FA/2439/2004 1/18 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD FIRST APPEAL No. 2439 of 2004 For Approval and Signature: HONOURABLE MR.JUSTICE H.B.ANTANI ===================================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment? NO 2 To be referred to the Reporter or not? NO 3 Whether Their Lordships wish to see the fair copy of the judgment? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any Order made thereunder? NO 5 Whether it is to be circulated to the Civil Judge? NO ========================================================= PARESH K GANDHI - Appellant Versus BIT YOLK SOFTWARE PVT.LTD. AND ANOTHER – Respondents ========================================================= Appearance : MR ASIM PANDYA FOR M/S HL PATEL ADVOCATES for the Appellant. MR NANDLAL THAKKAR for Respondent : 1. MR SAURABH G AMIN for Respondent : 2. ========================================================= CORAM : HONOURABLE MR.JUSTICE H.B.ANTANI Date : 25/03/2008 ORAL JUDGMENT 1. The present appeal preferred under Section 96 of the Code of Civil Procedure, 1908 is directed against the judgment and order dated 11-09-2004 FA/2439/2004 2/18 JUDGMENT passed by the learned Judge, City Civil Court, Ahmedabad in Civil Suit No. 4709 of 2000, by which the learned Judge dismissed the suit and vacated ad interim injunction granted to the original plaintiff – appellant. 2. The appellant - original plaintiff had filed the suit against respondent No. 1 - original defendant for declaration that the bank guarantee given by the appellant shall be declared to have been discharged and respondent No. 1 be restrained from encashing the bank guarantee in view of the letter of discharge issued by Chairman of respondent No. 1. 3. The short facts giving rise to the present appeal are as under:- Respondent No. 1 is a company registered under the Company's Act, 1956 and is engaged in computer education business and running by the name of “BYSOFT”. Respondent No. 2 is Madhupura Mercantile Cooperative Bank. The appellant is the franchisee of respondent No. 1 for imparting computer education as per the agreement entered into between the parties on 19-02-2000. As per the terms of agreement, a sum of Rs. 2 Lakhs was fixed by way of Affiliation Fees. The appellant paid Rs. 50,000/- at the time of initial agreement. It was further agreed between the parties that the total fees collected by the appellant should be deposited in the bank A/c opened by respondent No. 1. 30% of the amount was required to be retained by respondent No. 1 by way of royalty and 70% of the amount was required to be paid FA/2439/2004 3/18 JUDGMENT to the appellant. It was also agreed that in order to make the payment for remaining amount of Rs. 1.50 Lakhs, respondent No. 1 should deduct 15% from the amount payable to the appellant. As per the case of the appellant, respondent No. 1 had deducted sum of Rs. 75,335/- towards the Affiliation Fees. It is also averred by the appellant that the appellant furnished the bank guarantee for the sum of Rs. 1.50 Lakhs and it was given on 07-06-2000. As respondent No. 1 did not provide proper service and education material for the computer course, students suffered great hardship. The appellant was constrained to lodge the complaint before respondent No. 1 vide letter dated 29-07-2000. Respondent No. 1 cancelled the agreement by letter dated 10-08-2000 and also revoked the bank guarantee by letter dated 11-08- 2000. The appellant also informed respondent No. 2 – Bank by letter dated 17-08-2000 about the aforesaid fact. Respondent No. 1 filed Civil Suit No. 454 of 2000 against the appellant and other respondents. Respondent No. 1 could not encash the bank guarantee given by Madhupura Mercantile Cooperative Bank dated 07-06-2000 as it was revoked by letter dated 11-08- 2000. In view of the above, the appellant filed the suit for declaration and permanent injunction to restrain the respondent from encashing the bank guarantee dated 07-06-2000. The suit was resisted by respondent No. 1 by filing the written statement. As per the contention raised therein, the agreement was not terminated and respondent No. 1 had never cancelled the agreement and no bank guarantee was revoked by letter dated 11- FA/2439/2004 4/18 JUDGMENT 08-2000. It was also contended by respondent No. 1 that the appellant had created forged letter with the help of one Nandkishore, who was working as Chairman of respondent No. 1. Likewise, respondent No. 2 also resisted the suit by filing exhaustive written statement contending inter alia that the bank guarantee which was in favour of respondent No. 1 had come to an end in view of the letters produced by appellant dated 10-08-2000 and 11-08-2000. Respondent No. 1 produced the bank