Holding

The Supreme Court held that without a prima facie case of established fraud and irretrievable injury, an injunction restraining the enforcement of a bank guarantee cannot be granted, and the High Court's order was set aside.

Summary

The plaintiff (borrower) entered into contracts with suppliers for a 108 MW captive power plant and with a consortium of banks, including Svenska Handelsbanken, for financing. The plant was later found to have a capacity of only 60 MW, leading the plaintiff to allege fraud by the suppliers and the lender and to seek a declaration that the bank guarantees issued by IDBI were void, together with an injunction restraining their encashment. The trial court held there was no established fraud against the lenders, that the loan agreements were unconditional, and dismissed the injunction. The High Court reversed, finding a prima facie case of fraud and granting a two‑year injunction. On appeal, the Supreme Court held that the High Court misapplied the law, that no prima facie fraud or irretrievable injury existed, and that injunctions against bank guarantees are only permissible in cases of established fraud. Consequently, the High Court order was set aside, the trial court order restored, and the plaintiff's application for interim injunction dismissed.

Issues considered

Whether an injunction can be granted to restrain the encashment of a bank guarantee in the absence of an established fraud and irretrievable injury.
Whether the High Court correctly applied the principles of injunction on lenders versus the specific principles governing bank guarantees.
Whether the plaintiff established a prima facie case of fraud against the lenders (defendant No. 4 and consortium).
Whether the trial court's findings on the unconditional nature of the loan agreements and the lack of fraud should be upheld.
Whether Section 92 of the Evidence Act bars consideration of oral evidence in interpreting the written agreements.
Whether the balance of convenience favours the plaintiff or the lenders.

Legislation cited

Code of Civil Procedure, 1908s. Order 39 Rule I, s. Section 96
Indian Evidence Act, 1872s. Section 92
Sale of Goods Act, 1930s. Section 12(3), s. Section 59

Subjects

bank guaranteeinjunctionfraudprima facieirretrievable injurySale of Goods ActEvidence ActCivil Procedure Codeinternational financeloan agreementconsortium

Judgment

SVENSKA HANDELSBANKEN A
v.
MIS INDIAN CHARGE CHROME AND ORS.

OCTOBER 15, 1993

(J.S. VERMA, YOGESHWAR DAYAL AND B
B.P. JEEVAN REDDY, JJ.)

Civil Procedure Code, 1908-0rder 39, Rule I-Bank Guarantee-In-
junction against encashment of-Principles of-Proof of prima f acie case of
fraud and i"etrievable injury. c
Civil Procedure Code, 190~Section 96-Appeal -Duty of Appellate
Court.

Sale of Goods Act, 1930-Sections 12(3), 59-Breach of wa"an-
ty-Right to claim for damages. D
Evidence Act, 1872-Section 92-Written contract-Court deba"ed
from looking into oral evidenc~ceptions.

In 1982, defendant No. 13, a company, issued a global tender for
setting up a captive power plant, viz, a coal-fired steam power plant. The E
tender indicated that credit by the supplier will be preferred. Defendants
1 to 3, the suppliers submitted their tenders. They approached defendant
No. 4, one of the lenders to finance the project. Enquires were made to find
out the possibilities for financial assistance by the Swedish Government
in the form of interest at subsidised rates. Since 85% of the foreign F
exchange portion of the total price of the project was to be financed,
discussions were held between the borrower and defendant No. 4 for
finalising the terms an conditions of the loans and between the borrower
and the suppliers regard to the terms and conditions of the loans so as to
ensure that the credit agreements would be in accordance with the Swedish G
law and regulations for subsidised export credit facilities. Subsequently ·
contracts were entered into between the borrower, plaintiff and the sup-
pliers for setting up the power plant and for supplying the machinery and
other equipments for the plant to the borrower.

Defendant No. 4 formed a consortium of banks i.e. defendants 5 to H
323
324 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A 11, Swedish Banks for financing the project. These lenders entered into
.. credit agreements with the borrower. The credit agreements were entered
into by defendant No. 4 for itself and on behalf of defendants 5 to 11 under
which the lenders agreed to lend 85% of the foreign exchange portion of
the cost of the project to the borrower by way of certain credit facilities.
All c~edit agreements inter alia purported to provide payments by the
B lenders to the suppliers on various documents, as provided in the credit
agreements being presented to the lenders and also against a notice of
drawdown by the borrower. The loans were required to be repaid by equal
semi-annual consecutive instalments. Repayments were required by the
borrower to be made without demand or notice. It was specifically provided
c in the credit agreements that the liability of the borrower to effect any
payment under the Agreement was unconditional and not dependent upon
the performance of the contracts between the borrower and the supplier.
The credit agreements also provided that the borrower shall furnish
guarantees in favour of the lenders as security of the loans covering 100%
D of each of the loans plus if!-terest, costs and fees payable under the credit
agreements. The agreements also contained an arbitration clause. The
lenders were, as a matter of law and express agreement, in no way con-
nected or related to or dependent upon the contracts entered into between
the borrower and the suppliers. At the instance of defendant No. 4,
Industrial Development Bank of India, defendant No. 12 provided the bank
E guarantee for the payments to be made by lenders to the suppliers. In
order to ensure that the guarantor would be liable in all circumstances in
. the event of the borrower failing to carry out its obligations, .the lenders
insisted that the guarantees very clearly made express provision to ·be
unconditional which were insulated from any possible dispute between the
borrower and the suppliers and even the borrower and the lenders.
F
In the year 1989 the plaintiff took over the plant and issued a taking
over certificate. Defendant No. 4, lender was to disburse the balance 5% of
the payment to defendants 1 and 2. the plaintiff authorised defendant No.
4 to disburse the balance 5% of the payment to defendant No.3 as well.
G Amounts ~.ue to the suppliers were paid by the lenders on instruction from
the borrower, plain~iff and the suppliers had been paid in full by the
lenders. After the issuance of the take over certificate by the plaintiff, three
instalments of payments were made by the guarantor on behalf of the
plaintiff as per their instructions. In the year 1991, the plaintiff filed a civil
H .suit for a declaration that the taking over certificate dated 25th June, 1~89
HANDELSnANKEN i·. CHARGE CHROME 325

was ''oicl/voidable instrument, that the plaintiff was entitled to dimuni· A
thin/extinction of price towards the power plant, a decree of declaration
that the guarantees obtained from Industrial Development Bank of India,
defendants 12 and 13 by defendants 1 to 11 were void/voidable instruments
and sought to be delivered and cancelled, a decree of perpetual injunction
restraining defendants 12 and 13 from making payments falling due under B
any guarantee to defendant No. 4 and/or defendant Nos. 4 to 11 and a
decree or p2rpetual injunction restraining defendants 4 to 11 from recall·
ing loan and/or taking any step from recovering the said loan either in full
or in part, etc. etc.

The basis of the plaintiff's claim against defendants 1 to 12 was that C
defendant Nos. 1 to 3 had promised to supply the captive power plant of
the capacity of 108 MW whereas on working, the plant was found to be of
the capacity of 60 MW. The case of the plaintiff further was that all th~
agreements between the borrower and the suppliers and borrower and
lenders were inter-connected and constituted one transaction and were D
vitiated by fraud committed by defendants 1 to 4. It was pleaded that the
plaintiff was fraudulently let into entering of contracts with the suppliers
by fraud of the suppliers and defendant No. 4, lender. The suppliers were
not competent enough to manufacture 108 M.W. plant and they
fraudulently persuaded the plaintiff to go in for a 'stoker fired' boiler E
instead of a 'pulverised fuel' boiler inspite of the recommendations of the
Central Electricity Authority to the contrary. The representatives of the
consortium/suppliers represented to the plaintiff that the recommenda·
tions of the Central Electricity Authority were not correct. The defendants

- 1 to 3 further represented that they had arranged credit facility for the
proposed captive power plant through defendant No. 4 at a very low F
interest rate and specifically indicated that their offer was limited to the
setting up of only 'stoker tired' boilers. It was alleged in the plaint that the
___,. plaintiff relying on the judgment, representation and advice given by the
suppliers decide~ to go ahead with setting up of the power plant; that
subsequently the defendant No. 4 on behalf of itself and defendants 5 to G
11 approached the plaintiff directly and represented that they would
finance the project if the plaintiff accepted the offer of suppliers; that
defendant No. 4 represented to the plaintiff that the suppliers were the
valued clients of defendant No. 4; that defendant No. 4 alongwith defendant
Nos. 1 to 3 prepared a feasibility report for setting up 108 M.W. plaint; H
326 SUPREME COURTREPORTS (1993] SUPP. 3 S.C.R.
:
A that defendant No. 4 in fact, acted as representative or agent of defendant
Nos. 1. to 3, that the plaintiff rel~ing upon the representations made by
defendants 1 to 3 and 4 entered into separate contracts with the suppliers
for erection and commissioning of the capth·e power plant; and that the
condu~.t of defendants 1 to 4 clearly showed that they made fraudulent
B representations to the plaintiff which were false to the knowledge of
defendants 1 to 4 to induce the plaintiff to enter into agreement \\ith the
suppliers.

Defendant No. 12 furnished the guarantees as per direction of this
Court on a writ petition filed by the plaintiff to direct defendant No. 12 to
C furnish the guarantees in relation to the contracts.

In relation to the application for ad interim injunction, defendant No.
4 denied the case of fraud against the lenders. I also .challenged the
jurisdiction of the trial court to entertain the suit as well as the miscel·
D laneous application in view of the provision for arbitration. It was pleaded
that all loan agreements were separately guaranteed by defendant No. 12
as primary obliger and not as a surety and the amount was payable by
defendant No. 12 upon first demand; that the liability of the borrower was
unconditional and the payment to the lenders was not in any way affected
by any other claim which the borrower might have against the supplier;
E ~hat all disbursements and payments under the loan agreements were
made by defendant No. 4 to defendant Nos. 1 to 3 in Sweden and they had
been paid in full and it was only the lenders, who had to be paid by the
borrower and in view of such express provision in the loan agreements the
Indian Courts had no jurisdiction to entertain the suit or the miscel·
p laneous case as against the lender; that if the order for injunction was
vacated no irreparable loss would be caused to the plaintiff because the
amount could always be recovered from the banks, if any amount was
declared repayable by them; that the lenders were large and reputable
banks and tha~ the plaintiff had no prima f acie nor the balance of con-
G venience was in its favour; that the 1oan agreements provided a complete
answer to the claim of the plaintiff; that the plaintiff attempted to allege
fraud but the lenders had nothing to do with the negotiations or agree·
ments or subsequent performance of the project; that the lenders had no
concern with the suppliers with regard to the alleged fraud; that the
plaintiff had waited nearly seven years since the signing of the loan
H agreements and three years for commissioning of the plant before raising
HANDELSBANKEN v. CHARGE CHROME 327

such spurious assertions and this would show that there was no prima f acie A
case in favour of the plaintiff.

