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Judgment
S.S. Subramani, J.—First defendant in O. S. No. 7623 of 1979, on the file of the City Civil Judge, Madras, is the appellant. The suit filed
by the plaintiff was one for an injunction to restrain the second defendant from honoring the guarantee executed in favour of the appellant from
drawing any amount from the second defendant out of the guarantee amount.
Relevant facts as stated in the plaint are as follows:-
The plaintiff is a proprietary concern owned by one V. Devarajan. The said concern is situated at Madras. There is another firm by name Raja
Constructions, Ramaswami Street, R.S. Puram, Coimbatore. The first defendant and the firm at Coimbatore entered into an agreement for
construction of certain houses at Tenani and Alkjaraman Libiya. For the purpose of executing the work, a Power of Attorney was executed in
favour of V. Devarajan on 9.12.1978 evidenced by Ex. A-15. It is a photo copy of the Power of Attorney.
It is alleged by the plaintiff that for the purpose of executing the contract, V. Devarajan deposited a sum of Rs. 3,50,000/- with the second
defendant for the purpose of enabling the second defendant to give a bank guarantee to the appellant. It is stated that V. Devarajan, i.e., the
plaintiff landed at the site in Libiya with workers, in time. Even though he landed in time, the appellant was not allowed to proceed with the
construction, but he was asked to do some other work for which there was no authorisation. It is further averred that the condition in Libiya was
not good and V. Devarajan could not execute the work, and finally he surrendered the same on 4.9.1979. When V. Devarajan surrendered the
work, the appellant invoked the Bank Guarantee and demanded the second defendant in the suit to pay an amount of Rs. 11,70,000/-. The suit is
filed by V. Devarajan through his Power of Attorney who is none other than his son, to restrain the above defendants from ordering the guarantee
and from receiving the amount thereunder.
In the written statement filed by the appellant, it is stated that the plaintiff has no locus standi to file the suit, for, the privity of contract was with
the firm at Coimbatore and not with the proprietary concern. It is further contended that the deed of guarantee executed by the second defendant
in favour of the appellant is an independent contract and so long as the contract is not challenged, the suit is liable to be dismissed unless there is an
allegation of fraud. V. Devarajan who was authorised to do the work, has admittedly surrendered the same and the same amounts to a breach of
contract, and when the same is not challenged, a suit for injunction simpliciter is not maintainable. It is further contended that on the principle of
estoppel, the plaintiff has no locus standi to file the suit. It is also contended that the plaintiff has received the benefit under the contract, and after
receiving the same, it cannot say that the appellant cannot honour the Bank Guarantee.
On the above pleadings, the trial court raised eight issues. Issue No. 2 related to the privity of contract between the plaintiff and the first
defendant. It said that the plaintiff has privity of contract. On issue No. 3, it is further held that the Bank Guarantee by the second defendant was in
respect of the contract entered into by the Coimbatore firm, and since the plaintiff has advanced the amount for the purpose of Bank Guarantee, he
is entitled to maintain the suit. The trial court also found that there is a fraud on the part of the appellant in asking the power of attorney to do some
other work than that was entered into, and that is sufficient to grant an order of permanent injunction. In the result, the suit was decreed against the
appellant and a decree was passed as prayed for.
The appellant filed A.S. No. 323 of 1981, on the file of the Principal City Civil Court, Madras. The Appeal was also dismissed. It is against the
concurrent decision, the first defendant has preferred this Second Appeal.
The following substantial questions of law have been raised in this second appeal:-
1) Whether the Bank Guarantee offered by a Bank on behalf of the contracting party for the due performance of the contract is an independent
contract, unaffected by any demur, demand or claim between the contracting parties? and
2) Whether there should be fraud perpetrated if there has been agreement on any change or modification in the terms of contract and which has
been consented to by all parties concerned?
Before going into the questions of law raised, it is better to consider the salient facts.
As stated earlier, the suit is filed by V. Devarajan through his power of attorney as the proprietor of his concern. It was Devarajan who
deposited the amount with the second defendant in the suit so that the second defendant may execute a Bank Guarantee in favour of the appellant.
