1~89
-
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HANDELSnANKEN i·. CHARGE CHROME
325
was ''oicl/voidable instrument, that the plaintiff was entitled to dimuni· A
thin/extinction of price towards the power plant, a decree of declaration
that the guarantees obtained from Industrial Development Bank of India,
defendants 12 and 13 by defendants 1 to 11 were void/voidable instruments
and sought to be delivered and cancelled, a decree of perpetual injunction
restraining defendants 12 and 13 from making payments falling due under B
any guarantee to defendant No. 4 and/or defendant Nos. 4 to 11 and a
decree or p2rpetual injunction restraining defendants 4 to 11 from recall·
ing loan and/or taking any step from recovering the said loan either in full
or in part, etc. etc.
The basis of the plaintiff's claim against defendants 1 to 12 was that C
defendant Nos. 1 to 3 had promised to supply the captive power plant of
the capacity of 108 MW whereas on working, the plant was found to be of
the capacity of 60 MW. The case of the plaintiff further was that all th~
agreements between the borrower and the suppliers and borrower and
lenders were inter-connected and constituted one transaction and were D
vitiated by fraud committed by defendants 1 to 4. It was pleaded that the
plaintiff was fraudulently let into entering of contracts with the suppliers
by fraud of the suppliers and defendant No. 4, lender. The suppliers were
not competent enough to manufacture 108 M.W. plant and they
fraudulently persuaded the plaintiff to go in for a 'stoker fired' boiler E
instead of a 'pulverised fuel' boiler inspite of the recommendations of the
Central Electricity Authority to the contrary. The representatives of the
consortium/suppliers represented to the plaintiff that the recommenda·
tions of the Central Electricity Authority were not correct. The defendants
F
1 to 3 further represented that they had arranged credit facility for the
proposed captive power plant through defendant No. 4 at a very low
interest rate and specifically indicated that their offer was limited to the
setting up of only 'stoker tired' boilers. It was alleged in the plaint that the
plaintiff relying on the judgment, representation and advice given by the
suppliers decide~ to go ahead with setting up of the power plant; that
subsequently the defendant No. 4 on behalf of itself and defendants 5 to G
11 approached the plaintiff directly and represented that they would
finance the project if the plaintiff accepted the offer of suppliers; that
defendant No. 4 represented to the plaintiff that the suppliers were the
valued clients of defendant No. 4; that defendant No. 4 alongwith defendant
Nos. 1 to 3 prepared a feasibility report for setting up 108 M.W. plaint; H
326
SUPREME COURTREPORTS (1993] SUPP. 3 S.C.R.
A
that defendant No. 4 in fact, acted as representative or agent of defendant
Nos. 1. to 3, that the plaintiff rel~ing upon the representations made by
defendants 1 to 3 and 4 entered into separate contracts with the suppliers
for erection and commissioning of the capth·e power plant; and that the
condu~.t of defendants 1 to 4 clearly showed that they made fraudulent
B
representations to the plaintiff which were false to the knowledge of
defendants 1 to 4 to induce the plaintiff to enter into agreement \\ith the
suppliers.
Defendant No. 12 furnished the guarantees as per direction of this
Court on a writ petition filed by the plaintiff to direct defendant No. 12 to
C
furnish the guarantees in relation to the contracts.
In relation to the application for ad interim injunction, defendant No.