Defendant No. 12 the guarantors also filed objections to the applica-
tion for interim injunction with regard to the guarantee executed by defen-
d1mt No. 12 in favour of defendants 4 to 11. It was pleaded that the plaintifI
itself had filed Writ Petition and the Supreme Court directed the defendant B
No.12 to make disbursements and to issue guarantee; that the jurisdiction
of the Indian Court was expressly ousted; that under clause 1.2 of the
payment guarantee, the guarantee shall not be impaired by any dispute or
claim with regard the borrower and the suppliers or between the borrower
and the lenders; that the alleged dispute or the plaintiff with the suppliers C
did not affect the liability or obligation of defendant No. 12; that in case
defendant No. U was restrained from honouring Its obligation under the
payment guarantee executive by It, this will seriously affect its image and
financial reputation In international market; that defendant No. 12 was
neither aware nor concemed with any fraud.
D
The trial Court held that defendant No. 12 had not committed any
fraud nor It had any knowledge of it on the material produced; that the
project report was not prepared by defendant no. 4; that the defendant No.
4 made the payments to the suppliers only on instruction and notice issued ·· ·
by the plaintiff/borrower as per the credit agreements; that there was no E
direct allegation offraud against defendant Nos. 4to11; that defendant No.
4 being a banker had no concern with the agreements executed between the
plaintiff and supplier and that the agreements should be based for deciding
the Issue and the dues of the tenders as per the agree.ments between the
plaintiff and the lenders provided that all amounts payable by the borrower
under the agreement shall be paid without set off or counter claim and F
liability of the borrower to effect any payment under these agreements was
unconditional and was not in anyway dependant on the performance of the
contracts or be affected by any other claim which the borrower may have
against the suppliers or against any other party. Therefore no adjustments
could be made so far as the repayment of the loans with that of the claim
of the plaintiff against defendants 1 to 3 which was yet to be adjudicated. G
It was held that the bank ~arantee had been issued by defendant No. 12
in favour or the lenders on the direction issued by the Supreme Court and,
therefore, no fraud had been played in execution or the bank guarantee; that
the breach or terms between the plaintilf and defendants 1 to 3 did not
prima facie give rise to any cause or action against defendants 4 to 11 and H
328 syPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A for breach of contracts by defendants 1 to 3 remedies were available to the
plaintiff; that the bank guarantee was independent of thP- contracts between
the plaintiff and the suppliers and the same c<mld be enforced without
reference to any claim or counter claim arising from the main contracts
between the plaintiff and defendant 1to3. The Court held that the'plaintiff
had failed to establish prima f acie case of established fraud against defen· .
B dants 4 to 11, therefore, there was no prim a f acie case in favour of the
plaintiff and that the plaintiff will not suffer any irrepairable loss and the
balance of convenience was also against the plaintiff and in favour of
defendants 4 to 11. On these findings, the trial court vacated the ad interim
injunction and dismissed the application for interim relief.
c
On appeal, the High Court accepted appeal tiled on behalf of the
plaintiff while injuncting defendant Nos. 4 to 12 from encashing the bank
guarantee furnished by Industrial Develoi:;ment Bank of India in favour of .
defendant Nos. 4 to 11 for a period of 2 years of till the disposal of the
D suit. The Court noticed that defendant No. 4 had already paid to the
supplier and that defendants Nos. S to 11 were not directly connected with
the captive power plant, there was not question of any restraint of·them;
that since defendant No. 4 was the lender and the plaintiff was the
borrower principles of the guarantee would not be strictly applicable and
the general principles of injunctions on lender would alone be applicable;
E that the terms of clause 2.1 of the guarantee given by defendant No. 12 .in
favour of defendants 4 to 11 created an obligation on defendant No. 12 to
pay to defendant No. 4 upon first demand if the plaintiff did not pay any
amount when due or the loan was declared default. There was neither any
demand nor a declaration of default and much before the same the suit
F had been tiled alleging fraud in the transaction. The Court observed that
on the receipt or the plaint the defendant No. 12 was required to make
a
investigation whether there was fraud and how defendant No. 4 was
connected therewith. Defendant No. 12 without making any enquiry ought
not to have entered appearance to contest the claim of the plaintiff and
,_..
G ought to have waited till the order of the court. The Court held that on the
facts its could not be said that defendant No. 4 was as innocent as it
claimed to be and that the inference of fraud was to be drawn not from
individual event. Totality of the events cummulatively had the effect of
fraud and in this case, if the facts and circumstances from the stage of
global tender till the suit was filed were considered together, a clear (
.H impression of fraud in the transaction by defendants 1 to 3 was -created
\
f HANDELSBANKEN v. CHARGE CHROME 329

and defendant No. 4 could not be fully dissociated from it. On balance of A
convenience the Court held that it was favour of the plaintiff. Considering
the nature of injunction, the High Court issued a direction to defendant
No 4 not to insist defendant No. 12 for payment for two years till the end
of 1993 and a direction to defendant No. 12 not to pay defendant No. 4 till
that period on the basis of guarantee or till the disposal of the suit which
ever was earlier.
B

This appeal had been filed against the judgment and order of the
High Court.

Allowing the appeal, this Court c
HELD : 1. The High Court totally misdirected itself in assuming that
the present application for interim relief against the enforcement of bank
guarantee was not to be decided strictly on principles of injunction _in
relation to bank guar&ntee but general principles of injunction on lenders · D
would be applicable and on that basis proceeded to decide the matter.
(348-H, 349-A]

2. Whenever an appeal is heard it is the duty of the appellate court
to examine the findings of the trial court and ifthe findings of the trial court
are not correct, to deal with it. In present case the High Court did not even E
notice the findings of the trial court. One of the basic findings of the trial
court was that there was no material of established fraud against defendant
No. 4 nor the defendant No. ~ had any knowledge of any fraud having
committed by the defendants No. 1 to 3. The allegation of fraud against
defendant No. 4 had been made on suspicion. Another important finding
given by the trial court was that one had to look at the actual agreements F
executed between the parties and defendants 4 to 11 had not committed any
breach of agreements with the plaintiff. The trial court noticed that the
-< agreements executed by defendants 4 to 11 were not incidental to the design·
ing, manufacturing, erection and fabrication of the project and defendant
No. 4 being a banker had no concern with the agreements executed between
the plaintiff and the suppliers. It was recorded that the rights and obliga- G
tions of the parties flow from the agreements and, therefore, the agreements
should be the basis for deciding the issue. Again the trial court had very
specifically held that in view of the agreements between the lenders and
borrower, breach, if any, of the agreements by defendants 1 to 3 and claim,
if any, of the plaintiff against defendants 1 to 3 would be of no effect on the H
330 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A agreements between the borrower and lenders. None of these findings were
either noticed of met by the High Court. On the other hand the High Court
after noticing that the agreements between the borrower and suppliers were
separate from the agreements between the lenders and borrower it con-
cluded that defendant No. 4 had knowledge of the nature of the work to be
executive by defendant 1 to 3. Thus there was collaboration with such links .
B that agreement of defendant No. 4 could not be separately read at this stage
while considering the question of injunction. (349-B-G]

3. Section 92 of the Evidence Act debars court from looking into oral
evidence once the contract is executed in writing except as provided for in
six provisos thereof. The High Court found a strong prim a f acie case
c against defendant No. 4 merely on reading the plaint. Pleadings make only
allegation or averments of facts. Merely pleadings did not make a strong
case of prime facie fraud. The material and evidence had to show it. ·No
material whatsoever was referred to by the High Court. [349-H, 350-A]

D A.L.N. Narayanan Chettiyar and another v. Official Assignee, High
Court Rangoon and another, A.I.R. (1941) Privy Council 93, relied on.

4. This court was prima facie debarred from looking at va~ious
proposals, drafts, project reports, if any, before the contracts between the
borrower and defendant Nos. 1 to 3 on one hand and the credit agreements
E between the borrower and the lenders having been executed later. Facts
which come within provisos 1 to 6 to Section 92 of the Evidence Act can be ..•
·proved. The plaintiff could have resorted to proviso 1 to Section 92 of the
Evidence Act. It was clear from the averments in the plaint that the
plaintiff was not seeking cancellation of any of the agreements either with
F the suppliers or the lenders. In fact the plaintiff prayed for dimunition of
the price towards the power plant by way of breach of contracts, goods
being not of the specifications. The plaintiff prayed for avoidance of the
take over certificate. Viz-a-viz taking over certificate there was no allega-
tion of coercion or fraud against defendant No. 4 at all. Neither the trial
G court nor the High Court was required to go into the questicn of fraud on
behalf of defendants 1 to 3 as there was no interim relief being claimed
against them. (350-F, 351-C, 351-E-F]

5. In case of confirmed bank guarantees/irrevocable letters of credit,
it cannot be interfered with unless there is fraud and irretrievable injustice
H involved in the case and fraud has to be an established fraud. [358·A]
HANDELSBANKEN v. CHARGE CHROME 331

I
Elian and Rab bath (Trading as Elian & Rebbath) v. Matsas and Matsa.1· A
and othe1~ (1966) 2 Lloyd's List Law Reports 495 and General Electlic
Technical Se1vices Company /11(._. v. Punj Sons (P) Ltd. and another, [1991]
2 S.C.R. 412, relied on.

Itek Corporation v. The First National bank of Boston etc., 566 Federal
Supplement 1210; Handerson v. Candian Imperial bank of Commerce and B
Peat Marwick Ltd., 40 British Columbia Law Reports 318 and NMC
Enterprises, Inc v. Columbia Broadcasting System, Inc., 14 UCC Reporting
Service 1427, distinguished.

Halsbwy, Fourth Edition Vol. 9 para 542, referred to.
c
In the present case prime f acie the provision for capacity of the power
plant being of 108 M.W. was a condition. Therefore, the plaintiff could have
repudiated the contract as provided in Sec!ion 12(2) of the Sale of Goods
Act or treated as a warranty by waiving the condition or elect to treat the
breach of the condition as a breach of warranty and not as a ground for D
treating the contract as repudiated. The plaintiff has not repudiated the
contract. In fact it was working with the power plant and, therefore, the
breach of condition had been treated by the plaintiff as a breach of warranty
and in view of Section 12(3) of the Sale of Goods Act, the breach of warranty
gives a right to claim for damages but not a right to reject the goods and E
treat the contract as repudiated. Even the prayer in the plaint was for
dimunition of the price of the power plant and the relief was based on
Section 59 of the Sale of Goods Act. The contracts between the lenders and
the borrower were not vitiated by any fraud much less established fraud and
there was no question of irretrievable injury. Therefore, there was no reason
for the High Court to set aside the order of the trial court. Again there was F
no case of any irretrievable injury as there was no difficulty in the judgment
of this country being executable in the courts in Sweden. [366-B-F]

6. The High court was not right in working on mere suspicion of
fraud or merely going by the allegations in the plaint without prim a f acie G
case of fraud being spelt out from the material on record. The High Court
was also in error in considering the question of balance of convenience. In
law relating to bank guarantees, a party seeking injunction from encashing
of bank guarantee by the supplier has to show prim a f acie case of estab-
lished fraud and an irretrievable injury. Here there was no such problem.
Once the plaintiff was able to establish fraud against the supplier-cum- H
332 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

· A lenders and obtains any decree for damages or dimunition in price, ther.e.
was no problem for effecting recoveries in a friendly country where the
bankers and the suppliers were located .. Nothing had been pointed out to
show that the decree passed by the Indian 'court was not executable in
· Sweden. The High Court totally ignored the irretrievable injury which will
B be caused to defendant No. 12 in not honouring the bank guarantee in
international market which may cause grievous and irretrievable damage
to the interest of the country as opposed to the loss of money to the
borrower plaintiff. There was no question of defendant No. 4 not making
any demand. The instalments for repayment of the loans had already been
fixed and liable to be paid without demand by defendant No. 4. Defendant
C No. 12 was under a duty to pay the instalments regularly on a fixed date
without any demand to defendant No. 4. [366-G-H, 367-A·D)

7. The remark made by the High Court against defendant No. 12
were wholly uncalled for. Defendant No. 12 was party to the suit. It was
entitled to enter appearance on its behalf and to take the pleas open to it
D OD facts and in law. It had also to maintain its international credibility
·and not merely be guided by the loss to our dtizens. It had also to main$ain
its international credibility. Credibility is the most important thing for any
banking institution. [348-F-G]

E CIVIL APPELLATE JURISDICTION Civil Appeal No. 5433 of
1993.

From the Judgment and Order dated 11.10.1991 of the Orissa High
Court in Misc. Appeal No. 370 of 1991.

F K. Parasaran, V.A. Bobde, R.F. Nariman and K.J. John for the
Appellant.

Deepankar Gupta, Solicitor General, K.K. Venugopal, Jaydeep
Gupta, A.K. Sil, G. Joshi and G. Kandpal for the Respondents.

G The Judgment of the Court was delivered by

YOGESHWAR DAYAL, J. Special leave granted. Heard.

This is an appeal by M/s. Svenska Handelsbanken (defendant No. 4)
against the judgment and order dated 11th October, 1991 of the High
H Court of Orissa in Misc. Appeal No. 370 of 1991 whereby the Single Judge
HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 333

of the High Court accepted the appeal filed on behalf of the plaintiff while A
injuncting defendant Nos. 4 to 12 from encashing the bank guarantee
furnished by Industrial Development Bank of India (defendant No. 12) in
favour of defendant Nos. 4 to 11 for a period of 2 years of till the disposal
of the suit whichever is earlier and set side an order passed by the
Subordinate Judge. Cuttack dated 14th August, 1991 vacating an order of
ad interim injunction dated 25th April, 1991 and dismissing the application B
of ad interim injunction (Misc. Case No. 143 of 1991) against defendants
4 to 12.

