IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMAN & THE HONOURABLE MR. JUSTICE P.BHAVADASAN FRIDAY, THE 18TH SEPTEMBER 2009 / 27TH BHADRA 1931 FAO.No. 283 of 2008() --------------------- AGAINST THE ORDER DATED 19/07/2008 IN IA.3085/2008 IN OS.446/2008 of II ADDL.SUB COURT,ERNAKULAM .................... APPELLANT/PETITIONER/ PLAINTIFF --------------------------------------------------- JACSONS VENEERS AND PANELS PVT LTD. A COMPANY INCORPORATION UNDER THE COMPANIES ACT HAVING ITS REG; OFFICE AT ATLANTIS JUNCTION, M.G.ROAD, KOCHI AND REPRESENTED BY ITS DIRECTOR JACOB THOMAS. BY ADV. SRI.P.RADHAKRISHNAN SRI.MADHU RADHAKRISHNAN RESPONDENT(S): RESPONDENTS/DEFENDANTS ------------------------------------------------------------------- 1. STATE BANK OF TRAVANCORE, REPRESENTED BY ITS CHIEF MANAGER M.G.ROAD, ERNAKULAM. 2. MAYTAS INFRA LIMITED, 6-3-1186/5/A, III FLOOR, AMOGH PLAZA, BEGUMPET, HYDERABAD. ADV. SRI.K.P.SUJESH KUMAR SMT.AGNES ANETTA SIMPSON FOR R2 SRI.ANUKARSHAN.C FOR R2 SRI.MILLU DANDAPANI( NO MEMO) FOR R2 SRI.K.S.DILIP FOR R1 SRI.SAJU N.A. FOR R1 SMT.G.LEKHA FOR R1 SMT.P.J.FLONY FOR R1 SMT.UMA.G.KRISHNAN FOR R1 THIS FIRST APPEAL FROM ORDERS HAVING BEEN FINALLY HEARD ON 20/08/2009, ALONG WITH FAO NO. 287 OF 2008 THE COURT ON 18/09/2009 DELIVERED THE FOLLOWING: P.R. RAMAN & P. BHAVADASAN, JJ. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - F.A.O. Nos. 283 & 287 of 2008 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 18th day of September, 2009. JUDGMENT Bhavadasan, J, These two appeals arise from a common order and hence they are being disposed of together. 2. The plaintiffs had filed I.A. 3085 of 2008 in O.S. 436 of 2008 seeking an interim injunction and an ex-parte order of injunction was granted. On appearance by the respondents, the second respondent fled I.A. 4011 of 2008 for vacating the ex-parte interim order. Both the petitions were heard together and disposed of by a common order. Aggrieved by the said order, the petitioner in I.A. 3085 of 2008 has filed F.A.O.283 of 2008 and F.A.O.287 of 2008 against the order in I.A. 4011 of 2008. 3. Facts absolutely necessary for the disposal of these appeals alone are being referred to. The parties and facts are hereinafter referred to as they are available before the court FAOs.283 & 287/2008. 2 below. 4. The appellant instituted O.S. 446 of 2008 before the Sub Court, Ernakulam seeking a declaration and prohibitory injunction. The plaintiff is a registered Company and is engaged in the manufacture and supply of veneers, flush doors and MDF and such other materials. They have been in the business for the last thirty years. The first defendant is a Nationalised Bank and the second defendant is another company dealing in real estate and construction business. According to the plaintiff the second defendant in the suit placed orders for flush doors with the plaintiff. The plaintiff had to supply 4731 flush doors with the specifications stipulated by the second defendant Company and an agreement to that effect was entered into between them. Work order was placed by the second defendant Company. The plaintiff states that while placing work orders the second defendant had stipulated certain terms and conditions, which were not acceptable to the plaintiff Company. They in turn while accepting the work FAOs.283 & 287/2008. 3 order specified their terms and conditions. One of the conditions was that when 40% of the total consideration for the transaction is paid by the second defendant, plaintiff would provide a Bank Guarantee to the tune of Rs.35,00,000/-. There were other conditions regarding the period within which the supply has to be made and regarding the specifications also. Suffice to say that when 40% of the advance amount was paid, Bank Guarantee was furnished by the plaintiff Company. Bank Guarantee was furnished by the plaintiff Company through the first defendant. According to the plaintiff, it appears that for reasons which are not very proper, the second defendant invoked the Bank Guarantee. According to the plaintiff, they were not entitled to do so and therefore they laid the suit seeking a declaration that the amount covered by the Bank Guarantee dated 22.5.2007 issued to the first defendant belongs to the plaintiff and the invocation of the Bank Guarantee by the second defendant is illegal and vitiated by fraud. Consequential injunction was also sought. Along with the suit, it FAOs.283 & 287/2008. 4 is seen that the plaintiff filed I.A. 3085 of 2008 seeking a temporary injunction. An ex-parte order of injunction was granted in favour of the plaintiff. 5. The respondents entered appearance. The second respondent stoutly opposed the application for temporary injunction and pointed out that it was improper and in fact illegal for the court to injunct the said respondent from enforcing the Bank Guarantee. It was pointed out by them that the first respondent, namely, the Bank, is unconcerned with the terms and conditions of the agreement between the plaintiff and the second defendant and that the first defendant under no circumstance can refuse to honour the Bank Guarantee. It is also pointed out by them that once an unconditional and irrevocable Bank Guarantee has been given by the plaintiff, the plaintiff cannot then later on seek to injunct the second respondent from enforcing the Bank Guarantee for any reason except fraud or irreparable loss or injury. 