4 denied the case of fraud against the lenders. I also . challenged the
jurisdiction of the trial court to entertain the suit as well as the miscel·
D laneous application in view of the provision for arbitration. It was pleaded
that all loan agreements were separately guaranteed by defendant No. 12
as primary obliger and not as a surety and the amount was payable by
defendant No. 12 upon first demand; that the liability of the borrower was
unconditional and the payment to the lenders was not in any way affected
E
by any other claim which the borrower might have against the supplier;
~hat all disbursements and payments under the loan agreements were
made by defendant No. 4 to defendant Nos. 1 to 3 in Sweden and they had
been paid in full and it was only the lenders, who had to be paid by the
borrower and in view of such express provision in the loan agreements the
Indian Courts had no jurisdiction to entertain the suit or the miscel·
p
laneous case as against the lender; that if the order for injunction was
vacated no irreparable loss would be caused to the plaintiff because the
amount could always be recovered from the banks, if any amount was
declared repayable by them; that the lenders were large and reputable
banks and tha~ the plaintiff had no prima f acie nor the balance of conG venience was in its favour; that the 1oan agreements provided a complete
answer to the claim of the plaintiff; that the plaintiff attempted to allege
fraud but the lenders had nothing to do with the negotiations or agree·
ments or subsequent performance of the project; that the lenders had no
concern with the suppliers with regard to the alleged fraud; that the
plaintiff had waited nearly seven years since the signing of the loan
H agreements and three years for commissioning of the plant before raising
:
HANDELSBANKEN v. CHARGE CHROME
327
such spurious assertions and this would show that there was no prima f acie A
case in favour of the plaintiff.
Defendant No. 12 the guarantors also filed objections to the application for interim injunction with regard to the guarantee executed by defend1mt No. 12 in favour of defendants 4 to 11. It was pleaded that the plaintifI
itself had filed Writ Petition and the Supreme Court directed the defendant B
No.12 to make disbursements and to issue guarantee; that the jurisdiction
of the Indian Court was expressly ousted; that under clause 1.2 of the
payment guarantee, the guarantee shall not be impaired by any dispute or
claim with regard the borrower and the suppliers or between the borrower
and the lenders; that the alleged dispute or the plaintiff with the suppliers C
did not affect the liability or obligation of defendant No. 12; that in case
defendant No. U was restrained from honouring Its obligation under the
payment guarantee executive by It, this will seriously affect its image and
financial reputation In international market; that defendant No. 12 was
neither aware nor concemed with any fraud.
The trial Court held that defendant No. 12 had not committed any
fraud nor It had any knowledge of it on the material produced; that the
project report was not prepared by defendant no. 4; that the defendant No.
D
4 made the payments to the suppliers only on instruction and notice issued · · ·
by the plaintiff/borrower as per the credit agreements; that there was no E
direct allegation offraud against defendant Nos. 4to11; that defendant No.
4 being a banker had no concern with the agreements executed between the
plaintiff and supplier and that the agreements should be based for deciding
the Issue and the dues of the tenders as per the agree.ments between the
plaintiff and the lenders provided that all amounts payable by the borrower
under the agreement shall be paid without set off or counter claim and F
liability of the borrower to effect any payment under these agreements was
unconditional and was not in anyway dependant on the performance of the
contracts or be affected by any other claim which the borrower may have
against the suppliers or against any other party. Therefore no adjustments
could be made so far as the repayment of the loans with that of the claim
of the plaintiff against defendants 1 to 3 which was yet to be adjudicated. G
It was held that the bank ~arantee had been issued by defendant No. 12
in favour or the lenders on the direction issued by the Supreme Court and,
therefore, no fraud had been played in execution or the bank guarantee; that
the breach or terms between the plaintilf and defendants 1 to 3 did not
prima facie give rise to any cause or action against defendants 4 to 11 and H
328
syPREME COURT REPORTS [1993) SUPP. 3 S.C.R.
A
for breach of contracts by defendants 1 to 3 remedies were available to the
plaintiff; that the bank guarantee was independent of thP- contracts between
the plaintiff and the suppliers and the same c<mld be enforced without
reference to any claim or counter claim arising from the main contracts
between the plaintiff and defendant 1to3. The Court held that the'plaintiff
B
c
had failed to establish prima f acie case of established fraud against def en· .
dants 4 to 11, therefore, there was no prim a f acie case in favour of the
plaintiff and that the plaintiff will not suffer any irrepairable loss and the
balance of convenience was also against the plaintiff and in favour of
defendants 4 to 11. On these findings, the trial court vacated the ad interim
injunction and dismissed the application for interim relief.
