1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. Notice of Motion No.1653 of 1997 IN Suit No.2004 of 1997 Prarthana International & anr. .. .. Plaintiffs v/s. Sheemo Textile Company & ors. .. .. Defendants Mr.M.S . Sanghvi, Sr. Counsel with Mr.Virendra Pereira and Mr.Aziz Khan i/by M/s.Diya Shah & Co. for Plaintiffs. Mr.J.P . Sen with Mrs.F.Z.B . Kedia i/by M/s.F.Z.B. & Asso. For Defendant No.3. ------ CORAM : SMT.ROSHAN DALVI, J. Dated : 8 th September, 2008 P.C. : 1. The Plaintiffs have essentially sought an injunction against the 2 nd Defendant- Bank from making payment to the 3rd Defendant- Bank under the Bank Guarantee on the basis of the invocation of the Bank Guarantee by the 3rd Defendant- Bank. The Plaintiffs have also sought an injunction against the 3 rd Defendant- Bank from claiming, demanding or recovering any amount on the basis of the Bank Guarantee given in this Suit. 2. The Plaintiffs supplied certain readymade textile goods to the 1 st Defendant. The 1st Defendant was to receive the goods 2 and make payment. The Plaintiffs did not know the 1st Defendant who were parties from Sharjah, United Arab Emirates (U.A.E.). To secure its advance payment, a Bank Guarantee came to be given by the 1st Defendant through its Banker who is the 3 rd Defendant, to the Plaintiffs' Banker, the 2 nd Defendant. The Plaintiffs supplied the goods. The 3rd Defendant- Bank made payments as per the Bank Guarantee. Upon payments made, the 3rd Defendant- Bank invoked the Bank Guarantee. The 2nd Defendant- Bank had to make the payment to the 3rd Defendant- Bank, which it is willing to make as required, debiting the account of the Plaintiffs. Hence, the Plaintiffs have sued the contracting party to whom the goods were supplied as well as the two Banks of the parties to the contract through whom the international transaction took place. 3. The contract between the parties, Exhibit- A to the Plaint, is for shipment of the goods against advance payment to be released against the Plaintiffs' Bank Guarantee through the Plaintiffs' Banker who is the 2nd Defendant, to be released by the 1 st Defendant through its Banker who is the 3rd Defendant. The subject of the contract evidenced in the letter written by the 2nd Defendant and confirmed by the Plaintiffs on 12 th March 1996, Exhibit- A to the Plaint, reads thus:- 3 “ SUB : Contract for shipment of readymade garments against proposed advance payment by us of US$ 1,45,000/- to be released against your Bank Guarantee through State Bank of India, Dadar Branch to be released by us through Middle East Bank.” 4. The relevant clauses of the contract between the Plaintiffs and the 1 st Defendant are : “ (a) You are requested to route your all shipping documents to us through your Bankers in declaring details of advance remittance which will be honoured by us through Middle East Bank/Dubai. (b) On receipt of goods, we shall collect the sale proceeds and deposit such amount from time to time and get the liability reduced with Middle East Bank/Dubai and who in turn report such credits to your Bankers, State Bank of India. -(c) All the shipments are to Dubai Seaport and goods to be consigned to us directly but to be routed through Middle East Bank/Dubai quoting reference of advance payment with clear instructions to deliver us documents free. “ [Emphasis supplied] 5. The terms and conditions of the contract show that the Plaintiffs had to make shipment. The 3rd Defendant had to release the advance payment. The Plaintiffs had to route all the shipping documents through their Banker, the 2nd 4 Defendant, to be honoured by the 1st Defendant through its Banker, the 3 rd Defendant. On receipt of the goods by the 1st Defendant, it would collect the sale- proceeds and deposit the amount of the sale- proceeds from time to time to get its liability reduced with its Banker, the 3rd Defendant. Though the 3 rd Defendant would obtain the Plaintiffs' Bank Guarantee for U.S. $ 1,45,000 /- , it would release only U.S. $ 1,30,500/- through its Banker. The balance amount would be released after receipt of the final shipment. The shipments were to be routed from the 3rd Defendant- Bank quoting the reference of advance payment with clear instructions to deliver to the 1 st Defendant the documents free. 6. Hence, it is seen that under the contract where the Plaintiffs had to supply the goods, the 1st Defendant had to make advance payment through its Banker. The Plaintiffs would give a Bank Guarantee for the amount to be released by the 3 rd Defendant- Bank on behalf of the 1st Defendant to the Plaintiffs upon shipment. The 3rd Defendant- Bank was to be instructed to deliver the documents free to the 1st Defendant. 7. The Bank Guarantee was given by the Plaintiffs' Bankers on behalf of the Plaintiffs to the 3rd Defendant- 5 Banker on behalf of the 1st Defendant on 9.5.1996, Exhibit- B to the Plaint. 8. A reading of the Bank Guarantee becomes material. (i) It is issued in consideration of the 1 st Defendant making advance payment of U.S. $ 1,30,500/- . Hence, it is to secure the payment of the advance amount. (ii)It is made in connection with the supply of readymade garments by the Plaintiffs. Hence, it is not to secure the supply of the goods . (iii)The Plaintiffs' Bankers unconditionally and irrevocably undertook to pay the 3rd Defendant on their first written demand, the amount extending upto U.S. $ 1,45,000/- despite any contestation by the Plaintiffs. Hence, the amount was to be paid no matter why the Plaintiffs would refuse – It was unconditional and irrevocable Bank Guarantee . (iv)The claim of the 3rd Defendant- Banker will be honoured on receipt of its telex despite any protest from the Plaintiffs or the 2 nd Defendant. Hence, neither of these parties could challenge the 6 invocation of the Bank Guarantee . (v)The Plaintiffs' Banker, the 2nd Defendant, confirmed and undertook the above. Hence, the Bank had to honour the Bank Guarantee of the colleague Bank . 