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Dai-ichi Karkaria Private Ltd., Bombay Vs. Oil and Natural Gas Commission Bombay and Another - Court Judgment

LegalCrystal Citation
SubjectCommercial;Customs
CourtMumbai High Court
Decided On
Case NumberNotice of Motion No. 3270 of 1989 in Suit No. 3891 of 1989
Judge
Reported inAIR1992Bom309; 1991(4)BomCR631; (1991)93BOMLR183
ActsSpecific Relief Act, 1963 - Sections 38; Code of Civil Procedure (CPC), 1908 - Sections 94 and 151 - Order 6, Rule 4 and Order 39, Rules 1 and 2; Indian Contract Act, 1872 - Sections 15 and 17; Companies Act, 1956; Customs Act, 1962 - Sections 25; Indian Penal Code (IPC), 1860
AppellantDai-ichi Karkaria Private Ltd., Bombay
RespondentOil and Natural Gas Commission Bombay and Another
Appellant AdvocateK.S. Cooper,;G. Vahanvati and;P.M. Modi, Advs., i/b;M/s. Mulla and;Mulla and;Craigie Blunt and;Caroe, Advs.
Respondent AdvocateM.S. Sanghavi and;Kirit Modi, Advs., i/b;M/s. Ambubhai Diwanji
Excerpt:
bank-guarantee by bank -- letter of credit -- normal rule that courts not entitled to interfere with irrevocable obligations undertaken by bank under irrevocable letter of credit or unconditional bank guarantee -- exceptions to the rule--exception of fraud--broader meaning of fraud in equity -- exception of special equity resulting from particular situation -- challenging not the whole bank guarantee but one stipulation therein being unenforceable on grounds of special equity -- exception of economic duress -- doctrine of economic duress -- scope and its applicability in indian legal system -- refusing grant of injunction in bank-guarantee cases -- exception of ecomonic duress whether available -- victim of duress seeking injunction restraining enforcement of certain term imposed by other.....order1. the plaintiff is a company incorporated under the provisions of the companies act, 1954 carrying on business, inter alia, of manufacture of speciality chemicals. the 1st defendant is a statutory corporation constituted under the provisions of the oil and natural gas commission act, 1959. the 2nd defendant is a nationalised bank.2. the plaintiff supplies pour point depressant (ppd)/ flow improver to defendantno. 1, which, according to the defendant no, 1, is a critical material successfully developed by the plaintiff to meet the requirement of defendant no. 1 as an import substitution. at all material times, customs duty was payable on the raw material imported by the plaintiff which was required to be used in manufacture of the said goods for supplying the same to defendant no......
Judgment:
ORDER

1. The plaintiff is a company incorporated under the provisions of the Companies Act, 1954 carrying on business, inter alia, of manufacture of speciality chemicals. The 1st defendant is a statutory Corporation constituted under the provisions of the Oil and Natural Gas Commission Act, 1959. The 2nd defendant is a nationalised Bank.

2. The plaintiff supplies Pour Point Depressant (PPD)/ Flow Improver to defendantNo. 1, which, according to the defendant No, 1, is a critical material successfully developed by the plaintiff to meet the requirement of defendant No. 1 as an import substitution. At all material times, Customs duty was payable on the raw material imported by the plaintiff which was required to be used in manufacture of the said goods for supplying the same to defendant No. 1.

3. On 4th May 1984, the defendant No. 2 furnished a Bank Guarantee in favour of the defendant No. 1 at the instance of the plaintiff in a sum of Rs. 1,50,00,000/-, a copy whereof is annexed as Exhibit `T' to the plaint in this suit. The said bank guarantee recites that the defendant No. 1 purchaser had placed a supply order dated 12th December 1983 with the plaintiff for supply of Four Point Depressant/Flow Improver, Daitro-lity-MNF-1206, hereinafter referred to as 'the said goods'. It was recited in the said bank guarantee that the plaintiff had requested the defendant No. 1 to give an ad hoc payment up to an amount not exceeding Rs. 1,50,00,000/-in that behalf. Prior to the execution of the said Bank guarantee, it was contemplated by the parties, rightly or wrongly, that the Government of India might perhaps be persuaded to refund the amount of Customs duty paid by the plaintiff on the raw material used by the plaintiff in manufacture of goods to be supplied to defendant No. 1 under the said order. In this context, it was recited in the said order that the defendant No. 1 had agreed to make ad hoc payment to the plaintiff not exceeding Rs. 1,50,00,000/-, provided the plaintiff undertook to refund the said amount to defendant No. 1 within 10 days from the date of receipt of 'refund of the customs duty on the imported raw material' from the concerned authorities or within six months from the date of the guarantee, whichever was earlier, and the plaintiff agreed to furnish to defendant No. 1 a bank guarantee for a sum of Rs. 1,50,00,000/- in that behalf. It was recited in the said bank guarantee that defendant No. 2 irrevocably and unconditionally guaranteed as a prime obliger to repay the amount which may be received by the plaintiff as ad hoc payments, the maximum liability being to the extent of Rs. 1,50,00,000/-. The defendant No. 2 agreed to pay the said amount without anydemur merely on a demand from defendant No. I staling that the plaintiff had failed to repay the said amount Rs. 1,50,00,000/- or part thereof or that the amount claimed was for any loss or damage caused, to be suffered or would be caused or suffered due to nonpayment to the defendant No. I of the amounts so received. It was also recited in the said bank guarantee that any such demand made on the bank by defendant No. 1 shall be conclusive. It is not necessary to state anything more about the contents of the said bank guarantee at this stage. It is the case of the defendant No. 1 that relying upon the said bank guarantee furnished by the 2nd defendant, the defendant No. 1 paid three different sums of Rs.25 lacs. Rs. 95 lacs and Rs. 28 lacs, aggregating to Rs. 1,48,00,000/-, to the plaintiff on 26th May 1984 and 6th July 1984 respectively, as a loan to be returned by the plaintiff to defendant No. 1 in the manner set out in the bank guarantee. By its letter dated 16th December 1989, the defendant No. I invoked the said bank guarantee and called upon the 2nd defendant to pay the said amount. The defendant No. 1 addressed several letters also to defendant No. 2 invoking said bank guarantee. The said bank guarantee has been extended by the plaintiff from time to time and is operative up to 28th February 1991.