On appeal, the High Court accepted appeal tiled on behalf of the
plaintiff while injuncting defendant Nos. 4 to 12 from encashing the bank
guarantee furnished by Industrial Develoi:;ment Bank of India in favour of .
defendant Nos. 4 to 11 for a period of 2 years of till the disposal of the
D suit. The Court noticed that defendant No. 4 had already paid to the
supplier and that defendants Nos. S to 11 were not directly connected with
the captive power plant, there was not question of any restraint of·them;
that since defendant No. 4 was the lender and the plaintiff was the
borrower principles of the guarantee would not be strictly applicable and
the general principles of injunctions on lender would alone be applicable;
E that the terms of clause 2.1 of the guarantee given by defendant No. 12 .in
favour of defendants 4 to 11 created an obligation on defendant No. 12 to
pay to defendant No. 4 upon first demand if the plaintiff did not pay any
amount when due or the loan was declared default. There was neither any
demand nor a declaration of default and much before the same the suit
F
had been tiled alleging fraud in the transaction. The Court observed that
on the receipt or the plaint the defendant No. 12 was required to make
investigation whether there was a fraud and how defendant No. 4 was
connected therewith. Defendant No. 12 without making any enquiry ought
not to have entered appearance to contest the claim of the plaintiff and
G ought to have waited till the order of the court. The Court held that on the
facts its could not be said that defendant No. 4 was as innocent as it
claimed to be and that the inference of fraud was to be drawn not from
individual event. Totality of the events cummulatively had the effect of
fraud and in this case, if the facts and circumstances from the stage of
global tender till the suit was filed were considered together, a clear
. H impression of fraud in the transaction by defendants 1 to 3 was -created
(
\
.. ,_
f
-<
HANDELSBANKEN v. CHARGE CHROME
329
and defendant No. 4 could not be fully dissociated from it. On balance of A
convenience the Court held that it was favour of the plaintiff. Considering
the nature of injunction, the High Court issued a direction to defendant
No 4 not to insist defendant No. 12 for payment for two years till the end
of 1993 and a direction to defendant No. 12 not to pay defendant No. 4 till
that period on the basis of guarantee or till the disposal of the suit which
ever was earlier.
This appeal had been filed against the judgment and order of the
High Court.
Allowing the appeal, this Court
HELD : 1. The High Court totally misdirected itself in assuming that
B
c
the present application for interim relief against the enforcement of bank
guarantee was not to be decided strictly on principles of injunction _in
relation to bank guar&ntee but general principles of injunction on lenders · D
would be applicable and on that basis proceeded to decide the matter.
(348-H, 349-A]
2. Whenever an appeal is heard it is the duty of the appellate court
to examine the findings of the trial court and ifthe findings of the trial court
are not correct, to deal with it. In present case the High Court did not even E
notice the findings of the trial court. One of the basic findings of the trial
court was that there was no material of established fraud against defendant
No. 4 nor the defendant No. ~ had any knowledge of any fraud having
committed by the defendants No. 1 to 3. The allegation of fraud against
defendant No. 4 had been made on suspicion. Another important finding
given by the trial court was that one had to look at the actual agreements F
executed between the parties and defendants 4 to 11 had not committed any
breach of agreements with the plaintiff. The trial court noticed that the
agreements executed by defendants 4 to 11 were not incidental to the design·
ing, manufacturing, erection and fabrication of the project and defendant
No. 4 being a banker had no concern with the agreements executed between
the plaintiff and the suppliers. It was recorded that the rights and obliga- G
tions of the parties flow from the agreements and, therefore, the agreements
should be the basis for deciding the issue. Again the trial court had very
specifically held that in view of the agreements between the lenders and
borrower, breach, if any, of the agreements by defendants 1 to 3 and claim,
if any, of the plaintiff against defendants 1 to 3 would be of no effect on the H
330
SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.