We find it convenient to refer to the parties as they were described
in the suit.
c
.The suit out of which the present appeal arises was filed by the
plaintiff (hereinafter referred to as the 'borrower') before the Subordinate
Judge, Cuttack, inter alia for a declaration that the guarantees executed
by Industrial Development Bank of India India, defendant No. 12
(hereinafter referred to as the 'guarantor') in favour of defendant Nos. 4 D
and 5 to 11 (hereinafter referred to as the 'lenders') are void and for an
order of injunction restraining the guarantor from making payments under
the guarantees to the 'lenders'.

For appreciating the submissions make on behalf of the parties the
facts shortly stated, leading to the filing of the present appeals are as E
follows:

Sometime in 1982 M/s. Indian Metals & Ferro Alloys Ltd., (in short
'IMFA' - defendant No. 13) issued a global tender for setting up a captive
power plant, viz., a coal-fired steam power plant in Choudwar, Orissa. The
tender indicated that cre.dit by the suppliers will be preferred. Defendants F
1 to 3 (hereinafter referred to as the 'suppliers' submitted their tenders in
this regard. Since the tender indicated that suppliers' credit for the entire
project is preferred, the suppliers approached defendant No. 4 (one of the
lenders) to finance the project. Enquiries were made to find out the
possibilities for financial assistance by the Swedish Government in the form G
of interest at subsidised rates.

Since 85% of the foreign exchange portion of the total price of the
project was to be financed, discussions were held between the borrower
and defendant No. 4 (one of the lenders) for finalising the terms and
conditions of the loans. Discussions were also held between the borrower H

•
334 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R ..

A and the suppliers in regard to the terms and conditions of the loans so as
to ensure that the credit agreements would be in accordance with the
Swedish Law and regulations for sul?sidiscd export credit facilities.

The borrower made extensive investigation itself over a period of
about two years into the details of the proposed plant.
B
On or about 28th September, 1984 contracts were entered into
between the borrower (plaintift) and the suppliers for setting up 'the power
plant and for supplying the machinery and other equipments for the plant
to the borrower.
c Defendant No. 4 (one of the lenders) formed a consortium of banks
i.e. defendants 5 to 11 (Swedish Banks) (lenders) and an American Bank
for financing the project. The American Bank subsequently assigned its
interest in favour of one of the defendant Bank (lender). The lenders
entered into two credit agreements dated 30th October, 1984 with the
D borrower. The credit agreements were entered into by defendant No. 4 for
itself and on behalf of defendant 5 to 11 under which the lenders agreed
to lend 85% of the foreign exchange portion of the cost of the project to
the borrower by way of certain credit facilities. A third credit agreement
dated 15th November, 1984 between the borrower and defendant No. 4
(lender) in its individual capacity was entered into. The first two credit
E agreements were for the 'loans of the U.S. Dollars equivalent of Swedish
1<roner 370, 855,000 and 239,700,000 and the third was for the loan of the
sum of U.S. Dollars 1,754,000. Two additional credit agreements were also
entered into between the borrower and the lenders supplemental to the
first and second credit agreements on 23rd December, 1987 providing for
additional loans of 10% of the original loans which the borrower required
F to finance cost escalations caused by delay. These two additional credit
agreements were for U.S. Dollars equivalent of Swedish Kroner 37,085,000 ·
and 23,970,000. All the credit agreements inter alia purported to provide
payments by the lenders to the suppliers on various documents, as provided
in the credit agreements; being presented to the lenders and also against
G a notice of drawdown by the borrower. In relation to the third credit
agreement the disbursements to be m:i.de directly to the lenders in respect
of the financial cost payable by the borrower upon notice of drawdown by
the borrower.

The loans were required to be re-paid by twenty (subsequently
H amended to eighteen) equal semi-annual (six monthly) consecutive instal-

•
HANDELSB'ANKEN v. CHARGE CHROME [DAYAL, J.) 335

ments. The number of instalments and date of commencement of the A
instalments being separately provided for under each credit agreement.
Repayments we!e required by the borrower to be made without demand
or notice. It W-as specifically provided in the credit agreements that :

"Any amounts payable by the Borrower shall be paid without
set-off or counter claim. The liability of the Borrower to effect any B
payment under this Agreement is thus unconditional and shall not
in any way be dependent upon the performance of the Contracts
i.e. the agreements between the Borrower and the suppliers-Ex-
porters or be affected by any other claim which the Borrower may
have against the Exporters or against any other party (natural or C
le~al) collaborating with the Exporters.

(These are the actual words of the relevant clause in each credit
agreement.)"

The credit agreements also provided : D
"All disputes arising from the provisions of this Agreement or its
performance shall be finally settled by arbitration under the Rules
of Conciliation and Arbitration of the International Chamber of
Commerce by three arbitrators appointed in accordance with these E
rules. Arbitration shall take place in rules. Arbitration shall take
place in Stockholm and be conducted in the English language. The
award of the arbitral tribunal is final and obligatory for the parties
without any right for a further appeal or contestation of its fulfil-
ment. The Borrower hereby expressly submits to the jurisdiction
of the above mentioned arbitration tribunal. F
(These are the actual words of the relevant clause in each Credit
Agreement.)"

The credit agreements also provided that the borrower shall furnish
guarantees in favour of the lenders as security for the loans covering 100% G
of each of the loans plus interest, costs and fees payable under the credit
agreements. As quoted above, the agreements also contained an arbitration
clause which contemplates disputes arising from the agreements to be
finally settled by arbitration under the rules of Conciliation and Arbitration
of the International Chamber of Commerce by three arbitrators appoints . H
336 SUPREME COURT REPORTS (1993] SUPP. 3 S.C.R.

A in accordance with these rules. The arbitration is provided to take place at
Stockholm.

It is thus prim a f acie clear from the aforesaid terms of the credit
agreements with the borrower that the lenders are, as a matter of law and
express agreement, in no way connected or related to or dependent upon
the contracts e~tered into between the borrower and the suppliers. At the
instance of defendant No. 4, defendant No. 12 provided the bank guarantee
for the payments to be made by lenders to the suppliers. In order to ensure
that the guarantor would be liable in all circumstances in the event of the
borrower failing to carry out its obligations, the lenders insisted that the
c guarantees very clearly made express provision to be unconditional first
demand guarantees which we are insulated from any possible dispute
between the borrower and the suppliers and even the borrower and the
len~ers. In fact the form of guarantee was itself enclosed as all Appendix
to each credit agreement.
.o .
The terms of payment contained in the contracts between the bor-
rower and defendant~ 1 and 2 (supplier) which deals with disbursement of
last 5% of the respective contract price reads thus :

"5% of the contract price at the date of the purchasers' taking over
of the Power Plant against presentation of a taking over certificate,
E
issued by the purchaser, however, not later than 35 months after
the date this contract has come into force unless the date of taking
over is delayed due to reasons for which the supplier is respon-
sible."

F Defendant No. 4 (lender) was to disburse the balance 5% payment
to defendants 1 & 2.

On 24th June, 1989 the plaintiff (borrower) took over the plant and
on 25th June, 1989 issued a taking over -::ertificate. On 28th July, 1989 the
G plaintiff authorised defendant No. 4 to disburse the balance 5% of the
payment to defendant No. 3 well.

It is common case that the amounts due to the suppliers were paid
by the lenders on instructions from the borrower, plaintiff and the suppliers
have been paid in full by the lenders. After the issuance of the take over
H certificate by the plaintiff, three instalments of payments were made by the
HANDELSBANKENv. CHARGECHROME(DAYAL,J.] 337

guarantor on behalf of the plaintiff as per their instructions vide payments A
dated 31st October, 1989, 30th April, 1990 and 31st October; 1990 under
the first two credit agreements of the sum of US Dollars 9,033,324.47,
8,810,563.87 and 8,681,062.40 towards principal plus interest.

Again the three instalments were paid by the IDBI/guarantor under
the third agreement on 15th October, 1989, 15th May, 1990 and 15 Novem~ B
ber, 1990 amounting to US Dollars 301,339.99, 278,468.14 and 270,778.54
towards principal plus interest.

It was on or about April 28, 1991 that the present suit was filed by
the plaintiff for : (a) a declaration that the taking over certificate dated C
25th June, 1989 is void/voidable instrument and the same may be delivered
and cancelled, (b) it be further declared that the plaintiff is entitled to
dimunition/extinction of price towards the power plant as mentioned in
Annexure 'A' to the plaint, in the alternative, if the court finds, that any
amount is payable to defendants 1 to 11 jointly or severally, the saine be
directed to be paid as per reschedule of payment to the calculated on the D
basis of a cash flow basis on actual generation as determined on enquiry,
(c) a decree of declaration that the guarantees obtained from defendants
12 and 13 by defendants 1 to 11 are void/voidable instruments and ought
to be delivered and cancelled, (d) a decree of perpetual injunction restrain-
ing defendants 12 and 13 from making payments dated 30th April and
payments falling due on subsequent dates under any guarantee to defen- E
dant No. 4 and/or defendant Nos. 4 to 11, and (e) a decree of perpetual
injunction restraining defendants 4 to 11 from recalling the loan and/or
taking any s~eps from recovering the said loan either in full or in part, etc.
ct~ .

- The basis of the plaintiffs claim against defendants 1 to 12 was that
F
defendant Nos. 1 to 3 had promised to supply the captive power plant of
the capacity of 108 M.W. worked with talcher coal whereas on working,
the plant was found to be of the capacity of 60 M.W. The case of the
plaintiff further· was that all the agreements between the borrower and the
suppliers and borrower and lenders are inter-connected and constituted G
one transaction and are vitated by fraud committed by defendants 1 to 4.
It was pleaded that the plaintiff was fraudulently led into entering of
contracts with the suppliers by fraud of the suppliers and defendant No. 4,
lender. The suppliers were not competent enough to manufacture 108
M.W. plant. They fraudulently persuaded the plaintiff to go in for a 'stoker H
338 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R..

A · fired' boiler instead of a 'pulverised fuel' boiler inspite of the recommen-
dations of the Central Electricity Authority to the contrary. The repre-
sentatives of the consortium/suppliers visited Bhubaneshwar and
Choudwar in the second week of March, 1983 and during discussions
represented to the plaintiff that the recommendations of the Central
B Electricity Authority were not coi:rect and that their vast experience in this
field had shown that 'stoker fired' boilers were preferable over 'pulverised
fuel' boiler in the instant case, with talcher coal as the basic raw material.
The defendants 1 to. 3 further represented that they had arranged credit
facility for the proposed captive power plant through defendant No. 4 at a
L very law interest rate and specifically indicated that their offer was limited
C to the setting up of only 'stoker fired' boiler. It was further alleged in the
plaint that the plaintiff relying on the judgment, representation and advice
given by the suppliers decided to go ahead with setting up of the power
plant although Central Electricity authority and other advisors had ex-
pressed reservations that the boilers of the size as suggested by the sup-
D pliers would be less effective. Since the plaintiff had never undertaken and
were unaware of the technology/expertise required for the setting up the
captive power plant they had no other option/alternative but to rely totally
upon the skill of the suppliers in this regard. It was further pleaded that
subsequently in August, 1983 with a view to further induce the plaintiff to .
act on the representations made by consortium that the suppliers were
E .capable of setting up a 108 M.W. plant with 'stoker fired' boiler, the
defendant No. 4 on behalf of itself and defendants 5 to 11 approached the
plaintiff directly and represented that the said defendant No. 4 would
finance the project of setting up the captive power plant at a very low
interest rate if the plaintiff accepted the offer of suppliers for supply,
p erection and commission of the said plant with a 'stoker fired' boilers. It
was alleged that defendant No. 4 further represented to the plaintiff that
the supplier are the valued clients of defendant No. 4 and that defendant
No. 4 were aware of the background and experience of the suppliers.

