ION Civil Appeal No 3054 of 1987
From the Judgment and order dated 202
1987 of the Allahabad High Court in Civil Revision No 157 of 1986
AB Diwan Sandeep Narain and Shri Narain for the Appellant
VM 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 1987 and it was directed that the matter would be disposed of at the notice stage
After hearing the rival contentions we grant leave to appeal and dispose of the appeal by the order hereunder
This is an appeal from the judgment and order of the learned single judge of the Allahabad High Court Lucknow Bench in Revision 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 supply and installation of a Vanaspati manufacturing plant at Harducharu 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 1984
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 conditions of the contract bond the respondent was to furnish a performance bank guarantee for Rs 165 lakhs and yet another bank guarantee for Rs33 lakhs as security for the monies advanced by the appellant to the respondent for undertaking the work
Both these two 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 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 completed and the plant was formally inaugurated
The appellant contends that the plant could actually be commissioned for commercial production in JulyAugust 1985
The respondent on 4th of August 1986 filed a petition under section 41 of the hereinafter called the  in the Court of the Civil Judge Lucknow praying for an order restraining the appellant from realising and encashing the bank guarantees
The learned Civil Judge for the reasons indicated in his order dated 8886 declined to issue any injunction and dismissed the application Being aggrieved by the aforesaid decision the respondent went up before the Allahabad High Court
The learned Single Judge of the 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 1130 under the guarantee bonds themselves as being technical pleas
 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 MT per day Vanaspati Capacity comprising of 70 MT per day hardening capacity based on 95 usage of soyabean oil as raw oil 625 MT per day post refining capacity 72 MT deodoursisation capacity and 72 MT filling and packing capacity complete with all necessary utilities such as water and steam Distribution Equipments oil Storage Section Electrification and Distribution Equipments Automatic Weighing filling and packingsealing equipments and fire fighting equipments etc at Halducharu District Nainital UP lying at Bareilly Haldwani road about 35 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 UP 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 com mission 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 mentioned 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 1131 specified the contract price shall stand reduced to the extent hereinafter provided
 Clause 16 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 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 specifications
The complete WarranteesPerformance 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 clauses but clauses 5 2 and 5 3 are relevant and provide as follows 52 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 additional expenses so incurred by the PCF shall be recoverable from the seller
53 The seller also agrees to excludeinclude some of the machines equipments components from the plant as may be desired by the PCF during the course of this agreement and cost of such machines equipments components on reasonable actual basis shall deductedadded to from the contract price and thus the reducedincreased contract price shall be paid by the PCF However the PCF should intimate such exclusioninclusion within two months from the date of signing of the agreement
The said price of Rs16500000 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 1132 numbered 716 providedinter alia as follows NOW THEREFORE the Bank hereby guarantees to make unconditional payment of Rs165 lacs Rupees six teen 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 terms of the sale on the following terms and conditions emphasis supplied A The sole judge for deciding whether the seller 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
ie upto 24684
C Claims
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 pCF D Bank s liability under this guarantee deed is limited to Rs165 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 further 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 Rs33 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 Feder ation
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 1133 at Lucknow of the sum of Rs33 lacks Rupees thirty three 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 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 2 This Guarantee shall be valid upto 15 584 Fifteenth May 1984 after which period this guarantee shall stand cancelled and revoked
3 The claims of the PCF if any under this guarantee 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 155 1984 except with the writ 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 
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 UP Cooperative Federation Ltd and the subject matter of the dispute itself being as to whether the bank guarantee could be invoked and encashed The High Court was of the view that even otherwise it cannot be doubted that the appellant cannot be permitted to take advantage of illegally invoking a bank guarantee on a technical plea 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 1134 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 be invoked
The High Court was of the view that it was not a question of restraining the performance of any bank guarantee
I am however unable to agree
The principles upon which the 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