A
agreements between the borrower and lenders. None of these findings were
either noticed of met by the High Court. On the other hand the High Court
after noticing that the agreements between the borrower and suppliers were
separate from the agreements between the lenders and borrower it concluded that defendant No. 4 had knowledge of the nature of the work to be
B
c
D
E
F
executive by defendant 1 to 3. Thus there was collaboration with such links .
that agreement of defendant No. 4 could not be separately read at this stage
while considering the question of injunction. (349-B-G]
3. Section 92 of the Evidence Act debars court from looking into oral
evidence once the contract is executed in writing except as provided for in
six provisos thereof. The High Court found a strong prim a f acie case
against defendant No. 4 merely on reading the plaint. Pleadings make only
allegation or averments of facts. Merely pleadings did not make a strong
case of prime facie fraud. The material and evidence had to show it. ·No
material whatsoever was referred to by the High Court. [349-H, 350-A]
A.L.N. Narayanan Chettiyar and another v. Official Assignee, High
Court Rangoon and another, A.I.R. (1941) Privy Council 93, relied on.
4. This court was prima facie debarred from looking at va~ious
proposals, drafts, project reports, if any, before the contracts between the
borrower and defendant Nos. 1 to 3 on one hand and the credit agreements
between the borrower and the lenders having been executed later. Facts
which come within provisos 1 to 6 to Section 92 of the Evidence Act can be
·proved. The plaintiff could have resorted to proviso 1 to Section 92 of the
Evidence Act. It was clear from the averments in the plaint that the
plaintiff was not seeking cancellation of any of the agreements either with
the suppliers or the lenders. In fact the plaintiff prayed for dimunition of
the price towards the power plant by way of breach of contracts, goods
being not of the specifications. The plaintiff prayed for avoidance of the
take over certificate. Viz-a-viz taking over certificate there was no allegation of coercion or fraud against defendant No. 4 at all. Neither the trial
G court nor the High Court was required to go into the questicn of fraud on
behalf of defendants 1 to 3 as there was no interim relief being claimed
against them. (350-F, 351-C, 351-E-F]
5. In case of confirmed bank guarantees/irrevocable letters of credit,
it cannot be interfered with unless there is fraud and irretrievable injustice
H involved in the case and fraud has to be an established fraud. [358·A]
.. •
HANDELSBANKEN v. CHARGE CHROME
331
I
Elian and Rab bath (Trading as Elian & Rebbath) v. Matsas and Matsa.1· A
and othe1~ (1966) 2 Lloyd's List Law Reports 495 and General Electlic
Technical Se1vices Company /11(._. v. Punj Sons (P) Ltd. and another, [1991]
2 S.C.R. 412, relied on.
Itek Corporation v. The First National bank of Boston etc., 566 Federal
Supplement 1210; Handerson v. Candian Imperial bank of Commerce and
Peat Marwick Ltd., 40 British Columbia Law Reports 318 and NMC
Enterprises, Inc v. Columbia Broadcasting System, Inc., 14 UCC Reporting
Service 1427, distinguished.
Halsbwy, Fourth Edition Vol. 9 para 542, referred to.
