1997 Supreme(SC) 834

1997(5) Supreme 291
SUPREME COURT OF INDIA
(From Allahabad High Court)
K.S. Paripoornan, K. Venkataswami, B.N. Kirpal, JJ.
Dwarikesh Sugar Industries Ltd. -Appellant
versus
Prem Heavy Engineering Works (P) Ltd. & Anr. -Respondents
Civil Appeal No. 3376 of 1997
(Arising out of S.L.P. (C) No. 22809 of 1996)
Decided on 7-5-1997
Counsel for the Parties :
For the Appellant, Harish N. Salve, Sr. Advocate, Krishan Mahajan, P.H. Parekh, Ms. Indu Verma, Advocates.
For the Respondents, Sudhir Chandra, Sr. Advocate, Manmohan, Sanjay Raghuvanshi, R. Sasiprabhu, Advocates.

IMPORTANT POINTS
1. The courts should be slow in granting an injunction to restrain the realization of a bank guarantee considering that an injunction of the court ought not to be an instrument which is used in nullifying the terms of a contract, agreement or undertaking which is lawfully enforceable.
2. In encashment of bank guarantee the applicability of the principle of undue enrichment has no application.
3. When a position, in law, is well settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety for the subordinate courts including the High Courts to ignore the settled decisions and then to pass a judicial order which is clearly contrary to the settled legal position.

Headnote:Bank Guarantees-Encashment of-Principles regarding grant of injunction in matters relating to-Fraud has to be an established fraud-Resulting of irretrievable injury to be decisively established-It must be proved to the satisfaction of Court that there would be no possibility whatsoever of the recovery of amount from beneficiary, by way of restitution-When relevant terms of guarantee reveal that bank has unconditionally and irrevocably undertaken to pay to appellant the amount demanded by it-Guarantor had no right to know reasons of or to investigate merits of demand-If bank could not in law avoid payment, as demand had been made in terms of bank guarantee-Court ought not to have issued an injunction-An injunction of Court ought not to be an instrument which is used in nullifying terms of a contract, agreement or undertaking which is lawfully enforceable.

       Held : Dealing with the question of fraud it has been held that fraud has to be an established fraud. The second exception to the rule of granting injunction, i.e., the resulting of irretrievable injury, has to be such a circumstance which would make it impossible for the guarantor to reimburse himself, if he ultimately succeeds. This will have to be decisively established and in must be proved to the satisfaction of the Court that there would be no possibility whatsoever of the recovery of the amount from the beneficiary, by way of restitution. (Para 22)

       In the instant case, as has been already noticed there were two types of bank guarantees which were issued. Bank Guarantee No. 40/51 for Rs. 26,15,000/- was issued to ensure timely performance of the agreement by respondent No. 1. The relevant terms of this guarantee firstly makes it clear that the bank has unconditionally and irrevocably undertaken to pay to the appellant, on written demand and without demand, the amount demanded by it. Secondly, Clause II of the said guarantee clarifies that the payment shall be made within demand and on the undertaking that the appellant is to be sole judge whether the seller has committed any breach. Consequently the right of the appellant to recover the guaranteed amount is not to be effected or suspended by reason of any dispute which can be raised or pending before the courts tribunals or arbitrator. Thirdly the guarantor had no right to know the reasons of or to investigate the merits of the demand or to question or to challenge the demand or to know any facts affecting the demand and lastly it was not open to the bank to require the proof of the liability of respondent No. 1 to pay the amount before paying the aforesaid guaranteed amount to the appellant. (Para 23)