4. On 27th December 1989., the plaintiff filed the present suit for a declaration that the impugned demand made by defendant No. 1 on the 2nd defendant to make payment under the said bank guarantee was fraudulent, void, illegal and of no effect whatsoever. The plaintiff has sought a permanent injunction against defendant No. 1 from enforcing the said bank guarantee against defendant No. 2 from making any payment on the said bank guarantee.

5. By this notice of motion, the plaintiff seeks to restrain the defendant No. 1 from in any manner invoking the said bank guarantee and/or receiving any amount from defendant No. 2 thereunder. By this notice of motion, the plaintiff also seeks to restrain the defendant No. 2 from making any payment to defendant No. 1 under the said bankguarantee. The plaintiff is not challenging the said bank guarantee in its entirety. The said bank guarantee requires the plaintiff to pass on the amount of refund of customs duty as and when received from the Government of India within 10 days from the receipt thereof. The plaintiff accepts this part of the bank guarantee as binding on it. The plaintiff has not received refund of 'costoms duity' paid on imported raw material used in manufacture of goods supplied to defendant No. I. The plaintiff is impugning the later part of the bank guarantee in so far as it requires the plaintiff to pay the amount in question to defendant No. 1 irrespective of non-receipt of amount of refund of customs duty from Government of India on expiry of six months from the date of the guarantee and the invocation of bank guarantee by defendant No. 1 on ground of duress, fraud and special equities arising from certain situation. The above referred amount of Rs. l,48,00,000/-is described by defendant NO. 1 in the correspondence as 'Advance'. The said amount is described by defendant No. 1 as an 'ad hoc payment' in the said bank guarantee. The said amount is now described by defendant No. 1 as a loan in paragraph 7 of the affidavit in surrejoinder dated 5th February 1990.

6. On or about 18th/ 19th April 1990, the defendants were served with the writ of summons in this suit requiring them to file written statement within the time specified therein. The said time has already expired long back. The defendants have not filed any written statement so far. The plaintiff has filed a compilation of documents. Both the parties have filed written submissions in addition to making exhaustive oral arguments through their learned counsel.

7. The plaintiff has sought an interim injunction restraining defendant No. 1 from encashing the said bank guarantee inter alia on the ground of economic duress amounting to coercion, fraud and special equities of the situation.

8. It is well-settled that Court of law are not entitled to interfere with the irrevocable obligations undertaken by the bank under an irrevocable letter of credit or an unconditional bank guarantee except in cases where fraud is proved to the satisfaction of the Courtor some other recognised ground of exceptionavailable in law or in equity is clearly made out. In large number of decisions delivered by the highest Court of our country it had been held repeatedly that the contract of bank guarantee is an independent autonomous Contract between the bank and the beneficiary and its autonomy is ordinarily not affected by the main contract between the supplier and the purchaser of the goods or the disputes which may arise between them in respect of their rights and obligations under such contract. It has also been held in some casesthat this principle of bank guarantee being an independent or autonomous contract cannotbe extended to protect the unscrupulous beneficiary. The defendant No. 1 has denied every single allegation made against it by the plaintiff in respect of the alleged facts on the basis of which the plaintiff has pleaded economic duress, fraud and special equities. The defendant No. 1 has contended that the plaint does not disclose material particulars in support of the so-called plea of duress or fraud as required under Order VI, Rule 4 of the Code of Civil Procedure. According to defendant No. 1, the plaint discloses no cause of action. It has been contended on behalf of defendant No. 1 by its learned counsel that clear proof of fraud and irretrievable injustice are the only two exceptions available to the party seeking injunction in a matter of this nature and grounds like economic duress or special equities from the situations are not recognised by judicial decisions as valid grounds for seeking relief in support of plea for an injunction restraining encashment of bank guarantee. It has been contended by the learned counsel for defendant No. 1 that the ground of special equity arising from the situation recognised in one of the earlier Calcutta cases i.e. Texmaco Ltd. v. State Bank of India, : AIR1979Cal44 is no 'longer available to the party seeking injunction in view of the observations made to the contrary by the Supreme Court in its latest judgment in the case of U.P. Co-operative Federation Ltd. v. Singh Consultants and Engineers' (P) Ltd.reported in (1988) SCC 174. The learnedcounsel for the plaintiff submits that economic duress amounting to corcion, special-equities arising from a particular situation,fraud, irretrievable injustice are some of the recognised exceptions available to the plaintiff seeking injunction and the proposition oflaw formulated by the learned counsel fordefendant No. 1 in this behalf is too narrowand is incorrect.