In the present case prime f acie the provision for capacity of the power
plant being of 108 M.W. was a condition. Therefore, the plaintiff could have
repudiated the contract as provided in Sec!ion 12(2) of the Sale of Goods
B
c
Act or treated as a warranty by waiving the condition or elect to treat the
breach of the condition as a breach of warranty and not as a ground for D
treating the contract as repudiated. The plaintiff has not repudiated the
contract. In fact it was working with the power plant and, therefore, the
breach of condition had been treated by the plaintiff as a breach of warranty
and in view of Section 12(3) of the Sale of Goods Act, the breach of warranty
gives a right to claim for damages but not a right to reject the goods and E
treat the contract as repudiated. Even the prayer in the plaint was for
dimunition of the price of the power plant and the relief was based on
Section 59 of the Sale of Goods Act. The contracts between the lenders and
the borrower were not vitiated by any fraud much less established fraud and
there was no question of irretrievable injury. Therefore, there was no reason
for the High Court to set aside the order of the trial court. Again there was
F
no case of any irretrievable injury as there was no difficulty in the judgment
of this country being executable in the courts in Sweden. [366-B-F]
6. The High court was not right in working on mere suspicion of
fraud or merely going by the allegations in the plaint without prim a f acie G
case of fraud being spelt out from the material on record. The High Court
was also in error in considering the question of balance of convenience. In
law relating to bank guarantees, a party seeking injunction from encashing
of bank guarantee by the supplier has to show prim a f acie case of established fraud and an irretrievable injury. Here there was no such problem.
Once the plaintiff was able to establish fraud against the supplier-cum- H
332
SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.
· A lenders and obtains any decree for damages or dimunition in price, ther.e.
was no problem for effecting recoveries in a friendly country where the
bankers and the suppliers were located .. Nothing had been pointed out to
show that the decree passed by the Indian 'court was not executable in
· Sweden. The High Court totally ignored the irretrievable injury which will
B be caused to defendant No. 12 in not honouring the bank guarantee in
international market which may cause grievous and irretrievable damage
to the interest of the country as opposed to the loss of money to the
borrower plaintiff. There was no question of defendant No. 4 not making
any demand. The instalments for repayment of the loans had already been
fixed and liable to be paid without demand by defendant No. 4. Defendant
C No. 12 was under a duty to pay the instalments regularly on a fixed date
without any demand to defendant No. 4. [366-G-H, 367-A·D)
7. The remark made by the High Court against defendant No. 12
were wholly uncalled for. Defendant No. 12 was party to the suit. It was
entitled to enter appearance on its behalf and to take the pleas open to it
D
OD facts and in law. It had also to maintain its international credibility
·and not merely be guided by the loss to our dtizens. It had also to main$ain
its international credibility. Credibility is the most important thing for any
banking institution. [348-F-G]
E
CIVIL APPELLATE JURISDICTION Civil Appeal No. 5433 of
1993.
From the Judgment and Order dated 11.10.1991 of the Orissa High
Court in Misc. Appeal No. 370 of 1991.
F
K. Parasaran, V.A. Bobde, R.F. Nariman and K.J. John for the
Appellant.
Deepankar Gupta, Solicitor General, K.K. Venugopal, Jaydeep
Gupta, A.K. Sil, G. Joshi and G. Kandpal for the Respondents.
G
The Judgment of the Court was delivered by
YOGESHWAR DAYAL, J. Special leave granted. Heard.
This is an appeal by M/s. Svenska Handelsbanken (defendant No. 4)
against the judgment and order dated 11th October, 1991 of the High
H Court of Orissa in Misc. Appeal No. 370 of 1991 whereby the Single Judge
HANDELSBANKENv. CHARGECHROME[DAYAL,J.)
333
of the High Court accepted the appeal filed on behalf of the plaintiff while A
injuncting defendant Nos. 4 to 12 from encashing the bank guarantee
furnished by Industrial Development Bank of India (defendant No. 12) in
favour of defendant Nos. 4 to 11 for a period of 2 years of till the disposal
of the suit whichever is earlier and set side an order passed by the
Subordinate Judge. Cuttack dated 14th August, 1991 vacating an order of
ad interim injunction dated 25th April, 1991 and dismissing the application B
of ad interim injunction (Misc. Case No. 143 of 1991) against defendants
4 to 12.
We find it convenient to refer to the parties as they were described
in the suit.
.The suit out of which the present appeal arises was filed by the
plaintiff (hereinafter referred to as the 'borrower') before the Subordinate
Judge, Cuttack, inter alia for a declaration that the guarantees executed
c
by Industrial Development Bank of India India, defendant No. 12
(hereinafter referred to as the 'guarantor') in favour of defendant Nos. 4 D
and 5 to 11 (hereinafter referred to as the 'lenders') are void and for an
order of injunction restraining the guarantor from making payments under
the guarantees to the 'lenders'.