guarantee to the Bank on 13-09-2000 for encashment. Respondent No. 2 was, therefore, in dilemma as to whether to honour the bank guarantee or not. The learned Trial Judge framed the issues vide Exh. 43, and after considering the entire gamut of oral deposition and documentary evidence, held that the appellant has proved that, as per the agreement dated 19-02-2000, the appellant is having the franchise of respondent No. 1 – Company for a period of 3 years. The appellant had also paid Rs. 50,000/- out of Rs. 2 Lakhs towards Affiliation Fees and the remaining amount of Rs. 1.50 Lakhs was to be recovered from the fees and against which the appellant had given the bank guarantee of Rs. 1.50 Lakhs to respondent No. 1. It was further held by the learned Judge, after considering the evidence on record, that the appellant has not established the case against the respondents and the appellant was not entitled to discharge of the bank guarantee. The learned Judge placed reliance on documents at Exhs. 3 and 21 and held that it was an admitted position that respondent No. 2 – Madhupura Mercantile Cooperative FA/2439/2004 5/18 JUDGMENT Bank issued the bank guarantee for a sum of Rs. 1.50 Lakhs in favour of respondent No. 1 on 07-06-2000 at the instance of the appellant for the purpose of payment of franchise fee as per the agreement arrived at between the parties. It was also an admitted fact that the agreement was terminated by respondent No. 1 by letter dated 10-08-2000 at Exh. 90 and the bank guarantee was revoked by letter dated 10-08-2000 vide Exh. 91. The learned Judge, after considering the evidence on record, held that the appellant had not proved to satisfaction of the Court about discharge of the bank guarantee vide letter dated 11-08-2000 and further held that the bank guarantee which was issued by Madhupura Mercantile Cooperative Bank dated 07-06-2000 for the sum of Rs. 1.50 Lakhs was in existence and it continued and it was not discharged or cancelled. The learned Judge also considered the question with regard to the injunction against encashment of bank guarantee dated 07-06-2000 vide Exh. 64 and held that the injunction can also be granted against the bank guarantee in exceptional cases such as fraud or irreparable injury in view of catena of decisions rendered by the Apex Court. The learned Judge held that in view of settled legal position by the judgments of the Apex Court, the appellant had not made out a case for the grant of injunction as prayed for in the suit and dismissed the suit and vacated the injunction granted on earlier occasion. Aggrieved by the aforesaid order passed by the learned Judge, the appellant has preferred the present appeal. 4. The learned Advocate appearing on behalf of FA/2439/2004 6/18 JUDGMENT the appellant submitted that the judgment rendered by the learned Trial Judge is contrary to the evidence on record of the case. The learned Judge committed serious error in discarding the oral deposition and the documentary evidence relied upon by the appellant. The learned Advocate submitted that respondent No. 1 by his letter dated 10-08-2000 terminated the agreement and the termination was made effective from 01-09-2000. Respondent No. 1 informed respondent No. 2 by letter dated 11-08-2000 about the cancellation of the agreement and to treat the bank guarantee as cancelled. The learned Advocate submitted that in spite of demand made by the appellant for return of the original bank guarantee papers, the same was not returned to the appellant by respondent No. 1. By letter dated 13-09-2000, another Director invoked the bank guarantee. respondent No. 2 by letter dated 23-09-2000 informed respondent No. 1 that by letter dated 11-08-2000, the agreement between respondent No. 1 and appellant had been terminated and the bank guarantee had been cancelled. In view of the aforesaid facts and circumstances, respondent No. 2 was unable to honour the demand for encashment of the bank guarantee. The learned Advocate submitted that respondent No. 1 is a private limited Company. The act of one of the Directors in the ordinary course of business not only binds the Company but the other Directors as well. The correspondence made on behalf of respondent No. 1 whether written by one Mr. Praful Thakker or other Directors never contained outward numbers. From the documentary evidence, which is heavily relied on in the present case, respondent No. 1 failed to provide FA/2439/2004 7/18 JUDGMENT the services as agreed and from September 2000, there was complete stoppage of services by respondent No. 1 to all its affiliates. The appellant vide letter dated 29-07-2000 made grievance to respondent No. 1 about lack of proper services. The letter written by appellant was acknowledged by