Case: Svenska Handelsbanken Vs. Messrs Indian Charge Chrome and Others

4. The suit out of which the present appeal arises was filed by the plaintiff (hereinafter referred to as the borrower) before the Subordinate Judge, Cuttack, inter alia for a declaration that the guarantees executed by Industrial Development Bank of India, defendant No. 12 (hereinafter referred to as the guarantor) in favour of defendants Nos. 4 and 5 to 11 (hereinafter referred to as the lenders) are void and for an order of injunction restraining the guarantor from making payments under the guarantees to the lenders.5. For appreciating the submissions made on behalf of the parties the facts shortly stated, leading to the filing of the present appeals are as followsin 1982 M/s. Indian Metals & Ferro Alloys Ltd., (in short IMFA defendant No. 13) issued a global tender for setting up a captive power plant, viz., a coalfired steam power plant in Choudwar, Orissa. The tender indicated that credit by the suppliers will be preferred. Defendants 1 to 3 (hereinafter referred to as the suppliers submitted their tenders in this regard. Since the tender indicated that suppliers credit for the entire project is preferred, the suppliers approached defendant No. 4 (one of the lenders) to finance the project. Enquiries were made to find out the possibilities for financial assistance by the Swedish Government in the form of interest at subsidised rates.6. Since 85% of the foreign exchange portion of the total price of the project was to be financed, discussions were held between the borrower and defendant No. 4 (one of the lenders) for finalising the terms and conditions of the loans. Discussions were also held between the borrower and the suppliers in regard to the terms and conditions of the loans so as to ensure that the credit agreements would be in accordance with the Swedish Law and regulations for subsidised export credit facilities.7. The borrower made extensive investigation itself over a period of about two years into the details of the proposed plant.8. On or about 28th September, 1984 contracts were entered into between the borrower (plaintiff) and the suppliers for setting up the power plant and for supplying the machinery and other equipments for the plant to the borrower.9. Defendant No. 4 (one of the landera)formed a consortium of banks i.e. deendants 5 to 11 (Swedish Banks) (lenders) and an American Bank for financing the project. The American Bank subsequently assigned its interest in favour of one of the defendant Bank (lender). The lenders entered into two credit agreements dated 30th October, 1984 with the borrower. The credit agreements were entered into by defendant No. 4 for itself and on behalf of defendants 5 to 11 under which the lenders agreed to lend 85% of the foreign exchange portion of the cost of the project to the borrower by way of certain credit facilities. A third credit agreement dated 15th November, 1984 between the borrower and defendant No. 4 (lender) in its individual capacity was entered into. The first credit agreements were for the loans of the U.S. Dollars equivalent of Swedish Kroner 370,855,000 and 239,700,000 and the third was for the loan of the sum of U.S. Dollars 1,754,000. Two additional credit agreements were also entered into between the borrower and the lenders supplemental to the first and second credit agreements on 23rd December, 1987 providing for additional loans of 10% of the original loans which the borrower required to finance cost escalations caused by delay. These two additional credit agreements were for U.S. Dollars equivalent of Swedish Kroner 37,085,500 and 23,970,000. All the credit agreements inter alia purported to provide payments by the lenders to the suppliers on various documents, as provided in the credit agreements, being presented to the lenders and also against a notice of drawdown by the borrower. In relation to the third credit agreement the disbursements were to be made directly to the lenders in respect of the financial cost payable by the borrower upon notice of draw down by the borrower.10. The loans were required to beby twenty (subsequently amended to eighteen) equal(six monthly) consecutive instalments. The number of instalments and date of commencement of the instalments being separately provided for under each credit agreement. Repayments were required by the borrower to be made without demand or notice. It was specifically provided in the credit agreements thatamounts payable by the Borrower shall be paid withoutor counter claim. The liability of the Borrower to effect any payment under this Agreement is thus unconditional and shall not in any way be dependent upon the performance of the contracts i.e. the agreements between the borrower and theor be affected by any other claim which the borrower may have against the exporters or against any other party (natural or legal) collaborating with the exporters.(These are the actual words of the relevant clause in each credit agreement.)"credit agreements alsodisputes arising from the provisions of this agreement or its performance shall be finally settled by arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with these rules. Arbitration shall take place in Stockholm and be conducted in the English language. The award of the arbitral tribunal is final and obligatory for the parties without any right for a further appeal or contestation of its fulfilment. The borrower hereby expressly submits to the jurisdiction of the above mentioned arbitration tribunal.