For appreciating the submissions make on behalf of the parties the
facts shortly stated, leading to the filing of the present appeals are as E
follows:
Sometime in 1982 M/s. Indian Metals & Ferro Alloys Ltd., (in short
'IMFA' - defendant No. 13) issued a global tender for setting up a captive
power plant, viz., a coal-fired steam power plant in Choudwar, Orissa. The
tender indicated that cre.dit by the suppliers will be preferred. Defendants F
1 to 3 (hereinafter referred to as the 'suppliers' submitted their tenders in
this regard. Since the tender indicated that suppliers' credit for the entire
project is preferred, the suppliers approached defendant No. 4 (one of the
lenders) to finance the project. Enquiries were made to find out the
possibilities for financial assistance by the Swedish Government in the form G
of interest at subsidised rates.
Since 85% of the foreign exchange portion of the total price of the
project was to be financed, discussions were held between the borrower
and defendant No. 4 (one of the lenders) for finalising the terms and
conditions of the loans. Discussions were also held between the borrower H
•
334
SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R ..
A
and the suppliers in regard to the terms and conditions of the loans so as
to ensure that the credit agreements would be in accordance with the
Swedish Law and regulations for sul?sidiscd export credit facilities.
B
c
The borrower made extensive investigation itself over a period of
about two years into the details of the proposed plant.
On or about 28th September, 1984 contracts were entered into
between the borrower (plaintift) and the suppliers for setting up 'the power
plant and for supplying the machinery and other equipments for the plant
to the borrower.
Defendant No. 4 (one of the lenders) formed a consortium of banks
i.e. defendants 5 to 11 (Swedish Banks) (lenders) and an American Bank
for financing the project. The American Bank subsequently assigned its
interest in favour of one of the defendant Bank (lender). The lenders
entered into two credit agreements dated 30th October, 1984 with the
D borrower. The credit agreements were entered into by defendant No. 4 for
itself and on behalf of defendant 5 to 11 under which the lenders agreed
to lend 85% of the foreign exchange portion of the cost of the project to
the borrower by way of certain credit facilities. A third credit agreement
dated 15th November, 1984 between the borrower and defendant No. 4
E
F
(lender) in its individual capacity was entered into. The first two credit
agreements were for the 'loans of the U.S. Dollars equivalent of Swedish
1<roner 370, 855,000 and 239,700,000 and the third was for the loan of the
sum of U.S. Dollars 1, 754,000. Two additional credit agreements were also
entered into between the borrower and the lenders supplemental to the
first and second credit agreements on 23rd December, 1987 providing for
additional loans of 10% of the original loans which the borrower required
to finance cost escalations caused by delay. These two additional credit
agreements were for U.S. Dollars equivalent of Swedish Kroner 37,085,000 ·
and 23,970,000. All the credit agreements inter alia purported to provide
payments by the lenders to the suppliers on various documents, as provided
in the credit agreements; being presented to the lenders and also against
G a notice of drawdown by the borrower. In relation to the third credit
agreement the disbursements to be m:i.de directly to the lenders in respect
of the financial cost payable by the borrower upon notice of drawdown by
the borrower.
The loans were required to be re-paid by twenty (subsequently
H amended to eighteen) equal semi-annual (six monthly) consecutive instal-
•
HANDELSB'ANKEN v. CHARGE CHROME [DAY AL, J.)
335
ments. The number of instalments and date of commencement of the A
instalments being separately provided for under each credit agreement.
Repayments we!e required by the borrower to be made without demand
or notice. It W-as specifically provided in the credit agreements that :
"Any amounts payable by the Borrower shall be paid without
set-off or counter claim. The liability of the Borrower to effect any B
payment under this Agreement is thus unconditional and shall not
in any way be dependent upon the performance of the Contracts
i.e. the agreements between the Borrower and the suppliers-Exporters or be affected by any other claim which the Borrower may
have against the Exporters or against any other party (natural or C
le~al) collaborating with the Exporters.
