Case: State Trading Corporation of India Vs. Jaisons Clothing Corporation

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 banks 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 banks 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." 9. Under those circumstances, it was also held that the plea of fraud must be in the nature of an egregious nature as to vitiate the entire underlying transaction of the bank guarantee. It is fraud of that beneficiary and not the fraud of somebody else that would make the Court to grant the order of injunction as asked for. If the bank detects with the minimal investigation the fraudulent action of the seller, the payment could be refused is not a fraud as contemplated under the guarantee. We respectfully agree with that above ratio. This view was reiterated in General Electric Technical Services Co. Inc. v. Punj Sons (P) Ltd., 1991(4) SCC 230. This Court has held in paragraph 9 thus : "The question is whether the court was justified in restraining the Bank from paying to GETSCO under the bank guarantee at the instance of respondent 1. The law as to the contractual obligations under the bank guarantee has been well settled in a catena of cases. Almost all such cases have been considered in U.P. Co-op. Federation Ltd. v. Singh Consultants & Engineers (P) Ltd., 1988(1) SCC 174." 10. Following that ratio it was observed that : "the Bank must honour the bank guarantee 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, the court should interfere. In the concurring opinion one of us (K. Jagannatha Shetty, J.) has observed that whether it is a traditional bond or performance guarantee, the obligation of the Bank appears to be the same. If the documentary credits are irrevocable and independent, the Bank 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 Banks obligations of course should not be extended to protect the unscrupulous party, that is, the party 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." 11. To the same effect is the decision of this Court in Maharashtra State Electricity Board, Bombay v. Official Liquidator, High Court, Ernakulam, 1982(3) SCC 358, where this Court has reiterated that the injunction shall not be issued in honouring the bank guarantees which jeopardises the sanctity attached to the commercial transactions and such a payment, if made, is open to the bank to have recourse to the securities given by the company on whose behalf the bank guarantee was given. 12. It was also further reiterated in Syndicate Bank v. Vijay Kr., 1992(2) SCC 330. 13. The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the, contract does not give rise to a cause nor is the court justified on that basis, to issue an injunction from enforcing the contract, i.e., bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the partys favour, he/it is entitled to damages or other consequential reliefs.14. It is settled law that the Court, before issuing the injunction under Order 39, Rules 1 and 2, C.P.C. should prima facie be satisfied that there is triable issue strong prima facie case of fraud or irretrievable injury and balance of convenience is in favour of issuing injunction to prevent irremedial injury. The court should normally insist upon enforcement of the bank guarantee and the court should not interfere with the enforcement of the contract of guarantee unless there is a specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract of the guarantee, but not the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud.15. Under these circumstances, the High Court was wholly wrong in its conclusion that the respondent has proved prima facie case for granting injunction in favour of enforcement of the bank guarantee, admittedly entered into by the respondent with the appellant. The learned single Judge was quite right in refusing to issue the injunction in terms of clause 17 of the contract and the bank guarantee given by the respondent.16. Pending appeal, this Court directed the respondent to deposit the amount in the Registry and the Registry was directed to keep the amount in fixed deposit which would earn interest. Since the amount has already been deposited and it is earning interest, it is open to the appellant to withdraw the same from the Registry.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]7. None of the conditions are satisfied or applicable to the facts in this case. It is not the case that there is any fraud committed by the appellant in entering into contract with the respondent in particular with reference to clause 17 of the Contract dated April 20, 1985. Nor is there any fraud into formation or execution of bank guarantee. From the content on of the appellant it would appear that on account of negotiations between the appellant the principal foreignDhabi Municipality, the supply of 7000 M.T. ofbasmati rice was not made in terms of the principal contract entered into by the appellant with the foreign buyer. But there is no clause in the contract dated April 20, 1985 entered between the appellant and the respondents that the contract with the respondents is coterminus withor frustration of the contract with the foreign buyer. In the absence of such recital the necessary consequences is that irrespective of the frustration of the contract or cancellation of the contract between the principal supplier, namely, the appellant and the foreign buyer, namely, Abu Dhabi Municipality, the respondent was under the contract obligated to make supply of 3000 M.T. ofbasmati rice in terms thereof. The certificate issued by the officer clearly shows that there was a failure or default committed by the respondent in supplying the rice as contracted for. Under those circumstances, it is not a case of any fraud, but at best, it is a case of cancellation of the contract by thesupplier to the foreign buyer. But that does not have the effect of frustrating or cancelling the contract which the respondent had entered into with the appellant. Therefore, even from the affidavit evidence given in support of the application for injunction, not only no plea of fraud was made but also there was no plea of irretrievable injustice that the respondent was likely to suffer on account of the enforcement of the bank guaranteean exception carved out by this Court in U.P.Federation Ltd. v. Singh ConsultantsEngineers (P.) Ltd., 1988(1) SCC 174. Therein this Court after elaborate consideration of all the decisions, held in para 34 that on the basis of these principles the commitments of bank guarantee 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, the court would interfere.The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the, contract does not give rise to a cause nor is the court justified on that basis, to issue an injunction from enforcing the contract, i.e., bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the partys favour, he/it is entitled to damages or other consequential reliefs.14. It is settled law that the Court, before issuing the injunction under Order 39, Rules 1 and 2, C.P.C. should prima facie be satisfied that there is triable issue strong prima facie case of fraud or irretrievable injury and balance of convenience is in favour of issuing injunction to prevent irremedial injury. The court should normally insist upon enforcement of the bank guarantee and the court should not interfere with the enforcement of the contract of guarantee unless there is a specific plea of fraud or special equities in favour of the plaintiff. He must necessarily plead and produce all the necessary evidence in proof of the fraud in execution of the contract of the guarantee, but not the contract either of the original contract or any of the subsequent events that may happen as a ground for fraud.15. Under these circumstances, the High Court was wholly wrong in its conclusion that the respondent has proved prima facie case for granting injunction in favour of enforcement of the bank guarantee, admittedly entered into by the respondent with the appellant. The learned single Judge was quite right in refusing to issue the injunction in terms of clause 17 of the contract and the bank guarantee given by the respondent.16. Pending appeal, this Court directed the respondent to deposit the amount in the Registry and the Registry was directed to keep the amount in fixed deposit which would earn interest. Since the amount has already been deposited and it is earning interest, it is open to the appellant to withdraw the same from the Registry.