Ajit K. Sengupta, J.
1. This appeal by the defendant is directed againstthe interim orders dated March 2, 1993, and March 11, 1993, passed bya learned single judge of this court on an interlocutory application filedby the first respondent.
2. Shortly stated the facts are that the plaintiff, 'the first respondent, filed the instant suit on March 2, 1993, inter alia, praying for a declaration that the first defendant, the appellant before us, and the second defendant, United Bank of India, are not entitled to enforce the bank guarantee dated December 24, 1991, or payment of any portion of Rs. 30,50,000 being the amount covered thereby and the bank is not entitled to pay the same to the appellant. In the said suit, State Bank of India was also made a party. However, in the present appeal, the State Bank of India has notbeen made a party as no relief has been asked for against the State Bank of India.
3. In the interlocutory application filed by the plaintiff-first respondent, it has been, inter alia, alleged as follows :
(a) The conduct of the appellant is mala fide from the very beginning who induced the plaintiff-first respondent to extend the validity period of the bank guarantee issued by the State Bank of India on the express representation that the validity period of the bank guarantee, if extended, no payment would be realised in respect thereof.
(b) Relying upon the aforesaid representation and believing the same to be true the plaintiff-first respondent extended the validity period of the bank guarantee issued by the State Bank of India, but the appellant wrongfully, illegally and fraudulently realised a sum of Rs. 20,37,500 by invoking the bank guarantee.
(c) The plaintiff came to learn that another fraudulent demand had been made for invoking the bank guarantee furnished by the United Bank of India, the second respondent herein.
(d) At all material times the United Bank of India was fully aware that the said invocation of bank guarantee is wrongful, illegal and fraudulent and it was the duty and obligation of the United Bank of India as bankers, as also otherwise, not to make payment under the bank guarantee. Further in breach of its duties and obligation the bank has been wrongfully and illegally threatening to make payment under the said bank guarantee.
4. On these averments the plaintiff-first respondent asked for an order that the appellant be restrained from acting in furtherance of the letter demanding any payment under the said bank guarantee and for a direction upon the appellant and the United Batik of India not to enforce the said bank guarantee or to make any payment of any portion of Rs. 30,50,000.
5. Upon that application being moved ex parte before the court of the first instance on March 2, 1993, the court directed the parties to maintain status quo as on that date in respect of the said bank guarantee. On March 11, 1993, the learned judge directed the said interim order of status quo to continue till disposal of the said interlocutory application.
6. This appeal is preferred against the aforesaid orders, whereby the court of the first instance restrained the enforcement of the bank guarantee.
7. It is necessary at this stage to set out the facts pertaining to the said bank guarantee. The appellant by a letter of intent dated December 21, 1991, had placed an order, inter alia, for supply, erection and commissioning of diverse machinery production line on the terms and conditions mentioned therein. In accordance with the terms of the letter of intent an advance payment of 25 per cent, of the total consideration was made to the plaintiff-first respondent against their providing an unconditional and irrevocable bank guarantee. In pursuance thereof the respondent No. 2, the United Bank of India, had issued a bank guarantee dated December 24, 1991, being No. BG/93/91 in the sum of Rs. 30,50,000.
8. By the said bank guarantee the United Bank of India guaranteed fulfilment of the contract referred to above and undertook to pay the amount due or payable under that guarantee without any demur merely on a demand from the appellant stating that the amount claimed is due by way of loss or damage caused or to be caused or suffered by the appellant by reason of the plaintiff-first respondent committing breach of any of the terms and conditions of the contract. The bank guarantee further provided that the bank would not be relieved from its liability by reason of variation or extension being granted to the plaintiff-respondent.
9. According to the appellant, right from the beginning the plaintiff-first respondent failed to comply and fulfil the diverse terms and conditions of the said contract. Failure to comply with the obligation on the part of the plaintiff-first respondent has been recorded from time to time in the correspondence passed by and between the parties.
10. Ultimately, the appellant by the fax message dated January 23, 1993, addressed to the plaintiff-first respondent, stated as follows :
'1. Commissioning of cut to length line.--We refer to the telephonic talks with you when you have been promising various dates for deputing your electrical team for commissioning of the line but a number of dates have lapsed and as such we feel that you are not keen to complete the work of commissioning the cut to length line.
2. We have also informed you of the shortcomings in the supply of the equipment, vide our fax messages dated January 12, 1993, January 13, 1993, and January 15, 1993, We have not received your reply as to when and what actions will be taken by you to rectify the shortcomings.
3. We have explained to you repeatedly that the finishing lines ordered on you, namely, profiling line, cut to length line and slitting line, are essential for the finishing operations of the colour coated strips andthe delay on your part in completing our orders for these lines is affecting our operations very adversely and severely, since without the finishing operations, our colour coated strips cannot be marketed. It is very regrettable that not a single order has been yet completed by you and the supplies made are incomplete.