(These are the actual words of the relevant clause in each credit
agreement.)"
The credit agreements also provided :
"All disputes arising from the provisions of this Agreement or its
performance shall be finally settled by arbitration under the Rules
D
of Conciliation and Arbitration of the International Chamber of
Commerce by three arbitrators appointed in accordance with these E
rules. Arbitration shall take place in rules. Arbitration shall take
place in Stockholm and be conducted in the English language. The
award of the arbitral tribunal is final and obligatory for the parties
without any right for a further appeal or contestation of its fulfilment. The Borrower hereby expressly submits to the jurisdiction
of the above mentioned arbitration tribunal.
F
(These are the actual words of the relevant clause in each Credit
Agreement.)"
The credit agreements also provided that the borrower shall furnish
guarantees in favour of the lenders as security for the loans covering 100% G
of each of the loans plus interest, costs and fees payable under the credit
agreements. As quoted above, the agreements also contained an arbitration
clause which contemplates disputes arising from the agreements to be
finally settled by arbitration under the rules of Conciliation and Arbitration
of the International Chamber of Commerce by three arbitrators appoints . H
336
SUPREME COURT REPORTS (1993] SUPP. 3 S.C.R.
A
in accordance with these rules. The arbitration is provided to take place at
Stockholm.
c
. o
E
F
It is thus prim a f acie clear from the aforesaid terms of the credit
agreements with the borrower that the lenders are, as a matter of law and
express agreement, in no way connected or related to or dependent upon
the contracts e~tered into between the borrower and the suppliers. At the
instance of defendant No. 4, defendant No. 12 provided the bank guarantee
for the payments to be made by lenders to the suppliers. In order to ensure
that the guarantor would be liable in all circumstances in the event of the
borrower failing to carry out its obligations, the lenders insisted that the
guarantees very clearly made express provision to be unconditional first
demand guarantees which we are insulated from any possible dispute
between the borrower and the suppliers and even the borrower and the
len~ers. In fact the form of guarantee was itself enclosed as all Appendix
to each credit agreement.
.
The terms of payment contained in the contracts between the borrower and defendant~ 1 and 2 (supplier) which deals with disbursement of
last 5% of the respective contract price reads thus :
"5% of the contract price at the date of the purchasers' taking over
of the Power Plant against presentation of a taking over certificate,
issued by the purchaser, however, not later than 35 months after
the date this contract has come into force unless the date of taking
over is delayed due to reasons for which the supplier is responsible."
Defendant No. 4 (lender) was to disburse the balance 5% payment
to defendants 1 & 2.
On 24th June, 1989 the plaintiff (borrower) took over the plant and
on 25th June, 1989 issued a taking over -::ertificate. On 28th July, 1989 the
G plaintiff authorised defendant No. 4 to disburse the balance 5% of the
payment to defendant No. 3 well.
It is common case that the amounts due to the suppliers were paid
by the lenders on instructions from the borrower, plaintiff and the suppliers
have been paid in full by the lenders. After the issuance of the take over
H certificate by the plaintiff, three instalments of payments were made by the
-
HANDELSBANKENv. CHARGECHROME(DAYAL,J.]
337
guarantor on behalf of the plaintiff as per their instructions vide payments A
dated 31st October, 1989, 30th April, 1990 and 31st October; 1990 under
the first two credit agreements of the sum of US Dollars 9,033,324.47,
8,810,563.87 and 8,681,062.40 towards principal plus interest.
Again the three instalments were paid by the IDBI/guarantor under
the third agreement on 15th October, 1989, 15th May, 1990 and 15 Novem~ B
ber, 1990 amounting to US Dollars 301,339.99, 278,468.14 and 270,778.54
towards principal plus interest.