(These are the actual words of the relevant clause in each credit agreement.)"The credit agreementsprovided that the borrower shall furnish guarantees in favour of the lenders as security for the loans covering 100% of each of the loans plus interest, costs and fees payable under the credit agreements. As quoted above, the agreements also contained an arbitration clause which contemplates disputes arising from the agreements to be finally settled by arbitration under the rules of Conciliation and Arbitration of the International Chamber of Commerce by three. arbitrators appointed in accordance with these rules. The arbitration is provided to take place at Stockholm.It is thus prima facie clear from the aforesaid terms of the credit agreements with the borrower that the lenders are as a matter of law and express agreement, in no way connected or related to or dependent upon the contracts entered into between the borrower and the suppliers. At the instance of defendant No. 4, defendant No. 12 provided the bank guarantee for the payments to be made by lenders to the suppliers. In order to ensure that the guarantor would be liable in all circumstances in the event of the borrower failing to carry out its obligations, the lenders insisted that the guarantees very clearly made express provision to be unconditional first demand guarantees which were insulated from any possible dispute between the borrower and the suppliers and even the borrower and the lenders. In fact the form of guarantee was itself enclosed as an appendix to each credit agreement.13. The terms of payment contained in the contracts between the borrower and defendants 1 and 2 (suppliers) which deals with disbursement of last 5% of the respective contract price readsof the contract price at the date of the purchasers taking over of the Power Plant against presentation of a taking over certificate, issued by the purchaser, however, not later than 35 months after the date this contract has come into force unless the date of taking over is delayed due to reasons for which the supplier is responsible."Defendant No. 4 (lender) was to disburse the balance 5% payment to defendants 1 & 2.15. On 24th June, 1989 the plaintiff (borrower) took over the plant and on 25th June, 1989 issued a taking over certificate. On 28th July, 1989 the plaintiff authorised defendant No.4 to disburse the balance 5% of the payment to defendant No. 3 as well.16. It is common case that the amounts due to the suppliers were paid by the lenders on instructions from the borrower, plaintiff and the suppliers have been paid in full by the lenders . After the issuance of the take over certificate by the plaintiff, three instalments of payments were made by the guarantor on behalf of the plaintiff as per their instructions vide payments dated 31st October, 1989; 30th April, 1990 and 31st October, 1990 under the first two credit agreements of the sum of US Dollars 9,033,324.47; 8,810,563.87 and 8,681, 062.40 towards principal plus interest.17. Again the three instalments were paid by the IDBI/ guarantor under the third agreement on 15th October, 1989; 15th May, 1990 and 15th November, 1990 amounting to US Dollars 301,339.99; 278,468.14 and 270,778.54 towards principal plus interest.18. It was on or about April 28, 1991 that the present suit was filed by the plaintiff for: (a) a declaration that the taking over certificate dated 25th June, 1989 is void / voidable instrument and the same may be delivered and cancelled; (b) it be further declared that the plaintiff is entitled to dimunition /extinction of price towards the power plant as mentioned in Annexure A to the plant, in the alternative, if the Court finds, that any amount is payable to defendants 1 to 11 jointly or severally, the same be directed to be paid as per schedule of payment to be calculated on the basis of a cash flow basis on actual generation as determined on enquiry; (c) a decree of declaration that the guarantees obtained from defendants 12 and 13 by defendants 1 to 11 are void/voidable instruments and ought to be delivered and cancelled; (d) a decree of perpetual injunction restraining defendants 12 and 13 from making payments dated 30th April, 1991 and payments falling due on subsequent dates under any guarantee to defendant No. 4 and/or defendants Nos. 4 to 11; and (e) a decree of perpetual injunction restraining defendants 4 to 11 from recalling the loan and/or taking any steps from recovering the said loan either in full or in part, etc. etc.19. The basis of the plaintiffs claim against defendants 1 to 12 was that defendants Nos. 1 to 3 had promised to supply the captive power plant of the capacity of 108 M.W. worked with talcher coal whereas on working the plant was found to be of the capacity of 60 M.W. The case of the plaintiff further was that all the agreements betweenthe borrower and the suppliers and borrower and lenders areand constituted one transaction and are vitiated by fraud committed by defendants 1 to 4. It was pleaded that the plaintiff was fraudulently led into entering of contracts with the suppliers by fraud of the suppliers and defendant No.4, lender. The suppliers were not competent enough to manufacture 