It is stated in the plaintiff that Devarajan, who is the proprietor of the Plaintiff, is the Power of Attorney of the concern at Coimbatore, namely, M/s.
Raja Constructions. It is for the benefit of M/s. Raja Constructions, the plaintiff alleges that he has deposited the amount. M/s. Raja Constructions,
Coimbatore, is not a party to the suit. The power of Attorney of M/s. Raja Constructions, Coimbatore authorises his Power of Attorney to deal
with the contract regarding the construction of houses at Tenani and Alkjaraman in Libiya. It is also stated in the Power of Attorney which is
marked as Ex. A-15, that the Power of Attorney has no authority to go beyond the terms of the power granted, and if he does anything and make
any representation regarding the same, he alone will be responsible for its consequences. It is admitted that the contract for constructing the houses
was entered into by the appellant with the Coimbatore Firm. That Firm has no case that there was any misrepresentation made by its Power of
Attorney, for, the Firm is not a party here. It is also clear from the Power of Attorney that V. Devarajan is competent to do anything so far as the
contract which the appellant has entered into with the firm. On the basis of the said Power of Attorney, if V. Devarajan surrenders the contract and
has not executed the same, that will amount to breach of contract. The appellant, therefore, will be legally entitled to invoke the Bank Guarantee.
The surrender of the contract is also based on the power executed by the firm in favour of the said V. Devarajan.
If we go by the averments in the plaint, then it can be seen that V. Devarajan alone was dealing with the appellant. We find that as per Ex. B-1
dated 26.9.1979, written by V. Devarajan himself, that he has no objection in enforcing the Bank Guarantee, on the admission in the plaint, it is
clear that the plaintiff has deposited the amount to enable the second defendant to enter into a Bank Guarantee. It is not the firm at Coimbatore that
has deposited the amount. When the person who has deposited the amount agree that the Bank Guarantee may be invoked, and on that basis,
when the appellant writes to the second defendant to pay the amount, the plaintiff thereafter cannot turn round and say that it cannot be executed.
It is also clear from Ex. B-1 letter that prior to the same, the plaintiff has received the Mobilisation Advance in full from the appellant on the basis
of the above Bank Guarantee. It can be further seen from Ex. B-2 and B-3 that the plaintiff represented by V. Devarajan had no objection for
executing the contract at another place. That contract also shows that V. Devarajan has acted and has represented to the appellant to produce
with the construction at another place. The second defendant also expressed his consent to change the Bank Guarantee for a substituted place. On
the above admitted facts, the suit ought to have been dismissed. But the trial court as well as the first appellate court has entered a finding against
the appellant. The main reason for the conclusion by the Courts below was that M/s. Raja Constructions, Coimbatore has authorised V. Devarajan
only to execute the work as per the agreement. The contract at the substituted place was not on the basis of Power of Attorney. The said finding of
the Courts below is illegal so long as the Coimbatore concern is not a party to the suit
It is settled law that in cases regarding Bank Guarantees, unless there is a case of fraud, the court shall not interfere. In the plaint, there is no
pleading regarding fraud. Fraud also cannot be pleaded by V. Devarajan since he himself is a party to the alleged fraud. After having availed the
entire benefit from the appellant, he himself has filed the suit, to restrain the appellant from enforcing the Bank Guarantee. Such conduct on the part
of the plaintiff is really an abuse of process of court
In this connection, the powers of Court regarding the grant of injunction in respect of Bank Guarantees may also be considered.
In United Commercial Bank Vs. Bank of India and Others, their Lordships held thus:-
The Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of letter of credit or a bank
guarantee between 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. It is only in exceptional cases that the courts will interfere with the
machinery of irrevocable obligations assumed by bank. They are the life-blood of international commerce. The machinery and commitments of
banks are on a different level. They must be allowed to be honoured, free from interference by the courts. Otherwise, trust in international
commerce could be irreparably damaged. (1977) 3 WLR 752, Foll. No injunction could be granted under O. 39, R. 1 and 2 of the Code unless
the plaintiffs establish that they had a prima facie case, meaning thereby that there was a bona fide contention between the parties or a serious
question to be tried.