It was on or about April 28, 1991 that the present suit was filed by
the plaintiff for : (a) a declaration that the taking over certificate dated C
25th June, 1989 is void/voidable instrument and the same may be delivered
and cancelled, (b) it be further declared that the plaintiff is entitled to
dimunition/extinction of price towards the power plant as mentioned in
Annexure 'A' to the plaint, in the alternative, if the court finds, that any
amount is payable to defendants 1 to 11 jointly or severally, the saine be
directed to be paid as per reschedule of payment to the calculated on the D
basis of a cash flow basis on actual generation as determined on enquiry,
(c) a decree of declaration that the guarantees obtained from defendants
12 and 13 by defendants 1 to 11 are void/voidable instruments and ought
to be delivered and cancelled, ( d) a decree of perpetual injunction restraining defendants 12 and 13 from making payments dated 30th April and
payments falling due on subsequent dates under any guarantee to defenE
dant No. 4 and/or defendant Nos. 4 to 11, and (e) a decree of perpetual
injunction restraining defendants 4 to 11 from recalling the loan and/or
taking any s~eps from recovering the said loan either in full or in part, etc.
ct~
.
The basis of the plaintiffs claim against defendants 1 to 12 was that
defendant Nos. 1 to 3 had promised to supply the captive power plant of
the capacity of 108 M.W. worked with talcher coal whereas on working,
F
the plant was found to be of the capacity of 60 M.W. The case of the
plaintiff further· was that all the agreements between the borrower and the
suppliers and borrower and lenders are inter-connected and constituted G
one transaction and are vitated by fraud committed by defendants 1 to 4.
It was pleaded that the plaintiff was fraudulently led into entering of
contracts with the suppliers by fraud of the suppliers and defendant No. 4,
lender. The suppliers were not competent enough to manufacture 108
M.W. plant. They fraudulently persuaded the plaintiff to go in for a 'stoker H
338
SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R..
A · fired' boiler instead of a 'pulverised fuel' boiler inspite of the recommendations of the Central Electricity Authority to the contrary. The representatives of the consortium/suppliers visited Bhubaneshwar and
Choudwar in the second week of March, 1983 and during discussions
represented to the plaintiff that the recommendations of the Central
B
Electricity Authority were not coi:rect and that their vast experience in this
field had shown that 'stoker fired' boilers were preferable over 'pulverised
fuel' boiler in the instant case, with talcher coal as the basic raw material.
The defendants 1 to. 3 further represented that they had arranged credit
facility for the proposed captive power plant through defendant No. 4 at a
L
very law interest rate and specifically indicated that their offer was limited
C
to the setting up of only 'stoker fired' boiler. It was further alleged in the
plaint that the plaintiff relying on the judgment, representation and advice
given by the suppliers decided to go ahead with setting up of the power
plant although Central Electricity authority and other advisors had expressed reservations that the boilers of the size as suggested by the supD
pliers would be less effective. Since the plaintiff had never undertaken and
were unaware of the technology/expertise required for the setting up the
captive power plant they had no other option/alternative but to rely totally
upon the skill of the suppliers in this regard. It was further pleaded that
subsequently in August, 1983 with a view to further induce the plaintiff to .
act on the representations made by consortium that the suppliers were
E .capable of setting up a 108 M.W. plant with 'stoker fired' boiler, the
defendant No. 4 on behalf of itself and defendants 5 to 11 approached the
plaintiff directly and represented that the said defendant No. 4 would
finance the project of setting up the captive power plant at a very low
interest rate if the plaintiff accepted the offer of suppliers for supply,
p
erection and commission of the said plant with a 'stoker fired' boilers. It
was alleged that defendant No. 4 further represented to the plaintiff that
the supplier are the valued clients of defendant No. 4 and that defendant
No. 4 were aware of the background and experience of the suppliers.
It was pleaded that defendant No. 4 alongwith defendant Nos.