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

The appellant had entered into a contract with Abu Dhabi Municipality, Abu Dhabi for supply of 7,500 M.T. of B Grade basmati rice. It in turn had entered into an agreement with the respondent on April 20, 1985 for supply of 3000 M.T. and in case of necessity another 1500 M.T. at the option of the STC, for shipment, of thebasmati rice to foreign buyer M/s. Abu Dhabi Municipality, Abu Dhabi. In clause 17 of this contract envisages execution of a bank guarantee by the respondent for due performance of the contract, which reads thus :17. Bank Guarantee"The supplier shall within three days of the signing of this contract furnish to the STC a Bank Guarantee from a scheduled bank for an amount of Rs. 11,70,000/(Rupees Eleven lacs seventy thousand only) which is equivalent to 5% value of the contract as per the pro forma attached hereto as Annexure III for the performance of its obligations under this contract and the export contract. The Bank Guarantee should be made valid up to 22nd July 1985. In the event of suppliers failure to perform any of its obligations under thecontract and/or the export contract, STC shall without prejudice have the right to claim eventual damages, be entitled to invoke the Bank Guarantees and forfeit the amount realised thereunder. Suppliers liability and on account of their failure to fulfil their obligations will not be restricted up to the value of the Bank Guarantee to be furnished by supplier."2. In furtherance thereof, the respondent had executed the contract of guarantee of even date, namely, April 20, 1985 in the following manner :"That the Bank hereby irrevocably and unconditionally guarantee to the Corporation that in the event of any failure/ default for whatever reason on the part of M/s. Jainsons Clothing Corporation in performing all or any of its obligations under the said contract and or the export contract and the L/ C established thereunder and as may be amended from time to time, the Bank shall pay to the Corporation forthwith on corporations first demand an amount of Rs. 11,70,000/(Rupees eleven lacs Seventy thousand only) being approx. 5% of the contract value of the export. The payment shall be made by the Bank to the Corporation without any demur, protest or contestation and without any reference to supplier notwithstanding any dispute(s) whatsoever pending between the Corporation and the buyer. A certificate of the Corporation that supplier has defaulted in the fulfilment of its obligations shall be sufficient for the purpose of filing claim on the Bank under the Guarantee and the same shall be final, conclusive and binding on the Bank. The Bank shall forthwith pay to the Corporation the amount claimed by the Corporation up to the amount guaranteed herein. In case Bank fails to pay the amount claimed by the Corporation within 15 days of the date of demand of the Corporation, then the Bank shall also be liable to pay to the Corporation interest @ 22.75% per annum from the date of Corporation demand up to date of actual payment and the guarantee amount shall stand enhanced to the extent of the interest thus due and payable by the Bank."3. On June 15, 1986 the Officer of the S.T.C. in terms of the guarantee had issued a certificate that the respondent had committed default in the performance of the contract and called upon the Bank to pay the sum of Rs. 11,70,000/contracted under the bank guarantee. The respondent filed Suit No. 1086/85 in the High Court, Delhi for perpetual injunction restraining the appellant from enforcing the bank guarantee. I.A. No. 3455/85 was filed for temporary injuction, pending suit. By Order dated March 11, 1986, the learned single Judge of the High Court refused to grant injunction under O. 39, Rr. 1 and 2, C.P.C. On appeal, the Division Bench in FAO (OS) No. 97 of 1986 by Order dated August 4,1986 issued the injunction as prayed for. Thus, this appeal by special leave.

Court's reasoning:
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.