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2009 Supreme(Ker) 762
High Court Of Kerala
THE HONOURABLE MR. JUSTICE P.R. RAMAN & THE HONOURABLE MR. JUSTICE P. BHAVADASAN
Jacsons Veneers and panels pvt Ltd.Rep by its Director Jacob Thomas - Appellant
Versus
State Bank Of Travancore, Represented By Its Chief Manager - Respondents
FAO.Nos. 283 of 2008 & 287 of 2008
Decided On : 18 September 2009
The main legal point established in the judgment is the distinction between conditional and unconditional Bank Guarantee and the legal principles governing the grant of injunction against encashment of Bank Guarantee, emphasizing the need to establish prima facie grounds of fraud or irretrievable loss or injury in the case of unconditional Bank Guarantee.
Headnote:
Bank Guarantee - Interim Injunction - [Bank Guarantee] - [Interim Injunction] - [Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. ((1997)6 SCC 450), Syndicate Bank v. Vijay Kumar (AIR 1992 SC 1066), State Trading Corporation of India Ltd. v. Jainsons Clothing Corpn. (AIR 1994 SC 2778), Daewoo Motors India Ltd. v. Union of India ((2003) 4 SCC 690), BSES Ltd. (Now Reliance Energy Ltd.) v. Fenner India Ltd. ((2006) 2 SCC 728), Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co. ((2007)8 SCC 110), Vinitec Electronics Private Ltd. v. HCL Infosystems Ltd. ((2008) 1 SCC 544), Hindustan Construction Co. Ltd. v. State of Bihar (AIR 1999 SC 3710)] - The court analyzed various decisions of the Apex Court regarding the enforcement of Bank Guarantee and highlighted the distinction between conditional and unconditional Bank Guarantee. It emphasized that in the case of unconditional Bank Guarantee, the court may not injunct against encashment, except on establishment of prima facie grounds of fraud or irretrievable loss or injury. The court also pointed out the importance of construing the document to determine whether it is a conditional or unconditional Bank Guarantee.
Fact of the Case:
The plaintiff, a registered Company engaged in the manufacture and supply of veneers, flush doors, and MDF, filed a suit seeking a declaration and prohibitory injunction against a Nationalized Bank and another company dealing in real estate and construction business. The plaintiff alleged that the second defendant invoked a Bank Guarantee, which the plaintiff claimed was illegal and vitiated by fraud.
Finding of the Court:
The court found that the plaintiff failed to establish prima facie grounds of fraud or irretrievable loss or injury to warrant an injunction against the enforcement of the Bank Guarantee. It emphasized the distinction between conditional and unconditional Bank Guarantee and remanded the matter to the trial court for fresh consideration.
Issues: The main issue was whether the court should grant an interim injunction against the enforcement of the Bank Guarantee based on the allegations of fraud and breach of contract by the second defendant.
Ratio Decidendi: The court's decision was based on the analysis of various decisions of the Apex Court regarding the enforcement of Bank Guarantee. It highlighted the legal principles governing the grant of injunction against encashment of Bank Guarantee, emphasizing the need to establish prima facie grounds of fraud or irretrievable loss or injury in the case of unconditional Bank Guarantee.
Final Decision: The appeals were allowed, the impugned orders were set aside, and the matter was remanded to the trial court for fresh consideration in the light of the court's analysis of the legal framework governing the enforcement of Bank Guarantee.
Bhavadasan, J,
These two appeals arise from a common order and hence they are being disposed of together.
2. The plaintiffs had filed I.A. 3085 of 2008 in O.S. 436 of 2008 seeking an interim injunction and an ex-parte order of injunction was granted. On appearance by the respondents, the second respondent fled I.A. 4011 of 2008 for vacating the ex-parte interim order. Both the petitions were heard together and disposed of by a common order. Aggrieved by the said order, the petitioner in I.A. 3085 of 2008 has filed F.A.O.283 of 2008 and F.A.O.287 of 2008 against the order in I.A. 4011 of 2008.
3. Facts absolutely necessary for the disposal of these appeals alone are being referred to. The parties and facts are hereinafter referred to as they are available before the court below.
4. The appellant instituted O.S. 446 of 2008 before the Sub Court, Ernakulam seeking a declaration and prohibitory injunction. The plaintiff is a registered Company and is engaged in the manufacture and supply of veneers, flush doors and MDF and such other materials. They have been in the business for the last thirty years. The first defendant is a Nationalised Bank and the second defendant is another company dealing in real estate and construction business. According to the plaintiff the second defendant in the suit placed orders for flush doors with the plaintiff. The plaintiff had to supply 4731 flush doors with the specifications stipulated by the second defendant Company and an agreement to that effect was entered into between them. Work order was placed by the second defendant Company. The plaintiff states that while placing work orders the second defendant had stipulated certain terms and conditions, which were not acceptable to the plaintiff Company. They in turn while accepting the work order specified their terms and conditions. One of the conditions was that when 40% of the total consideration for the transaction is paid by the second defendant, plaintiff would provide a Bank Guarantee to the tune of Rs.35,00,000/-. There were other conditions regarding the period within which the supply has to be made and regarding the specifications also. Suffice to say that when 40% of the advance amount was paid, Bank Guarantee was furnished by the plaintiff Company. Bank Guarantee was furnished by the plaintiff Company through the first defendant. According to the plaintiff, it appears that for reasons which are not very proper, the second defendant invoked the Bank Guarantee. According to the plaintiff, they were not entitled to do so and therefore they laid the suit seeking a declaration that the amount covered by the Bank Guarantee dated 22.5.2007 issued to the first defendant belongs to the plaintiff and the invocation of the Bank Guarantee by the second defendant is illegal and vitiated by fraud. Consequential injunction was also sought. Along with the suit, it is seen that the plaintiff filed I.A. 3085 of 2008 seeking a temporary injunction. An ex-parte order of injunction was granted in favour of the plaintiff.
5. The respondents entered appearance. The second respondent stoutly opposed the application for temporary injunction and pointed out that it was improper and in fact illegal for the court to injunct the said respondent from enforcing the Bank Guarantee. It
was pointed out by them that the first respondent, namely, the Bank, is unconcerned with the terms and conditions of the agreement between the plaintiff and the second defendant and that the first defendant under no circumstance can refuse to honour the Bank Guarantee. It is also pointed out by them that once an unconditional and irrevocable Bank Guarantee has been given by the plaintiff, the plaintiff cannot then later on seek to injunct the second respondent from enforcing the Bank Guarantee for any reason except fraud or irreparable loss or injury.
6. The second defendant in turn also filed I.A. 4011 of 2008 to have the interlocutory application filed by the plaintiff for t