4. By causing such inordinate delay you will force us to encash the bank guarantee.'
11. It appears that no reply was received to the said fax message. By a letter dated January 25, 1993, addressed to the United Bank of India, the second respondent, the appellant invoked the bank guarantee in the sum of Rs. 30,50,000. In the said letter, it was, inter alia, stated as follows :
'(i) The contractor, I.F.B. Industries Ltd., have not completed the work awarded for the supply of (a) cut to length-cum-roll forming line, and (b) C R slittor for colour coated sheets, vide letter of intent dated December 21, 1991.
(ii) I. F. B. Industries Ltd. have committed breaches of the bank terms of the contract and has not yet completed the aforementioned job and have also committed the following breaches :
(1) Delay in submission of drawings ;
(2) Delay in supply of equipment ;
(3) No commissioning done for cut to length line ;
(4) Even when equipment had been supplied it was incomplete ;
(5) Not a single equipment despatched for slitting line ;
(iii) In addition to the breaches stated above, I.F.B. Industries Ltd., Calcutta, have also failed and neglected to complete the said job under the contract despite several opportunities having been accorded to I.F.B. Industries Ltd., Calcutta, to remedy the breaches. It has chosen not to do so and it leaves us with no other alternative but to encash the bankguarantee and demand for the loss and the damages.
(iv) We hereby demand you to release the payment through a demand draft payable at Bombay to Shree Precoated Steels Ltd. in our favour for the amount of Rs. 30,50,000 under the bank guarantee dated December 24, 1991.'
12. Thereafter, the plaintiff-first respondent approached the appellant to extend the said bank guarantee, but in spite of prolonged correspondencethe finally extended bank guarantee was not forwarded to the appellant. Inasmuch as the bank guarantee would have otherwise expired on February 28, 1993, the appellant, by a letter dated February 23, 1993, addressed to the United Bank of India once again called upon the bank to issue a demand draft payable at Bombay against the aforesaid bank guarantee. On February 24, 1993, the plaintiff-first respondent informed the appellant that the bank guarantee had in fact been extended by the bank till May 31, 1993. By a letter dated February 25, 1993, addressed to the United Bank of India the appellant made it clear that the appellant was no longer interested in the renewal of the bank guarantee and even if such renewed bank guarantee was received by the appellant, they would send it back to the bank. The bank was again requested to issue a demand draft. The bank, however, did not make the payment to the appellant. In the meantime an ex parte order was obtained by the plaintiff-first respondent on March 2, 1993.
13. The stand taken by the bank was that, in view of the interim order passed by the court of the first instance, the payment on the bank guaranteecould not be made.
14. On these facts, the only question is whether the learned judge of the court of the first instance was justified in granting the interim order against the enforcement of the bank guarantee. It may be mentioned at this stage that the bank did not make the payment under the bank guarantee in spite of the invocation thereof by the letter of the appellant dated February 23, 1993. On March 2, 1993, the order of injunction was obtained by the plaintiff-first respondent.
15. It has been contended by Mr. Deb, learned counsel appearing for the appellant, relying on the decisions of the Supreme Court in U.P. Cooperative Federation Ltd. v, Singh Consultants and Engineers (P.) Ltd. : [1988]1SCR1124 and General Electric Technical Services Co. Inc. v. Punj Sons (P.) Ltd., : [1991]3SCR412 that in this case there is no averment of any fraud or special equity or any other circumstance justifying the court in passing an interim order against the enforcement of the bank guarantee. He has drawn our attention to the averments made in the interlocutory application, to which we have already referred earlier.
16. It is the contention of Mr. S.K. Kapur, learned counsel appearing for the plaintiff-first respondent, that the bank guarantee was invokedwrongfully, illegally and fraudulently. He has referred to the letter dated February 23, 1993, of the appellant addressed to the bank invoking the bank guarantee and has submitted that invocation was not done in terms of the bank guarantee and as such the bank cannot act on the basis of such letter.
17. The only contention raised by the bank is that 'the bank's hands are tied in view of the interim order passed by the court.' The bank has not taken any other plea, but the bank has not explained as to why the payment was not made when the bank guarantee had been invoked by the letter of February 23, 1993, before the interim order was obtained by the plaintiff-respondent on March 2, 1993.
18. We have considered the rival contentions. It is by now well settled that no order of interim injunction relating to bank guarantee should be made unless there are exceptional circumstances. The court would not normally interfere with irrevocable obligations assumed by banks by furnishing bank guarantees in favour of the beneficiary. The Supreme Court in V.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. : [1988]1SCR1124 has observed as follows (at pages 295, 296 of 65 Comp Cas) :
'In order to restrain the operation either of an irrevocable letter of credit or of a confirmed letter of credit or of the bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise, the very purpose of bank guarantees would be negatived and the fabric of trading operations would get jeopardised.'
