1987 Supreme(SC) 873

SUPREME COURT OF INDIA
K.Jagannatha Shetty : Sabyasachi Mukharjee
U.P.Co Operative Federation Limited
Versus
Stngh Consultants And Engineers Private Limited
Case No. : 3054 of 1987
Date of Decision : 11/19/87
Advocates Appeared: Divan Anil B. : Narain Sandeep : Syed Shakeel Ahmad : Tarkunde V.M.

Headnote:

Arbitration Act. 1940 – Section 41 – Contract – Guaranteed performance of work – This is an appeal from the judgment and order of the learned Single Judge of the Allahabad High court (Lucknow bench) in Revision Petition – It appears that the appellant, a State government enterprise, on or about 17/05/1983 entered into a contract with the respondent - a private limited company for the supply and installation of a vanaspati manufacturing plant at Halduchaur in the District of Nainital, in the State of Uttar Pradesh. – The contract bond contemplated, according to the appellant, guaranteed performance of work at various stages in accordance with the time schedule prescribed therein and provided for completion and commissioning of the plant after due trial run by 15/05/1984. – The appellant contends that time was essentially and indisputably the essence of the contract. – Contention of the appellant was that as per the terms and conditions of the contract bond. the respondent was to furnish a performance bank guarantee for Rs. 16.5 lakhs and yet another bank guarantee for Rs. 33.00 lakhs as security for the monies advanced by the appellant to the respondent for undertaking the work. – Both these two guarantees as also the contract bond entitled the appellant to invoke them and call for their realisation and encashment on the respondents failing to perform the obligations for which the appellant was made the sole judge. – Held, Case involving the obligations under a performance guarantee was considered by the court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. – The facts in that case are these: English sellers entered into a contract to supply and erect glass-houses in Libya. – Libyan buyers were to open an irrevocable letter of credit in favour of the sellers. – The sellers told their English bank to give a performance guarantee. – The English bank instructed a Libyan bank to issue a performance bond in favour of the buyers for a certain sum and gave their guarantee payable on demand without proof or conditions to cover that sum. – Libyan bank issued a bond accordingly. – Sellers received no confirmed letter of credit and refused to proceed with the contract. – Sellers obtained an interim injunction to prevent the English bank from paying on the guarantee – Held, Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. – If the documentary credits are irrevocable and independent, the banks 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. – Banks obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. – But, the banker must be sure of his ground before declining to pay. – Nature of the 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. – If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. – The bank cannot be compelled to honour the credit in such cases. – But it may be very difficult for the bank to take a decision on the alleged fraudulent action. – In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction. – Court, however, should not lightly interfere with the operation of irrevocable documentary credit. – Court agree with my learned brother that in order to restrain the operation of the irrevocable letter of credit, performance bond or guarantee, there should be serious dispute to be tried and there should be a good prima facie acts of fraud – 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. – Appeal must be allowed. – Case involving the obligations under a performance guarantee was considered by the court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. – The facts in that case are these: English sellers entered into a contract to supply and erect glass-houses in Libya. – Libyan buyers were to open an irrevocable letter of credit in favour of the sellers. – The sellers told their English bank to give a performance guarantee. – The English bank instructed a Libyan bank to issue a performance bond in favour of the buyers for a certain sum and gave their guarantee payable on demand without proof or conditions to cover that sum. – The Libyan bank issued a bond accordingly. – Sellers received no confirmed letter of credit and refused to proceed with the contract. – Sellers obtained an interim injunction to prevent the English bank from paying on the guarantee – Order Accordingly