In Maharashtra State Electricity Board, Bombay Vs. Official Liquidator, High Court, Ernakulam and Another, it was held thus:-
The Bank''s liability under the guarantee in question was absolute and unconditional and did not depend upon prior proof of any default on the part
of the Company. The Electricity Board was not concerned with what the Bank did in order to reimburse itself after making payment of the amount
by it. It was the responsibility of the Bank to deal with the securities held by it in accordance with law.
In Centax (India) Ltd. Vs. Vinmar Impex Inc. and Others, their Lordships held thus:-
The obligation of the Allahabad Bank under the letters of indemnity countersigned by the appellant was absolute and upon a demand being made
by the Shipping Company i.e., the beneficiary, the Bank was liable to honour the same regardless of any controversy between the parties i.e., the
appellant - buyer and respondent sellers, as to whether the contract of sale had been performed. The appellant took the risk of unconditional
wording of the letters of indemnity executed by its bankers, the Allahabad Bank. There is really no equity in favour of the appellant. The appellant
had no prima facie case. The figure 5202 or 5502 was not concerned with the grade or quality of the goods contracted for but pertain to ''Shipping
mark'' of the goods. The balance of convenience did not require the grant of an injunction and the refusal of such injunction would not put the
appellant to any irreparable loss.
15A. In U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., their Lordships approved the decision of the Queen''s
Bench Division by Mr. Justice Kerr in H.D. Harbottle (Mercantile) Ltd. and another v. National Westminster Bank ltd. and others ( 1977 2 All
ELR 862). The relevant portion of the said decision reads thus:-
This question was again considered by the Queen''s Bench Division by Mr. Justice Kerr in R.D. Harbottle (Mercantile) Ltd. and another v.
National Westminster Bank Ltd. and others (1977 2 All ELR 862). In this case injunction was sought on a question in respect of a performance
bond. The learned single judge Kerr, J. gave the following views:
i) Only in exceptional cases would the courts interfere with the machinery of irrevocable obligations assumed by banks. In the case of a confirmed
performance guarantee, just as in the case of a confirmed letter of credit the Bank was only concerned to ensure that the terms of its mandate and
confirmation had been complied with and was in no way concerned with any contractual disputes which might have arisen between the buyers and
sellers. Accordingly, since demands for payment had been made by the buyers under the guarantees and the plaintiff had not established that the
demands were fraudulent or other special circumstances, there were no grounds for continuing the injunctions.
ii) It was right to discharge the injunction against the bank, the fact that the Egyptian defendants had taken no part in the proceedings could not be
a good ground for maintaining those injunctions. Further, equally strong consideration applied in favour of the discharge of the injunctions against
the Egyptian defendants, and their failure to participate in the proceedings did not preclude the court from discharging the injunctions against them.
In my opinion the aforesaid represents the correct state of the law. The Court dealt with three different types of cases which need not be dilated
here.
In the same Reports, a little down, in paragraph 24 (at page 413), it is held as follows:
I may notice that in India, the trend of law is on the same line. In the case of Texmaco Ltd. Vs. State Bank of India and Others, one of us
(Sabyasachi Mukharji) held that in the absence of special equities arising from a particular situation which might entitle the party on whose behalf
guarantee is given to an injunction restraining the bank in performance of bank guarantee and in the absence of any clear fraud, the Bank must pay
to the party in whose favour guarantee is given on demand, it so stipulated, and whether the terms are such have to be found out from the
performance guarantee as such. There the Court held that where though the guarantee was given for the performance by the party on whose behalf
guarantee was given, in an orderly manner its contractual obligation, the obligation was undertaken by the bank to repay the amount on ""first
demand"" and without contestation, demur or protest and without reference to such party and without questioning the legal relationship subsisting
between the party in whose favour guarantee was given and the party on whose behalf guarantee was given, and the guarantee also stipulated that
the bank should forthwith pay the amount due ''notwithstanding any dispute between the parties, "" it must be deemed that the moment a demand
was made without protest and contestation, the bank had obliged itself to pay irrespective of any dispute as to whether there had been
performance in an orderly manner of the contractual obligation by the party. Consequently, in such a case, the party on whose behalf guarantee
was given was not entitled to an injunction restraining the bank in performance of its guarantee. It appears that special equities mentioned therein
may be a situation where the injunction was sought for to prevent injustice which was irretrievable in the words of Lord Denning M.R. in Elian and
Rabbath (Trading Elian and J. Rabbath) v. Mastsas and Mastas & Others (Supra).
