Back
2008 Supreme(Bom) 171
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
V.C. DAGA, J.
Petroleum India International — Plaintiffs.
Versus
Bank of Baroda & Ors. — Defendants.
OTICE OF MOTION No.4093 of 2006
IN SUIT No.3252 of 2006.
Decided on : 4th February, 2008.
Mr D.D. Madon, Senior Counsel with Ms Jyoti
Ghag i/b Thakore Jariwalla & Associates for the
Plaintiffs in support. Mr P.K. Dhakephalkar, Senior Counsel with D.S. Paranjpe, Advocate for the Defendant No.1 to show cause.
None present for the Defendant Nos.2 and 3.
The main legal point established in the judgment is that the court will not grant an injunction to restrain the enforcement of a bank guarantee unless clear and cogent evidence of fraud and the bank's knowledge of the fraud is presented. The court also emphasized the principle that a bank issuing a performance guarantee must honor that guarantee according to its terms, except in cases of clear fraud of which the bank has notice.
Headnote:
Bank Guarantee - Contract Dispute - 2006-1 S.C.C. 663, 2006-2 S.C.C. 728 - The court discussed the legal provisions related to bank guarantees and the circumstances under which an injunction can be granted to restrain the enforcement of a bank guarantee. The court emphasized the need to establish fraud and the bank's knowledge of the fraud to warrant the grant of an injunction. The court also highlighted the principle that a bank issuing a performance guarantee must honor that guarantee according to its terms, except in cases of clear fraud of which the bank has notice.
Fact of the Case:
The plaintiff sought to restrain the defendant bank from making payments under a bank guarantee issued in favor of the defendant No.3. The plaintiff alleged fraud by defendant No.3 and sought to prevent the invocation of the bank guarantee.
Finding of the Court:
The court found that the plaintiff failed to establish fraud and the bank's knowledge of the fraud, which are necessary conditions for granting an injunction to restrain the enforcement of a bank guarantee. The court also noted that the plaintiff did not raise any dispute regarding the underlying contract between the parties.
Issues: The key issues revolved around the alleged fraud by defendant No.3, the bank's obligation to honor the bank guarantee, and the conditions for granting an injunction to restrain the enforcement of the bank guarantee.
Ratio Decidendi: The court emphasized the need to establish clear and cogent evidence of fraud and the bank's knowledge of the fraud to warrant the grant of an injunction. The court also highlighted the principle that a bank issuing a performance guarantee must honor that guarantee according to its terms, except in cases of clear fraud of which the bank has notice.
Final Decision: The court dismissed the notice of motion for interim relief, finding that no case was made out for the grant of an injunction. The court also extended the ad-interim order for two weeks, with a warning that no further extension would be granted.
1. This notice of motion is taken out by the plaintiff to claim following relief: (a) "That pending the hearing and final disposal of the above suit, the defendant No.1 by itself,its servants and agents be restrained by an order and injunction of this Hon’ble Court from making any payments to Defendant No.2 or any other person/persons under the said Bank Guarantee dated 25th February, 2006 annexed as Exh.Q to the plaint". THE FACTUAL BACKDROP:-
2. The factual backdrop brought on record by the plaintiff is that after having entered into contract with the defendant no.3, the plaintiff, who is a customer of the defendant no.1-bank, vide its letter dated 15th February, 2006 requested its banker-(defendant no.1) to issue bank guarantee in favour of the defendant no.3 ("M/s Abaja Contracting Est. Kingdom of Saudi Arabia") through defendant no.2 ("The Saudi British Bank") as the plaintiff was awarded contract for dismentaling of the refinery at Riyadh by defendant No.3 and for rebuilding of refinery at AL-Mukala in Yemen under phase II.
3. The terms of contract required the plaintiff to submit a bank guarantee for 10% of the contract value being the first payment milestone against advance to be paid by the defendant no.3.
4. The value of the aforesaid contract was US $ 4,00,000. As such the similar was the value of the bank guarantee.
5. In pursuance of the aforesaid request of the plaintiff, the Deed of Counter Guarantee bearing No. F2/2006 was executed by defendant no.1, in favour of defendant no.2; guaranteeing an amount not exceeding US $ 4,00,000/-. The bank guarantee issued is unconditional and irrevocable undertaking on the part of the first defendant to pay to the defendant No.2 forthwith on demand in writing or by cable. The liability of defendant no.1 was limited to maximum of US $ 4,00,000/-. The bank guarantee contains a clause that the said guarantee shall be subject to the laws of Saudi Arabia.
6. After execution of the above deed of counter guarantee dated 3.3.2006 by first defendant in favour of second defendant, the second defendant in turn issued bank guarantee dated 8.3.2006 in favour of the third defendant. Thus, the terms and conditions of the bank guarantee issued by the first defendant were accepted by defendant No.2 and the same were acted upon by it by guaranting irrevocably and unconditionally, payment of US $ 4,00,000/-, to the defendant No.3 on demand.
7. The terms of the aforesaid bank guarantee, inter-alia, provided that the guarantee was to remain in full force upto 17.8.2006.(inclusive ) The said guarantee also provided that it shall not be necessary for defendant no.3 to proceed against plaintiff before proceeding to invoke bank guarantee. The said guarantee further provided that the liability of bank to the defendant no.3 shall remain in force notwithstanding the existence of any difference or disputes between plaintiff and defendant no.3.
8. Plaintiff vide it’s letter dated 13.9.2006 requested defendant no.1 not to make payment under the aforesaid bank guarantee if any request is received from the second defendant. In reply, defendant no.1 through its Branch Manager vide its letter dated 1.8.2006 informed the plaintiff that as per terms of the aforesaid bank guarantee defendant no.1 was bound to make payment of guarantee amount as and when demanded by the beneficiary i.e. defendant no.3.
9. It appears that the plaintiff requested the defendant no.1 to extend the validity of the bank guarantee furnished by the plaintiff in favour of the defendant no.3 and, accordingly, the plaintiff got the bank guarantee validated and extended till 30.9.2006.
10. It appears that the first defendant received swift message from defendant no.2 that they had received official claim from beneficiary under the above guarantee demanding US $ 4,00,000 and further called upon them to make payment forthwith. As such defendant no.2 requested the first defendant to immediately credit full amount of the bank guarantee to th