It was pleaded that defendant No. 4 alongwith defendant Nos. 1 to
G 3 prepared a feasibility report for setting up 108 M.W. plant. The feasibility
report was prepared on the assumptions - (a) a 108 M.W. plant shall be
established guaranteeing a minimum generation of 700 million units of
electricity per year and (b) raw material used will be talcher coal. The
feasibility report specifically enumerated and set out a cash flow statement
which was based on an assumption that 700 million units would be
H
HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 339

generated each year. Based on this assumption a cash flow statement was A
prepared on the basis of generation of a minimum of 700 million units per
year which was with the knowledge of defendants 1 to 4 and the plaintiff
was informed that generation at 700 million units per annum would be the
basis of the repayment schedule to be adopted for defraying the proposed
loans to be given by defendant No. 4 on behalf of defendant Nos.4 to 11
in twenty (which was later reduced to eighteen) half yearly instalments. B
It was further pleaded' that defendant No. 4, in fact, acted as repre-
sentative or agent of defendant Nos. 1 to 3. It was also pleaded that in fact
the supply of the plant and financing thereof through deferred credit was
one composite transaction in which defendant No. 4 was integrally involved C
and inter-connected as defendant Nos. 1 to 3. It was pleaded that the
plaintiff relying upon the representations made by defendants 1 to 3 and 4
entered into three separate contracts with the suppliers on 28th September,
1984 for erection and commissioning of the captive power plant.

It is not necessary at stage to elaborately refer to '•he terms and D
conditions of the suppliers' agreements with the borrower except to men-
tion that - under the first contract, defendant No. 1 has agreed to supply
turbine and other accessories for a total consideration of Swedish Kroner
432 million; under the second contract between the borrower and defen-
dant No. 2, defendant No. 2 had agreed to supply 4 chain grate stoker fired
boilers with other accessories and under the third contract defendant No. E
3 agreed to erect and commission the captive power plant. The third
agreement in clauses 12.1, 12.2, 12.7 and 13.1 provided as under:

"12.1.
Taking over. The plant shall be deemed to have been taken over F
by the purchaser at the time when the Tests on
completion- show that the Plant has the operational
characteristics which, in accordance with the
Agreement, it should have at the time of taking
over, and when the Contractor has fulfilled all other
obligations to be performed by him under the terms G
of the Agreement before taking over the Plant.

12.2.
Taking-over The purchaser shall issue a certificate to confirm
Certificate. taking over in accordance with Clause 12.1. H
340 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A 12.7. Taking over of Plant as above does not relieve the
Performance Contractor from carrying out Performance Testing
Testing in accordance with Section 13.

13.1
Time point Determination of whether the Plant has the "Perfor-
B for determi- mance and other characteristics as guaranteed in
nation of the agreement shall be done when the plant under-
. performance goes Performance Testing."

That an agreement was also signed on 28th September, 1984 between
C the plaintiff and defendant No. 3 wherein it was specifically guaranteed
that the said plant would be 108 M.W. plant and capable of producing a
minimum of 1400 million units of electricity over a period of 2 years. The
loan was .required to be re-paid as per the agreement by 20 equal semi-an-
nual consecutive instalments, the first six month after the taking over date,
but in no case later than February 1, 1988.. (Later on changed to October,
D 1988 and instalments reduced to 18 half yearly instalments.)

The borrower also undertook to furnish to defendant No. 4 the
guarantee in favour of the lenders as security for the loan covering 100 %
of the loan. As mentiQned earlier the plaintiff furnished the guarantee of
defendant No. 12 to defendant No. 4 ( clefendant No. 4 acting for itself and
E on behalf of defendants 5 to 11) to guarantee repayment of loans given by
defendant Nos. 4 to 11. Defendant No. 12 in turn was provided a guarantee
by defendant No. 13.

We may mention that defendant No. 12 furnished the guarantees as
per directions of this Court on a writ petition being filed by the plaintiff to
F direct defendant No. 12 to furnish the guarantees in relation to the
aforesaid contracts. The guarantor made payment of 15% of the contract
immediately and as stated earlier made some payments to the lenders
before and after the taking over certificate.

G It was further pleaded in the plaint that defendants 1 to 3 on 29th
May, 1989 conducted a test on completion of the captive plant using
Australian coal. Defendant Nos. 1 to 3 wrongfully, fraudulently and illegally
began to insist that the said test on completion was in terms of the contract
and that the plaintiff should give a 'take over certificate' of the captive
power plant to enable the defendant No. 3 to receive the final 5 % payment
H from defendant No. 4. It was pleaded that the attempt of the consortium
HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 341

was to deceive the plaintiff that they had supplied, erected and commis- A
sioned a plant having 108 M.W. capacity which would run with talcher coal.
It was pleaded that the plaintiff was not satisfied with the plant and
expressed its unwillingness to give a take over certificate. The plaintiff
pointed out to def~ndants 1 to 3 that talcher coal was going to be used and
the plant should be made ready to accept the same. It was pleaded that
defendants 1 to 3/suppliers threatened the plaintiff that if it did not take B
over plant immediately, they would shut down 50 % of the plant as they
had be then already received 100 % of the payment. Further to induce the
plaintiff to issue take over certificate, the suppliers offered a 'package deal'
if the plaintiff gave a taking over certification to the suppliers. Under the
'package deal' the defendant Nos. 1 to 3 offered that if the take over C
certificate was given by the plaintiff the suppliers would rectify all the
defects of the plant and increase the defect liability period. Although the
plaintiff was not satisfied by the test on completion which was specifically
communicated to the suppliers but in view of the threat of the suppliers
and on the basis of the offer of 'package deal' which was accepted by the
plaintiff, the plaintiff give a conditional taking over certificate on 25th June, D
1989 with effect form 24th June, 1989. The said take over certificate was a
part of the 'package deal' it was pleaded. It was also pleaded that when
the plant was operated on talcher coal the plaintiff came to know that the
defendants had not supplied the plant as per the specifications envisaged
under the contracts and that the plant was not or 108 M.W. It was
pleaded that defendant Nos. 1 to 3 have committed a fundamental breach E
of the contracts. ·

It was on these allegations that the plaintiff pleaded that the conduct
of defendants 1 to 4 clearly shows that they made fraudulent repre~
sentations to the plaintiff which were false to the knowledge of defendants F
1 to 4 to induce the plaintiff to enter into agreements with the suppliers
and defendants 4 to 11 when the defendants 1 to 4 knew that the plaintiff
would suffer because of an under capacity over-rated plant. It was pleaded
that defendants 1 to 4 were aware that the captive power plant is not of
the specifications as contracted for and the ~uppliers by their letters dated
3rd July, 1989 and 23rd August, 1989 intentionally terminated the 'package G
deals' with a view to perpetuate fraud.

In paragraph 52 of the plaint it was specifically pleaded thus :

"52. That the cause of action arose in favour of th~ plaintiff on 25th H
342 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R.

A June, 1989 when the defendants 1 to 4 fraudulently mis-repre-
sented to the plaintiff regarding their intention to supply the goods
as per the description and requirement of the plaintiff. The cause
of action again arose on the various dates when the representatives
of defendants 1 to 4 met the representatives of plaintiff and
induced the plaintiff by their fraudulently misrepresentations to
B enter into an agreement with the plaintiff. The cause of action also
arose on 29th and 3 lst May, 1990 when the plaintiff for the first time
became aware of the fraud perpetuated by the defendants on the
plaintiff. The cause of action also arose on March 1990 the plaintiff
discovered the fundamental breach committed by the consortium.
c The cause of action for this suit also arose when the defendant
No. 4 as agent on behalf of defendants No. 4 to 11 called upon the
plaintiff by telex dated 4th March, 1991 tt> pay the sum of US$
·8.40 million by 30th April, 1991. Furthermore defendant No. 12
has also called upon the plaintiff to make a sum of 8.40 million
payable by 30th April, 1991. The cause of action is continuous and
D
no part of it is barred by law of limitation."

We have already noticed that defendant No. 12, on instructions from
the plaintiff, made payments to the lenders on 31st October, 1989 and again
on 15th November, 1990.
E
On receipt of summons in the suit and notice on the application for
interim injunction filed by the plaintiff, defendant Nos. 1·to 3 did not enter
appearance. Defendant No. 4 entered appearance specifically in Misc.
Case No. 143 or 1991 i.e. in relation to the application for ad interim
injunction and specifically denied the case of fraud against the lenders. It
F also challenged the jurisdiction of the trial court to entertain the suit as
well as the miscellaneous application in view of the provision for arbitration
under the rules of conciliation and Arbitration of the International Cham-
ber of Commerce. It was pleaded that separate loan agreements were
executed between the plaintiff and the lenders. All the loan agreements
G were governed by Swedish Law. All three loan agreements were separately
guaranteed by defendant No. 12 primary obliger and not as a surety and _
the amount is payable by defendant No. 12 upon first demand. It was.
pleaded that the liability of the borrower is unconditional and shall not in
any way be dependent upon t.he performance of the contracts for supply
of power plant and the payment to the lenders is not in any way affected
H by any other· claim. which the borrower may have against the suppliers. It
HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 343

was also pleaded that all disbursements and payments under · the loan A
agreements were made by defendant No. 4 to defendant Nos. 1 to 3 Sweden
and they have been paid in full and it is only the lenders, who had to be
paid by the borrower and in view of such express provision in the loan
agreements the Indian Courts have no jurisdiction to entertain the suit or
the miscellaneous case as against the lenders. It was pleaded that if the
order for injunction is vacated no irreparable loss would be caused to the B
plaintiff because the amount could always be recovered from the banks, if
any amount is declared repayable by them. It was pleaded that the lenders
are large and reputable banks. That the plaintiff has no prim a f acie case
nor the balance of convenience is in its favour. The loan agreements
provided a complete answer to the claim of the plaintiff. It was pleaded C
that the plaintiff attempted to allege fraud but the lenders had nothing to
do with the negotiations or agreements or subsequent performance of the
project and there is no question of fraud as alleged against the lenders. It
was pleaded that there might have some misrepresentations or fraud on
the part of the suppliers which is not to their knowledge. The lenders have
no concern with the suppliers with regard to the alleged fraud. It was D
pleaded that the plaintiff had waited nearly seven years since the signing
of the loan agreements and three years or commissioning of the plant
before raising such spurious assertions and this would show that there is
no prima f acie in favour of the plaintiff. ·

Defendant No. 12, the guarantor, also filed objections to the applica- E
tion for interim injunction with regard to the guarantee executed by defen-
dant No. 12 in favour of defendants 4 to 11. It was pleaded that the plaintiff
itself had filed Writ Petition Nos. 5218 and 5219 and this Court (Supreme
Court) by order dated 5th June, 1985 directed the defendant No. 12 to
make 5th June, 1985 disbursements prior to 15th June, 1985 of the first
down payment of 15 % of the loan amount and to issue guarantee as per F
the letter of intent dated 27th October, 1984. Even no application filed
before the Supreme Court by defendant No. 12 for modification of the
order the Supreme Court directed by order dated 17th June, 1985 that the
earlier order directing down payment of 15 % of the loan amount and issue
of guarantee are to be carried out by defendant No. 12 on or before 25th G
June, 1985. In pursuance of the aforesaid direction the Plaintiff executed
necessary documents in favour of defendants 4 to 11 and in turn defendant
No. 12 executed the necessary guarantee in favour of defendants 4 to 11
and defendant No. 4 as agent of defendant 5 to 11. It was pleaded that
under clause 5.2 action or proceedings against the guarantor in respect of
- '~tt
344 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R.

A the loan agreements or loans may be br_ought in the High Court of Justice
in England or in some other Court in United States or in the court of
Sweden or indian as the lenders or any of them may determine. It was
pleaded that in view of the aforesaid provisions under the guarantee
executed by defendant No. 12 no proceeding arising out of the loan
guarantees or. the loans can be brought in any Court in India and the
B jurisdiction of the Indian Courts is expressly ousted. It was also pleaded
that under clause 1.2 of the payment guarantee, the guarantee shall not be
impaired by any dispute or claim with regard the borrower and the sellers
or between the borrower and the lenders. Under clause 2.1 if the borrower
does not pay any amount when due, the guarantor shall forthwith without
C any protest of any kind pay the full amount due and payable under the
agreements on first demand. It was pleaded that the alleged dispute of the
plaintiff with the suppliers does not affect the liability of obligation of
defendant No. 12. It was also pleaded that in case defendant No. 12 is
restrained from honouring its obligation under the payment guarantee
executed by it, this will seriously affect its image and financial reputation
D in international market and the objects of defendant No. 12 for develop-
ment of industries in the country shall be frustrated and the defendant No.
12 may be dragged into litigation in Swedish Court in view of the guarantee I
··executed by it. It was also pleaded that defendant No. 12 is neither aware ~,
nor concerned with any fraud.