6. The second defendant in turn also filed I.A. 4011 of FAOs.283 & 287/2008. 5 2008 to have the interlocutory application filed by the plaintiff for temporary injunction dismissed. It was quite unnecessary for the second defendant to do so after having filed a detailed counter to I.A.3085 of 2008 filed by the plaintiff for temporary injunction. 7. For the purpose of the interlocutory application, the court below had Exts.A1 to A14 marked from the side of the plaintiff and Exts.B1 to B12 on the side of the defendants. On the basis of the relevant provision and also based on the decisions of the Apex Court, the court below came to the conclusion that the two grounds upon which the court could grant injunction against enforcement of Bank Guarantee are (1) on the proof of fraud and (2) irretrievable harm or injury to the plaintiffs. Prima facie no such grounds were made out in the present case and therefore the application filed by the plaintiffs was dismissed and the application filed by the second defendant was allowed. These orders are assailed in these appeals. 8. The basic facts are not in dispute. It is not in dispute FAOs.283 & 287/2008. 6 that the second defendant had placed orders for supply of 4731 flush doors with the plaintiff. Ext.A1 is the work order issued by the second defendant. It contains various terms and conditions. It mentions about the Bank Guarantee also. The plaintiff sent Ext.A3 reply. It may be noticed here that the total consideration for the transaction was Rs.77,78,896/-. Clause 5 of Ext.A2 refers to the Bank Guarantee. Ext.A4 mentioned about the time for supply. It is not in dispute that goods a little over Rs.8,00,000/- were supplied by the plaintiff and received by the second respondent. Of course there is some dispute regarding the subsequent supply and with reference to the modified specifications etc., to be furnished by the second defendant. 9. By letter dated 24.9.2007 the plaintiff informed the second defendant about the readiness to furnish Bank Guarantee and demanded that 40% of the advance amount be paid to them. It is claimed by the second defendant that a cheque for a sum of Rs.8,30,251/- was issued by the second respondent in favour of the FAOs.283 & 287/2008. 7 plaintiff towards the price of 350 flush doors supplied to them. This is infact disputed by the plaintiff. But for the present purpose, it is not necessary to go deep into this issue. 10. The second respondent appears to have invoked the Bank Guarantee furnished by the plaintiff. The plaintiff alleged fraud. According to them, even though there is communication to show that the cheque has been issued as price for 350 flush doors, the amount was not actually paid. The plaintiff relied on Ext.A11 to establish this fact. Plaintiff would say that they were given to understand that the second respondent was sending a team of officers for inspection. Plaintiff would not dispute that they have accepted the offer made by the second defendant. But at the same time, they would contend that they had not accepted the terms and conditions stipulated by the second defendant in their communication and while accepting the offer, they had mentioned therein the terms and conditions also. 11. According to the second respondent the above FAOs.283 & 287/2008. 8 allegations are of no consequence and the plaintiff cannot seek to restrain the second defendant from enforcing the Bank Guarantee. They would characterize the Bank Guarantee as an unconditional and irrevocable one. They would also point out that mere allegation of fraud itself is not sufficient and there should be materials to support the same. 12. Learned counsel appearing for the appellant pointed out that the court below was not justified in dismissing the petition filed by the plaintiff for temporary injunction. At no point of time the second defendant had pointed out any flaw in the materials by the plaintiff and it was infact they who had defaulted in their commitments. Even though they claimed that the price for 350 flush doors delivered to them and accepted by them had been sent by way of demand draft, no such demand draft was ever sent. At no point of time, the second defendant had any complaint regarding the quality of the articles delivered to them and received by them nor any case of delay in supplying the same was raised. It FAOs.283 & 287/2008. 9 is not possible to understand as to what had prompted the second defendant to invoke the Bank Guarantee. In fact the plaintiff was made to believe that the second defendant would go through with the transaction after having accepted the initial consignment of 350 flush doors without demur. Documents produced by the plaintiff would show that the second defendant had wanted slight modification in the specifications given by them on the earlier occasion and that the plaintiff was awaiting for the same. Under these circumstances, according to the learned counsel, the second respondent was not entitled to invoke the Bank Guarantee. 