# U.P. CO-OPERATIVE FEDERATION LTD v. SINGH CONSULTANTS & ENGINEERS (P) LTD

- **Citation:** [1988] 1 S.C.R. 1124
- **Court:** Supreme Court of India
- **Decided:** 1987-11-19
- **Case number:** Civil Appeal No. 3054 of 1987
- **Bench:** Sabyasachi Mukharji, K. Jagannatha Shetty
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/u-p-co-operative-federation-ltd-v-singh-consultants-engineers-p-ltd-9697
- **Pages:** 27

## Headnote

Performance of contract-guaranteed performance in accordance
._
with time schedule prescribed-Failure to perform obligation within time
stipulated-Effect of-Bank guarantee-Right to invoke-To injuncc
tion against.
/~~~
The appellant, a State Government enterprise, on or about May
17, 1983, entered into a contract with the respondent, a pritate limited
company, for the supply and installation of a vanaspati manufacturing
plant at a place in the district of Nainital. The contract bond contempD lated guaranteed performance of the work at various stages in accordance with the time schedule prescribed and provided for completion
and commissionin~ of the plant after trial run by May 15, 1984. According to the appellant, the time was essentially and indisputably the essence of.the contract.
E
As per the terms and conditions of the contract bond, according to
the appellant, the respondent was to furnish a performance bank
guarantee for Rs.16.5 lakhs and yet another bank guarantee for Rs.33
lakhs as security for the monies advanced by the appellant to the
respondent for undertaking the work. Both these guarantees as also the
contract bond entitled the appellant to invoke them and call for their
F realisation and encashment on the failure of the respondent to perform
the obligations for which the appellant was made the sole judge.
It was alleged that the respondent defaulted at various stages and
finally failed to complete the work within the stipulated time. The
appellant invoked the two guarantees one after the other, and thereafG ter proceeded to have the plant completed, etc. According to the appellant, the plant could actually be commissioned for commercial produc·
tion inJuly/August, 1985.
The respondent, on August 4, 1986, filed an application under
--
··--'\
section 41 of the Arbitration Act, 1940 (The Act) in the court of the Civil
'
H Judge, praying for an injunction restraining the appellant from realis·
1124
-
U.P. CO-OPT. FEDERATION v. SINGH CONSULTANTS
1U5
ing and encashing the bank guarantees. The Civil Judge dismissed the A
application. The respondent filed a revision petition before the High
Court, which allowed the same, holding that the invocation of the
performance guarantees was illegal, and the contentions of the appellant that the performance guarantees constituted independent and separate contracts between the guarantor bank and the beneficiary and
created independent rights, liabilities and obligations under the B
guarantee bonds themselves, as being "technical pleas". The High
Court, however, directed the respondent to keep alive the bank
guarantee during the pendency of the arbitration proceedings. The
appellant then moved this Court for relief by special leave.
Allowing the appeal, The Court,
HELD: Per Sabyasachi Mukharji, J.
Under the terms agreed to between the parties, there is no scope
of injunction. The High Court procee(ied on the basis that this was not
c
an injunction sought against the bank but against the appellant. But the D
net effect of the injunction is to restrain the bank from performing the
bank guarantee. That cannot be done. One cannot do indirectly what
one is not free to do directly. The respondent was not to suffer any
injustice which was irretrievable. The reseondent can sue the appellant
for damages. There cannot be any basis in the case for apprehension
that .irretrievable damage would be caused, if any. His Lordship was of E ·
the opinion that this was not a case in which injunction should be
granted. An irrevocable commitment either in the form of confirmed
bank guarantee or irrevocable letter of credit cannot be interfered with
except if a case of fraud or a case of a question of apprehension of
irretrievable injustice has been made out. This is the well-settled principle of the law in England. This is also the well-settled principle of law in F
India. No fraud and no question of irretrievable injustice was involved
in the case. [1138C-F]
In order to restrain the.operation either o

## Text

_Characters 0–39,996 of 66,721. This is a partial read: ask again with offset=39996 for what follows._

A
B
U.P. CO-OPERATIVE FEDERATION LTD.
v.
SINGH CONSULTANTS & ENGINEERS (P) LTD.
NOVEMBER 19, 1987
[SABYASACHI MUKHARJI AND K. JAGANNATHA
SHETTY, JJ.]
Performance of contract-guaranteed performance in accordance
._
with time schedule prescribed-Failure to perform obligation within time
stipulated-Effect of-Bank guarantee-Right to invoke-To injuncc
tion against.
/~~~
The appellant, a State Government enterprise, on or about May
17, 1983, entered into a contract with the respondent, a pritate limited
company, for the supply and installation of a vanaspati manufacturing
plant at a place in the district of Nainital. The contract bond contempD lated guaranteed performance of the work at various stages in accordance with the time schedule prescribed and provided for completion
and commissionin~ of the plant after trial run by May 15, 1984. According to the appellant, the time was essentially and indisputably the essence of.the contract.