E On these averments, the trail court held (1) that defendant No. 12
has not committed any fraud nor it has any knowledge of it on the material
produced; (2) that the project report was not prepared by defendant Np.
4; (3) that the defendant No. 4 made the payments to the suppliers only
on instructions and notice issued by the plaintiff/borrowers as per the
credit agreements; (4) that there is no direct allegation of fraud against
F defendant Nos. 4 to 11 and the allegation of fraud are based on suspicion;
(5) that the allegations of fraud against defendant Nos. 4 to 11 "is practi-
cally without substance"; (6) that after the execution of the agreements only
the agreements are to be looked into and there is no allegation of the
plaintiff that defendant Nos. 4 to 11 have breached any terms and condi-
G tions of agreements executed between the plaintiff and defendants 4 to 11;
(7) that the agreements executed by defendants 4 to 11 are not incidental
to the designing, manufacturing, erection and fabrication of the project and
defendant No. 4 being a banker has no concerned with the agreements
executed betweent the plaintiff and suppliers; (8) that the rights and
obligations of the parties flow from the agreements and therefore the
H
HANDELSBANKEN i·. CHARGE CHROME (DAY AL. J. J 345

agreements should be based for deciding the issue and (9) that the dues A
of the lenders as per clause' 10.07 of the agreements between the plaintiff
and the lenders provide that all amounts payable by the borrower under
the agreements shall be paid without set off or counter claim and liability
of the borrower to effect any payment under these agreements is uncondi-
tional and is not in any way dependent on the performance of the contracts
or be affected by the other claim which the borrower may have against the B
suppliers or against any other party collaborating with the suppliers. This
being so no adjustments can be made so far as the repayment of the loans
that of the claim of the plaintiff against defendants 1 to 3 which is yet to
be adjudicated and defendants 4 to 11 are entitled to the repayment of the
loans advanced by them notwithstanding any claim of the plaintiff against C
the suppliers that is defendants 1 to 3; (10) that the bank guarantee had
been issued by defendant No.12 in favour of the lenders on the writ
petitions filed by the plaintiff itself and defendant No. 13 and direction
issued by the Supreme Court and, therefore, no fraud has been played in
execution of the bank guarantee; (11) that the breach of terms between the
plaintiff and defendants 1 to 3 does not prim a f acie give rise to any cause D
.... of action against defendants 4 to 11 and for breach of contracts by
defendants 1 to 3' remedies are available to the plaintiff; (12) that the bank
·guarantee in question is independent of the contracts between the plaintiff
and the suppliers and the same can be enforced without reference to any
claim or counter claim arising from the main contracts between the plaintiff
and defendants 1 to 3; (13) that the plaintiff has failed to establish prima E
facie case of established fraud, therefore, in the absence of clear and
established fraud against defendants 4 to 11 there is no prima facie case
in favour of the plaintiff and. (14) that the plaintiff will not suffer any
irreparable foss and the balance of convenience is also against the plaintiff
and in favour of defendants 4 to 11.
F
On these findings, as stated earlier, the trial court vacated the ad
interim injunction and dismissed the application for interim relief.

The plaintiff being dissatisfied went up in appeal to the High Court
(Miscellaneous Appeal No. 370 of 1991). It appears that when the appeal G
was listed for admission before the High Court defendants 4 and 12
entered appearance and since the matter was urgent in nature, it was heard
finally without issue of notice to defendant Nos. 1 to 3 and 5 to 11 who had
not entered appearance in the trial court.

The High Court noticed that defendant No. 4 has already paid to the H
346 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R,

A suppliers. The defendant Nos. 5 to 11 are npt directly connected with the
captive power plant and defendant No. 4 islI their agent. Since defendants
5 to 11 are not concerned and defendants' 1 to 3 have already received
payments, there is no question of any resb'aint on them. It was noticed by
the H_igh Court that defendant No. 4 is the lender and the plaintiff is the
B borrower. The High Court observed that Principles of guarantee would be
strictly applicable to it. General principles of Injunction on lender would
alone be applicable. The High Court examined the terms of clause 2.1 of
the guarantee given by defendant No. 12 in favour of defendants 4 to 11
and took the view that this clause the guarantee agreement creates an
obligation on defendant No. 12 to pay to defendant No. 4 upon first
C demand if the plaintiff does not pay any amount when due or the loan is
declared default. There is neither any demand nor a declaration of default.
Much before the same the suit had been filed alleging fraud in the kans- ,
action. On the receipt of the plaint the defendant No. 12 •Was required to
make investigation whether there was a fraud and how defendant No. 4 is
D connected there with. Defendant No. 12 without making any enquiry ought
not to have entered appearance to contest the claim of the plaintiff and ·'Slllll
ought to have waited till the order of the court. Instead it has contested
the claim which may give rise to suspicion that it is anxious to pay to
defendant No. 4 in terms of U.S. Dollars which is DOW precious for our
republic. If ·defendant 'No. 12 which gave the guarantee direction of the
E .Supreme court was not happy about the filing of the suit by the plaintiff it
could have approached the Supreme Court, which gave· the direction, to «--
get an order to discharge its obligation to defendant No. 4 and ought to
have acted upon such direction; The High Court also notice that the fraud
is alleged against defendant Nos. 1 to 4 and, therefore, it thought it fit to
F examine whether the prima facie allegation of fraud against defendant Nos.
1 to 4 has been made out by the plaintiff.

The High Court in paragraph 14 of its order took the view as under:

"14. Defendant No. 13 issued a global tender for execution of work
G of captive power plant. Defendant No. 2 on basis of such global
tender offered to defendant No. 1 by telex on 5.10.82. On 19.1.1983
defendant No.4 addressed a letter by defendant No. 13 offering
financial assistance referring to defendant No. 2's arrangement for
'easy terms. On 31.3.83 defendant No. 4 described the credit
H facilities which can be give by defendant No. 4. Inspite of the fact
HANDELSbANKENv. CHARGECHROME[DAYAL,J.) 347

that each party entered into separate agreements, the facts con- A
tained therein gives a clear idea that defendant No. 4 had
knowledge of the nature o( work to be executed by defendant Nos.
1 to 3. Thus, there was collaboration with such links that agreement
of defendant No. 4 cannot be separately read at this stage while
' considering the question of injunction."
B
Though no notice wao; issued defendant 1 to 3 in the appeal, the High
Court observed :

"......... It shall be sufficient to shortly state that I carry an impression
on reading the documents filed that defendant Nos. 1 to 3 had no C
capacity to execut the work of 108 MW captive power plant. Even
if they had capacity, the execution was not prefect. They had
knowledge that the power plant is to be commissioned based on
Talcher Coal. They, however, Commissioned the same on
Australian Coal. All these were within their knowledges. Defen- D
dant No. 4 was linked with them in such manner that for the
purposes of considering the question of injunction, defendant No.
4 ought not to be delinked and treated separately."

The High Court also held that it is true that the plaintiff failed to
bring to the notice of defendant No. 4 about its grievances and about the E
nature of work executed by defendants 1 to 3. If the same would have been
brought to the notice of defendant No. 4 and in spite of it defendant No.
4 would have paid to defendants 1 to 3 basing upon clearance given by the
plaintiff, a strongprima facie case of fraud by defendant No. 4 could have
been out. However, on the facts as presented at this stage it cannot be said F
that defendant No. 4 is as innocent as it claims to be. The High Court to.ok
the view that the inference of fraud is to be drawn not from individual event
and such event by itself may not be sufficient for drawing inference of
fraud. Totality of the events cumulatively have the effect of fraud and in
this case, if the facts and circumstances from the stage of global render till
the suit is filed are considered together, a clear impression of fraud in the G
transaction of captive power plant by defendants 1 to 3 is created and
defendant No. 4 cannot be fully disassociated from it. On balance of
convenience the High Court took the view that if the injunction is granted,
payinent to defendant No. 4 would be delayed and if no injunction is
granted, defendant No. 12 would pay to defendant No. 4 periodically on H
348 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R.

A demand and fall back on the plaintiff to pay the dues. the plaintiff is to pay
on cash flow basis as per the project and feasibility report. On account of
generation of electrical energy which is far less than the assured units, there
is no scope for payment on cash flow basis. It has to divert its capital for
payment of loans and in what process becomes owner of a sick industry.
While on account of delayed payment defendant No. 4 may have some
B effect on its goodwill whereas the plaintiff will have to sacrifice its entire
goodwill Therefore, the basis balance of convenience is in favour of the
plaintiff. The High Court then considered the nature of injunction that
would be granted by it. For this it issued a direction to defendant No. 4
not to insist defendant No. 12 for payment for two years till the end of 1993
C and a direction to defendant No. 12 n9t to pay defendant No. 4 till that
perioct;on the basis of guarantee or till the disposal of the suit whichever
is earlier-and for this period of deferred payment the plaintiff shall pay
interest althe rate of 18% instead of subsidised interest for amount due
during this {>eriod.
D Before we examine the respective contentions of learned counsel for
the parties we very much regret the observation made by the High Court
against IDBI, defendant No. 12. It is true that the guarantee was given as
per the order of this Court. In the order of this Court the guarantee
culminated into the accepted agreements between the lenders and IDBI.
E There was no question of defendant No. 12 approaching this Court for
taking direction as to what it should do while meeting its won contractual
obligations as an apex organisation of the Government in helping the
industralisation of the country. The remarks against defendant No. 12 are
wholly uncalled for. Defendant No. 12 is party to th~ suit. It is entitled to
enter appearance on its behalf and to take the pleas open to it on facts
F
and in law. It has to maintain its credibility and not merely be guided by
the loss to our citizens. It has also to maintain its international credibility.
Credibility is the most important thing for any banking institution. If the
credibility goes the bank cannot survive. The bank in its working has to be
most upright and honest in dealing with its customers.
G
Coming to the merits of the case itself it appears to us that the High
Court totally misdirected itself in assuming that the present application of
interim relief against the enforcement of bank guarantee is not to be
decided strictly on principles of injunction in relation to bank guarantee
H but general principles of injunction on lenders would be applicable and on
HANDELSBANKENv. CHARGECHROME(DAYAL,J.] 349

that basis proceeded to decide the matter. A

Whenever an appeal is heard it is the duty of the appellate court
examine the finding of the trial court and if the findings of the trial court
are not correct. to deal with. What we much in the present case that the
High Court did not even appear to have noticed the findings of the trial B
Court much less any attempt being made to meet them. We have noticed
earlier the. findings which were recorded by the trial court. One of the basic
findings of the trial court was that there is no material of established fraud
against defendant No. 4 nor the defendant No. 4 has any knowledge of any
fraud having committed by defendant Nos. 1 to 3. The allegation of fraud
against defendant No. 4 has been made on suspicion. Another important C
finding given by the trial court was that one has to look at the actual
agreements executed between the parties and defendants 4 to 11 have not
committed any breach of agreements with the plaintiff. Another finding
given by the trial court was that the agreements executed by defendants 4
to 11 are not incidental to the designing, manufacturing, erection and D
fabrication of the project and defendant No. 4 being a banker has no
concern with the agreement executed between the plaintiff and the sup-
pliers. The other finding recorded by the trial court was that the rights and
obligation of the parties flow from the agreements and, therefore, the
agreements should be basis for deciding the issue. Again the trial court bad
very specifically held that in view of the agreements between the lenders E
and borrower, breach, if any, of the agreements by defendants 1 to 3 and
claim, if any, of the plaintiff against defendants 1 to 3 would be of no effect
on the agreements between the borrower and lenders. None of these
findings are either noticed or met by the High Court. On the other hand
the High Court after noticing that the agreements between the borrower F
and suppliers are separate from the agreements between the lenders and
borrower it jumped to the conclusion that "the facts contained therein gives
a clear idea that defendant No. 4 had knowledge of the nature of the work
to be executed by defendants 1 to 3. Thus there was collaboration with such
links that agreement of defendant No. 4 cannot be separately read at this
stage while considering the question of injunction." G
' '

With all due respect to the learned Judge, we fail to understand this
reasoning. Section 92 of the Evidence Act debars court from looking into
oral evidence once the contract is executed in writing except as provided
fc, in six provisos thereof. H
350 SUPREME COURT REPORTS [1993) SUPP. 3 S.C.R.