respondent No. 1. The learned Advocate submitted that considering the facts of the case and the documentary evidence, the appellant had proved that the original agreement was actually terminated by respondent No. 1 by his letter dated 10-08-2000. Thus, the learned Advocate submitted that the agreement was validly terminated by respondent No. 1 and bank guarantee was duly cancelled by it. It is also settled position of law that outsiders are not concerned with the indoor management of the Company and they can safely rely on the acts performed by de facto Director or Managing Director or Chairman of the Company. The learned Advocate submitted that the Doctrine of Indoor Management was propounded in the year 1856 in the case of Royal British Bank Vs. Turqund, 1856 E&B 327. The aforesaid decision has been subsequently followed in Courts in England as well as in other countries. The learned Advocate further placed reliance on the judgment rendered by Punjab and Haryana High Court in Dewan Singh Vs. Minerva Films Limited, 1959 (29) Company Cases 263 and the decision of Madhya Pradesh High Court in M/s. Jindal Strips Limited and Another Vs. Madhya Pradesh Electricity Board and Others, AIR 1998 MP 122. The learned Advocate submitted that the learned Trial Judge has committed error in holding that the franchise agreement was not terminated and FA/2439/2004 8/18 JUDGMENT the bank guarantee was not discharged. The learned Advocate further submitted that the bank guarantee was conditional. On perusal of the bank guarantee, it becomes clear that the appellant had to furnish the bank guarantee to pay and reimburse respondent No. 1 its charges and dues outstanding on account of bills raised by respondent No. 1 on the appellant from time to time upto the amount of Rs. 1.50 Lakhs. The bank guarantee is to be encashed for dues of respondent No. 1 from the appellant. The bank guarantee was to continue to have the binding effect on the bank during the subsistence of the agreement. The bank guarantee was to remain irrevocable during the aforesaid prescribed period. The learned Advocate contended that respondent No. 1 is thus legally not entitled to invoke the bank guarantee unless the conditions as stated therein were fulfilled. It is also an admitted fact that respondent No. 1 has not raised any bills upon the appellant and there was no due recoverable from the appellant on the date of invocation of the bank guarantee. In view of the aforesaid facts and circumstances, the respondents are required to be restrained from encashing the bank guarantee. The learned Judge committed error in allowing the respondents to encash the bank guarantee. The learned Advocate heavily placed reliance on the judgment rendered by the Apex Court in Hindustan Construction Co. Ltd. v. State of Bihar, AIR 1999 SC 3710 in support of the submission canvassed at the Bar. The learned Advocate emphatically submitted that it is well settled legal position that in ordinary course, the Court would not grant injunction FA/2439/2004 9/18 JUDGMENT against the invocation of bank guarantee, but there are two exceptions to the said rule: (i) Fraud and (ii) Irretrievable loss to the party which may ultimately result in the miscarriage of justice. The learned Advocate submitted that the case of the appellant is covered by the second exception and that irretrievable loss that may be caused may ultimately result in the miscarriage of justice. It is evident from the record of the case that respondent No. 1 had stopped providing services from 01-09-2000 and, therefore, it cannot demand the amount in terms of the agreement. Respondent No. 1 was entitled to Rs. 1.50 Lakhs only in the event the agreement had remained in force for a period of three years or at the most if the appellant commits any breach of the contract or agreement. The learned Advocate submitted that on the contrary, respondent No. 1 was required to compensate the appellant for the breach of the agreement committed by it. Thus, it is contended by the learned Advocate that the learned Trial Court has committed error in vacating the interim relief which was granted in favour of the appellant. Thus, the equity is in favour of the appellant because the appellant had already paid Rs. 50,000/- out of Rs. 2 Lakhs as affiliation fees at the initial stage. During the short span of 4 to 5 months of the agreement, respondent No. 1 recovered additional amount of Rs. 75,335/- from the appellant out of collection of tuition fees and, therefore, the appellant paid Rs. 1,25,000/- in all out of Rs. 2 Lakhs and, therefore, respondent No. 1 cannot be entitled to claim an amount of more than Rs. 75,000/- even if all the contentions raised by the appellant FA/2439/2004 10/18 JUDGMENT are rejected by the Court. Thus, considering the balance of convenience and the equity, which is in favour of the appellant, this appeal, as per the submission of the learned Advocate, requires to be allowed. 