E
As per the terms and conditions of the contract bond, according to
the appellant, the respondent was to furnish a performance bank
guarantee for Rs.16.5 lakhs and yet another bank guarantee for Rs.33
lakhs as security for the monies advanced by the appellant to the
respondent for undertaking the work. Both these guarantees as also the
contract bond entitled the appellant to invoke them and call for their
F realisation and encashment on the failure of the respondent to perform
the obligations for which the appellant was made the sole judge.
It was alleged that the respondent defaulted at various stages and
finally failed to complete the work within the stipulated time. The
appellant invoked the two guarantees one after the other, and thereafG ter proceeded to have the plant completed, etc. According to the appellant, the plant could actually be commissioned for commercial produc·
tion inJuly/August, 1985.
The respondent, on August 4, 1986, filed an application under
--
··--'\
section 41 of the Arbitration Act, 1940 (The Act) in the court of the Civil
'
H Judge, praying for an injunction restraining the appellant from realis·
1124
-
U.P. CO-OPT. FEDERATION v. SINGH CONSULTANTS
1U5
ing and encashing the bank guarantees. The Civil Judge dismissed the A
application. The respondent filed a revision petition before the High
Court, which allowed the same, holding that the invocation of the
performance guarantees was illegal, and the contentions of the appellant that the performance guarantees constituted independent and separate contracts between the guarantor bank and the beneficiary and
created independent rights, liabilities and obligations under the B
guarantee bonds themselves, as being "technical pleas". The High
Court, however, directed the respondent to keep alive the bank
guarantee during the pendency of the arbitration proceedings. The
appellant then moved this Court for relief by special leave.
Allowing the appeal, The Court,
HELD: Per Sabyasachi Mukharji, J.
Under the terms agreed to between the parties, there is no scope
of injunction. The High Court procee(ied on the basis that this was not
c
an injunction sought against the bank but against the appellant. But the D
net effect of the injunction is to restrain the bank from performing the
bank guarantee. That cannot be done. One cannot do indirectly what
one is not free to do directly. The respondent was not to suffer any
injustice which was irretrievable. The reseondent can sue the appellant
for damages. There cannot be any basis in the case for apprehension
that .irretrievable damage would be caused, if any. His Lordship was of E ·
the opinion that this was not a case in which injunction should be
granted. An irrevocable commitment either in the form of confirmed
bank guarantee or irrevocable letter of credit cannot be interfered with
except if a case of fraud or a case of a question of apprehension of
irretrievable injustice has been made out. This is the well-settled principle of the law in England. This is also the well-settled principle of law in F
India. No fraud and no question of irretrievable injustice was involved
in the case. [1138C-F]
In order to restrain the.operation either of irrevocable letter of
credit or of confirmed letter of credit or of bank guarantee, there
should be a serious dispute and a good prima facie case of fraud and G
special equities in the form of preventing irretrievable injustice between
the parties; otherwise, the very purpose of bank guarantees would be
negatived and the fabric of trading operation would be jeopardised.
The commitments of the banks must be honoured free from interference
by the courts; otherwise, trust in commerce internal and international
would be irreparably damaged. It is only in exceptional cases, that is, in H
1126
SUPREME COURT REPORTS
[ 1988) I S.C.R.
A cases of fraud or in cases of irretrievable injustice that the court should
interfere. This is not a case where irretrievable injustice would be done
by enforcement of the bank guarantee. This is also not a case where a
strongprima facie case of.fraud in entering into a transaction was made
out. The High Court should not have interfered with the bank
guarantee. The judgment and order of the High Court set aside. The
B order of the Civil Judge restored. [1141A·B; 11420-H)
c
Per K. JagannathaShetty, J. (concurring):
The crux of the matter relates to the obligation assumed by the
bank under a performance guarantee. [1143B)
Whether the obligation is similar to the one arising under a letter .
of credit? Whether the Court could interfere in regard to such obliga·
tion, and if so, under what circumstances? These are the questions
raised in the appeal. [1143B-C)
D
The primary question for consideration is whether the High Court
was justified in restraining the appellant from invoking the bank
guarantees. The basic nature of the case relates to the obligations
assumed by the bank under the guarantees given to the appellant. If
under the law, the bank cannot be prevented by the respondent from
honouring the credit guarantees, the appellant also cannot be resE trained from invoking the guarantees. What applies to the bank must
equally apply to the appellant. Therefore, the frame of the suit by not
impleading the bank cannot make any difference in the position of law.
