Case: U.P. Co-Operative Federation Ltd Vs. Singh Consultants &amp; Engineers (P) Ltd

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 bankers obligation under an irrevocable letter of credit to pay, his buyer-customer cannot instruct him not to pay. 50. In Centax (India) Ltd. ((1986) 4 SCC 136 ), this Court again speaking through A. P. 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 bankers letter of indemnity." 51. 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, stand-by 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 credit. 52. A case involving the obligations under a performance guarantee was considered by the Court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. ((1978) 1 All ER 976). 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 an interim injunction to prevent the English bank from paying on the guarantee. On appeal Lord Denning, M.R. said: "So, as one 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 they will have to pay And saidAll 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 the 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 guarantee, on demand if so stipulated, without proof or conditions. The only exception is when there is a clear fraud of which the bank has notice." 53. 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 banks 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 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. 54. The court, however, should not lightly interfere with the operation of irrevocable documentary credit. I agree with my learned brother that in order to restrain the operation of the 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, M. R. said in Bolivinter Oil SA v. Chase Manhattan Bank ((1984) 1 All ER 351, 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 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. 55. 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. 56.

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

Explanation:
1[ds]13. 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 U.P. 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 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 after a trial run and that the commercial production had started and 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 bankI 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 theIn 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 thisIn the instant case, there was no fraud involved and no question of irretrievable injustice wasMr. 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 bankIn the aforesaid view of the matter, 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 the learned Civil Judge, Lucknow dated August 8, 1986In the facts and circumstances of the case parties will bear their own costs of this appeal