9. The facts and circumstances leading to the filing of the suit are peculiar and stand by themselves. I am conscious of the well-settled proposition of law that as a general rule, no interim injunction can be granted in a matter of this nature in view of the bank guarantee being irrevocable, unconditional and the bank having undertaken its obligation to pay the amount payable on demand without any demur and in view of the fact that the bank has undertaken to treat the demand of defendant No. 1 for repayment of the said amount as conclusive. With this preface and caution, 1 shall have still to consider whether the plaintiff has really made out a strong prima facie case to warrant grant of an interim injunction as the above referred general rule is subject to recognised exceptions there to. Before 1 discuss the authorities cited by the learned counsel on either side and the passages from standard law books, it shall be necessary to set out the material facts in proper sequence.

10. Before I proceed to set out the facts, I must state at the outset that the facts, circumstances and the events will have to be classified in three different parts. It shall have to be separately considered as to what was the commitment of defendant No. 1 prior to 12th December 1983. It shall have to be considered as to whether the defendant No. 1 induced the plaintiff to believe that the defendant No. I was agreeable to pay the price for the goods supplied and to be supplied at the domestic rate and even a binding contract was arrived at between the parties on that footing by 31st October 1983. It shall have to be considered as to whether prior to 12th December 1983, the defendant No. 1 induced the plaintiff to import more and more raw material and pay customs duty thereon and manufacturefurther goods with speed in view of their urgent requirement, so as to place the plaintiff in a situation of financial and economic crisis in case the defendant No. 1 later on backed out of the commitment alleged to have been made to-the plaintiff by defendant No. 1 as aforesaid. It must be borne in mind that before even placing the order of 12th December 1983, the plaintiff had already supplied part of the goods to defendant No. 1 in the month of November 1983 and had submitted its invoices which were all accepted by defendant No. 1 without any demur. In other words, I must ask myself the question as to what was the situation in which the plaintiff was placed on the day on which formal written order dated 12th December 1983 was placed by defendant No. 1 with the plaintiff. The second chapter of relevant events will have to be considered together in respect of the period commencing from 17th December 1983 when the plaintiff received the formal written order dated 12th December 1983 and 4th May 1984 when the said bank guarantee was furnished by the plaintiff. Lastly I will have to consider the facts and events pertaining to the period after the execution of the said bank guarantee until the filing of the suit. By and large, 1 see no difficulty in making prima facie assessment of the facts of this case at this stage, though no oral evidence is led, as most of these facts are borne out by correspondence, invoices and other documents. Subject to the rights of the parties to lead oral and documentary evidence at the trial of the suit and rebut my strong prima facie view of the matter on facts as now recorded hereinafter, I shall proceed to narrate the facts in so far as the same are germane for the disposal of this notice of motion. The material facts are as under:

(a) In or about April 1983, the defendant No. 1 floated a tender for its requirement of 7,500 M.T. of the said goods described by the parties in their correspondence as 'PPD'. The plaintiff submitted its quotation to defendant No. 1 in that behalf on 29th June 1983 offering to supply 3,600 M.T. of the said goods.

(b) By a notification No. 210/82 dated 10th September 1982, issued under sub-section (1)Central Government exempted raw materials and components required for the manufacture of goods to be supplied to 'International Development Association , or international Bank for Reconstructions and Development of Bilateral or Multilateral aided projects when imported into India' from Customs duty payable under the Customs Tariff Act, 1975 and the whole of the additional duly livable thereon. On 2oth July 1983, the Government of India issued Notification Not GSR-571(E) in exercise of the powers conferred on it by sub-section (1) of S. 25 of the Customs Act, 1962 amending the above referred notification dated 10th September 1982 so as to bring within its sweep importation raw materials and components required for manufacture of goods to be supplied to Oil and Natural Gas Commission. Thus the party intending to import raw materials and components to be used in manufacture of goods to be supplied to defendant No. 1 became entitled to obtain import licence and import raw materials and components thereunder duty free, subject to the importer satisfying the conditions which may be prescribed. This notification did not make any provision for refund of amount of customs duty. I am given to understand by the learned counsel arguing this case that the necessary procedure for availing of these benefits was prescribed by the Government for the first time on or about 7th February 1984.

(c) On 5th September 1983, the Government of India issued a circular bearing No. 1(15)/83-EAC, stating therein that supplies of certain category of goods by the supplier to defendant No. 1 will be treated as 'deemed exports' and various incentives will be available to the plaintiff in case all the conditions of the said circular were complied with. It is common ground that the Government of India is not prepared to treat the supplies under the suit contract as 'deemed export'. Perhaps only supplies are to be treated as 'deemed export' where the duty free raw material is imported under a special import licence for specific purpose of manufacturing the goods with help of such duty free materials and such finished goods aresupplied to defendant No. 1. It is common ground that the suit supplies were made by manufacture of goods from the duty paid raw material already in stock and also raw material obtained during pendency of con-(ract on payment of customs duty.

