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HIGH COURT OF CALCUTTA
SABYASACHI MUKHERJI, A. K. JANAH
STATE BANK OF INDIA - Appellant
Versus
ECONOMIC TRADING CO. S. A. A. - Respondent
A. F. O. D. 259 Of 1969
Decided On : JULY 1, 1974
BANK GUARANTEE - IRREVOCABLE LETTER OF CREDIT - DISTINCTION - INJUNCTION AGAINST BANK FROM MAKING PAYMENT UNDER GUARANTEE - VALIDITY - ADDITION OF BANK AS PARTY TO SUIT - NECESSITY.
Fact of the Case:
Plaintiff, an Indian company, entered into a contract with Defendant No. 1, an Egyptian company, for the supply of polythene bags. The contract included a guarantee clause requiring the plaintiff to provide a letter of guarantee for 20% of the face value of the goods sold in favor of the consignees through an authorized Egyptian Bank. The plaintiff requested the State Bank of India (SBI) to issue a letter of guarantee for Rs. 14,64,966/- in favor of Defendant No. 3, the Bank of Alexandria. SBI issued the guarantee and the plaintiff provided a letter of indemnity to SBI. A dispute arose between the plaintiff and Defendant No. 1 regarding the quality of the goods, and Defendant No. 1 purported to cancel the contract. The plaintiff filed a suit against Defendants Nos. 1, 2, and 3, seeking an injunction to restrain the defendants from claiming or receiving any money under the letter of guarantee and to restrain the Bank of Alexandria from making any payment on account of the defendants. SBI was not made a party to the suit. The trial court granted an injunction restraining SBI from making any payment to the Bank of Alexandria. SBI appealed the order.
Finding of the Court:
1. The distinction between an irrevocable letter of credit and a bank guarantee is that the former is autonomous and independent of the underlying contract, while the latter is dependent on the contract between the beneficiary of the guarantee and a third party. 2. Payment under a bank guarantee becomes due only on compliance with the terms on which the bank is to pay under the respective documents. 3. The unilateral assertion of the Bank of Alexandria that under Egyptian law they were under an obligation to pay without contestation, where there is already a lawful injunction granted by this Court, cannot be conclusive of the matter. 4. An order to prevent circumvention of a lawful order by indirect methods would not be illegal. 5. No order could be passed, except in very special circumstances, against a party who is not a party to the proceeding.
Issues: 1. Whether the trial court erred in granting an injunction against SBI without adding it as a party to the suit. 2. Whether the trial court erred in directing SBI to deposit the amount of Rs. 12,00,000/- with the Registrar.
Ratio Decidendi: 1. The trial court erred in granting an injunction against SBI without adding it as a party to the suit. The order was irregular and improper. 2. The trial court erred in directing SBI to deposit the amount of Rs. 12,00,000/- with the Registrar. There was no justification for such an order.
Final Decision: The appeal was disposed of on the following terms: 1. SBI was added as a party to the suit. 2. The cause title and the plaint were amended as indicated in the petition in support of the notice of motion dated December 4, 1967. 3. The order of deposit to SBI was modified to the extent that there would be an injunction restraining SBI from making any payment to the Bank of Alexandria or any other person in respect of or in connection with the letter of guarantee or undertaking dated September 4, 1967, furnished by the Bank of Alexandria in favor of Defendant No. 2. 4. If any money had already been deposited by SBI pursuant to the order made by the trial court, the same should be returned back to SBI.
( 1 ) THIS appeal arises out of an order of A. K. Basu, J. , dated the 3rd June, 1969, in Suit No. 2643 of 1967. In order to appreciate the dispute in this appeal it is necessary to refer briefly to certain facts. On the 10th August, 1967, there was a contract between the Economic Trading Co. , defendant No. 1 in this suit who was the buyer and Messrs. Lohia Jute Press Private Limited who was the plaintiff-seller for purchase of 27,12,900 pieces of polythene bags at Rs. 270/- per 100 bags, f. o. b. , Calcutta the total value being Rs. 73,24,830. 00. In the said contract there was a guarantee clause which stated as follows:"the sellers to provide letter of guarantee for 20% of the face value of the goods sold in favour of the consignees within three weeks from date through an Authorised Egyptian Bank. The Letter of guarantee should be valid for claims to be filed by the Buyers or consignees within three months of the expiry date of L/c. This letter of guarantee should be unconditionally payable on demand. "the plaintiff requested the State Bank of India on the 25th August, 1967, for a packing credit loan and performance guarantee for Rs. 14,65,000/ -. It further stipulated that the guarantee should be given in favour of Alexandria Bank of Cairo, which was the defendant No. 3 in the suit before the expiry of two weeks of the contract which fell on the 29th August, 1967. As per terms of the contract the guarantee should be valid upto the 31st May, 1968. The said instructions are contained in the letter dated the 25th August, 1967. which appears at page 26 of the Paper Book. On the 29th August, 1967, a letter of indemnity and/of counter guarantee was given by the plaintiff to the State Bank of India. The said letter of counter guarantee at page 60 of the Paper Book states as follows:--"in consideration of your having at the request of Lohia Jute Press Pvt. Ltd. , Calcutta-7, (hereinafter referred to as the Company) agreed to execute a Letter of Guarantee (as per copy annexed hereto) for Rs. 14,64,966/- (Rupees Fourteen lacs sixty-four thousand nine hundred sixty- six only) in favour of Egyptian Chemical Industries (KIMA) S. A. E. , Cairo, (hereinafter referred to as the Beneficiary) we hereby agree and declare that the company will hold harmless and indemnify the Bank against and will pay to the Bank on demand at Calcutta the amount of all costs, claims, demands, damages, losses, and expenses which may be made against or sustained by the Bank or for which the Bank may become liable by reason of the Bank having given and signed the said Guarantee or otherwise in connection therewith. And the company also agrees to pay to the Bank at its Calcutta Local Head Office forthwith on demand any
amount which the Bank may be called upon to pay under the said Guarantee (and whether the Bank shall have paid any such amount or not) plus all costs and charges which may be incurred by the Bank or become payable in connection with the fulfilment of the terms of the said Guarantee. "on the 29th August, 1967, the State Bank of India cabled to Bank of Alexandria at the request of the plaintiff asking the said Bank to execute an unconditional guarantee for Rs. 14,64,966/- in favour of the defendant No. 2 representing 20 per cent, f. o. b. value of the goods. A copy of the said cable appears at page 63 of the Paper Book which is in the following terms:--"at request Lohia Jute Press Private Limited Calcutta please execute your unconditional guarantee for Rs. 14,64,966/-half of Indian Rupees 2929932 favouring Egyptian Chemical Industries (KIMA) S. A. E. Cairo representing 20% F. O. B. value of goods viz. , Rs. 73,24,830/- for supply of 27,12,900 Polythene Coated Hessian Bags at rate Rs. 270/- per 100 bags F. O. B. Calcutta in terms contract dated 10th August 1967. signed at Cairo stop we understand Egyptian buyers have established relative credit for Rupees 73,24,830/- in favour Indian Suppliers through your intermediary stop pro
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