9. The Bank Guarantee was given by the 2nd Defendant- Banker at the instance of the Plaintiffs. 10. It need hardly be mentioned that it has been stated time and again in the numerous precedents that international contracts would collapse if Bank Guarantees are not honoured as per its terms. In a case like this the unconditional and irrevocable Bank Guarantee has to be honoured without any demur and despite any objection. 11. The Plaintiffs have sought to do precisely otherwise. It has brought an action in law to restrain the 2nd Defendant from honouring the guarantee and the 3rd Defendant from invoking it. Consequently, as per the well established jurisprudence in that behalf, the Plaintiffs must show a fraud in the invocation of the Bank Guarantee, irretrievable injustice which would be caused to the Plaintiffs upon its invocation or irreparable injury. 7 12. Defaults in contract, by which a party would suffer loss in a commercial transaction is none of the above. Besides, the fraud etc. would have to be shown on the part of the Bank invoking the Bank Guarantee. If invocation is fraudulent, of course, the transaction would be injuncted by the Courts. Aside from this narrow compass in which the Plaintiffs would be entitled to reliefs, international contracts demand that no such reliefs be granted in respect of the Bank Guarantee. 13. The Plaintiffs' supply was effected under the Documentary Collection Schedules forwarded by the Plaintiffs' Banker, the 2nd Defendant to the 3rd Defendant along with the relevant shipping documents. These collection Schedules are marked Exhibits D1 to D3 in the Affidavit- in-reply of the 3rd Defendant. There is a specific instruction to the 3rd Defendant- Bank to deliver the goods under the consignment to the drawee free of payment . The drawee under the delivery Schedules is the 1st Defendant. As per the terms of the contract between the parties, Exhibit- A to the Plaint, specifically shown in Clause- 8 thereof, which has been recited above, the 3rd Defendant- Bank was to deliver the goods strictly as per the instructions to deliver the documents free. Those instructions are specifically set 8 out in the Documentary Collection Schedules. 14. The 3 rd Defendant has relied upon ICC Publication No.322 relating to uniform rules for collection between the Banks in respect of the international contracts. Under Clause- C of the General Provisions and Definitions, the 2nd Defendant is required to send all the documents accompanied by a collection order giving complete and precise instructions. The 3rd Defendant- Bank is required to strictly act upon those instructions. Hence, as per Clause- 8 of the contract when the Plaintiffs' Banker despatched the goods under the shipping documents requiring the 3rd Defendant to deliver the documents free of payment to the drawees they were bound to so deliver. Once having delivered, they had to invoke the Bank Guarantee. The Plaintiffs had guaranteed the 3rd Defendant to unconditionally and irrevocably pay the 3rd Defendant the amount mentioned in the guarantee through their Banker. Consequently, the Plaintiffs' Banker had to pay that amount despite any protest of the Plaintiffs. 15. The paying Bank must strictly adhere to the terms of the Bank Guarantee or a Letter of Credit and must honour the guarantee; the Bank's obligation is absolute under an unconditional Bank Guarantee United Commercial Bank 9 vs. Bank of India & ors., (1981) 2 SCC 766, State Bank of Maharashtra & anr. vs. National Construction Company, Bombay & anr., (1996) 1 SC 735 and Hindustan Steel Works Construction Ltd. vs. Tarapore & Co. & anr., AIR 1996 SC 2268 . 16. It appears that the 1st Defendant has breached the terms of the contract. The 1st Defendant has not made payment to its own Banker as contracted. It was required to deposit amount from time to time with its Banker which it has failed to do. However, since the Plaintiffs gave a Bank Guarantee, their Banker has released the payment on behalf of the 1 st Defendant. Upon such guarantee, the Banker would be required to be paid as soon as it invokes the Bank Guarantee. The Plaintiffs cannot protest on the ground that the 1 st Defendant has defaulted in payment for the goods supplied. If the Plaintiffs are allowed to do so, it would mean that the Banker of the purchaser of the goods would be required to collect the amounts from its customers. That would bring to a stand- still international contracts and would betray of the banking transaction. That cannot be allowed. The Plaintiffs must honour the Bank Guarantee given through their Banker. There is absolutely no fraud, injury or injustice to the Plaintiffs. They had to abide by their contract under the Bank Guarantee and honour the 10 Bank Guarantee. 17.Well settled law with to regard to Bank Guarantees in Mahatma Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engg. Coop. Ltd. & anr., (2007) 6 SCC 470 , Svenska Handelsbanken vs. M/s.Indian Charge Chrome & ors, (1994) 1 SCC 502, U.P. Cooperative Federation Ltd. vs. Singh Consultants & Engineers (P) Ltd., (1988) 1 SCC 174, Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Co., (2007) 8 SCC 110 and Makharia Brothers vs. State of Nagaland & ors., AIR 1999 SC 3466 relied upon on behalf of the Plaintiffs show that breach of the terms and conditions of the contract cannot stand in the way of enforcement of a Bank Guarantee as that would not tantamount to fraud or irretrievable injury; the Court must see the irretrievable damage to the interest of the country as opposed to loss of money to the Plaintiffs and that the Court must be slow in granting such an order except in the exceptional circumstances. 18. This is not a case for an injunction against the invocation of Bank Guarantee, no fraud, irreparable injury or injustice to the Plaintiffs having been shown. 19. The Notice of Motion is dismissed, No order as to costs. 11 [SMT.ROSHAN DALVI, J.]