(d) The learned counsel for the plaintiff has repeatedly stated with some solemnity at the bar that the defendant No. 1 is a monopoly buyer of the said goods and the plaintiff 'manufacture these goods for particular project of defendant No. 1 so as to meet the requirement of defendant No. 1 and that the supplies of such goods cannot be diverted to any other customer.

(e) On or about 10th October, 1983, the plaintiff received a telex indent from the 1st defendant whereby the 1 st defendant required of the plaintiff to supply urgently 1,500 M.T. of P.P.D. at the rate of Rs. 29,000/-per M.T. At this state itself, something will have to be stated to explain the price mechanism germane for the purpose of grasping the controversial contentions of the parties urged in this case. The plaintiff quotes normal domestic price for supply of these goods in India after taking into consideration all the duties paid thereon, like Customs duty, Excise duty, etc. Since the plaintiff imports raw material on which duty was payable at the material time, the quotation of the plaintiff for normal domestic price will have to be viewed in this perspective. It is common ground that the duty component is to the extent of about Rs. 9.95 per Kg. At all material times, the plaintiff quoted domestic price of Rs.40.40 per Kg. for supply of the said goods to defendant No. 1 as the said goods were manufactured and were liable to be manufactured with duty paid raw material. The plaintiff could import duty free raw material against import licence only after February, 1984 and thus the finished goods to be manufactured from duty free raw material could be made available by the plaintiff to defendant No. 1 much later and not before 31st March, 1984, as desired by the defendant No. 1. however as a matter of business practice the plaintiff also quoted 'export price' of Rs. 30.50 per Kg. to be charged to the purchaser only if the plaintiff's supplierwas able to procure duty free raw material against special import licence as in that event the plaintiff will not be out of pocket to the extent of duty component. The. difference between the domestic price of Rs. 40.40 per Kg. and the export price of Rs. 3.0.50 per Kg represents nothing but the duty component of about Rs. 9.50 per Kg. on the raw material used in manufacture of goods to be supplied to defendant No. 1.

(f) Before receipt of the said telex indent, the enquiries made by the plaintiff in the office of the Joint Chief Controller of Imports and Exports and elsewhere had created a belief in the mind of the plaintiff that the refund of customs duty paid on the raw material already imported to be used in the manufacture of goods to be supplied to defendant No. 1 was not likely to be available to the plaintiff. The plaintiff was quite sure at all material time (as obvious from the correspondence to be referred to hereinafter) that the plaintiff would be heading for total crisis jeopardising its economic viability if the plaintiff were compelled to bear the amount of customs duty paid by it and supply the goods to defendant No. 1 for 'deemed export' price. The above referred approach and decision of the plaintiff in this behalf is borne out by the correspondence referred to hereinafter.

(g) On 11th October, 1983, the plaintiff addressed a letter to defendant No. 1 making it clear that the plaintiff would accept the said order for supply of 1,500 M.T. of PPD only at the domestic price of Rs. 40,40 per Kg. and not at the export price of Rs. 29/- per Kg. as desired by defendant No. 1. On 14th October, 1983, the plaintiff addressed one more letter to defendant No. 1 reiterating its offer to supply the said goods at the domestic price only. It is obvious that the defendant No. 1 represented to the plaintiff on some occasion that the plaintiff would not suffer any loss if the plaintiff charged deemed export price to the defendant No. 1 and got refund of customs duty etc. from the Government of India. In case the plaintiff received the entire sum of Rs. 40.40 per Kg. for the said supply from the defendant No. 1, the plaintiff would have no objection to pass on the amount ofrefund of customs duty if and when received from the Government of India. In its letter dated 14th October, 1983, the plaintiff stated that in case the plaintiff received refund of the amount of duty paid on the raw material used in manufacture of the goods to be supplied to defendant No. 1, the plaintiff would certainty pass on the said amount to defendant No. 1. On 17th October, 1983, the plaintiff once again addressed a letter to defendant No. 1 repeating that the plaintiff had already paid customs duty and all other taxes on the raw material running in lacs and lacs of rupees. In this letter the plaintiff further stated as under :--

'We, therefore, request that the present order for 1,500 M.T. be placed on us at our domestic rates only.' These letters leave no ambiguity and make it amply clear that the defendant No. 1 shall have to pay the price at the rate of Rs. 40.40 per Kg. i.e. the normal domestic price where the price was loaded with the duties actually and already paid on the raw material used in manufacture of the goods to be supplied to defendant No. 1.

Federations Ltd. v. Singh Consultants & Engineers (P) Ltd., reported in : [1988]1SCR1124 , the Supreme Court once again surveyed the entire law on the subject and laid down the following principles :--

'Commitments of bank must be honoured free from interference by the Court. An irrevocable commitment either in the form of confirmed bank guarantee or irrevocable letter of credit whether furnished during course of internal trade or international must be honoured and must be allowed to be honoured irrespective of disputes raised by the party at whose instance the Bank guarantee was furnished. No temporary injunction could be granted to restrain the Bank from performing the Bank guarantee or so as to restrain the beneficiary under the guarantee from invoking the guarantee except in case of fraud or special equities in the form of preventing irretrievable injustice,'

In this case, the Supreme Court surveyed most of the earlier cases on the subject and formulated the relevant principles. In this case, the amount was payable under the Bank guarantee without reference to the question as to whether the seller had failed to fulfil the terms of the sale. It was also provided in the two Bank guarantees in that case that the sole judge for deciding whether the seller had failed to fulfil the terms of the sale, shall be the PCF. In this case, the supreme Court referred to the judgment of Court of Appeal in England in the case of Elian and Rabbath v. Matsas and Matsas, (1966) 2 Lloyd LLR 495,where lord Denning had granted an injunction to restrain the ship owners from invoking the Bank guarantee as a special case.In this case, the telex message showed that ship owners had agreed to release the goods on furnishing of the Bank guarantee by the ship owner and not press its Hen for demurrage. It was held that the ship owners had invoked the guarantee in breach of the understanding between the ship owners and the shippers and a special case was made out for grant of injunction. This case shows that in the very exceptional circumstances and in very special cases, the Courts would he duty bound to grant the temporary injunction sought for and the recognised exceptions to the general rule could not be placed in a straight jacket.