5. As against the aforesaid submission, the learned Counsel for original respondent No. 1 vehemently submitted that the Trial Court has considered the evidence on record of the case and rightly dismissed the suit and vacated the interim injunction. The learned Advocate placed reliance on various judgments of the Supreme Court in support of the submission that normally the Court would not grant injunction against the invocation of the bank guarantee and the case as propounded by the appellant does not fall within the exception to the said rule of fraud and irretrievable loss so as to call for any interference in an appeal preferred by the appellant. Thus, the learned Advocate submitted that in view of the reasons assigned by the learned Trial Judge, no interference is called for in the present appeal preferred by the appellant and the same may be dismissed. 6. The learned Advocate representing original respondent No. 2 submitted that respondent No. 2 was not joined as a necessary party in the suit. As per the request made by the appellant, who is the customer of respondent No. 2 Bank, bank guarantee was given in favour of respondent No. 1 and accordingly, the same was given on 07-06-2000 for Rs. 1.50 Lakhs. Thereafter, the appellant informed the Bank on 22-08- FA/2439/2004 11/18 JUDGMENT 2000 that the agreement between the appellant and defendant No.1 had come to an end and also produced the letter dated 11-08-2000 to the Bank stating therein that the agreement between the appellant and respondent No. 1 came to be terminated wef 10-08-2000 and it was further stated in the said letter that the guarantee issued by the Bank had been cancelled. But, subsequently, on 13-09-2000 respondent No. 1 wrote a letter to the Bank for invoking the bank guarantee and requested the Bank to pay the amount of the guarantee. In view of the aforestated facts and circumstances of the case, confusion was created and, therefore, it has been submitted by the learned Advocate that having regard to the evidence on record of the case, the Bank would abide by the Hon'ble Court's order with regard to payment of bank guarantee and appropriate order in that regard be passed. 7. Heard learned Counsel at length and in great detail. I have perused the judgment rendered by the learned Trial Judge in Civil Suit No. 4709 of 2000 dated 11-07-2004 and the reasons assigned by the learned Judge. Record and Proceedings of the aforesaid suit was called for and the same has been carefully perused by me. 8. I have taken into consideration the entire evidence on record of the case and the reasons assigned by learned Trial Judge while dismissing the suit of the appellant. On re-appreciation and re- evaluation of the evidence, it becomes clear that the appellant had filed the suit for permanent injunction FA/2439/2004 12/18 JUDGMENT against the defendants. The admitted position with regard to both the parties is stated hereunder:- Respondent No. 1 is a Private Limited Company and running the business of Computer Education through various Computer Centres by giving franchisee to different persons. The appellant is having Computer Centre in Jivraj Park area, Ahmedabad. Respondent No. 1 has given a franchisee to the appellant for Computer Education for 3 years from 01-04-2000 to 31-03-2003 by agreement dated 19- 02-2000. As per the said agreement, respondent No. 1 agreed to supply material for Computer Education to the students. It was agreed between the parties that 30% of the total collection will be paid to respondent No. 1 by way of royalty. 70% will be paid to the appellant. It was further agreed between the parties to deposit total collection-fee in Savings A/c No. 110 in the name of respondent No. 1 in Madhupura Mercantile Cooperative Bank, Ambawadi Branch, Ahmedabad. Accordingly, the appellant has deposited total amount collected from the students in the said A/c on the name of respondent No. 1 upto August 2000. As per the agreement between the parties, Rs. 2 Lakhs were fixed by way of franchisee fee. The appellant has paid sum of Rs. 50,000/- to respondent No. 1 by cheques on 29-02-2000 and 08-03- 2000. Respondent No. 2 – Madhupura Mercantile Cooperative Bank executed a bank guarantee dated 07- 06-2000 for a sum of Rs. 1.50 Lakhs in favour of respondent No. 1 at the instance of the appellant. Respondent No. 1 wrote a letter to respondent No. 2 on 13-09-2000 through ANZ Grinlands Bank. Respondent FA/2439/2004 13/18 JUDGMENT No. 2 – Madhupura Cooperative Bank replied to respondent No. 1 by letter dated 23-09-2000 and informed that