In General Electric Technical Services Company Inc. Vs. M/s. Punj Sons (P) Ltd. and another, it was held thus:
The High Court miscons trued the terms of the bank guarantee and the nature of the inter-se rights of the parties under the contract. The appellant
having made a demand for encashment under the bank guarantee and in terms thereof, the Bank has to pay and the Bank was willing to pay as per
the undertaking. The Bank cannot be interdicted by the court at the instance of respondent in the absence of fraud or special equities in the form of
preventing irretrievable injustice between the parties. The High Court in the absence of prima facie case on such matters committed an error in
restraining the Bank from honoring its commitment under the Bank guarantee. The Bank if not concerned with the outstanding amount payable by
the appellant under the running bills. The right to recover the amount under the running bills has no relevance to the liability of the Bank under the
guarantee. The liability of the Bank remained intact irrespective of the recovery of mobilisation advance or the non-payment under the running bills.
The failure on the part of the appellant to specify the remaining mobilisation advance in the letter for encashment of bank guarantee is of little
consequence to the liability of the Bank under the Guarantee.
In Syndicate Bank Vs. Vijay Kumar and others, it was held thus:
By mercantile system the Bank has a general lien over all forms of securities or negotiable instruments including FDRs deposited by or on behalf of
the customer in the ordinary course of banking business in absence of an agreement to the contrary. The general lien is a valuable right of the
banker. Banker has a right to use the proceeds in respect of any balance that may be due from the customer by way of reduction of customer''s
debit balance.
However, bank guarantees are on different level. The issuance of guarantee is what that a guarantor creates to discharge liability when the principal
debtor fails in his duty and guarantee in the nature of collateral agreement to answer for the debt. The Bank guarantee is an autonomous contract
and imposes an absolute obligation on the Bank to fulfill the terms and the payment in the Bank Guarantee becomes due on the happening of a
contingency on the occurrence of which the guarantee becomes enforceable. Bank guarantee has a dual aspect. In the case of a Bank guarantee its
banker is the promisor. It is a contract between the Bank and the beneficiary of the guarantee and it is also a security given to the beneficiary by a
third party.
The obligations arising under the bank guarantee are independent of the obligations arising out of a specific contract between the parties. The bank
guarantees must be allowed to be honoured free from interference by the courts. A bank which gives a guarantee must honour the same according
to the terms under which it has bound itself.
It cannot be made liable for more than what it had undertaken. It is only in exceptional cases that the court will interfere with the machinery of
irrevocable obligations assumed by the banks. A fortiori the same principle applies in respect of Bank guarantees which are discharged. When
once the Bank guarantee is discharged the obligation of the Bank ends and there is no question of going behind such discharged Bank guarantee.
The courts should refrain from probing into the nature of the transactions between the customer which led to the furnishing of the bank guarantee.
In The State Trading Corporation of India Ltd. Vs. Jainsons Clothing Corporation and another, it was held thus:-
None of the conditions of fraud as set out in the definition u/s 17 of the Contract Act are satisfied or applicable to the facts in this case. It is not the
case that there was any fraud committed by the appellant in entering into contract with the respondent in particular with reference to clause 17 of
the contract. Nor is there any fraud in formation or execution of Bank guarantee. From the contention of the appellant it would appear that on
account of negotiations between the appellant and the principals foreign buyer - Abu Dhabi Municipality, the supply of 7000 MT of B Grade
Basmati 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 that the contract with the respondents was coterminous with non-performance of frustration of the contract with the foreign buyer. In the
absence of such recital the necessary consequence 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, the respondent was under the contract obligated to make supply of 3000 MT of B
Grade Basmati 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 the appellant-principal supplier 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 out but also there it was no plea of irretrievable injustice that the respondent was likely to suffer on
account of the enforcement of the bank guarantee.