Equally, it would be futile to contend that the court was justified in
granting the injunction since it has found a prima facie case in favour of
the respondent. The question of examining the prima facie case or
p
balance of convenience does not arise if the court cannot interfere with
the unconditional commitment made by the bank in the guarantees in
question. [1144C-D; 1145A-B)
The modern documentary credit had its origin from letters of
credit. The letter of credit has developed over hundreds of years of
G international trade. It was intended to facilitate the transfer of goods
between distaitt and unfamiliar buyer and seller. It was found difficult
for a buyer to pay for goods prior to their delivery. The bank's letter of
credit came to bridge this gap. In such transactions, the seller (beneficiary) receives payment from the issuing bank when he presents a
demand as per the terms of the documents. The bank must pay if the
H documents are in order and the terms of credit are satisfied. The bank,
U.P. CO-OPT. FEDERATION v. SINGH CONSULTANTS
1127
however, was not allowed to determine whether the seller had actually
shipped the goods or whether the goods conformed to the re4uirements
of the contract. Any dispute between the seller and the buyer must be
settled between themselves. The Courts, however, in carving out an
exception to this rule of absolute independence, held that if there has
been a "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. [1145C, E-H; 1146A)
A
B
l
In modern commercial transactions, various devices are used to
'-· ensnre performance by the contracting parties. The traditional letter of
- credit has taken a new meaning. Stand-by letters of credit are also used
C
in business circles. Performance bond and guarantee bond are also
devices increasingly adopted in transactions. The Courts have treated
such documents as analogous to letter of credit. [l148E)
Whether it is a traditional letter of credit or a new device, like
performance bond or performance guarantee, the obligation of the D
bank appears to be the same. Since the bank pledges its own credit,
involving its reputation, it has no defence except in the case of fraud.
The nature of the fraud that the courts talk about is the fraud of an
"egregious nature as to vitiate the entire underlying transaction". It is
the fraud of the beneficiary, not fraud of somebody else. The bank
cannot be compelled to honour the credit in such cases. In such cases, it
would be proper for the bank to ask the buyer to approach the court for
an injunction. The court, however, should not lightly interfere with the
operation of irrevocable documentary credit. In order to restrain the
operation of irrevocable letter of credit, performance bond or
guarantee, there should be a serious dispute to be tried and there should
be a goodprimafacie act of fraud. [1149E-H; 1150A)
The sound banking system may, however, require more caution in
the issuance of irrevocable documentary credit. It would be for the
banks to safeguard themselves by other means, and, generally, not for
E
F
the courts to. come to their rescue with injunctions unless there is established fraud. The appeal must be allowed, and the order of the civil G
judge, restored. [11500-E)
Hamzeh Me/as & Sons v. British Imex Industries Ltd., [1958) 2
Q.B.D. 127; Elian and Rabbath (Trading as Elian & Rabbath v. Mastas
and Mastas & Ors., [1966) 2 Lloyd's List Law Reports 495; R.D.
Harbottle (Mercantile) Ltd. and Another v. National Westminster
H
A
B
c
D
1128
SUPREME COURT REPORTS
[ 1988] I S.C.R.
Bank Ltd. and Ors., [1977] 2 All England Law Reports 862; Edward
<:
Owen Engineering Ltd. v. Barclays Bank International Ltd, [1978] 1
All England Law Reports 976; United City Merchants (Investments)
Ltd. & Ors. v. Royal Bank of Canada & Ors., [1982] 2 All England
Law Reports 720; Taxmaco Ltd. v. State Bank of India & Ors., Am
1979 Calcutta 44; State Bank of India v. The Economic Trading Co.
S.A.A. & Ors., AIR 1975 Calcutta 145; B.S. Auila Company Pvt. Ltd. I
v. Kaluram Mahadeo Prasad & Ors., AIR 1983 Calcutta 106; Union of
India & Ors. v. Meena Steels Ltd. & Another, AIR 1985 Allahabad 282;
Arul Murugan Traders v. Rashtriya Chemicals & Fertilizers Ltd. j
Bombay and another, AIR 1986 Madras 161; Tarapore & Co. Madras
v, Mis. V/o Tractors Export, Moscow & Anr., [1969] 2 SCR 920;
United Commercial Bank v. Bank of India & Ors., [1981] 3 SCR 300;-·
Centax (India) Ltd. v. Vinmar lmpex Inc. and others, [1986] 4 SCC
136; United Commercial Bank v. Bank of India & Ors., [1981] 3 SCR
300 and Bolivinter Oil SA v. Chase Mannettan Bank & Ors., [1984] 1
All E.R. 351 at 352, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3054
of 1987.
From the Judgment and Order dated 20.2.1987 of the Allahabad
High Court in Civil Revision No. 157 of 1986.
\..
E
A.B. Diwan, Sandeep Narain and Shri Narain for the Appellant.
F
G
V.M. Tarkunde, Shakeel Ahmed Syed for the Respondent.
The following Judgments were delivered by
SABYASACHI MUKHARJI, J. Special Leave granted.
In the Special Leave Petition notice was issued on 13th of July,
!987 and it was directed that the matter would be dispose"d of at the
notice stage. After hearing the rival contentions, we grant leave to
appeal and dispose of the appeal by the ordeJ hereunder.