108 M.W. plant. They fraudulently persuaded the plaintiff to go in for a stoker fired boiler instead of a pulverised fuel boiler in spite of the recommendations of the Central Electricity Authority to the contrary. The representatives of the consortium/suppliers visited Bhubaneshwar and Chowder in the second week of March, 1983 and during discussions represented to the plaintiff that the recommendations of the Central Electricity Authority were not correct and that their vast experience in this field had shown that stoker fired boilers were preferable over pulverised fuel boilers in the instant case, with talcher coal as the basic raw material. The defendants 1 to 3 further represented that they had arranged credit facility for the proposed captive power plant through defendant No. 4 at a very low interest rate and specifically indicated that their offer was limited to the setting up of only stoker fired boilers. It was further alleged in the plaint that the plaintiff relying on the judgment, representation and advice given by the suppliers decided to go ahead with setting up of the power plant although Central Electricity Authority and other advisors had expressed reservations that the boilers of the size as suggested by the suppliers would be less effective. Since the plaintiff had never undertaken and were unaware of the technology/expertise required for the setting up the captive power plant they had no other option/alternative but to rely totally upon the skill of the suppliers in this regard. It was further pleaded that subsequently in August, 1983 with a view to further induce the plaintiff to act on the representations made by consortium that the suppliers were capable of setting up a 108 M.W. plant with stoker fired boiler, the defendant No. 4 on behalf of itself and defendants 5 to 11 approached the plaintiff directly and represented that the said defendant No. 4 would finance the project of setting up the captive power plant at a very low interest rate if the plaintiff accepted the offer of suppliers for supply, erection and commission of the said plant with a stoker fired boilers. It was alleged that defendant No. 4 further represented to the plaintiff that the suppliers are the valued clients of defendant No. 4 and that defendant No.4 was aware of the background and experience of the suppliers.

Court's reasoning:
It will be noticed that in the present case prima facie the provision for capacity of the power plant being of 108 M. W. was a condition. Therefore, the plaintiff could have repudiated the contract as provided in S. 12(2) of the Sale of Goods Act or treated as a warranty by waiving the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treatingthe contract as repudiated.In the present case the plaintiff has not repudiated the contract. In fact it is working with the power plant and, therefore, the breach of condition has been treated by the plaintiff as a breach of warranty and in view of S. 12(3) of the Sale of Goods Act, the breach of warranty gives a right to claim for damages but not to a right to reject the goods and treatthe contract as repudiated.Even the prayer in the plaint is for diminution of the price of the power plant and the relief is based on S. 59 of the Sale of Goods Act.We have already held that the contracts between the lenders and the borrower are not vitiated by any fraud much less established fraud and there is no question of irretrievable injury. Therefore, there was no reason for the High Court to set aside the order of the trial court.Again there is no case of any irretrievable injury either of the type as held in the case of Itek Corporation (566 Federal Suppl. 1210) (supra) as there is no difficulty in the judgment of this country being executable in the courts in Sweden.The High Court was not right in working on mere suspicion of fraud or merely going by the allegations in the plaint without prima facie case of fraud being spelt out from the material on record.The High Court was also in error in considering the question of balance of convenience. In law relating to bank guarantees, a party seeking injunction from encashing of bank guarantee by the suppliers has to show prima facie case of established fraud and an irretrievable injury. Irretrievable injury is of the nature as noticed in the case of Itek Corporation (566 Federal Supplement 1210) (supra). Here there is no such problem. Once the plaintiff is able to establish fraud against the suppliers orand obtains any decree for damages or diminution in price, there is no problem for affecting recoveries in a friendly country where the bankers and the suppliers are located. Nothing has been pointed out to show that the decree passed by the Indian courts could not be executable in Sweden.The High Court totally ignored the irretrievable injury which will be caused to defendant No. 12 in not honouring the bank guarantee in international market which may cause grievous and irretrievable damage to the interest of the country as opposed to the loss of money to the borrower / plaintiff. There was no question of defendant No.4 not making any demand. The instalments for repayment of the loans had already been fixed and liable to be paid without demand by defendant No.4. Defendant No. 12 is under a duty to pay the instalments regularly on a fixed date without any demand to defendant No.4.