21. In paragraph 17 of his judgment, the Hon'ble Mr. justice Sabyasachi Mukherji (as His Lordship then was) referred to the judgment of Mr. Justice Kerr in R. D. Harbottle (Mercantile) Ltd. v. National Westminister Bank Ltd. (1977) 2 All ER 862, and approved the well known passage from the judgment of Kerr, J. laying down the law to the effect that the Courts could grant injunction so as to interfere with irrevocable obligations of the Bank under the performance guarantees only in 'exceptional cases', 'special circumstances' like 'fraud'.

22. In paragraph 19 of his judgment, Mr. Justice Mukherji referred to another leading judgment of Court of Appeal in England with approval i.e. in the case of Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., (1978) 1 All ER 976, wherein it was held that a performance guarantee was similar to a confirmed letter of credit and the Bank was bound to honour the same according to its terms except where fraud by one of the parties to the underlying contract had been established and the Bank had notice of the fraud.

23. In paragraph 22 of its judgment, the Court referred to the judgment of House of Lords in United. City Merchants [Invest ments) Ltd. v. Royal Bank of Canada, (1982) 2 All ER 720. If was in terms 'held' that the principles enunciated in the cases dealing with confirmed irrevocable letters of credit were equally applicable to the case of Bank guarantees in internal trade within a country.

24. In paragraph 24 of its judgment, the Court approved the ratio of the judgment in the case of Taxmaco Ltd. v. State Bank of India : AIR1979Cal44 , holding that in' absence of any 'clear fraud' or special equities, the Bank must honour its commitment under the guarantee and no injunction could be granted. As regards the recognised exception of 'special equities' arising from a particular situation is concerned, it was observed by the Apex Court as under : --

'It appears that special equities mentioned therein may be a situation where the injunction was sought for to prevent injustice which was irretrievable in the words of Lord Denning, Mr. R. in Elian and Rabbath v. Matsas and Matsas (1966) 2 LR 495.' .

25. Referring to the judgment of the High Court of Madras in. Arul Marugan Traders v. Rashtriya Chemicals &Fertilizers;, Bombay.,'' : AIR1986Mad161 (being the case in which interim injunction to restrain encashment of Bank guarantee was rightly granted), the Court observed that interim injunction could be granted to restrain the operation of letter of credit or the bank guarantee if the plaintiffs made out a good case of fraud and special equities in the form of preventing irretrievable injustice between the parties. In my judgment, 'special equities' is a separate head of recognised exception and the Hon'ble Supreme Court approved the ratio of the judgment of the High Court of Calcutta in the case of Texmaco Ltd. v. State Bank of India, : AIR1979Cal44 (supra).

26. In its above referred later judgment, the Supreme Court reiterated the principles of law laid down in the case of United Commercial Bank v. Bank of India, : [1981]3SCR300 , and held that the Courts usually refrained from granting injunction to restrain the performance of contractual obligations arising out of a letter of credit or a Bank guarantee. The Supreme Court has taken a similar view in Centax. (India) Ltd. v. Vinmar Impex Inc., : AIR1986SC1924 . This case did not deal with the ground of economic duress as an exception to the general rule that injunction must be refused in Bank guarantee cess.

27. In the above referred case, the Hon'ble Mr. Justice Jagannatha Shetty, in his separate concurring judgment, highlighted the principles of law laid down in the most illuminating case of Sztein v. J. Henry Schroder Banking Corporation (1941) 3 HYS 2 631, decided by the New York Supreme Court in 1941. In this 'case, the Court enunciated the principle of law applicable to the exception of fraud to the rule of autonomy of letter of credit. The plaintiff Sztejn wanted to buy bristles from India and entered into a deal with an Indian seller to sell him' a quantity. The issuing Bank issued a letter of credit to the Indian seller which provided that, upon receipt of appropriate documents, the Bank would pay for the shipment. Somehow Mr. Szlejn discovered that the shipment made was not crates of bristles, but crates of worthless material and rubbish. The Bank took the view that the letter of credit was an independent undertaking and it would have to pay. The Court issued an injunction to restrain the payment. This is the landmark judgment from amongst the judgments of American Courts on the subject and was referred to with approval by the English Court of Appeal in Edward Owen Engg. Ltd. v. Barclays Bank International Ltd., (1978 (1) All ER 976 (supra). Shientag, J. further observed in the said American case as under :--

'...on the present motion, it must be assumed that the seller has intentionally failed to ship any goods ordered by the buyer. In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller.'