This is an appeal from the judgment and order of the learned
single judge of the Allahabad High Court (Lucknow Bench) in Revit
sion Petition No. 157 of 1986. It appears that the appellant, a State
Government enterprise, on or about 17th of May, 1983 entered into a
contract with the respondent-a private limited company for the supH
ply and installation of a Vanaspati manufacturing plant at Harducharu
U.P. CO-OPT. FEDERATIONv. SINGHCONSULTANTS1MUKHARJI, J.l 1129
in the District of Nainital, in the State of Uttar Pradesh. The contract
bond contemplated, according to the appellant, guaranteed performance of work at various stages in accordance with the time schedule
prescribed therein and provided for completion and commissioning of
the plant after due trial run by the 15th May, J984. The appellant
contends that time was essentially and indisputably the essence of the
contract.
The contention of the appellant was that as per the terms and
A
B
.-<
conditions of the contract bond, the respondent was to furnish a
performance bank guarantee for Rs.16.5 lakhs and yet another bank
'.
guarantee for Rs.33 lakhs as security for the monies advanced by the
~appellant to the respondent for undertaking the work. Both these two c
guarantees as also the contract bond entitled the appellant to invoke
them and call for their realisation and encashment on the respondent's
failing to perform the obligations for which the appellant was made the
sole judge.
The 15th of May, 1984 was the date·fixed for completion and D
commissioning of the plant after 15 days' trial run for commercial
production. It was alleged that between the 26th of December, 1984
and 28th of January, 1985 the respondent defaulted at various stages
and finally failed to complete the work within the stipulated time. The
'· ·~
appellant invoked the two guarantees one after the other. The appellant thereafter on 15th March, 1985 proceeded to have the plant compE
leted and the plant was formally inaugurated. The appellant contends
....
that the plant could actually be commissioned for commercial production in July/August, 1985. The respondent on 4th of August, 1986 filed
a petition under section 41 of the Arbitration Act 1940 (hereinafter
called the Arbitration Act), in the Court of the Civil Judge, Lucknow
~
prayin~ for an order restraining the appellant from realising and
F
.
encashmg the bank guarantees. The learned Civil Judge for the
reasons indicated in his order dated 8.8.86 declined to issue any
injunction and dismissed the application.
' -r
Being aggrieved by the aforesaid decision, the respondent went
up before the Allahabad High Court. The learned Single Judge of the
G
Allahabad High Court, by the impugned judgment of 20th February,
1987, allowed the revision petition and held that the invocation of the
performance guarantees were illegal and further held the contentions
of the appellant that the performance guarantees constituted independent and separate contracts between the guarantor bank and the
beneficiary and created independent rights, liabilities and obligations
H
1130
SUPREME COURT REPORTS
(1988) 1 S.C.R.
A
under the guarantee bonds themselves, as being "technical pleas."
~
B
c
D
E
F
G
H
On 17th May, 1983, as mentioned hereinbefore, an agreement
had been executed between the appellant and the respondent wherein
it was decided as follows:
"WHEREAS THE PCF (the appellant herein) has decided
to set up a Vanaspati Plant of 62.5 M.T. per day Vanaspati r
Capacity, comprising of 70 M. T. per day hardening capacity based on 95% usage of soyabean oil as raw oil 62.5 M.T.
1
per day, post refining capacity, 72 M.T. deodoursisation
capacity and 72 M. T. filling and packing capacity, complete
with all necessary utilities such as water and steam Dis-~
tribution Equipments Oil Storage Section Electrification
and Distribution Equipments Automatic Weighing filling
and packing/sealing equipments and fire-fighting equipments etc, at Halducharu, District Nainital (UP) lying at
Bareilly-Haldwani road about 3.5 Kms. from Lalkuan
towards Haldwani." and the agreement further stated:-
"AND WHEREAS the seller (the respondent herein) has
undertaken to provide technical know-how and fabricate,
design, engineer, manufacture, procure, import, supply,
erect, instal, give trial runs and commission the Vanaspati
Complex as referred to above complete in all respects at
Halducharu District-Nainital (U.P.) as per specifications
contained at Annexures 'A' to 'Q' and signed by both the
parties in token of incorporation as an integral part of this
agreement with guaranteed performance on the terms and
conditions hereinafter appearing and contained.
...
AND WHEREAS the contract price here-in-after ~
mentioned is based on the 'Seller's undertaking to commission and make ready for commercial production the
said Vanaspati Complex by May 15, 1984 and if the seller
fails to do so the contract price shall stand reduced to the
extent as hereinafter provided.
AND WHEREAS the contract price hereinafter men- r
tioned is also based on the guaranteed performance of the
said Vanaspati Complex as here-in-after provided and it is
. a term of this Agreement that if the said Vanaspati Complex fails to give the guaranteed performance as hereinafter
-
-U.P. CO-OPT. FEDERATION v. SINGH CONSULTANTS (MUKHARJI, J.] 1131
specified, the contract price shall stand reduced to the A
eY,tent hereinafter provided."