the bank guarantee was cancelled on 11- 08-2000. Madhupura Mercantile Cooperative Bank did not make payment as bank guarantee was cancelled and the contract was terminated. Respondent No. 1 filed Civil Suit No. 454 of 2000 on 08-09-2000 against the present appellant and other persons having franchisee for injunction. The appellant is defendant No. 3. They have filed reply on 12-09-2000. The appellant has filed present suit for injunction. It is also an admitted position that respondent No. 2 issued bank guarantee for a sum of Rs. 1.50 Lakhs in favour of respondent No. 1 dated 07-06-2000 at the instance of the appellant for the purpose of payment of franchise fee as per the agreement arrived at between the parties. 9. The main bone of contention is whether the appellant has proved that the bank guarantee which was produced vide Exh. 64 for a sum of Rs. 1.50 Lakhs is validly discharged or revoked by letter dated 11- 08-2000. On considering the evidence on record of the case and on perusal of the letter dated 11-08- 2000 vide Exh. 91 as well as the discharge of the bank guarantee vide Exh. 64 dated 07-06-2000, it becomes clear that the letter was written by one Nandkishore on behalf of respondent No. 1 Company. He worked in respondent No. 1 Company upto 18-08- 2000. However, the appellant had not examined Nandkishore as a witness in order to prove his writing which has been referred to by the learned Judge in his judgment. Since the said Nandkishore FA/2439/2004 14/18 JUDGMENT has not entered into witness box, doubt is created about the genuineness of the said letter. It is further alleged that the letter dated 11-08-2000 vide Exh. 91 was written to the Branch Manager, Madhupura Mercantile Cooperative Bank Limited, Ahmedabad, but the same was not received by the Bank. In view of the stand taken by the Bank vide Exh. 15, it becomes clear that the letter was not received by the Madhupura Mercantile Cooperative Bank. Non-receipt of the letter by the Bank also raises doubt. Thus, considering the deposition adduced by the appellant, the letter vide Exh. 91 raises doubt and in such circumstances, the version given on behalf of the appellant cannot be believed and the same was rightly rejected by the learned Trial Judge. With regard to the agreement arrived at between both the sides, distinct suit bearing No. 454 of 2000 was filed in the Court where the present appellant is also one of the parties. The learned Judge has considered the reply filed by the appellant on 12-09-2000 in the aforesaid suit vide Exh. 314. The appellant also produced copy of the letter dated 10-08-2000 vide Exh. 90 about the cancellation of agreement in the suit. However, the appellant had not stated a single word about the discharge of the bank guarantee on 11- 08-2000. In view of the aforesaid facts and circumstances, as no word is stated by the appellant with regard to discharge of bank guarantee by letter dated 11-08-2000 in the reply filed vide Exh. 314 of the said suit, no interference in the said finding is required. Thus, considering the reasoning given by the learned Judge, I do not think that any interference is called for in the said finding. With FA/2439/2004 15/18 JUDGMENT regard to the terms and conditions of the agreement vide Exh. 321, which was arrived at between the parties, the appellant was required to deposit total amount collected from the students by way of fee in the said account which is produced in the case vide Exh. 136. It was further agreed by both the sides that respondent No. 1 should withdraw the amount deposited in the account and 30% should be kept by respondent No. 1 by way of royalty and remaining 70% was to be paid to the appellant by respondent No. 1. respondent No. 1 had withdrawn various amounts from Savings A/c from time to time. The appellant started depositing the amount on 18-04-2000 and the appellant deposited the sum of Rs. 1400 on 19-08-2000 and Rs. 5500/- on 22-08-2000. Thus, the appellant has also deposited various amounts even on 12-08-2000 and 18- 08-2000 and produced the counterfoils and pay-in slips of the same. As per the say of the appellant, the agreement was cancelled by letter dated 10-08- 2000 vide Exh. 90 and bank guarantee was discharged by letter dated 11-08-2000 vide Exh. 91, if that be so, then there was no reason for the appellant to deposit various amounts in the account of respondent No. 1 after 10-08-2000 and no explanation was forthcoming on behalf of the appellant. It is also urged by the learned Counsel on behalf of the appellant that initially, he had paid a sum of Rs. 50,000/- and the respondent No. 1 had already deducted an amount of Rs. 75,237/- during the four months from the remaining amount of Rs. 1.50 Lakhs. As per the submission of the