In this case, on the above principles, let us consider Ex. A-13, which is the guarantee executed by the second defendant in favour of the appellant.
Paragraphs 2, 3 and 4 of the Guarantee are relevant for our purpose, and they read as follows:
The Lakshmi Vilas Bank Limited do hereby undertake to pay the amount due and payable under this guarantee without any demur, merely on a
demand from the Corporation stating that the amount claimed is due by way of loss of damage caused to or would be caused to or suffered by the
Corporation by reason of any breach by the said Supplier/Contractor/Consultants of any of the terms or conditions contained in the said contract.
''''Any such demand made on the Bank shall be conclusive as regards the amount due and payable by the Bank under this guarantee. However,
our liability under the guarantee shall be restricted to an amount not exceeding Rs. 3,35,000/- (Rupees three lakhs and thirty five thousands only).
We, the Lakshmi Vilas Bank Limited further agree that the guarantee herein contained shall remain in full force and effect during the period that
would be taken for the performance of the contract and that it shall continue to be enforceable till all the dues of the Corporation under or by virtue
of the said contract have been fully paid and its claims satisfied or discharged or till the Chairman-cum-Managing Director of National Buildings
Construction Corporation Ltd., certified in writing that the terms and conditions of the said contract have been fully, and properly carried out by
the Supplier/Consultants/Contractor.
We, the Lakshmi Vilas Bank Limited further agree with the corporation that Corporation shall have the fullest liberty without our consent and
without effecting in any manner our obligations hereunder to vary any of the terms and conditions of the said contract or to extend time of
performance by the Supplier/Consultants/Contractor from time to time or to postpone for any time or from time to time any of the powers
exercisable by the Corporation against the Supplier/Consultants/contractor and to forbear or enforce any of the terms and conditions relating to the
said contract and we shall not be relieved from our liability by reasons of any such variations or extension being granted to the
Supplier/Consultant/Contractor or for any forbearance, act or omission on the part of the Corporation or any indulgence by the Corporation to the
Supplier/Consultant/Contractor or by any such matter or thing whatsoever which under the law relating to the sureties would but for this provision
have effect of so relieving us.
A reading of the above will show that there is an independent contract, and the second defendant has agreed that he will honour the Guarantee
as and when a demand is made. So long as this guarantee is not challenged, the plaintiff cannot question the right of the appellant to honour the
same, especially when there is no plea of fraud.
As stated earlier, the plaintiff also cannot plead a case of fraud, because it is he who has agreed that the Bank Guarantee will be honoured and
it was he who has agreed for the substituted work at Libiya.
The Courts below, without considering the above facts, and without considering the law, have decreed the suit illegally.
Messrs. Raja Constructions, Coimbatore (referred to in the earlier portion of this judgment) was impleaded in this Second Appeal as per
Order in C.M.P. No. 3342 of 84 dated 13.3.1984. Impleading of a party in Appeal, who is not a party to the suit, is not normally allowed. The
power of the appellate court to implead a person is only under Order 41, Rule 20, C.P.C. None of the grounds Has been made out to involve the
said provision, but in spite of the same, the third respondent has been impleaded. But the same is not going to advances the case of the plaintiff in
any way.
On Question No. 1, I hold that Ex. A-13 is an independent contract and the same can be enforced by the appellant.
On Question No. 2, I find that there is no plea of fraud, and, on the admitted facts, the finding regarding fraud is also without any basis. I also
find that there is no modification in the terms of the contract. Both the questions of law are found in favour of the appellant. In the result, I set aside
the judgments and decrees of the Courts below, and dismiss the suit. The second Appeal is allowed with costs throughout.