Clause 1.6 stipulated that the date of commissioning and handing
over shall be the date on which the PCF takes over the complete Plant
after successful commissioning and fulfilling of guaranteed performance specified in the agreement. This clause further stated:
B
"The seller shall be deemed to have completed the erection
and commissioning after giving successful trial runs for continuous period of 15 days with all the Plants working
simultaneously. However, the seller should fulfil the Warrantees of individual plants separately also as given in the C
specifications. The complete Warrantees/Performance
guarantees shall be demonstrated by the seller over a continuous period of 15 days."
Thus the mutual obligations of the sellers as well as purchasers
were stated in the contract. It is not necessary to set out in detail all the · D
clauses, but clauses 5.2 and 5.3 are relevant and provide as follows:
"5.2 In case the seller fails to fulfil and his obligations as
referred to in this agreement the PCF shall be at liberty to
get the same completed through and other agency or
agencies without the approval of the seller and all the addiE
tional expenses so incurred by the P.C.F. shall be recoverable from the seller.
5.3 The seller also agrees to exclude/include some of the
machines equipments components from the plant as may be
desired by the PCF during the course of this agreement,
P
and cost of such machines equipments components on
reasonable actual basis shall deducted/added to from the
contract price and thus the reduced/increased contract
price shall be paid by 'the PCF _. However, the PCF should
intimate such exclusioO:/inclusion within two months from
the date of signing of the agreement. The said price of G
Rs.1,65,00,000 (Rs. one crores and sixty five lakhs only)
shall be paid by the PCF to the seller in the following
manners:·"
On or about 25th of June, 1983 two bank guarantees were
executed by Bank of India, Ghaziabad. and the bank guarantee H
A
B
c
D
E
F
G
H
1132
SUPREME COURT REPORTS
[ 1988] I S.C.R.
numbered 17/16 provided, inter alia, as follows:-
-<;-
"NOW, THEREFORE, the Bank hereby guarantees to
make unconditional payment of Rs.16.5 lacs (Rupees sixteen lacs fifty thousand only) to the Federation on demand
at its office at Lucknow without any further question or
reference to the seller on the seller's failure to fulfil the tenns
of the sale on the following terms and conditions
r
(emphasis supplied)
A) The sole judge for deciding whether the seiler has
failed to fulfil the terms of the sale, shall be the PCF.
. -.-..
B) This guarantee shall be valid upto twelve months from
the date of issue, i.e. upto 24.6.84.
C) Cl~ims, if any, must reach to be Bank in writing on or
before expiry date of this guarantee after which the Bank
will no longer be liable to make payments to the PCP.
D) Bank's liability under this guarantee deed is limited to
Rs.16.5 lacs (Rupees sixteen lacs fifty thousand only).
E) This guarantee shall not be revoked by the Bank in any
case before the expiry of its date without written permission of the Federation."
The Bank guarantee No. 17 /15 of the said date f!H'ther went on to
provide as follows:-
"AND WHEREAS to secure the said advance, the seller
requested the Bank to furnish a Bank Guarantee of the said
amount of Rs.33 lacs (Rupees thirty three lacs) in favour of
the PCF and the Bank accepted the said request and agreed
to issue the required Bank guarantee in favour of the
Federation.
Now, therefore, in consideration of the aforesaid
advance of the said sum of Rs.33 lacs (Rupees thirty three
lacs only) to be paid by the PCF to the seller as aforesaid
the Bank hereby agrees and guarantees to make unconditionally immediate payment to the Federation at its office
\ ....
U.P. CO-OPT. FEDERATION v. SINGH CONSUL TANI'S [MUKHARJl,J.] 1133
~
at Lucknow of the sum of Rs.33 Jacks (Rupees thirty three A
lacs only) or any part thereof, as the case may be, due to
the PCF from the seller at any time on receipt of the notice
of demand without any question or reference to the PCF or
to the seller on the seller's failure to fulfil the terms of the
said advance on the following terms and conditions:-
B
y
(Emphasis supplied)
~
1) The PCF shall be sole judge to decide whether the seller
has failed to fulfil any terms and conditions of the said
advance and on account of the said failure what amount
.
,
has become payable to the PCF under this guarantee .
c
2) This Guarantee shall be valid upto 15.5.84 (Fifteenth
May 1984) after which period this guarantee shall stand
cancelled and revoked.
3) The claims of the PCF, if any, under this guarantee,
D
must reach the Bank on or before the date of expiry of
this guarantee and after the date of expiry, no claim will
be entertained by the Bank .
.,
4) The Bank shall not revoke this guarantee in any case
before its expiry date of 15.5.1984 except with the writE
ten permission of the PCF."
--
I have set out in extenso the terms in order to highlight the fact
that under the terms agreed to between the parties, there is no scope of
injunction.