Reference 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 Hamzeh Melas  Sons vs British Imex Industries Ltd 1958 2 QB 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 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 the Court had wide jurisdiction to grant injunction this was not a case 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 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 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 Jenkins LJ Observed that a vendor of goods selling against a con 1135 firmed letter of credit was selling under the assurance that nothing would prevent it from receiving the price
That was of no mean 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 guarantee
The Court of Appeal in England had occasion once again to consider this question in Elian and Rabbath Trading as Elian  Rabbath
vs 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 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 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 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 exercised and claimed to enforce guarantee
Plaintiff claimed declaration 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 grant an injunction to prevent what might be irretrievable injustice
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
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 1136 there was a prima facie ground for saying that on the telex messages A 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 in breach of that understanding imposed a further lien they were disabled from acting on the guarantee But as mentioned here in 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
This question was again considered by the Queen s Bench Division by Mr Justice Kerr in RD Harbottle Mercantile Ltd and Another vs National Westminister Bank Ltd and others 1977 2 All England Law Reports 862
In this case injunction was sought on a question in respect of a performance bond
The learned Single Judge Kerr J gave the following views 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 letter 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 1137 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 vs 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 performance guarantee for the sum of pound 50203
Acting on those instructions the defendants requested a bank in Libya to issue 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 issued a letter of guarantee for pound 50203 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 given by the Libyan bank who in turn claimed against the defendants on the guarantee they had 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 had been established and the bank had 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 had not established fraud on the part of the buyers the defendants were re 1138 quired to honour their guarantee on the demand made by the Libyan Bank
It followed that the judge had been right to discharge the injunction and that the appeal would be dismissed
Lord Denning MR held that Justice Kerr was right in discharging 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 MR indicated at page 984 that seeing that the bank must pay and will probably come down on the English suppliers on their counter guarantee it followed that the only remedy of the English suppliers was to sue the Libyan customers for damages
The contract contained a clause giving exclusive jurisdiction to the courts of Libya
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 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 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 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 in justice was involved
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 vs 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 was to give the seller of goods an assured right to be paid before he 1139 parted with control of the goods without risk of the payment being refused reduced or deferred because of a dispute with the buyer
It 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 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 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 accurate
These principles must in my opinion apply in case of bank 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 vs State Bank of India and others AIR 1979 Calcutta 44 one of us Sabyasachi Mukharji held that in the absence of special equities arising from a particular situation which 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 terms are such have to be found out from the performance guarantee as such
There the Court held that where though the guarantee was given for the performance by the party on whose behalf guarantee was 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 between the party in whose favour guarantee was given and the party on whose behalf guarantee was given and the guarantee also 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 pay irrespective of any dispute as to whether there had been performance in an orderly manner of the contractual obligation by the party
Consequently in such a case the 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 1140 Rabbath Trading as Elian  Rabbath vs Matsas and Matsas  Ors
supra
The same view was more or less expressed by the High Court of Calcutta in its decision in the case of State Bank of India vs The Economic Trading Co SAA and others AIR 1975 Calcutta 145
See also a decision in the case of BS Aujla Company Pvt Ltd vs Kaluram Mahadeo Prosad and others A I 
1983 Calcutta 106
In the instant case I have emphasised the terms of the Bank guarantee
Our attention was drawn to Bench decision of the Allahabad High Court in the case of Union of India and others vs Meena Steels Ltd and Another AIR 1985 Allahabad 282
There a suit by a company was filed restraining Railways to encash bank guarantee