       The letter of invocation issued by the appellant demanding the payment of Rs. 26,15,000/- was is accordance with the terms of bank guarantee No. 40/51 and the bank was, therefore, under an obligation to honour its undertaking and to make the payment. It, however, chose not to fulfil its obligation. If the bank could not in law avoid the payment, as the demand had been made in terms of the bank guarantee, as has been done in the present case, then the court ought not to have issued an injunction which had the effect of restraining the bank from fulfilling its contractual obligation in terms of the bank guarantee. An injunction of the court ought not to be an instrument which is used in nullifying the terms of a contract, agreement or undertaking which is lawfully enforceable. In its aforesaid letter dated 24th November, 1995 respondent No. 1 had clearly admitted that entire supply had not been made. In view of this also the High Court was not justified in granting an injunction. (Para 24)

       (ii) Bank guarantee-Agreement-Respondent No. 1 was to supply boiling house equipment-Four bank guarantees furnished in favour of appellant-Respondent s failure to supply equipment at site, within time allowed-Respondent No. 1 obtained ex-parte injunction restraining appellant from encashing bank guarantees-No payment made by bank to appellant-Injunction vacated-Revision-Matter remanded back to trial Court-High Court directed that till disposal of injunction application bank guarantees shall not be invoked or encashed-Appeal against-High Court ignoring judicial decisions of this Court-Absence of established fraud-Terms of bank guarantees not examined-No justification for High Court in invoking alleged principle of unjust enrichment-Court could not, in the present case, have granted an injunction relating to encashment of bank guarantees-Bank has not shown professional efficiency-It has acted in a partisan manner to help and assist respondent No. 1.

       Held : This is not a case where defendant No. 1 had at any time alleged fraud prior to the filing in injunction application. The main contract, pursuant to which the bank guarantees were issued, was not sought to be avoided by alleging fraud, nor was it at any point of time alleged that the bank guarantee was issued because any fraud had been played by the appellant. We have no manner of doubt that the bald assertion of fraud had been made solely with a view to obtain an order of injunction. In the absence of established fraud and not a mere allegation of fraud and that also having been made only in the injunction application, the court could not, in the present case, have granted an injunction relating to the encashment of the bank guarantee. (Para 28)

       Further held : It is unfortunate that the High Court did not consider it necessary to refer to various judicial pronouncements of this Court in which the principles which have to be followed while examining an application for grant of interim relief have been clearly laid down. The observation of the High Court that reference to judicial decisions will not be of much importance was clearly a method adopted by it is avoiding to follow and apply the law as laid down by this Court. Yet another serious error which was committed by the High Court, in the present case, was not to examine the terms of the bank guarantee and consider the letters of invocation which had been written by the appellant. If the High Court had taken the trouble of examining the documents on record, which had been referred to by the trial court, in its order refusing to grant injunction, the could would not have granted the interim injunction. We also do not find any justification for the High Court in invoking the alleged principle of unjust enrichment to the facts of the present case and then deny the appellant the right to encash the bank guarantee. If the High Court had taken the trouble to see the law on the point it would have been clear that in encashment of bank guarantee the applicability of the principle of undue enrichment has no application. (Para 29)

       From the facts stated hereinabove it appears to us that the respondent bank has not shown professional efficiency, to say the least, and has acted in a partisan manner with a view to help and assist respondent No. 1. At the time when there was no restraint order from any Court, the bank was under a legal and moral obligation to honour its commitments. It, however, failed to do so. It appears that the bank deliberately dragged its feet so as to enable respondent No. 1 to secure favourable order of injunction from the Court. Such conduct of a bank is difficult to appreciate. (Para 33)

       (iii) Judicial Impropriety-Tendency of subordinate Courts including High Courts to ignore settled decisions and in passing whimsical orders granting wrongful and unwarranted relief to one of parties-Deprecated-It is time that this tendency stops.

       Held : When a position, in law, is well settled as a result of judicial pronouncement of this Court, it would amount to judicial impropriety to say the least, for the subordinate courts including the High Courts to ignore the settled decisions and then to pass a judicial order which is clearly contrary to the settled legal position. Such judicial adventurism cannot be permitted and we strongly deprecate the tenancy of the subordinate courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wrongful and unwarranted relief to one of the parties. It is time that this tendency stops. (Para 32)