This case shows that even the principles of autonomy of bank guarantee or letter of credit has some limitation and if the conduct of the beneficiary of the bank guarantee is unscrupulous, the Courts can intervene and ought to intervene by granting necessary injunction.

28. In the case of Elian and Rabbath v.Matsas and Matsas, (1966) 2 LR 495, the plaintiff had claimed a declaration that the guarantee was not valid and an injunction to restrain the ship owners or their agents from enforcing the bank guarantee. Having regard to the facts of this case, Lord Denning M. R. in the Court of Appeal held that it was a special case in which the Court should grant an injunction to prevent irretrievable injustice', as the guarantee was given on the understanding that the lien was raised and no further lien would be imposed and that when the shipowners committed a breach of the understanding, they were disabled from acting on the guarantee. The facts of the present case also appear to be special as the conduct of defendant No. 1 is clearly blame-worthy in insisting on paying deemed export price when the transaction can never be treated as deemed export. It is true that the bank guarantee is enforceable notwithstanding the disputes between the parties to the main contract and the non-performance of the underlying contract is not sufficient to resist the enforcement of the bank guarantee. If, however, allegations of economic duress and fraud are made, all the facts and circumstances of the case will have to be considered together in perspective and the necessary inference will have to be drawn by considering the cumulative effect of all the facts and circumstances. For the limited purpose of -considering as to whether a recognised exception to the general rule of refusing to grant injunction is made out or not, the questions as to what was the original contract, why the contract was re-negotiated, what was the circumstance in which the plaintiff was compelled to furnish a bank guarantee and what was the mutual understanding between the parties throughout will have to be taken into consideration as all these factors must enter the judicial verdict before a finding is recorded one way or the other as to whether the allegations of fraud, coercion or special equities are proved or not.

29. It shall have to be considered as to what is the meaning of the word 'fraud' while examining the issue as to whether a strong prima facie case is made out so as to bring the case within one of the well recognisedexception available to a party to seek injunction in a case of this kind. Mr. Cooper, the learned counsel for the plaintiff, has relied upon the judgment of Variava, J. in suit, No. 807 of .1986 in the case of Jaihind Mills, Co. v. Canara Bank decided on 17th April 1989, In this case, large number of American cases were cited by the learned counsel and the learned Judge appears to have accepted the ratio of the judgment in the case of Dynamics Corporation of America v. The Citizens and Southern National Bank 356 Fed supp 991. It was held in this case that thelaw of 'fraud' was not static. It was in terms observed by the Court that 'fraud' had a broader meaning in equity than at law and an intention to defraud or to misrepresent was not a necessary element. The relevant portion of the quotation from the judgment of Dynamics Corporation of America's case is as under : --

'Fraud, indeed, in the sense.of a court of equity properly includes all acts, omissions and concealments which involve a breach of legal or equitable duty, trust, or confidence, justly reposed, and arc injurious to another, or by which an undue and unconscientiously advantage is taken of another.'

I am in complete agreement with this judgment.

30. Mr. Cooper, the learned counsel for the plaintiff, has relied upon various meanings of the word 'fraud' given in Black's Law Dictionary, Fifth Edition. One such meaning relied upon by the learned counsel reads as under:

'Fraud in the inducement. Fraud connected with underlying transaction and not with the nature of the contract or document signed.'

31. Mr. Cooper, the learned counsel for the plaintiff, has also heavily relied upon three unreported judgments of our High Court in support of his plea that the ground of special equity resulting from the situation is available to the plaintiff as an exception to the general rule of refusing to grant injunctions in matters of bank guarantee and letter of credit.

Mr. Cooper relied upon the judgment ofLentin, J. dated 9th August 1979 in Notice of Motion No. 843 of 1979 in Long Cause Suit No. 1113 of 1979. It was held in this case, following the judgment of the Calcutta High Court in Texmaco Ltd.'s case : AIR1979Cal44 , that the Court must interfere at the interim stage in view of special equities arising from the situation in the exceptional and peculiar facts and circumstances of the case. The special equities propounded on behalf of the plaintiffs seeking injunction were that the guarantee given by the 3rd defendant Bank at the instance of the plaintiffs in favour of defendants Nos. 1 and 2 was that the exporter i.e. the 1st defendant, having procured from the foreign buyer an order for supply of certain goods, had agreed to place a back-to-back order on the same terms and conditions with the plaintiffs-manufacturer for supply of those goods. It was observed by the learned Judge that the 1st defendant had wrongfully failed to enter into a back-to-back contract with the plaintiffs. It was held in this case that the goods could not be exported due to the objection raised by the Customs authorities which was a circumstance beyond control, Mr. M. S. Sanghavi, the learned counsel for the defendant No. 1, has submitted that the ratio of this judgment is impliedly overruled by the subsequent judgment of the Supreme Court in the case of U. P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P.) Ltd. : [1988]1SCR1124 (supra) and even the judgment of the High Court of Calcutta in Texmaco's case : AIR1979Cal44 no longer represents the correct law. It is not possible to accept this submission of Mr. Sanghavi. According to my reading, the ratio of the judgment in the case of Texmaco Ltd. was in terms approved by the judgment of the Supreme Court. Merely because of observations in the Supreme Court judgment to the effect that 'Special equities mentioned therein (meaning thereby, mentioned in Texmaco Ltd.'s case) may be a situation where the injunction was sought to prevent injustice which was irretrievable in the words of Lord Denning, M. R. in Elian and Rabbath v. Matsas and Matsas, (1966) 2 L R 495,' it cannot be inferred that Texmaco's case : AIR1979Cal44 is overruled entirely or in part. In some situations, special equities may coincide with another recognised exception like 'irretrievable injustice', but it cannot be said that apart from irretrievable injustice special equities arising from a particular situation as a separate exception (referred to in Texmaco Ltd.'s case) has now ceased to be available as a recognised exception to the plaintiff seeking injunction to restrain encashment of bank-guarantees. It is not possible to accept Mr. Sanghavi's interpretation of judgment of the Supreme Court in the case' of U, P. Cooperative Federation Ltd. (supra) and High Court of Calcutta in the case of Texmaco Ltd. (supra). In very rare cases the Court would grant injunction. But if a rate case is made out, it is the duty of the Court to protect the victim and suppress the wrong and grant an injunction on appropriate terms, if necessary.