A Again it appears the High Court found a st,rong prim a f acie case
against defendant No. 4 merely on reading the plaint. pleadings make only
allegation or averments of facts. Merely pleadings do not make a strong
case of p1i111a facie fraud. The material and evidence has to show it. No
material whatsoever is referred to by the High Court.

B In A.L.N. Narayanan Chettiyar and another v. Official Assignee, High
Court Rangoon and another, 28 A.LR. (1941) Privy Council 93 the privy
Council held that "fraud like any charge of a criminal proceedings, must
be established beyond reasonable doubt. A finding as to fraud cannot be
based on suspicion and conjecture".
c Mr. Venugopal, learned counsel for the plaintiff, took us through the
entire correspondence exchanged between the supplier (defendant No.2)
and the holding company of the plaintiff (defendant No. 13) including the
letters dated 5th October, 1982, 7th January, 1983, 31st March, 1983, 14th
April, 1983, Project Report .dated 12th August, 1983, the financial pattern
D as well as various proposals made by defendants 1 to 3 defendant No. 13;
draft agreements and other documents till the culmination of contracts with
defendant No. 1 to 3. Learned counsel also took us to the various letters
dated 7th April, 1989; 20th April, 1989, 22-24 May, 1989 from the plaintiff
to defendant Nos. 1 to 3 and other documents including letter dated 6th
E October, 1989 from the plaintiff to defendant No. 3 and mass of other
documents.

We are prima facie debarred from looking at various proposal,
drafts, project reports, if any, before the contracts between the borrower
and defendant Nos. 1 to 3 on one hand and the credit agreements between
F 1
f. 1e borrower and the lenders having been executed later. Facts which come

within provisos 1 to 6 to Section °2 of the Evidence Act can be proved.
The plaintiff could have resorted to proviso 1 to Section 92 of the Evidence
Act. Section 92 with proviso 1 of the Evidence Act reads as follow :

"92. Exclusion of evidence of oral agreement - When the terms of
G any such contract, grant or other disposition of property, or any
matter required by law to be reduced to the form of a document,
have been proved accnrding to the last section, no evidence of any
oral agreement or statement shall be. admitted, as between the
parties to any such instrument or their representatives in interest,
H for the purpose of contradicting, varying adding to, or substracting
HANDELSBANKEN v. CHARGE CHROME [DAYAL, J.] 351

from, its terms : A
Proviso (1) - Any fact may be proved which would i11validate any
document, or which would entitle any person to any decree or
order relating thereto; such as fraud, intimidation, illegality, want
of due execution, want of capacity in any contracting party, went
or failure of consideration, or mistake in fact or law." B

It is clear form the averments in the plaint that the plaintiff was not
seeking cancellation of any of the agreements either with the suppliers or
the lenders. We have already reproduced the substance of the prayers
made in the plaint. J.n fact the plaintiff prayed for dimunition of the price C
towards the power plant by way of breach of contracts, goods being not of
the specifications. The plaintiff prayed for avoidance of the take over
.certificate. Viz-a-viz taking over certificate there is no allegation of coer-
cion or fraud against defendant No. 4 at all.

The plea that the lenders were to be paid from the cash flow by sale D
of surplus electricity in the market is no where mentioned in any of the
contracts between the borrower and the suppliers and the High Court
without any prima f acie admissible material went on to rely on the bald
averment in the pleadings. Again it is not known on what material the High
Court got "the clear impression of fraud in the transaction of captive power E
plant by defendant Nos. 1 to 3 is created and defendant No. 4 cannot be
fully disassociated from it". Neither the trial court nor the High Court was
required to go into the question of fraud on behalf of defendants 1 to 3 as
there was no interim relief being claimed against them. Even if we assume
fraud by defendant 1 to 3 where was the material to associate defendant
No. 4 with defendants 1 to 3. F
Mr. Venugopal again stressed the fact that defendant No. 4 the
lender was the agent of defendants 1 to 3, the suppliers. For this submission
that is no material whatsoever except the suppliers' introducing defendant
No. 4 as the formal channel for making the credit available. The com-
munication of defendant No. 4 to the plaintiff mentioning the suppliers as G
valuable clients of defendant No. 4 is again of no consequence. A banker
has to deal with its_ customers every day. If the bank calls its customer a
valuable client it only means the credit worthiness of the client. Nothing
more nothing less. It made no mention of the professional capability of the
suppliers. H
352 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R.

A United Commercial Ba11k v. Bank of India a11d others, (1981j 3 S.C.R.
300, as it appears from its title, was a case between two bankers i.e. United
Commercial Bank and Bank of India. In that case appellant bank was a
bank for the buyer whereas the respondent bank was bank for the seller.
The facts were that respondent No. 2 entered into a contract to sell to
respondent No. 3 the goods valued at approximately Rs. 86 lakhs pursuant
B to which the buyer opened a letter of credit with the appellant bank. After
despatching the goods to various destinations to which they were instructed
to send, the seller presented 20 sets of documents in the first lot and 27
sets of documents in the second, the aggregate value of which ·was
equivalent to the amount of the letter of credit. The appellant, who was
c the buyer's bank refused to make payment "except under reserve" pointing
to a discrepancy in the railway receipts as regard the description of goods.
On instructions from the seller the respondent bank received the money in
respect of the first lot of 20 documents "under reserve" and credited the
amount to their account with a specific notation that the amount was paid
D "under reserve" as a result of discrepancies between the railway receipts
. and the instructions in the letter of credit."

In respect of the second lot, the appellant bank refused payment on
the ground of discrepancies in the railway receipts as before as also on the·
ground that some of the railway receipts were "stale".
E
In the meantime the appellant bank asked the respondent to refund
the amount paid in respect of the first lot of documents under reserve
because the bills were not acceptable to the buyer due to discrepancies.
Some correspondence ensued between the parties and the bank; eventually
on the faith of an undertaking given by the seller appellant bank paid the
F remainder amount in respect of the 27 bills as well "under reserve" so that
the value in respect of both the sets of bills paid to the seller in two
instalments was made "under reserve".

The seller filed the suit in the High Court. a few days thereafter the
appellant bank served a letter of demand on the respondent bank for
G refund of the entire amount paid to it in respect of two sets of bills together
with interest thereon because, according to it, the bills of exchange had not
been retired by the buyer for the reasons that the railway receipts were
stale; that the goods had not been supplied according to the terms of the
agreement and that chemical analysis of the oil showed that it was not fit
H for human consumption.
HANDELSBANKENv. CHARGECHROME(DAYAL,J.] 353

The respondent bank in turn wrote lo the seller to refund the whole A
amount whereupon the seller moved the High Court for the grant of an ex
partc ad interim injunction restrain in the appellant from recalling or
n:cciving the amount due from the respondent bank which was granted. A
Single .Judge of the High Court made a temporary injunction till the
disposal of the suit filed by the seller on the view that the appellant was
not entitled under the terms of the letter of credit to unilaterally impose a
B
condition of the payment "under reserve" or refuse to pay to the seller
merely because of the alleged discrepancies.

On an appeal the Division Bench summarily dismissed the
appellant's bank appeal with the result that the seller received the whole C
of the amount of the letter of credit as well as bought the whole lot of
goods for Rs. 18.53 lakhs.

On the question whether the High Court should, in a transaction
between a banker and-a banker, grant an injunction at the instance of the
beneficiary of an irrevocable letter of credit restraining the issuing bank D
from recalling the amount paid under reserve from the negotiating bank
acting on behalf of the beneficiary against a document of guarantee at the
instance of the beneficiary this Court held that "the High Court was wrong
in granting the temporary injunction restraining the appellant bank from
recalling the amount paid to the respondent bank. Courts usually refrain E
from granting injunction to restrain the performance of the contractual
obligations arising out of a letter of credit or a bank guarantee between
one bank and another. If such temporary injunctions were to be granted in
a transactioq. between a banker and a banker, restraining a bank from
recalling the amount due when payment is made under reserve to another
bank or in terms of the letter of guarantee or credit executed by it, the F
whole banking system in the country would fail."

In U.P. Co-operative Federation Ltd. v. Singh Consultants & Engineers
(P) Ltd., (1988] 1 SCR 1124, the facts were : -

The appellant, a State Government enterprise, on or about May 17, G
1983, entered into a contract with the respondent, a private limited com-
pany, for the supply and installation of a vanaspati manufacturing plant at
a place in the district of Nainital. The contract bond contemplated guaran-
teed performance of the work at various stage in accordance with the time
,
schedule prescribed and provided for completion and commissioning of H
354 SUPREME COURT REPORTS IJ993) SUPP. 3 S.C.R.

A the plant after trial run by May .J5. 198.+. According to the appellant. the ·
time was essentially and mdisputahly. the essence of the rnntract.

As per thl.! terms and conditions of t.he contract bond, according to
the appellant, the respondent was to furnish a performance bank guarantee
for 16:5 lakhs and yet another bank guarantee for Rs. 33 lakhs as security
B for the monies advanced by the appellant to the respondent for undertak-
ing the work. Both these guarantees as also the contract bond entitled the
appellant to invoke them and call for their realisation and encashment on
the failure of the respondent to perform the obligations for which the
appellant was made the sole 'judge.
c It was alleged that the respondent defaulted at various stages and
finally failed to complete the work within the stipulated time. The appellant
invoked the two guarantees one after, the other, and thereafter proceeded
to have the plant completed, etc. According to the appellant, the plant
could actually by commissioned for commercial production in. July/August,
D 1985.

The respondent, on August 4, 1986, filed an application under sec-
tion 41 of the Arbitration Act, 1940 (The Act) in the court of the Civil
Judge, praying for an injunction restraining the appellant from realising
E and encashing the bank guarantees. The Civil Judge dismissed the applica-
tion. The respondent filed a revision petition before the High Court, which
allowed the same, holding that the invocation of the performance guaran-
tees was illegal, and the contentions of the appellant that the performance
guarantees constituted independent and separate contracts between the ·
guarantor bank and the beneficiary and created independent rights,
F liabilities and obligations under the guarantee bounds themselves , as being
"technical pleas". The High Court, however, directed the respondent to
keep alive the bank guarantee during the ·pendency of the arbitration
proceedings.

G The appellant then moved this Court' and this Court through
Sabyasachi Mukharji and Shetty, JJ. allowed the appeal; at page 1138 of
the report Mukharji, J. observed as under : ·

"Under the terms agreed to between the parties, the~e' is no scope
of injunction. The High Court proceeded on the basis that this was
H not an injunction sought a~ainst the bank but against the appellant.
HANDELSBANKEN v. CHARGE CHROME [DAYAL.J.] 355
'
But the net effect of the injunction is lo restrain the hank from A
performing the hank guarantee. Thal cannot he done. One cannot
do indirectly what one is not free lo do directly. ,The respondent
was not to suffer any injustice which was irretrievable. The respon-
dent can sue the appellant for damages. There cannot be any basis
in the case for apprehension that irretrievable damage would be
caused, if any. His Lordship was of the opinion that this was not
B
a case in which injunction should be granted. An irrevocable
commitment either in the f9rm of confirmed bank guarantee or
irrevocable letter of credit cannot be interfered with except if a
case of fraud or a case of a question of apprehension of irretriev-
able injustice has been made out. This is the well-settled principle c
of the law in England. This is also the well-settled principle of law
in India. No fraud and no question of i"etrievable injustice was
involved in the case. (emphasis supplied)

The learned Judge at pages 1141 and1142 held as under :
D
"In order to restrain the operation either of irrevocable letter of
credit or of confirmed letter of credit or of bank guarantee, there
should be a serious dispute and a good prima facie case of fraud
and special equities in the form of preventing irretrievable injus-
cice between the parties; otherwise, the very purpose of bank E
guarantees would be negatived and the fabric of trading operation
would be jeopardised. The co~mitm~nts of the banks must be
honoured free from interference by the courts; otherwise, trust in
commerce internal and international would be irreparably
damaged. It is only in exceptional cases, that is, in cases of fraud
or in cases of irretrievable injustic~ that the court should interfere. F
This is not a case where irretrievable injustice would be done by
enforcement of the bank guarantee. This is also not a case where
a strong prima f acie case of fraud in entering into a transaction
was made out. The High Court should 'not have interfered with the
bank guarantee. The judgment and order of the High Court set G
aside. The order of the Civil Judges restored."