In that suit application was made for temporary injunction
The Court was of the view that the matter would still be referred to arbitration and in those circumstances if bank guarantees were permitted to be encashed if would be improper
I am however unable to sustain this view in view of the well settled principle on which bank guarantees are operated
Our attention was also drawn to the judgment of the learned single Judge of the Madras High Court in Arul Murugan Traders vs Rashtriya Chemicals and Fertilizers Ltd Bombay and another AIR 1986 Madras 161 where the learned Single Judge expressed the opinion that there was no absolute rule prohibiting grant of interim injunction relating to Bank guarantees and in exceptional case courts would interfere with the machinery of irrevocable obligations assumed by banks and that the plaintiff must establish prima facie case meaning thereby that there is a bona fide contention between the parties or serious question to be tried and further the balance of convenience was also a relevant factor
If the element of fraud exists then courts step in to prevent one of the parties to the contract from deriving unjust enrichment by invoking bank guarantee
In that case the learned Single Judge came to the conclusion that the suit involved serious questions to be tried and particularly relating to the plea of fraud which was a significant factor to be taken into account and claim for interdicting the enforcement of bank guarantee should have been allowed
I am however of the opinion that these observations must be strictly considered in the light of the principle enunciated
It is not the decision that there should be a prima facie case
In order to restrain 1141 the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee there should be serious dispute and there should be good prima facie case of fraud and 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 will get jeopardised
In Tarapore  Co Madras vs Ms Vo Tractors Export Moscow and Anr
1969 2 S R 920 this Court observed that irrevocable letter of credit had a definite implication
It was independent of and unqualified by the contract of sale or other underlying transactions
It was a machanism of great importance in international trade and any interference with that mechanism was bound to have serious repercussions on the international trade of this country The Court reiterated that the autonomy of an irrevocable letter of credit was entitled to protection and except in very exceptional circumstances courts should not interfere with that autonomy These observations a fortiori apply to a bank guarantee because upon bank guarantee revolves many of the internal trade and transactions in a country
In United Commercial Bank vs Bank of India and others   this Court was dealing with injunction restraining the bank in respect of letter of credit
This Court observed that the High Court was wrong in granting the temporary injunction restraining the appellant bank from recalling the amount paid to the respondent bank
This Court reiterated that Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another
If such temporary injunction were to be granted in a transaction between a banker and a banker restraining a bank from recalling the amount due when payment was made under reserve to another bank or in terms of the letter of guarantee or credit executed by it the whole banking system in the country would fail The Court however observed that the opening of a confirmed letter of credit constituted a bargain between the banker and the seller of the goods which imposed on the banker an absolute obligation to pay
The banker was not bound or entitled to honour the bills of exchange drawn by the seller unless they and such accompanying documents as might be required thereunder were in exact compliance with the terms of the credit
This principle was again reiterated by this Court in Centax 1142 India Ltd vs Vinmar Impex Inc and others A where the appellant entered into a contract with the respondent company of Singapore for supply of certain goods to it
The Contract inter alia stipulated that the bills of lading should mention shipping mark 5202 
Pursuant to the contract at the request of the appellant the Allahabad Bank opened a letter of credit it favour of the respondent
The respondent thereupon despatched the goods covered by the bills of lading This Court was concerned with the bank guarantee and referred to the previous decision of this Court in United Commercial Bank vs Bank of India and others supra
This Court found that this case was covered
The Court observed that the Court should not in transaction between a banker and banker grant an injunction at the instance of the beneficiary of an irrevocable letter of credit restraining the issuing bank from recalling the amount paid under reserve from the negotiating bank acting on behalf of the beneficiary against a document of guarantee indemnity at the instance of the beneficiary On the basis of these principles I reiterate that commitments of 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 to say in case of fraud or in case of irretrievable injustice be done the Court should interfere
Mr Tarkunde submitted before us that in this case the grievance of the appellant was that there was delay in performance and defective machinery had been supplied
He submitted that if at this stage appellant was allowed to enforce the bank guarantee damage would be done
He submitted before us that appellant could not be permitted to take advantage of illegality by invoking the bank guarantee
But in my opinion these contentions cannot deter us in view of the principle well settled that there should not be interference in trade
This is not a case where irretrievable injustice would be done by enforcement of bank guarantee
This is also not a case where a strong prima facie case of fraud in entering into a transaction was made out
