2006 Supreme(SC) 1154

2006(9) Supreme 50
SUPREME COURT OF INDIA
(From Patna High Court)
S.B. Sinha and Dalveer Bhandari, JJ.
M/s Reliance Salt Ltd. - Appellant
versus
M/s Cosmos Enterprises & Anr. - Respondents
Civil Appeal No. 5151 of 2006
(Arising out of SLP (C) No. 2749 of 2006)
Decided on 22-11-2006
Counsel for the Parties :
For the Appellant : Ranjan Mukherjee, Advocate.
For the Respondents : Sunil Kumar, Ranjit Kumar, Sr. Advocates, Rajiv Shankar Dvivedi, Manish Mohan, Ashish Thakur, Ajay Choudhary, S.S. Ray and Ms. Rakhi Ray, Advocates.

IMPORTANT POINT
In the matter of invocation of bank guarantee, fraud which vitiates the contract must have a nexus with acts of the parties prior to entering into contract and subsequent breach of contract on part of a party would not vitiate the contract itself.

Headnote:BANK GUARANTEE - Indian Contract Act - Section 126 - Respondent was Consignment Agent by an agreement for sale of product of appellant and furnished bank guarantee for Rs. 5 lakhs - Bank Guarantee was invoked as appellant’s bills remained unpaid - Suit for declaration and injunction against invocation of bank guarantee - Trial Court decreed suit on a finding that invocation of Bank guarantee was vitiated by fraud and that respondent would suffer irreparable injury - High Court upheld the decree - Appeal - Bank Guarantee was given against any loss or damage caused to or suffered by Principal Company, by reason or any breach of contract by consignment agent, major term being settlement of Principal’s Company’s bill within 30 days from date of bill - Bank Guarantee furnished was an unconditional one - It was not in dispute that some amount was due to appellant from respondent - Suit was not a suit for settlement of accounts - Breach of contract by reason of supply of inferior quality of goods or delay in supply or a short supply may render a party responsible for damages but it would not lead to conclusion that fraud had been committed - Impugned judgment was liable to be set aside.

       Held : Before we embark upon the rival contentions of the parties, it would be necessary to notice the salient features of the Bank Guarantee. The Bank Guarantee was limited to the extent of Rs.5 lakhs. It was given only against any loss or damage caused to or suffered by the Principal Company, by reason or any breach of contract by the consignment agent their due performance of the duties of consignment agent of the Principal Company, the major terms being settlement of the Principal Companys bills by the consignment agent within 30 days from the date of those bills. The Bank undertook to pay the amounts due without any demur and merely on demand by the Company. Such payment was merely to be made on the basis of a statement that the amount claimed, inter alia, is due by way of loss or damage caused to suffer by the Principal Company by reason of any breach of contract for non-payment of the Principal Companys bill by the consignment agent of any of the terms and conditions to be agreed upon in performance of their duties of Consignment Agent on behalf of the Principal Company. Any such demand made on the Bank of India should be conclusive as regards the amount due and payable by the Bank under the said Bank Guarantee.(Para 11)

       A bare perusal of the contents of the Bank Guarantee, as noticed hereinbefore, shows that there is no escape from arriving at a conclusion that the guarantee furnished was an unconditional one. It not only provided for loss or damage in case of breach of contract, but also loss or damage by reason of non-settlement of bills. Such bills under the agreement of consignment were to be settled within a period of 30 days. In the event the bills are not settled within the period stipulated in the agreement, the parties intended, as it appears from the tenor of the Bank Guarantee, that the same would constitute a breach of contract. It is not in dispute that some amount was due to the Appellant from the Respondent. The suit was not a suit for settlement of accounts. The suit was, inter alia, only for a decree for injunction restraining Appellant from invoking the Bank Guarantee. Respondent No.2-Bank, indisputably, did not controvert allegations contained in the demand of the appellant. It did not contest the suit. It even did not support Plaintiff-Respondent No.1 before the learned Trial Judge or before the High Court. (Para 15)

       A claim which is denied or disputed, in the event of necessity for determination of the lis, may not be found to be correct. If Appellant was to allege a breach of contract in a properly framed suit, Respondent No.1 could also allege the breach of contract on the part of Appellant herein. Breach of contract by reason of supply of inferior quality of tea or salt or delay in supply or a short supply may render a party responsible for damages for commission of breach of contract, but, breach of contract alone does not lead to the conclusion that a fraud had been committed thereby. It is contended that commission of fraud would include any act to deceive but then such act must be confined to acts committed by a party to a contract with intention to deceive another party or his agent or to induce him to enter into a contract. Fraud, which vitiates the contract, must have a nexus with the acts of the parties prior to entering into the contract. Subsequent breach of contract on the part of a party would not vitiate the contract itself. (Para 16)

       Although, the learned Trial Judge as also the High Court observed that the Bank Guarantee was invokable after lapse of 30 days from date of the bill, as stipulated therein, on its own terms the Bank was bound to pay the amount in question on its invokation, subject of course to the fulfillment of the other conditions laid down therein. It could not have refused to honour its commitment only because the purported accounts were not settled between the parties or the accounts furnished to the Court were wrong ones. The other reasons assigned by the learned Trial Judge as also the High Court that the conduct of Appellant was not clean or it had tried to defraud other customers in other parts of the State, in our considered opinion, are of not much significance in view of the nature of the guarantee furnished by the Bank.(Para 20)

       We, therefore, are of the opinion that the impugned judgments cannot be sustained. They are set aside accordingly. The appeal is allowed. This order shall not, however, come in the way of Respondents to file a suit for accounts or take other measures which are available to them in law. (Para 22)