Courts should refrain from granting injunctions to restrain the performance of contractual obligations arising out of a letter of credit or bank guarantee between banks unless the plaintiff establishes a prima facie case or irreparable damage.

The judgment of the Court was as follows :––

THE COURT: This is an application for an order as follows:––

"(a) An order of injunction do issue restraining the second defendant, M/s. United Industrial Bank Limited, its servants and or agents to act in terms of the purported Bank guarantee dated 10th August, 1981 executed in favour of State Bank of Hyderabad, the third defendants herein;

(b) An injunction do issue restraining the defendants and each one of them and/or their servants and/or agents from taking any steps in terms of the purported Bank guarantee dated 10th August 1981, executed by the said Messrs. United Industrial Bank Limited, the second defendant in favour of the third defendant, M/s. State Bank of Hyderabad."

Upon such application being made ex parte, the Court passed an order of status quo which was later continued till the disposal of this application. This case arises out of the following facts :––

2. There was an agreement between the plaintiff-petitioner and the defendant No. 1 whereby the plaintiff undertook to carry out certain fabrication works for the first defendant in respect of diverse steel materials. The said agreement, inter alia, provides that the plaintiff would collect the raw materials from the stockyard of Steel Authority of India Ltd and that the plaintiff would furnish necessary bank guarantee for securing the said raw materials supplied by the first defendant. It appears that at the relevant time the raw materials were lying pledged and/or hypothecated and/or charged to the State Bank of Hyderabad being the defendant No. 3 and accordingly a bank guarantee was given by the defendant No. 2 in favour of the defendant No. 3. The relevant clause provides as follows :––

"We hereby undertake and agree to pay to State Bank of Hyderabad on demand and without demur, without any objection or consideration at any time the tenor and/or subsistency of this guarantee irrespective of the fact that Messrs. Surendra Engineering Works Pvt. Ltd. has committed any default of any of the terms and conditions of their contract with Messrs Technicon.

We, United Industrial Bank Ltd., further agreed that the State Bank of Hyderabad shall be the sole judge as to whether a loss has been suffered resulting in the invocation of the Guarantee."

Thereafter, this bank guarantee was invoked by a letter dated 4th March, 1983 and letters subsequently written. Thereafter, this suit was filed restraining the defendants from enforcing the said bank guarantee and this application was made.

3. Mr. Sen appearing for the petitioner has raised various points before me. His main challenge was against the bank guarantee itself. He has submitted that it does not comply with the relevant provisions of the Contract Act. He has also submitted that in any event at present the materials worth Rs. 65,000/- only are held by his client and, therefore, the bank guarantee should be reduced. He has further raised the question of failure and/or default of the terms and conditions of the contract. He has also submitted that there is no proper invocation of Bank guarantee.

4. Mr. Roy, appearing for defendant No.1 and Mr. Mitter appearing for defendant No.3 have disputed the contentions of Mr. Sen. They have in any event submitted that the Court should not grant any such Prayer or issue any such order in view of the decisions of this Court and the Supreme Court. In the case or (1) United Commercial Bank v. Bank of India & Ors., reported in AIR 1981 SC 1426 it was a case of letter of credit. However, the Supreme Court pointed out that the same consideration would apply in respect of a bank guarantee. It was pointed out that in view of the banker's obligation under an irrevocable letter of credit to pay, a buyer-customer cannot instruct him not to pay. It was further pointed out that the Courts shall refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or bank guarantee between one