If that is the position then the High Court should not have interfered with the bank guarantee
In the aforesaid view of the matter this appeal must be allowed The Judgment and order or the Allahabad High Court dated 20 287 must be set aside and the order of the learned civil Judge Lucknow dated 88 86 restored
1143 In the facts and circumstances of the case parties will bear their own costs of this appeal
JAGANNATHA SHETTY J l agree respectfully with the judgment of my learned brother Sabyasachi Mukherji J I wish however to draw attention to some of the aspects of the matter to which I attach importance
The crux of the matter relates to the obligation assumed by the bank under a performance guarantee
Whether the obligation is similar to the one arising under a letter of credit Whether the Court could interfere in regard to such obligation and if so under what circumstances These are the questions raised in this appeal
The facts which are relevant for my purpose are these On May 17 1983 Ms Singh Consultants  Engineers Pvt Ltd SCE P Ltd entered into a contract with UP Cooperative Federation Ltd UPCOF Ltd for constructing a Vanaspati manufacturing plant at Haldpur District Nainital UP
The contract required that UPCOF Ltd should be given two bank guarantees for proper construction and successful commissioning of the plant
In accordance with the terms of the contractthe Bank of India gave two guarantees in favour of UPCOF Ltd one for Rs1650000 and another for Rs3300000
These contain similar terms and conditions
Thereunder the bank has undertaken not to revoke the guarantee in any event before the expiry of the due date
The Bank has also undertaken to make unconditional payments on demand
without reference to SCE P Ltd The guarantee also provides that the UPCOF Ltd was the sole judge for deciding whether SCEP Ltd has fulfilled the terms of the contract or not
The guarantee was thus undisputedly irrevocable with absolute discretion for UPCOF Ltd to invoke the same
The dispute arose between the parties as to the erection and performance of the plant
The SCEP Ltd apprehending that the bank guarantees would be invoked by the UPCOF Ltd approached the Court of the Civil Judge Lucknow for a restraint order against the latter
The action was brought under Sec
41 of the read with order 39 r 1 and 2 of the Code of Civil Procedure contending inter alia that there was no default in the construction or delivery of possession of the plant
But the UPCOF Ltd had a different version
It contended that the construction was not within the time schedule and performance of the plant was not up to the mark
It also 1144 contended that the Court should not grant injunction in the matter
The trial court refused to interdict UPCOF Ltd the SCEP Ltd took up the matter in revision before Lucknow Bench of the Allahabad High Court
The learned Judge before whom the matter came up for disposal was of the view that SCEP Ltd has made out a prima facie case 
It has prima facie proved that the plant was delivered after a trial run and commercial production had started
So stating learned Judge allowed the revision and granted the relief sought for
The UPCOF Ltd was restrained from invoking the bank guarantees
The learned Judge however issued a direction to SCEP Ltd to keep alive the bank guarantees during the pendency of the arbitration proceedings
The UPCOF Ltd by special leave has come up before this Court challenging the validity of the order of the High Court
The Primary question for consideration is whether the High Court was justified in restraining the appellant from invoking the Bank guarantees The submission of Mr AB Diwan learned counsel for the appellant rested on the law governing the irrevocable letter of credit where courts keep themselves away from the liability assumed by the banks
In support of the submission the counsel strongly relied upon the two decisions of this Court i United Commercial Bank vs Bank of India  Ors  and ii Centax India Ltd vs Vinmar Impex Inc  Ors
Mr VM Tarkunde learned counsel for the respondent or the other hand urged that both the said decisions are not relevant since the present case concerns with rights and obligations of parties under a construction contract
The rights under the contract in question are justiciable in the Court of law
The performance guarantee given by the Bank flows from the terms of the construction contract
But the issues to be determined in the suit do not relate to the obligations of the bank under the guarantees given and the bank is also not a party to the suit
The counsel further urged that the respondent has established a prima facie case to justify the grant of injunction and this Court should not interfere with the discretionary relief granted
The argument for the respondent is attractive but it seems to overlook the basic nature of the case
The basic nature of the case relates to the obligations assumed by the bank under the guarantees given to UPCOF Ltd If under law the bank cannot be prevented by SCEP Ltd from honouring the credit guarantees the UPCOF Ltd also cannot be restrained from invoking the guarantees
What applies 1145 to the bank must equally apply to UPCOF Ltd Therefore the frame of the suit by not impleading the bank cannot make any difference in the position of law
Equally it would he futile to contend that the court was justified in granting the injunction since it has found a prima facie case in favour of the SCEP Ltd The question of examining the prima facie case or balance of convenience does not arise if the court cannot interfere with the unconditional commitment made by the bank in the guarantees in question
The modern documentary credit had its origin from letters of credit
We may therefore begin the discussion with the traditional letter of credit