F
?"-
The trial Court in its judgment held that the Bank should be kept
to fulfil its obligations and commitments and the Court should not
come in the way. But that principle was distinguished by the High
Court on the ground that the respondent was seeking relief against the
U.P. Cooperative Federation Ltd. and the subject matter of the dispute
itself being as to whether the bank guarantee could be invoked and
G
encashed. The High Court was of the view that even otherwise it
7
cannot be doubted that the appellant cannot be permitted to take
advantage of illegally invoking a bank guarantee on a technical plea
,r
that the guarantee was independent of the contract and involving only
the bank and the opposite party at pleasure. The High Court was of
the view that prima facie it appeared that the plant was handed over
H
1134
SUPREME COURT REPORTS
[ 1988] I S.C.R.
after a trial run and that the commercial production had started and
~
A this has not been assailed as a fact. The High Court was of the view,
that in these circumstances this cannot be said that the invocation
order was final and irrevocable. The High Court was further of the
view that having taken over the possession of the plant it was necessary
to consider all the aspects and held that the bank guarantees could not
B
be invoked. The High (:ourt was of the view that it was not a question
of restraining the performance of any bank guarantee.
r
I am, however, unable to agree. The principles upon which the
>--
c
bank guarantees could be invoked or restrained are well-settled. Our
attention was also drawn to several decisions of the High Court as well
as of this Court. Refei;,ence had also been made to some of the English ,, ~
..
decisions. So far as the position of English law is concerned, the principles by now are well-settled. I will refer to some of the decisions and
explain the position.
The question arose before the Court of Appeal in England in
D
Hamzeh Melas & Sons v. British Imex Industries Ltd., [1958] 2 Q.B.D.
127. There 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
the opening in favour of the defendants of two confirmed letters of
\,.-·
credit with the Midland Bank Ltd., in London, one in respect of each
E
instalment. The letters of credit were duly opened and the first was
realized by the defendants on the delivery of the first instalment. The
plaintiffs complained that instalment was defective and sought an
injunction to bar the defendants from realizing the second letter of
credit.' Justice Donovan refused the application. The plaintiffs
appealed to the Court of Appeal in England. It was held that although
F
the Court had wide jurisdiction to grant injunction, this was not a case . w
in which, in the exercise of its discretion, it ought to do so. The Court
- '-
of Appeal emphasised that an elaborate commercial system had been
built up on the footing that a confirmed letter of credit constituted a
bargain between the banker and the vendor of the goods, which
imposed upon the banker an absolute obligations to pay, irrespective
G of any dispute there might be between the parties whether or not the
goods were up to contract. The principle was that commercial trading
must go on the solemn guarantee either by the letter of credit or by r
bank guarantee or irrespective of any dispute between contracting
parties whether or not the goods were upto contract. The banks cannot
be absolved of their responsibility to meet the obligations. Lord
H Jenkins L.J. observed that a vendor of goods selling against a con-
'
U.P. CO-OPT. FEDERATION v. SINGH CONSULTANTS IMUKHARJI, J.I 1135
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firmed letter of credit was selling under the assurance that nothing
would prevent it from receiving the price. That was of no me.an A
advantage when goods manufactured in one country were sold in
another. Though, in this case no international trade was involved,
bank guarantee was uninvocable and on that assurance parties have
bargained. This principle enunciated by Lord Justice Jenkins has been
invokved by this Court in some decisions in case of confirmed bank
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guarantee.
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The Court of Appeal in England had occasion once again to
consider this question in Elian and Rabbath (Trading a&i:lian & Rab-
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bath). v. Matsas and Matsas & Ors., (1966] 2 Lloyd's List Law Reports
495. In that case injunction was granted to prevent irretrievable
injustice. There the facts were peculiar. In that case the first c
defendants' Greek motor vessel Flora M was chartered by Lebanese
charterers for carriage of plaintiffs' cargo (consigned to Hungary) from
Beirut to Rijeka. Discharge was delayed at Rijeka and shipowners
exercised lien on cargo in respect of demurrage. Third defendant bank
put up guarantee in London in favour of second defendants (first
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defendants' London agents) to secure release of cargo. There was a
claim by Yugoslavians to distrain on goods, involving ship in further
delay and master of Flora M, on lifting original lien, immediately
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exercised another lien in respect of extra delay (which was raised when
Hungarian buyers put up£ 2000). Two years later, shipowners claimed
arbitration with charterers to assess demurrage for which first lien was
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exercised and claimed to enforce guarantee. Plaintiff claimed declara-
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tion that guarantee was not valid and injunction to restrain shipowners
or their agents from enforcing guarantee. First and second defendants
appealed against granting of injunction by Blain, J. It was held by the
Court of Appeal that it was a special case in which the Court should
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grant an injunction to prevent what might be irretrievable injustice.