13. Learned counsel appearing for the contesting respondents submits that none of the above contentions have any legal basis. According to the learned Senior Counsel, since the Bank Guarantee is unconditional and irrevocable one, under no circumstance can the second defendant be restrained from enforcing the Bank Guarantee and nor can the Bank refuse to honour the Bank Guarantee. Learned counsel pointed out that the FAOs.283 & 287/2008. 10 court below has noticed the various decisions of the Apex Court, which clearly stipulate the law regarding the enforcement of Bank Guarantee. According to the learned counsel the principles have been properly applied by the court below and no grounds are made out to interfere with the impugned order. 14. The issue as to whether there was any violation of the terms of contract between the plaintiff and the second defendant by any one of them may not be of much relevance in the present context. It is not disputed that the plaintiff did furnish Bank Guarantee for a sum of Rs.35,00,000/-. It is true that the plaintiff has alleged fraud on the part of the second respondent in enforcing the Bank Guarantee. The main contention of the plaintiff is that the second defendant had not honoured the terms of the contract and there was no laches on the part of the plaintiff, which entitles the second respondent to invoke the Bank Guarantee. Plaintiff puts the blame on second defendant. Infact the specific case of the plaintiff is that the second defendant cannot FAOs.283 & 287/2008. 11 take advantage of their own laches. 15. The court below has referred to various decisions rendered by the Apex Court in relation to the enforcement of Bank Guarantee. A reading of the order of the court below would indicate that the court below was of the impression that under no circumstances the court can injunct a person from invoking the Bank Guarantee unless ofcourse there is prima facie evidence of fraud or irretrievable injury or harm caused to the plaintiff. The court below also noticed that from the available materials, prima facie there is nothing to show that any fraud had been played by the second defendant and then goes on to observe that if any harm or injury is caused to the plaintiff, he would be compensated. At any rate according to the court below, a detailed analysis of these questions arises only after evidence is adduced. The court below therefore held that the claim for temporary injunction has to fail. 16. The view of the court below that no matter whatever be the terms of the Bank Guarantee, unless there is prima FAOs.283 & 287/2008. 12 facie evidence to show that fraud has been committed or that irreparable injury is caused, the enforcement of Bank Guarantee cannot be restrained does not appear to be legally correct. There seems to be a distinction between an unconditional Bank Guarantee and conditional Bank Guarantee. In the case of unconditional or irrevocable Bank Guarantee, the view taken by the court below may be correct. In the case of conditional Bank Guarantee the position is slightly different. 17. It also needs to be noticed that in all the decisions mentioned by the court below, the terms of the Bank Guarantee have been construed. 18. In the decision reported in Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. ((1997)6 SCC 450) it can be seen that the Bank Gurantee considered in that case made it clear that the Bank had unconditionally and irrevocably undertaken to pay without demur to the appellant. It was then held that the guarantor had no right to FAOs.283 & 287/2008. 13 know the reasons of or to investigate the merits of the demand or to question or challenge the demand. True that in this case it was held that the restrain to enforce the Bank Guarantee can be granted only in cases where it is prima facie established that there is fraud or irretrievable harm or injury to one of the parties. The facts of the case show that the trial court had held that there was no basis for granting an interim prohibitory injunction. High Court under appeal reversed the same and granted an injunction. Pointing out that liability under the Bank Guarantee being unconditional and irrevocable, there is no justification in granting an interim order and the Apex Court restored the order of the trial court. 19. In the decision reported in Syndicate Bank v. Vijay Kumar (AIR 1992 SC 1066) it was held as follows: “It is in common parlance that the issuance of guarantee is what that a guarantor creates to discharge liability when the principal debtor fails in his duty and guarantee is in the nature of collateral agreement to answer for the debt. It is well settled that the Bank FAOs.283 & 287/2008. 14 guarantee is an autonomous contract and imposes an absolute obligation on the Bank to fulfil the terms and the payment in the Bank guarantee becomes due o the happening of contingency on the occurrence of which the guarantee becomes enforceable.” 20. In the decision reported in State Trading Corporation of India Ltd. v. Jainsons Clothing Corpn. (AIR 1994 SC 2778) it was held that normally unless there is a plea of fraud or irretrievable loss or injury to one of the parties, no interference should be made to the enforcement of the Bank Guarantee. But the facts in that case show that the term of the Bank Guarantee was such that the Bank had irrevocably and unconditionally guaranteed to pay the amount. 