Paul R Verkuil in an article Bank Solvency and Guaranty Letters of Credit Standford Law Review V 25 1972 73 at p 719 explains the salient features of a letter of credit in these terms C The letter of credit is a contract
The issuing party usually a bank promises to pay the beneficiary  traditionally a seller of goods on demand if the beneficiary presents whatever documents may be required by the letter
They are normally the only two parties involved in the contract
The bank which issues a letter of credit acts as a principal not as agent for its customer and engages its own credit
The letter of credit thus evidences irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit
 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 receives 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 1146 the bank could dishonour beneficiary s demand for payment
The A Courts have generally permitted dishonour only on the fraud of the beneficiary not the fraud of somebody else
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 vs J Henry Schroder Banking Corporation 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 crates 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
Mr Sztejn did not take that sitting down
He went to court and he sought an injunction
Now in 1941 people just did not get injunctions against payment under letters of credit
The defendant bank against its customer filed the equivalent of a motion to dismiss for failure to state a claim
In that posture all the allegations of the complaint were taken as true and those allegations were gross fraud that the holders in due course were involved
On those facts the court issued an injunction against payment
The exception of fraud created in the above case has been codified in sec
5 114 of the Uniform Commercial Code
It has been accepted by Courts in England
See i Hamzeb Milas and Sons vs British Lmex Industries Ltd  ii RD Harbottle Mercantile Ltd and another vs National West Minister Bank Ltd  iii Edward Owen Engineering Ltd vs Barclays Bank International Ltd 1978 l All ER 976 and iv UCM Investment vs Royal Bank of India The last case is of the House of Lords where Lord Diplock in his speech said at p 725 The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of the any dispute with the buyer as to the performance of the contract of sale being used as a ground for non payment or reduction or deferment of payment
1147 To this general statement of principle as to the contractual obligations of the confirming bank to the seller there is one established exception that is where the seller for the purpose of drawing on the credit fradulently presents to the confirming bank documents that contain expressly or by implication material representations of fact that to his knowledge are untrue
Although there does not appear among the English authorities any case in which this exception has been applied it is well established in the American cases of which the leading or landmark  case is Sztejn vs Henry Schroder Banking Corp  1941 3 1
This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd vs Barclays Bank International Ltd 1978 1 All ER 979 though this was actually a case about a performance bond under which a bank assumes obligation to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit
The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application to the maxim ex trupi cause non oritur actio or if plain English is to be preferred fraud unravels all  the courts will not allow their process to be used by a dishonest person to carry out a fraud
 This was also the view taken by this Court in United Commercial Bank case  There AP Sen J speaking for the Court said pages 323 and 324 The rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and 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
It is somewhat unfortunate that the High Court should have granted a temporary injunction as it has been done in this case to restrain the appellant from making a recall of the amount of Rs8584456 from the Bank of India in terms of the letter of guarantee or indemnity executed by it
The courts usually refrain from granting injunction to 1148 restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another
If such temporary injunctions were to be granted in a transaction between a banker and a banker restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it the whole banking system in the country would fail
In view of the banker s obligation under an irrevocable letter of credit to pay his buyer customer cannot instruct him not to pay
 In Centax India Ltd  this Court again speaking through AP Sen J following the decision in the United Commercial Bank case said We do not see why the same principles should not apply to a banker s letter of indemnity
 It is true that both the decisions of this Court dealt with a contract to sell specific commodities or a transaction of sale of goods with an irrevocable letter of credit
But in modern commercial transactions various devices are used to ensure performance by the contracting parties
The traditional letter of credit has taken a new meaning
In business circles standby letters of credit are also used
Performance bond and guarantee bond are also the devices increasingly adopted in transactions
The Courts have treated such documents as analogous to letter of cedit
A case involving the obligations under a performance guarantee was considered by the Court of Appeal in Edward Owen Engineering Ltd vs Barclay s Bank International Ltd The facts in that case are these English sellers entered into a contract to supply and erect glass houses in Libya
The Libyan buyers were to open an irrevocable letter of credit in favour of the sellers
The sellers told their English bank to give a performance guarantee
The English bank instructed a Libyan bank to issue a performance bond in favour of the buyers for a certain sum and gave their guarantee payable on demand without proof or conditions to cover that sum