32. Mr. Cooper, the learned counsel for the plaintiff, also relied upon the judgment of a Division Bench of our High Court in the State Trading Corporation of India Limited v. Indian Cotton Mills Federation. In this case, it was held that if the beneficiary invoked bank-guarantee for a collateral purpose and was not acting bona fide, the Court would restrain the invocation of the bank-guarantee. In this case, the Court called upon the appellant beneficiary to explain to the Court as to why the bank guarantee was being invoked even though the decision of the beneficiary on the question was stated to be final under the terms of the bank guarantee. The appellant did not explain the basis of invocation of the bank guarantee to the Court and accordingly the above referred proposition of law was laid down that the Court should refrain from granting injunction against the operation of bank guarantee because such injunction will stultify normal commercial transactions and allow the parties to evade commercial obligations solemnly undertaken, but that there were certain well known exceptions to the general principle. It was further observed by the Hob'ble Division Bench as under:--

'One of the exception is where it is alleged and prima facie established that the bankguarantee is sought to be operated for collateral purposes and that the party invoking the same is not acting bona fide.'

Mr. M. S. Sanghavi has submitted that this case also does not lay down the correct law and, according to him, fraud and irretrievable injustice are the only two exceptions available to the party seeking injunction. In other words, the learned counsel for the defendant No. 1 submits that the exception recognised in the above-referred Division Bench judgment and the said observations are not in conflict with any of the judgments of the Hon'ble Supreme Court. I must, therefore, follow the same judgment.

33. Mr. Cooper, the learned counsel for the plaintiff, also relied upon the judgment of D. N. Mehta, J. of our High Court dated 17th and 18th October, 1989 in Notice of Motion No. 1067 of 1988 in Suit No. 1078 of 1988, Techma Incorporated v. Oil and Natural Gas Commission. In this case, the learned Judge granted an injunction restraining the enforcement of the bank guarantee as he came to the conclusion that the first defendant to the suit in that case had committed fraud and a prima facie case was made out. This case does not lay down any new or additional principle and is, therefore, not of much assistance to me.

34. The defendant No. 1 by its conduct had represented to the plaintiff that defendant No. 1 would pay the normal domestic price for the supply of the said goods made and to be made in the month of October and November, 1983, as already discussed by me earlier. Defendant No. 1 had induced the plaintiff to make the said supplies on this footing. Defendant No. I also induced the plaintiff to manufacture further goods and import further raw materials on that footing. When the plaintiff repeatedly asserted in the correspondence before effecting the supplies that the plaintiff would be supplying the goods at the domestic price and if the defendant No. 1 had any reservation, the defendant No. 1 should immediately disclose its intention to the plaintiff then and there before accepting the supply, the defendant No. I did not say a word. On this aspect, theExplanation to Section 17 of the Indian Contract Act, 1872 is of considerable significance. The said Explanation reads as under:--

'Explanation silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.'

Illustration (c) to the said Section, which is a statutory illustration, is as under:--

'(c). 'B' says to 'A' - 'If you do not deny it, I shall assume that the horse is sound. 'A' ' says nothing. Here' A's silence is equivalent to speech.'

Thus, both by express representation as well as by intentional silence, the defendant No. 1 induced the plaintiff to change their position and supply the said goods. At this stage, the defendant No. 1 strengthened the said belief in the mind of the plaintiff by accepting the invoices at domestic rate and by keeping mum for a period of about 5 to 6 weeks. Prima facie, it is established that defendant No. 1 committed fraud on the plaintiff when it tried to resile from its earlier representation made to the plaintiff on which representation the plaintiff had acted upon and supplied the said goods.