21. In the decision reported in Daewoo Motors India Ltd. v. Union of India ((2003) 4 SCC 690) it was held that no interim order would be granted against enforcement of Bank Guarantee since the guarantee construed in the case was an unconditional one. FAOs.283 & 287/2008. 15 22. In the decision reported in BSES Ltd. (Now Reliance Energy Ltd.) v. Fenner India Ltd. ((2006) 2 SCC 728) too the Bank Guarantee construed contained a clause that the guarantee was unconditional and irrevocable. The decision reported in Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. ((2007)8 SCC 110) also does not take a different view from the above. 23. In the decision reported in Vinitec Electronics Private Ltd. v. HCL Infosystems Ltd. ((2008) 1 SCC 544) it was held that when the Bank Guarantee offered or furnished is an unconditional or irrevocable one, no objection can be raised against its enforcement. A reading of the decision shows that the Bank Guarantee involved in the case was also an unconditional and irrevocable guarantee. 24. The distinction between a conditional Bank Guarantee and an unconditional Bank Guarantee is stated in the decision reported in Hindustan Construction Co. Ltd. v. State of FAOs.283 & 287/2008. 16 Bihar (AIR 1999 SC 3710). There too, the question regarding enforcement of Bank Guarantee came up for consideration. It was held on the facts of the case that since the Bank Guarantee offered was conditional one, the normal rule did not apply. 25. It could thus be seen that there is a distinction in law between a conditional Bank Guarantee and unconditional Bank Guarantee. In all cases it has been held that normally for injunction against enforcement of Bank Guarantee, there are only two exceptions, ie., fraud and irretrievable loss or injury where the Bank Guarantee was unconditional or irrevocable. As already noticed in each of the cases, the documents involved have been construed. 26. Therefore the view of lower court that no injunction can be granted against enforcement of Bank Guarantee, whether it be conditional or unconditional does not appear to be correct. However, the court below has not approached the issue from this angle. FAOs.283 & 287/2008. 17 27. Ext.A6 is the Bank Guarantee involved in this case. Clause 1 reads as follows: “1. AND NOW THIS GUARANTEE WITNESETH that in consideration of the Customer having entered into this Contract with the Supplier and the Customer having agreed to pay an advance of Rs.35,00,000/- (Rupees thirty five lakhs only) required by the Supplier from the Customer for the above supply as per the above purchase order, which figure of advance shall become reduced and extinguished as per the order acceptance dated 24.09.07 the Bank hereby unconditionally and irrevocable guarantee to pay on demand without protest or demur contest and without recourse to the Supplier to the said Customer up to and not exceeding altogether a sum of Rs.35,00,000/- (Rupees thirty five lakhs only) being the amount of the (one hundred ) 100 percent of the advance payment or such other unadjusted amount of the said advance within the guaranteed amount. The decision of the customer as to whether the terms and conditions of this Guarantee have been observed shall be final and FAOs.283 & 287/2008. 18 binding on the Bank subject to submission of documents supporting the same.” The court below had infact to consider the impact of the above clause. It would appear that the court below had not noticed the distinction between conditional Bank Guarantee and unconditional Bank Guarantee. That issue is crucial in this case going by the facts. If as a matter of fact, on a construction of the document, the lower court comes to the conclusion that it is unconditional Bank Guarantee, the finding may be justified. But if on the other hand it is found that it is a conditional Bank Guarantee, then the position would be entirely different. This vital difference has been omitted to be noticed by the court below and that appears to have resulted in the present finding. 28. As a matter of rule, in a case of unconditional Bank Guarantee, the court may not injunct against encashment, except on establishment of prima facie grounds of fraud or irretrievable loss or injury. It is therefore necessary to construe FAOs.283 & 287/2008. 19 the document in question and then come to a conclusion whether it is a conditional or unconditional Bank Guarantee and if it is found to be a conditional Bank Guarantee, then the principle laid down in the decision reported in Hindustan Construction Co. Ltd.'s case may be attracted. In the result, these appeals are allowed, the impugned orders are set aside and the matter is remanded to the trial court for fresh consideration in the light of what has been stated above. the court below will make every endeavour to dispose of the matter as expeditiously as possible at any rate within two months from the date of receipt of a copy of this judgment. P.R. Raman, Judge P. Bhavadasan, Judge sb.