The Libyan bank issued a bond accordingly
The sellers received no confirmed letter of credit and refused to proceed with the contract
The sellers obtained in interim injunction to prevent the English bank from paying on the guarantee
On appeal Lord Denning MR said 1149 So as on takes instance after instance these performance guarantees are virtually promissory notes payable on demand
So long as the Libyan customers make an honest demand the banks are bound to pay and the banks will rarely if ever be in a position to know whether the demand is honest or not
At any rate they will not be able to prove it to be dishonest
So these will have to pay  And said All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit
A bank which gives a performance guarantee must honour that guarantee according to its terms
It is not concerned in the least with the relations between the supplier and the customer nor with question whether the supplier has performed his contractual obligation or not nor with the question whether supplier is in default or not
The bank must pay according to its guarantees on demand if so stipulated without proof or conditions
The only exception is when there is a clear fraud of which the bank has noticed
 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 the 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
The Court however should not lightly interfere with the operation of irrevocable documentary credit
I agree with my learned 1150 brother that in order to restrain the operation of irrevocable letter of credit performance bond or guarantee there should be serious dispute to be tried and there should be a good prima facie acts of fraud
As Sir John Donaldson MR said in Bolivinter oil SA vs Chase Mannattan Bank  ors
1 at 352 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
 From the above discussion what appears to me is this The sound banking system may however require more caution in the issuance of irrevocable documentary credits
It would be for the banks to safeguard themselves by other means and generally not for the court to come to their rescue with injunctions unless there is established fraud
In the result this appeal must be allowed
The judgment and order of the Allahabad High Court dated February 20 1987 must be set aside and the order of learned Civil Judge Lucknow dated August 8 1986 restored
SL Appeal allowed


Summary:
 The respondent Aditya V Birla described to be a technician with experience in the business of manufacturing and selling Stapple Fibres and the Thai Rayon Company Thailand engaged in the business of manufacturing and selling Stapple Fibres entered into an agreement wherein the respondent was stated to be approached by the Thai Company to make his services available to the Company as his employer  in Bangkok on certain terms and conditions for which the Company would pay him remuneration receivable at Bangkok
The agreement was for a period of three years and was subject to the approval of the Governments of India and Thailand etc
The respondent applied to the Government of India for its approval of his employment with the Thai Company under the agreement for the purpose of securing the benefits conferred by section 80 RRA of the Income Tax Act 1961
The Government declined to accord its approval to the respondent s employment with the Thai Company on the terms and conditions contained in the agreement for the purpose of section 80 RRA on the ground that the section according to its view contemplates rendering service outside India in the status of an employee  whereas the status of the respondent under the foreign employer was that of a consultant  and not an employee  and that therefore the remuneration contemplated under section 80 RRA would be applicable to the case of the respondent and the benefit of the section could not be given to him
The respondent moved the High Court for relief against the decision of the Government
A learned Single Judge of the High Court quashed the order of the Government and directed it to reconsider the case of the respondent
The Letters Patent Appeal against the order of the Single Judge was dismissed by the Division Bench of the High Court
The appellant then moved this Court against the order of the High Court by Special Leave
Dismissing the appeal the Court 116  HELD An analysis of section 80 RRA reveals that in the case of the respondent in order to be entitled to the deductions at the rate enumerated in the section the sum must be i remuneration ii received by him in the foreign currency iii from any employer being a foreign employer or an Indian Concern for any service rendered by him outside India
Further the terms and conditions of his service outside India must be approved by the Government of India
Furthermore in his case the deduction of the section would not be allowed In respect of the remuneration if the service related to any period after the expiry of 36 months
He was not employed beyond the period of 36 months
Indisputably the sum concerned in the case fee was remuneration being the amount paid in lieu of services  rendered
The sum in question was received in foreign currency for services rendered outside India
120D F In the context of the Income Tax Act the expression employee  will include a consultant or a technician employed by a foreign company
The amplitude of the expressions employee  and employer  I covers the case of the consultant or the technician
There is nothing in the scheme of the section to warrant any exception as contended for by the revenue
122E 121B The High Court was right in dismissing the appeal123E Aiyar The Lexicon 1941 Ed
at page 387 Shri Chintaman Rao and Anr
vs The State of Madhya Pradesh
19581 SCR 1340 at 1346 Ellis vs Ellis and Co 19051 1 KB 324 Stroud s Judicial Dictionary 4th Edition Vol 2 at page 893 and Morren vs Swinton and Pendlebury BC1965 1 WLR 576 referred to