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Lord Denning, M.R., observed that although the shippers were not
parties to the bank guarantee, nevertheless they had a most imporant
interest in it. If the Midland Bank Ltd., paid under this guarantee,
they would claim against the Lebanese bank, who in turn would claim
against the shippers. The shippers would certainly be debited with the
account. On being so debited, they would have to sue the shipowners
for breach of their promise express or implied, to release the goods.'
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Lord Denning, M.R., further posed the question were the shippers to
be forced to take that course? Or can they short-circuit the dispute by
suing the shipowners at once for an injunction? He further observed
on page 497 of the Report that this was a special case in which injunction should be granted. Lord Denning, M.R. went on to observe that
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SUPREME COURT REPORTS
I 1988) l S.C.R.
there was a prima facie ground for saying that, on the telex messages
...,.
which passed (and indeed, on the first three lines of the guarantee) the
shipowners promised that, if the bank guarantee was given, they would
release the goods. He further observed that the only lien they had in
mind at that time was the lien for demurrage. But would anyone suppose that the goods would be held for another lien? It can well be
argued that the guarantee was given on the understanding that the lien
was raised and no further lien imposed, and that when the shipowners, r
in breach of that understanding imposed a further lien, they were
disabled from acting on the guarantee. But as mentioned here-in-
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before, this was a very special case and I shall notice that Lord Denning, M.R. treated this as a very special case and in later decision he
expressed his views on this matter.
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This question was again considered by the Queen's Bench Division by Mr. Justice Kerr in R.D. Harbottle (Mercantile) Ltd. and
Another v. National Westminister Bank Ltd. and others, (1977) 2 All
England Law Reports 862. In this case injunction was sought on a
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question in respect of a performance bond. The learned Single Judge
Kerr, J. gave the following views:-
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"i) Only in exceptional cases would the courts interfere
with the machinery of irrevocable obligations assumed by
banks. In the case of a confirmed performance guarantee,
just as in the case of a confirmed Ie1ter of credit, the bank
was only concerned to ensure that the terms of its mandate
and confirmation had been complied with and was in no
way concerned with any contractual disputes which might
have arisen between the buyers and sellers. Accordingly,
since demands for payment had been made by the buyers
under the guarantees and the plaintiffs had not established
that the demands were fraudulent or other special circumstances, there were no grounds for continuing the injunctions.
"ii) It was right to discharge the injunctions against the
bank, the fact that the Egyptian defendants had taken no
part in the proceedings could not be a good ground for
maintaining those injunctions. Further, equally strong considerations applied in favour of the discharge of the injunctions against the Egyptian defendants, and their failure to
participate in the proceedings did not preclude the court
from discharging the injunctions against them."
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U.P. CO-OPT. FEDERATIONv. SINGH CONSULTANTS [MUKHARJI, J.] 1137
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In my opinion the aforesaid represents the correct state of the A
law. The Court dealt with three different types of cases which need not
be dilated here.
In Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., [1978] 1 All England Law Reports 1976. English suppliers,
entered into a contract with Libyan buyers to supply goods to them in
Libya. The contract was subject to a condition precedent that the
plaintiffs would arrange for a performance bond or guarantee to be
given, for ten per cent of the contract price, guaranteeing performance
of their obligations under the contract. Accordingly, the plaintiffs
instructed the defendants, their bankers, to give on their behalf a
petformance guarantee for the sum of £ 50,203. Acting on those
instructions the defendants requested a bank in Libya to issue a
performance bond to the buyers for that sum, and promised the
Libyan bank that they would pay the amount of the guarantee on first
demand, without any conditions or proof. The Libyan bank isc•1ed a
letter of guarantee for £ 50,203 to the buyers. The contract between
the plaintiffs and the buyers provided for payment of the price of the
goods supplied by a confirmed letter of credit. The letter of credit
opened by the buyers was not a confirmed letter of credit and did not,
therefore, comply with the contract. Because of that non-compliance
the plaintiffs repudiated the contract. Although it was the buyers who
appeared to be in default and not the plaintiffs, the buyers nevertheless claimed on the guarantee gi.ven by the Libyan bank who in tum
claimed against the defendants on the guarantee they bad given. The
plaintiffs issued a writ against the defendants claiming an injunction to
restrain them from paying any sum under the performance guarantee.
A judge granted the plaintiffs an interim injunction in the terms of the
injunction claimed by the writ but subsequently another judge discharged the injunction. The plaintiffs appealed to the Court of Appeal
in England. It was held by a Bench consisting of Lord Denning M.R.,
Browne and Geoffrey Lane, LJ that a performance guarantee was
similar to a confirmed letter of credit. Where, therefore, a bank had
given a performance guarantee it was required to honour the
guarantee according to its terms and was not concerned whether either
party to the contract which underlay the guarantee was in default. The
only exception to that rule was where fraud by one of the parties to the
underlying contract bad been established and the bank bad notice of
the fraud. Accordingly, as the defendants' guarantee provided for payment on demand without proof or conditions, and was in the nature of
a promissory note payable on demand, and the plaintiffs bad not
established fraud on the part of the buyers, the defendants were reB
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1138
SUPREME COURT REPORTS
[ 1988] I S.C.R.
quired to honour their guarantee on the demand made by the Libyan
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Bank. It followed that the judge had been right to discharge the injunction and that the appeal would be dismissed.
