Back
1982 Supreme(Del) 230
High Court Of Delhi
BANWARI LAL RADHE MOHAN - Appellant
Versus
PUNJAB STATE CORPORATIVE SUPPLY AND MARKETING FEDERATION LIMITED - Respondent
ORIGINAL MISCELLANEOUS PETITION 62 of 1982
Decided On : 08/27/1982
A.K.Bhasin, KAPIL SIBAL, L.M.Sanghvi, R.K.Anand
The fraud exception to the general rule regarding contracts of guarantee only applies to fraud related to the contract of guarantee itself, not to the underlying contract.
Headnote:
BANK GUARANTEE - ENCASHMENT - FRAUD - INTERPRETATION OF GUARANTEE CONTRACT - SECTION 7 OF EXPORT (QUALITY CONTROL AND INSPECTION) ACT, 1963 - APPLICABILITY.
Fact of the Case:
Petitioners, Banwari Lal Radhe Mohan, entered into an agreement with MARKFED to supply 2000 metric tons of superior Basmati Sela rice. They furnished a bank guarantee of Rs. 5.27 lacs for the performance of the agreement. Petitioners supplied 1371928.215 Kgs. of rice and MARKFED paid Rs. 49,18,286.74 in satisfaction of the price. Petitioners demanded the balance of Rs. 24,39,431.96, but MARKFED refused, claiming the rice was sub-standard and rejected by the foreign buyer. Petitioners filed an application for a temporary injunction to restrain MARKFED from encashing the bank guarantee, alleging fraud.
Finding of the Court:
The court held that the bank guarantee was absolute and could be encashed on demand by MARKFED. The court also held that the fraud exception to the general rule regarding contracts of guarantee only applies to fraud related to the contract of guarantee itself, not to the underlying contract. The court found no prima facie case of fraud by MARKFED and dismissed the petitioners' applications.
Issues: 1. Whether the bank guarantee was absolute and could be encashed on demand by MARKFED? 2. Whether the fraud exception to the general rule regarding contracts of guarantee applies to fraud related to the underlying contract? 3. Whether there was a prima facie case of fraud by MARKFED?
Ratio Decidendi: 1. The court held that the bank guarantee was absolute and could be encashed on demand by MARKFED based on the following legal principles: - Performance guarantees are either absolute, encashable on demand, or require proof of breach of the underlying contract. - The bank issuing a performance guarantee is not concerned with the underlying contract unless the guarantee itself says it will be enforceable on proof of breach of the primary underlying contract. - The only exception is in clear cases of fraud of which the banks have notice. 2. The court held that the fraud exception to the general rule regarding contracts of guarantee only applies to fraud related to the contract of guarantee itself, not to the underlying contract, based on the following legal principles: - The contract of guarantee is independent of the underlying contract and is autonomous. - Scrutiny of the performance of the underlying contract would destroy the autonomy and independence of the absolute guarantee contract. - The fraud contemplated by the exception is one that has a direct connection with the contract of guarantee in respect of its coming into existence, continuance, etc. 3. The court found no prima facie case of fraud by MARKFED based on the following findings: - MARKFED paid a huge amount to the petitioners, indicating a genuine belief in the performance of the contract. - Petitioners allegedly committed fraud by supplying sub-standard rice and misleading MARKFED to obtain payment. - MARKFED's allegations of fraud require determination in appropriate legal proceedings.
Final Decision: The court dismissed the petitioners' applications for an injunction and a direction to MARKFED not to withhold payment of the balance amount.
( 1 ) THIS judgment disposes of 0. M. P. 62 of 1982 and 1. A. 1719/82. The application (1. A. 17i9/82) is for issue of a temporary injunction restraining the State Bank of Patiala,shardhanand Marg, Delhi from encashment of the bank guarantee given at the instance of M/s. Banwari Lal Radhe Mohan (hereinafter REFERRED TO as the petitioners) in favour of the Punjab State Cooperative Supply and Marketing Federation Limited (hereinafter REFERRED TO and commercially known as MARKFED ). 0. M. P. 62/82 is for issue of a direction to the MARKFED that the latter should not withhold payment of Rs. 24,39)431. 96 during the pendency of the arbitration proceedings between the parlies.
( 2 ) THERE is no dispute in respect of some of the facts. On 14th May, 1981 a contract was entered into between the State Trading Corporation Limited (hereinafter to STC) and M/s. Sulaiman Al-Mohammad Al-Rashid of Saudi Arabia (hereinafter to referred as the foreign buyer) for supply of superior Basmati Sela rice by the former to the latter. STC then entered into some agreements with various parties including MARKFED for the supply of a portion of contracted rice for onward shipment to the foreign buyer. The agreement which was entered into with MARKFED is dated 29th June, 1981. Then MARKFED entered into an agreement dated 16th July, 1981 with the petitioners for supply of 2000 metric tone of superior Basmati Sela rice at the railhead at Delhi in August/september, 1981. According to that agreement, the petitioners had to furnish a bank guarantee to the extent of Rs. 5. 27 Lacs for the performance of the agreement. Accordingly, the petitioner furnished bank guarantee of that amount of State Bank of Patiala,shardhanand Mars;, Delhi. Pursuant to the said agreement, they supplied 1371928. 215 Kgs. of rice. MARKFED paid a sum of Rs. 49,18,286. 74 in satisfaction of the price of the part of the rice supplied by the petitioners, The petitioners made a demand for payment of the balance of Rs. 24,39,431. 96 P. The reply of the MARKFED was that the rice which was supplied was not in accordance with the terms of the contract and that the same was sub-standard on account of which the same was rejected by the foreign buyer.
( 3 ) ACCORDING to the petitioners, the rice supplied was in accordance with the specifications and was not sub-standard and that they are entitled to the balance of the price.
( 4 ) THE petitioner entertained an apprehension that instead of paying the balance price, MARKFED would resort to encashment of bank guarantee. They, therefore, brought I. A. 4316/81 in Suit No. 1392-A of 1981 for issue of ex parte temporary injunction, restraining the MARKFED from encashment of the aforesaid bank guirantee. That application was decided by H. L. Anand, J. along with such other applications in other matters. The judgment of H. L. Anand, J. is M/s. Banwuri Lal Radhe Mohan v. Punjab State Co-operative Supply and Marketing federation Ltd, reported as AIR. 1982 Delhi 357. It is laid down by H. L. Anand,j. that it is well settled that the performance guarantee, even though having their genesis in the primary contract between the parties, are nevertheless autonomous and independent contracts, that a bank which gives performance guarantee must honour that guarantee according to its terms and that it is not concerned in the least with the relations between the supplier and customer, nor with the question whether the supplier has performed his contracted obligations or not and that the only exception is when there is a clear fraud of which the bank has notice. In respect of the guarantee involved in this case it was held that it was absolute and that the same could be got encashed by way of making a demand in accordance with its terms. . by the MARKFED. In respect of this guarantee the following observations were made in para 7 which reads as under :
"7. In the case of I. A. 4316/81, on the ex parte interim injunction being granted by this Court, the responden