Shetty, J. concurring with Mukharji, J. noticed the question involved
at page 1143 of the report as under :

"Whether the obligation is similar to the one arising under a letter H
356 SUPREME COURT REPORTS [1993] SUPP. 3 S.C.R.

A of credit? Whether the Court could interfere in regard to such
obligation, and if so, under what circumstances? These are the
questions raised in the appeal."

The learned Judge at pages 1144 to 1145 observed :

B "The primary question for consideration is whether the High Court
was justified in restraining the appellant from invoking the bank
guarantees. The basic natur:e of the case relates to the obligations
assumed by the bank under the guarantees given to the appellant.
If under the law, the bank cannot be prevented by the respondent
from hououring the credit guarantees the appellant also cannot be
c restrained from invoking the guarantees. What applies to the bank
must equally apply to the appellant. Therefore, the frame of the
suit by not impleading the bank cannot make any difference in the
position of law. Equally, it would be futile to contend that the court
was justified in granting the injunction since it has found a prima
D f acie case in favour of the respondent. The question of examining
the prima f acie case or balance of convenience does not arise if
the court cannot interfere with the unconditional commitment
made by the bank in the guarantees in question. n

The learned Judges further at pages 1145, 1146 and 1148 observed :
E
1
'The modern documentary credit had its origin from letters of
credit. The letter of credit has developed over hundreds of years
of international trade. It was intended to facilitate the transfer of
goods between distant and unfamiliar buyer and seller. It was
F found difficult for a buyer and seller. It was found difficult for a
buyer to pay for goods prior to their delivery. The bank's letter of
credit came to bridge this gap. In such transactions, the seller

-
(beneficiary) receives payment from the issuing bank when he
presents a demand as per the terms of the documents. The bank
must pay if the documents are in order and the terms of credit are
G satisfied. The bank, however, was not allowed to determine
whether the seller had actually shipped the goods or whether the
goods conformed to the requirements of the contract. Any dispute
between the seller and the buye{ must be settled between them·
selves. The Courts, however, in carving out an exception to this
H rule of absolute independence, held that if there has been a "fraud
HANDELSBANKEN v. CHARGE CHROME [DAY AL, J.] 357

in the transaction'~ the bank could dishonour beneficimy's demand A
for payment. The Courts have generally permitted dishonour only
on the fraud of the beneficiary, not the fraud of somebody else."

"In modern commercial transactions, various devices are used to
ensure performance by the contracting parties. The traditional
letter of credit has taken a new meaning. Stand-by letters of credit B
are also used in business circles. Performance bound and guaran-
tee bond are also devices increasingly adopted1n transactions. The
Courts have treated such documents as analogous to letf.er of
credit."

Learned Judge at pages 1149 and 1150 again observed as under :
c
"Whether it is a traditional letter of credit or a new device, like
performance bond or performance guarantee, the obligation of the
bank appears to be the same. Since the bank pleadges its own
credit, involving its reputation, it has no defence except in the case D
of fraud. The nature of the fraud that the courts talk about is the
fraud of an "egregious nature as to vitiate the entire underlying
transaction". It is the fraud of the benefichtry, no fraud of some-
body else. The bank cannot be compelled to honour the credit in
such cases. In such cases, it would be proper for the bank to ask
E
the buyer to approach the court for an injunction. The court,
however, should not lightly interfere with the operation of ir-
revocable documentary credit. In order to restrain the operation

- of irrevocable letter of credit, performance bound or guarantee,
there should be a serious dispute to be tried and there should be
a good prima facie act a fraud." F
Learned Judge at page 1150 observed: \
"The sound banking system may, however, required niore caution
in the issuance of irrevocable documentary credit. It would be for
the banks to safeguard themselves by other means, and, generally,
G
not for the courts to come to their rescue with injunctions unless
there is established fraud. The appeal must be allowed, and the
order of the civil judge, restored."

We have referred to the observations of both Sabyasachi Mukharji H
358 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R.

A as well as She,tty, JJ. in extenso to emp~asise that in case of confirmed bank
guarantees/irrevocable letters of credit, it cannot be interfered with unless
there is fraud and irretrievable injustice involved in the case and fraud has
to be an established fraud. The expression "to p~event irretrievable injus-
tice" appears to have been taken from,the decisio!i.of the -Court of Appeal
B in England in the case of Elian and Rabbath (Trading as Elian & Rabbath)
v. Matsas and Matsas and others, [1966) 2 Lloyd's List Law Reports 495.
The facts of that pse were peculiar. The fir~t defendant, vessel, was
chartered by Lebanese charterers for carriage pf plaintiffs' cargo (con-
signed to Hungary) from Beirut io Rijeka. Dis~harge of the cargo was
delayed at Rijeka and the shipowners ex~rcised it~ lien on cargo in respect
C of demurrage due to delay in discharge of cargo. the third defendant-bank
put up a guarantee in London in favour of the ~econd defendants, who
were first defendants' London agents, to secure rekase of cargo. There was
a claim by Yugoslavians to distrian on goods, involrmg ship in further delay
and master of the ship, on lifting original lien,! immediately exercised
D another lien, respect of extra delay. Original lien ~aised when Hungarian
buyers put up Pounds 2000. Two years later t~e shipowners claimed
arbitration with charterers to assess demurrage for\ which the first lien was
exercised and claimed to enforce guarantee. Plain~iff claimed declaration
that guarantee was not valid (as the original lie~ had been lifted) and
·injunction to restrain shipowners or their agents frdm enforcing guarantee.
E The shipowners and their Lon~on agents as first and second defendants
appealed against granting of injunction by Blain, J. It was held by the Court
· of Appeal that it was a special case in which court ~hould grant injunction
to prevent what might be irretrievable injustice. IJord Denning observed
that a although the shippers were not 'parties to the ~ank guarantee,
F nevertheless they had a most important interest in it. If the Midland Bank
Ltd., paid under this guarantee, they would claim against the Lebanese
Bank, who in turn would claim against the shippers. The shippers would
certainly be debited with the account. On being so debited, they would have
to sue the shipowners for breach of tqeir promise express or implied to
release the goods. Lord Denning posed the question 'were the shippers to
G be forced to take that course'? Or ckn they short-circuit the dispute by
suing the shipowners at once for an ibjunction? Lord Denning observed
that it was a special case in which injunction should be granted and went
on to observe that there a prim a f acie ground for saying that the shipowners
promised that, if the bank guarantee was given, they would release the
H
HANDELSBANKEN v. CHARGE CHROME [DAYAL, J.) 359

goods. He further went on to observe that the only lien they had in mind A
at that time was the lien for demurrage. But would any one suppose that
goods would be held for another lien in respect . of extra delay. His
Lordship observed that "it can well be argued that the guarantee was given
. on the understanding that the lien was raised and no further lien imposed,
and that when the shipowners, in breach of that understanding imposed. a B
further lien, they were disabled from acting on the guarantee". If we closely
analyse the facts of that case, irretrievable injustice which was made for
the basis for grant 'of injiirtction r·eally was on the ground that the guarantee
was not encashable on its terms when the buyers had paid pounds 2000 to
lift the original lien.
c
Another matter came before this hon'ble Court in General Electric
Technical SelVices Company Inc. v. Punj Sons (P) Ltd. and another, [1991)
2 S.C.R. 412. Tlie facts of the case are as follows :

The appellant's contract with Indian Airlines included the construc-
tion and fabrication of air craft testing centre/engine repair centre in Delhi. D
For getting lhat work done, the appellant entered into a contract with the
respondent-1.

As per the contract; respondent-1 was required to provide perfor-
mance bond equal to 30 per cent of the total value of contract price, which
was to be split up into two performance bonds partly to be released on E
completion of the pr~ject, and the balance upon the expiration of the
warranty, and to furnish a Bank guarantee to secure the mobilisation
advance of 25 per cent of contract value.

Respondent-1, instead of furnishing the two performance bonds,
wrote a letter for a revised proposal, which was accepted by the appellant.
F

As the respondent-1 failed to complete the project within the stipu-
lated time, as per contractual specifications, despite repeated oppor-
tunities, the appellant terminated respondent-l's right to continue the
project and sought for encashment of the Bank guarantee for Rs. G
1,06,12,500, which was issued to the appellant by the Bank.

The respondent-1 filed a suit for injunction against the appellant and
the Bank in the High Court and obtained an ex-parte injunction from the
Single Judge, restraining the Bank and the appellant from encashing the
Bank guarantee. H
360 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R. ·

A When the ex-parte injunction was vacated, respondent-1 preferred
an appeal to the Division Bench of the High Court. The Division Bench
allowed the appeal, staying the encashment of the Bank guarantee till the
disposal of the respondent's suit.

On the question, whether the Court was justified in restraining the
B Bank from paying the appellant under the Bank guara:itee at the instance
of respondent-1, allowing the appeal of the appellant-company, this Court
held as under :

"In the instant case, the High Court has misconstrued the terms of
c the Bank guarantee and the nature of the inter-rights of the parties
under the contract. The mobilisation advance is required to be
recovered by the appellant from the running bills submitted by the
respondent. If the full mobilisation advance has not been
recovered, it would be to the advantage of the respondent. Second-
ly, the Bank is not concerned with the outstanding amount payable
D
by the appellant under the running bills. The right to recover the
amount under the running bills has no relevance to the liability of
the Bank under the guarantee. The liability of the Bankremained
intact irrespective of the recovery of mobilisation advance or the
non-payment under the running bills. The failure on the part of
.E the appellant to specify the remaining mobilisation advance in the
letter for encashment of Bank guarantee is of little consequence
to the liability of the Bank under the guarantee. The demand by
the appellant is under the Bank guarantee and as per the terms
thereof. The Bank has to pay and the Bank was willing to pay as
F per the undertaking. The Bank cannot be interdicted by the Court
at the instance of respondent- 1 in the absence of fraud or special
equities in the form of preventing irretrievable injustice between
the parties. The High Court in the absence of prima facie case on
such matters has committed an error in restraining the Bank from
honouring its commitment under the bank guarantee."
G
One of the arguments in that case was that as per the terms of bank
guarantee it could not be encashed at the stage. This Court at pages 416
to 418 noticed the terms and conditions of the first bank guarantee which
was towards the performance of the project and to secure mobilisation
H advance of 25 % of the contract value. Again at page 418 the Court noticed
HANDELSBANKENv. CHARGECHROME[DAYAL,J.) 361

the replaced second composite bank guarantee dated 25th January, 1988 A
keeping the other terms of the original bank guarantee dated 28th October,
1986 unchanged. The case of the plaintiff was that there was no proper
demand for payment of balance of the mobilisation advance nor was it
mentioned in the letter of demand to the bank. It was also the case of the
respondent that on terms of the bank guarantee the stage had not reached
to encash it. This Court noticed at pages 419-420 of the report as follows:
B

"The second bank guarantee with which we are concerned makes
a reference to the first guarantee. It states that the guarantee is a
composite bank guarantee for mobilisation of advance and perfor-
mance bond. It further states that all the other terms and condi- c
tions of the original Guarantee will remain unchanged."