Lord Denning, M.R. held that Justice Kerr was right in dischargB
ing the injunction and reiterated that the bank must honour its commitment. The principle must be that upon that basis trade and commerce are conducted. Lord Denning, M.R., in_dicated at page 984 that r
seeing that the bank must pay, and will probably come down on the
English suppliers on their counter-guarantee, it followed that the only
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remedy of the English suppliers was to sue the Libyan customers for
damages. The contract contained a clause giving exclusive jurisdiction
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to the courts of Libya.
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In the instant case, the learned Judge has proceeded on the basis
that this was not an injunction sought against the bank but this was the
injunction sought against the appellant. But the net effect of the
injunction is to restrain the bank from performing the bank guarantee.
D That cannot be done. One cannot do indirectly what one is not free to
do directly. But a maltreated man in such circumstances is not
remedyless. The respondent was not to suffer any injustice which was
irretrievable. The respondent can sue the appellant for damages. In
this case, there cannot be any basis for apprehension that irretrievable
damages would be caused if any. I am of the opinion that this is not a
E case in which injunction should be granted. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable
letter of credit cannot be interfered with except in case of fraud or in
case of question of apprehension of irretrievable injustice has been
made out. This is the well-settled principle of the law in England. This
is also a well-settled principle of law in India, as I shall presently notice
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from some of the decisions of the High Court and decisions of this
Court.
In the instant case, there was no fraud involved and no question
of irretrievable injustice was involved.
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Before, however, I deal with the decisions of India reference may
be made to a decision of the House of Lords in United City Merchants
(Investments) Ltd. and Others v. Royal Bank of Canada and Others,
[ 1982] 2 All England Law Reports 720 where it was reiterated that the
whole commercial purpose for which the system of confirmed irrevocable documentary credits had been developed in international trade
'-I was to give the seller of goods an assured right t9 be paid before he
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U.P. CO-OPT. FEDERATIONv. SINGH CONSULTANTS [MUKHARJI,J.I 1139
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parted with control of the goods without risk of the payment being
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refused, reduced or deferred because of a dispute with the buyer.·11
followed that the contractual duty owed by an issuing or confirming
bank to the buyer to honour the credit notified by him on presentation
of apparently conforming documents by the seller was matched by a
corresponding contractual liability on the part of the bank to the seller
to pay him the amount of the credit on presentation of the documents.
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The bank's duty to the seller was only vitiated if there was fraud on the
part of the seller, and the bank remained under a duty to pay the
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amount of the credit to the seller even if the documents presented,
although conforming on their face with the terms of the credit,
nevertheless contained a statement of material fact that was not accu-
/.·~·- rate. These principles must in my opinion apply in case of bank c
guarantees in internal trade within a country.
I may notice that in India, the trend of law is on the same line. In
the case of Texmaco Ltd. v. State Bank of India and Others, A.LR.
1979 Calcutta 44, one of us (Sabyasachi Mukharji) held that in the
absence of special equities arising from a particular situation which
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might entitle the party on whose behalf guarantee is given to an injunction restraining the bank in performance of bank guarantee and in the
absence of any clear fraud, the Bank must pay to the party in whose
favour guarantee is given on demand, if so stipulated, and whether the
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terms are such have to be found out from the performance guarantee
as such. There the Court held that where though the, guarantee was
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given for the performance by the party on whose behalf guarantee was
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given, in an orderly manner its contractual obligation, the obligation
was undertaken by the bank to repay the amount on "first demand"
and 'without contestation, demur or protest and without reference to
such party and without questioning the legal relationship subsisting
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between the party in whose favour guarantee was given and the party F
on whose behalf guarantee was given," and the guarantee also
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stipulated that the bank should forthwith pay the amount due'
notwithstanding any dispute between the parties," it must be deemed
that the moment a demand was made without protest and contestation, the bank had obliged itself to P-.'.1Y irrespective of any dispute as to
whether there had been performance in an orderly manner of the G
contractual obligation by the party. Consequently, in such a case, the
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party on whose behalf guarantee was given was not entitled to an
injunction restraining the bank in performance of its guarantee. It
appears that special equities mentioned therein may be a situation
where the injunction was sought for to prevent injustice which was
irretrievable in the words of Lord Justice Danckwerts in Elian and H
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SUPREME COURT REPORTS
[1988] 1 S.C.R.
A Rabbath (Trading as Elian & Rabbath) v. Matsas and Matsas & Ors.
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(supra).
The same view was more or Jess expressed by the High Court of
Calcutta in its decision in the case of State Bank of India v. The
Economic Trading Co.