19. In para 34 of the aforesaid judgment, Sabyasachi Mukharji J. (as his Lordship then was), has observed as follows (at page 297 of 65 Comp Cas) :
'On the basis of these principles, I reiterate that commitments of banks 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 cases of fraud or in case of apprehension of irretrievable injustice that the court should interfere.'
20. There the Supreme Court noted the submission of Mr. Tarkunde and observed as follows (at page 297) :
'Mr. 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 the appellant was allowed to enforce the bank guarantee, damage would be done. He submitted before us that the 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 the 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 bank guarantee.'
21. Jagannatha Shetty J., who concurred with the judgment of Sabyasachi Mukharji J. (as his Lordship then was), observed as follows (at page 304 of 65 Comp Cas) :
'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 an irrevocable letter of credit, performance bond or guarantee, there should be a serious dispute to be tried and there should be a good prima facie act of fraud. As Sir John Donaldson M.R. said in Bolivinter Oil SA v. Chase Manhattan Bank [1984] 1 All ER 351, 352 (CA) :
'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 bank's 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 bank's 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.'
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.'
22. In General Electric Technical Services Co. Inc. v. Punj Sons (P.) Ltd. [1992] 74 Comp Cas 624, the Supreme Court reiterated the principles laid down in U. P. Co-operative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. [1989] 65 Comp Cas 283 (SC). There the Supreme Court observed as follows (at page 649 of 74 Comp Cas) :
'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 bank's 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 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.'
23. In the instant case, there is no averment that there is any special equity in favour of the plaintiff-first respondent, nor do we find any serious dispute to be tried in this suit. The bank guarantee is against the advance payment. The appellant as a purchaser paid an advance being 25 per cent, of the value of the order in terms of the contract/letter of intent and accordingly the contractor agreed to furnish the purchaser a bank guarantee for an amount of Rs. 30,50,000. The contractor did not comply with the terms of the contract/letter of intent as mentioned in the fax message dated February 23, 1993. It is true that it has been alleged that the bank guarantee has been invoked fraudulently. But mere assertion of fraud will not satisfy the principles laid down in the aforesaid judgment. Not only should there be a good prima facie case of fraud but there should also be established fraud. No particulars of fraud have been given in this case. No circumstance or fact has been pleaded which would go to show any fraudulent action of the appellant or the bank. As already indicated, the bank in this case has not taken the plea that the party enforcing the bank guarantee is guilty of fraud. Even if there is a fraud, the fraud must be such as to vitiate the entire transaction. It must be fraud of the appellant who is the beneficiary under the bank guarantee but no such case has been pleaded or made out. There is no special equity in favour of the plaintiff-first respondent which would warrant Interference by the court for preventing irretrievable injustice between the parties. The bank guarantee in the instant case is in essence a performance guarantee. The bank which gives a performance guarantee must honour that guarantee according to its terms. Mr. Kapoor contended that invocation of the bankguarantee was not made according to the terms of the bank guarantee. We are unable to accept this contention. The material clause of the bank guarantee is as follows :
'We, United Bank of India do hereby irrevocably guarantee the fulfilment by the said contractor of the said contract letter of intent and undertake to pay the amounts due or payable under this guarantee without any demur, merely on a demand from Shree Precoated Steels Ltd. stating that the amount claimed is due by way of loss or damage caused or would be caused to or suffered by Shree Precoated Steels Ltd. by reason of any breach by the said contractor of any of the terms and conditions contained in the said contract/letter of intent or any reason of the contractor's failure to perform any obligations under the said contract/letter of intent. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee and shall be restricted to an amount not exceeding Rs. 30,50,000 (rupees thirty lakhs fifty thousand only).'
24. In the letter of invocation of the bank guarantee, as we have already indicated, the appellant enumerated the breaches of the contract/letter of intent. It has also been specifically mentioned in the said letter that acts of breaches mentioned therein and failure and negligence on the part of the plaintiff-first respondent in completing the job and remedying the breaches complained of, compelled the appellant to encash the bank guarantee and demand for loss and damages.
25. In our view, the demand by the appellant is under the bank guarantee and as per the terms thereof. The bank ought to have paid accordingto its guarantee and undertaking on demand as stipulated but for reasonsbest known to them they waited without taking any plea and inaction onthe part of the bank in making the payment enabled the plaintiff-firstrespondent to obtain an order of injunction restraining the bank fromhonouring its commitment under the bank guarantee. In our view thereis not even any prima facie case of fraud by the appellant or special equityin the form of irretrievable injustice between the parties justifying interference by the court.
26. For the reasons aforesaid, the appeal succeeds and is allowed. Orders under appeal are set aside. This order disposes of the stay application as well the interlocutory application of the plaintiff-first respondent pending in the first court. Filing of paper book is dispensed with. Undertaking in that behalf will stand discharged.
27. There will be no order as to costs.
28. All parties are to act on a signed copy of the operative part of the judgment on the usual undertaking.
Nure Alam Chowdhury, J.
29. I agree.