The Court first decided that all the terms of the first bank guarantee
were there except that earlier guarantee was towards the mobilisation
advance whereas the later guarantee was a composite bank guarantee for D
both -performance of the contract as well as for recovery of mobilisation
advance. The Court noticed how the liability under the guarantee will get
reduced from stage to stage by realisation from running bills towards
mobilisation advance and under the first guarantee itself the bank had
undertaken to pay to the appellant the amount guaranteed without any
demur merely on demand stating that the amount is due by way of loss or E
damage caused to or would be caused to or suffered by any breach
committed by the respondent on any of the terms or conditions contained
in the agreement or by reason of respondent's failure to perform the
agreement and that such demand shall be conclusive as regards the amount
due and payable by the bank under the guarantee. The appellant had only p
sought to enforce the bank guarantee for the balance amount of the
mobilisation advance on a complaint that respondent No. 1 had failed to
perform the contract as per terms and conditions. As mobilisation advance
could be recovered earlier only from the running bills and since the
contract had been terminated, the balance of mobilisation advance was
sought to be recovered from the bank guarantee. The bank had undertaken G
to pay this amount in fact the bank was prepared to pay the same. It was
in these circumstances that the court accepted the appeal and observed
that the law has been settled in the aforesaid case of U .P. Cooperative
Federation Ltd. and again noticed the observations of Mukherji J. in that
case and observed at page 421 that the High Court has misconstrued the H
362 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R..

A terms of the bank guarantee and the nature of the inter se rights of the
parties under the contact. It was on the question whether the amount was
due under the terms and conditions of the bank guarantee that the learned
Judge speaking for the Court observed tha~ in the absence of prima facie
case on such matters the High Court committed error in restraining the
bank fi~m honouring its commitment under the bank guarantee.
B
Shetty, J. speaking for the Bench noticed the earlier observations of
Mukharji, J. in the case of U.P. Co-operative Federation Ltd. (supra) and
stated that the nature of the fraud that the courts talk about is fraud of an
"egregious nature as to vitiate the entire underlying transaction". It is fraud
C of the beneficiary, not the fraud of somebody else.

Again in this very judgment Shetty, J. referred to the observations of
Mukharji, J. that there should be prima facie case of fraud and special
equaties in the form of preventing irretrievable injustice between the
parties. Mere irretrievable injustice without prima facie case of established
D fraud is of no consequence in restraining the encashment of b'ank guaran-
tee.

Mr. Venugopal, learned counsel for the borrower referred us to the
decision in Itek Corporation v. The First National Bank etc., by the United
E States District Court, Massachusetts reported in 566 Federal Supplement
1210, particularly observations at page 1217, which read thus :

"Because I find that Itek has demonstrated that it has no adequate
remedy at law, and because I find that the allegations of irreparable
harin are not speculative, but genuine and immediate, I am satis-
F fied that Itek will suffer irreparable harm if the requested relief is
not granted."

The facts in that case were that the exporter in U.S.A entered into
an agreement with Imperial Government of Iran has brought action seeking
G order terminating its liability on standby letters of credit issued by
American Bank in favour of Iranian Bank as part of the contract. The
learned District Court held that the contractor was entitled to issuance of
preliminary injunction.

It will be noticed that this judgment is on peculiar facts of its own
H and the situation created after the Iranian Revolution and the American
HANDELSBANKEN v. CHARGE CHROME (DAYAL, J.] 363

-. Government cancelled the export licence in relation to Iran as if related to A
high technology. As the American Government had cancelled the export
licence in view of revolution in Iran and the Iranian Government had
forcible taken 52 American citizens as hostages and the President Carter
by Executive order blocked all Iranian assets subject to the jurisdiction of
the United States and also cancelled the export contracts, the plaintiff
informed the importer in Iran invoking force majeure but the Iranian B
importer inspite of it resorted to encashment of the bank guarantee. The
court was of the view that even if claim for damages is decreed by the
American courts situation in Iran was such that the decree will not be
executable in Iran. It was no these facts that the court felt that it was a
case where the plaintiff had demonstrated that it has no adequate remedy C
at law and the allegations of irreparable harm are not speculative but
genuine and immediate and the plaintiff would suffer irreparable harm if
the requested relief is not granted. the court also found as a fact at page
1217 itself that "the uncontested facts in the record, if proved at trial,
appear to make out a prim a f acie case of fraud within the meaning of
Section 5-114(2)(b) and held that under these circumstances, any demand D
on the guarantees or letter~ of credit by Iran importer in March, 1980
would necessarily have been fraudulent".

It is thus clear that this judgment is based on peculiar facts, par-
ticularly of situation in the Government of Iran which came into power
after the revolution in Iran and its relation with the United States of E
America and in any case on the prim a f acie finding of fraud being given by
the learned court read within finding of irreparable harm which could not
be avoided by adequate remedy at law due to peculiar situation in Iran.

It will be noticed that the plea of the plaintiff was that the contract F
will get frustrated due to restrictions imposed for import and export by the
American Government. Alongwith it the plea was of irretrievable injury
which was explained in the judgment also as to what it meant.

Mr. Venugopal then referred us to the decision of Berger, J. in
Handerson v. Candian Imperial Bank of Commerce and Peat Marwick Ltd., G
40 British Columbia Law Report 318. Here again the facts were peculiar.
The plaintiff arranged an irrevocable letter of credit to fulfill his obligation
to purchase 20 episodes of two television shows from a production com-
pany. Although the shows w~re never produced and the production com-
pany went into bankruptcy, the receiver of the seller made demand upon H
364 SUPREME COURT REPORTS (1993) SUPP. 3 S.C.R.

A the bank for payment under the letter of credit anCI the plaintiff brought
an application for an interlocutory injunction to stop the bank from making
payment. The Court granted the interim injunction and held that the letter
of credit is independent of the primary contract of sale between the buyer
and the seller. The issuing bank agreed to pay upon presentation of
documents, not goods there is an exception to this rule; the bank should
B not pay under the credit where it knows that the request for payment is
made fraudulently in circumstances when there is no right to payment. The
case fell within this exception. The bank had been put in knowledge of the
fact that the shows had not been produced and, therefore, the receiver was
not entitled to the proceeds. It will be noticed that this decision is based
C on obvious fraud and this view was given. by Berger, J. after considering
the case of Sztejn v. /. Henry Schroder Banking Corp., (1941), 31 N.Y. Supp.
2{d) 631 at 633.

A decision of New York Supreme Court in NMC Enterprises, Inc. v.
D Columbia Broadcasting System. Inc., 14 UCC Reporting Service 1427 was
also referred to by Mr. Venugopal. Here again Fein, J, observed that
preliminary injunctive relief will be granted, restraining bank from honour-
ing a letter of credit, where a prim a f acie showing has been made of fraud
in the underline transaction and the plaintiff has further shown that it may
be irreparably injured if the relief is not granted.
E
On the facts the Court had taken the view that the plaintiff had made
a sufficient showing of fraud to justify an injunction against the honouring
of the letter of credit covering the sale of stereo receivers and related
equipment where it appeared by affidavit that at the time the contract was
F negotiated, the plaintiff was provided with brochures containing technical
performance specifications for the receivers including their continuous
power out put ratings; that the receivers did not comply with the repre-
sentation as to continuous power out put thereby reducing their value; that
an officer of the defendant had allegedly admitted that defendant was
aware of the non-conformity prior to the execution of the contract and
G failed to distlose it to the plaintiff; and that if the letter of credit was drawn
up or negotiated plaintiff might be forced into bankruptcy.

It will again be noticed that in this case the dispute was between the
supplier and the purchaser and the decision is based on the facts found by .
H the court for grant of preliminary injunction.
HANDELSBANKENv. CHARGECHROME[DAYAL,J.] 365

Halsbury Fourth Edition Volume 9 para 542 observes as follows : A

"542. Conditions and warranties. The predominant modern ap-
proach is to consider the nature of the terms of the contract in
order to decide whether those terms are conditions or warranties.
Prime f acie a breach of condition entitles the innocent party to B
rescind the contract and claim damages for any loss he may have
suffered, whereas a breach of warranty only entitles him to
damage."

Section 12 of the Sale of goods Act, 1930 provides the difference
betv1een 'condition' and 'warranty' and reads as follows : C

"12. Condition and warranty - (1) A stipulation in a contract of
sale with reference to goods which are the subject thereof may be
a condition or a warranty.

(2) A condition is a stipulation essential to the main purpose of D
the contract, the breach of which gives rise to a right to treat the
contract as repudiated.

(3) A warranty is a stipulation collateral to the main purpose of
the contract, the breach of which gives rise to a claim for damages E
but not to a right to reject the goods and treat the contract as
repudiated.

(4) Whether a stipulation in a contract of sale is a condition or a
warranty depends in each case on the construction of the contract.
A stipulation may be a condition, though called a warranty in the F
contract."

Again Section 13 of the Sale of Goods Act provides when 'condition'
to be treated as 'warranty', relevant part of sub- sections (1) & (2) thereof
reads as under :
G
"13. When condition to be treated as warranty - (1) Where a
contract of"sale is subject to any condition to be fulfilled by the
seller, the buyer may waive the condition or elect to treat the
breach of the condition as a breach of warranty and not as a ground
for treating the contract as repudiated. H
--
SUPREME COURT REPORTS (1993] SUPP. 3 S.C.R.

A (2) Where a contract of sale is not severable and the buyer has
accepted the goods or part thereof, the breach of any condition to
be fulfilled by the seller can only be treated as a breach of warrant
and not as a ground for rejecting the goods and treating the
contract as repudiated, unless there is a term of the contract,
express or implied to that effect."
B
It will be noticed that in the present case prima f acie the provision
for capacity of the power plant being of 108 M.W. was a condition.
Therefore, the plaintiff could have repudiated the contract as provided in
Section 12 (2) of the Sale of Goods Act or treated as a warranty by waiving
C the condition or elect to treat the breach of the condition as a breach of
warranty and not_ as a ground for.treating the contract as repudiated.

In the present case the plaintiff has not repudiated the contract. In
fact it is working with the power plant and, therefore, the breach of
condition has been treated by the plaintiff as a breach of warranty and in
D view of Section 12(3) of the Sale of Goods Act, the breach of warranty
gives a right to claim for damages but not to a right to reject the goods
and treat the contract as repudiated. Even the prayer in the plaint if for
dimunition of the price of the power plant and the relief is based on Section
59 of the Sale of Goods Act.
E
We have already held that the contracts between the lenders and the
.borrower are not vitiated by any fraud much less established fraud and
there is no question of irretrievable injury. therefore, there was no reason
for the High Court to set aside the order of the trial court. ...
F Against there is no case of any irretrievable injury either of the type
as held in the case of Itek Corporation (supra) as there is no difficulty in
the judgment of this country being executable in the courts in Sweden.

The High Court was not right in working on mere suspicion of fraud
G or merely going by the allegations in the plaint without prima f acie case of
fraud being spelt out from the material on record.

The High Court was also in error in considering the question of
balance of convenience. In law relating to bank guarantees:a party seeking
injunction from encashing of bank guarantee by the suppliers has to show
H prima facie case of established fraud and an irretrievable injury. Irretriev-
HANDELSBANKENv. CHARGECHROME[DAYAL,J.] . 367

able injury is of the nature as noticed in the case of Itek C01poration A
(supra). Here there is no such problem. Once the plaintiff is able to
establish fraud against the suppliers or suppliers-cum-lenders and obtains
any decree for damages or dimunition in price, there is no problem for
affecting recoveries in a friendly country where the bankers and the sup-
pliers are located. Nothing has been pointed out to show that the decree B
passed by the Indian courts could not be executable in Sweden.

The High Court totally ignored the irretrievable injury which will be
caused to defendant No. 12 in not honouring the bank guarantee in
international market which may cause grievous and irretrievable damage
to the interest of the country as opposed to the loss of money to the C
borrower/plaintiff. There was no question of defendant No. 4 not making
&.ny demand. The instalments for repayment of the loans had already been
fixed and liable to be paid without demand by defendant No.4. Defendant
No. 12 is under a duty to pay the instalments regularly on a fixed date
without any demand to defendant No. 4.
D
We may make it clear that our views are only tentative and prima
f acie for the purpose of the decision of the application for injunction and
should not be construed as expression of opinion at all on the merits of the
controversy between the plaintiff and the defendant.

For the reasons stated above the appeal is accepted; the judgment E
and order of the High Court dated 11th October, 1991 is set aside and that
of the trial court dated 14th August, 1991 is restored and the application
of the borrower/plaintiff for interim injunction against the lenders is dis-
missed with costs.
F
S.L.P. (C) No. 1530 of 1992.

YOGESHWAR DAYAL, J.

In view of the orders passed by us today in Civil Appeal arising out
of Special Leave Petition {Civil) No. 421 of 1992, no orders are called for G
on this petition.

R.A. Appeal allowed.