Injunction of an unconditional Bank Guarantee cannot be granted except in case of fraud or ‘special equities’, SC [Read Judgment]

Supreme Court traces the law on the subject matter and summarizes the principles for grant or refusal of injunction to restrain enforcement of bank guaranteeResolving the legal nodus as to whether the beneficiary of an unconditional and irrevocable bank guarantee can be injuncted from enforcing the guarantee at the instance of the customer of the bank on whose behalf the guarantee has been furnished, a bench of the Supreme Court comprising of Justice Jagdish Singh Khehar and Justice R. Banumathi has affirmed and followed the dicta laid down in U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, and Vinitec Electronics Private Ltd. vs. HCL Infosystems Ltd., (2008) 1 SCC 544 wherein the law on the subject has been laid down to the effect that the person in whose favour the guarantee is furnished by the bank cannot be prevented by way of an injunction from enforcing the guarantee on the pretext that the condition for enforcing the bank guarantee in terms of the agreement entered into between the parties has not been fulfilled, and that the seller cannot raise the dispute of whatsoever nature and prevent the purchaser from enforcing the bank guarantee by way of injunction except on the ground of fraud and irretrievable injury.The Supreme Court was considering an appeal preferred by M/s Adani Agri Fresh Ltd.- the 3rd defendant, in a suit for permanent injunction filed at the instance of the 1st respondent (before the Apex Court) seeking to restrain State Bank of Mysore (for short “the bank”) which had executed a bank guarantee on his behalf from paying any guarantee amount to the 3rd defendant till the claim of the plaintiff and the 3rd defendant was settled amicably or through court of law. The appeal was filed challenging the order and judgment of the Karnataka High Court which declined to interfere with the order passed by the Trial Court injuncting the bank from making payment of schedule amount to the 3rd defendant till the disposal of the suit either amicably or judiciously between the plaintiff and the 3rd defendant.The above ruling came in the following fact situation: The appellant – M/s Adani Agri Fresh Ltd. which is a supplier of fruit and vegetables entered into a contractual agreement with M/s RMS Fruits and Company (hereinafter referred to as `M/s RMSFC'), a wholesale dealer in fruits (whose proprietor was the 1st respondent in the appeal before the Apex Court.)For securing payment in lieu of the products supplied by the appellant to the 1st respondent - M/s RMSFC, the appellant required the 1st respondent to furnish bank guarantees, whereby the appellant would be entitled to recover the proceeds of the products, transported by it to M/s RMSFC.Three such registered bank guarantees which constitute the basis of the controversy were executed by the State Bank of Mysore on 24.12.2010, 09.02.2011 and 10.02.2011.Under the bank guarantees, the appellant – M/s AAFL would first make a demand/claim for the payment in lieu of fruits transported to the 1st respondent and in case the 1st respondent failed to reimburse the consideration, the appellant had the right to make a demand from the guarantor, for the above payment.(A perusal of the terms of the bank guarantee, the Supreme Court found, would reveal that the same was an unconditional guarantee, and that, the guarantor expressly waived off rights of any objection and defence, irrespective of the disputed positions adopted by the contracting parties, or even, the validity and legal effects of the contractual agreement.)The aforesaid demand in terms of the bank guarantee was to be made on the basis of a demand/claim at the hands of M/s AAFL indicating the despatch of goods, and the amount payable in lieu thereof. Thereupon, the guarantor was to make the payment of the amount claimed, immediately without any demur, and without any recourse. On the receipt of such a certificate of the outstanding amount(s), the bank guarantee(s) would stand invoked forthwith, notwithstanding any suit or proceedings, that may have been instituted by one or the other party, with reference to the contractual obligations.It was the case of the appellant, that the company had issued an “Outstanding Certificate” seeking payment, on account of despatch of fruit to M/s RMSFC. The outstanding debt indicated therein was, for a sum of Rs.62,32,328/- (Rupees sixty two lakhs thirty two thousand three hundred and twenty eight only). Consequent upon the aforesaid demand being not honoured by the 1st respondent, the bank guarantee was sought to be invoked, through the aforesaid “Outstanding Certificate” dated 31.05.2011, whereupon the 1st respondent, in order to wriggle out of the liability filed the suit for permanent injunction before the Civil Judge (Junior Division), Mysore with the prayer already referred above.After entertaining the suit, the Trial Court passed an order of interim injunction restraining the bank from making payment of...

Injunction of an unconditional Bank Guarantee cannot be granted except in case of fraud or ‘special equities’, SC [Read Judgment]

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Injunction of an unconditional Bank Guarantee cannot be granted except in case of fraud or ‘special equities’, SC [Read Judgment]

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