35. In a given case, the conduct of the beneficiary of the Bank guarantee may be fraudulent in invoking the bank guarantee even though the bank guarantee itself may not be totally void or voidable, as in this case. Such a possibility cannot be ruled out in the realm of human affairs. A party defrauded may not exercise the option available to him to avoid the entire transaction. A party defrauded may resist the enforcement of a particular stipulation incorporated in the contract by unfair means or by committing fraud in the wider sense of the term. In the instant case, the demand made by defendant No. 1 on defendant No. 2 to pay the amount under the bank guarantee is not contrary to the mandate of the written bank guarantee, but is in breach of the understanding pleadedby the plaintiff. The plaintiff has averred, in paragraph 25 of the plaint, that the bank guarantee was void and of no effect whatsoever. The learned counsel for defendant No. 1 has submitted that no such declaration is asked for in the plaint and the reliefs claimed in the plaint are only to the effect that the demand made by defendant No. 1 on defendant No. 2 to pay the amount under the bank guarantee and its invocation is void. In other words, the learned counsel for defendant No. 1 has contended that the bank guarantee itself is not challenged as such by the plaintiff, but only its invocation is challenged and that also not on valid grounds. It is open to the party wronged to claim limited reliefs in a plaint and it cannot be said that the plaintiff should have necessarily challenged the bank guarantee in its entirety. Even today the plaintiff says that in case the plaintiff receives the amount of refund of customs duty from the Government of India, the plaintiff would pass on the same to the defendant No. 1 and in case the plaintiff does not pass on the same, the defendant No. 1 can enforce the said bank guarantee. Of course, the chances of the plaintiff getting the refund of Customs duty from the Government of India are almost nil as even recently the Government has declined to grant any refund to the plaintiff.

36. I shall now turn to the additional ground of economic duress relied upon by the plaintiff in support of its application for interim relief. On this aspect, the legal position emerging from the decided cases and from the enunciation of the principles set out in well known legal books is as under: --

(i) In Universe Tankships Inc. of Monrovia v. International Transport Workers Federation, reported in (1982) 2 WLR 803, the House of Lords dealt with a 'problem involving 'Economic duress'. A ship registered in Liberia and flying a Liberian flag docked at Milford Howen on July 17, 1978 and discharged her cargo by the following afternoon. The International Transport Workers Federation adopted a policy to 'black the ships' in an attempt to improve the wages and conditions of service of crews on ships. As a result of blacking by the respondent, no tugs were available and the ship could not sail. The ship owners were virtually compelled to pay U. S. Dollars 80,000 by way of back pay for crew of the ship and a contribution of 6,480 Dollars to the I.T.F. Welfare Fund. The owners acceded to the respondent's demands for fear of disastrous economic consequences if they refused. In consequence of payment made and the agreement signed by the American shipowners in these circumstances, the ship was allowed to sail on July 29, 1978. On August 10, 1978, the owners' Solicitors demanded the return of 80,000 Dollars maintaining that the agreement was arrived at by duress and was void. The owners commenced and pursued action for return of Dollars 6,480 paid to the I.T.F.'s Welfare Fund. Parker J. upheld the plea of duress. The Court of Appeal allowed the appeal of the respondent. The owners appealed to the House of Lords. The House of Lords referred to large number of cases cited by counsel including the case in North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd., (1979) OB 705, and the Privy Council judgment in Pao On v. Lau Yiu Long, (1980) AC 614, Lord Diplock observed, inter alia, as under:--

'It is not disputed that the circumstances in which I.T.F. demanded that the shipowners should enter into the special agreement and the typescript agreement and should pay the moneys of which the latter documents acknowledge receipt, amounted to economic duress upon the shipowners; that is to say, it is conceded that the financial consequences to the shipowners of the Universe Sentinel continuing to be rendered off-hire under her time charter to Texaco, while the blacking continued, were so catastrophic as to amount to a coercion of the shipowner's will which vitiated their consent to those agreements and to the payments made by them to I.T.F.'

'This concession makes it unnecessary for your Lordships to use the instant appeal as the occasion for a general consideration of the developing law of economic duress as a ground for treating contracts as voidable and obtaining restitution of money paid under economic duress as money had and receivedto the plaintiffs' use. That economic duress may constitute a ground for such redress was recognised, albeit obiter, by the Privy Council in Pao On v. Lau Yiu Long, (1980) AC 614.'

In this case, Lord Diplock inter alia expressed the view that the rational behind the developing law of economic duress was that the apparent consent of the party aggrieved was induced by pressure exercised upon him by the other party which the law does not regard as legitimate, with the consequence that his consent was treated as revocable unless approbated expressly or by implication after the illegitimate pressure had ceased to operate on mind. Lord Diplock took specific precaution to distinguish the doctrine or concept of 'economic duress' from mere 'commercial pressure' which in some degree always existed whenever one party to a commercial transaction was in a stronger bargaining position than the other party. Commercial pressure by itself does not amount to economic duress. Lord Diplock equated the rationale behind recognition of economic duress as a ground of relief by observing inter alia at page 813 as under:--

'It is a rationale similar to that which underlies the avoid ability of contracts entered into and the recovery of money exacted under colour of office or under influence or in consequence of threats of physical duress.' The majority of law Lords decided to allow the appeal. Lord Scarman dissented. Lord Brandon also dissented. Lord Scarman observed that the demand for contribution and blacking of the ship in support of the demand amounted to a legitimate exercise of pressure and did not constitute duress. In his dissenting judgment, Lord Scarman referred to the Privy Council judgment in the case of Pao On v. Lau Yiu Long (supra) highlighting the law of economic duress. It was held by the Privy Council in this case that two elements were necessary to constitute duress i.e. (1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted. For all practical purposes, the victim of duress must have no other choice. The early law of duress dealt with threat to life or limb. The later developmentsrecognise threat to property or threat to business or trade as duress. In a given situation, a party may be virtually ruined unless it submitted to illegitimate pressure for the time being although the wrongdoer was exploiting the situation and theoretically it could be said in every case that the victim should have refused to submit to duress and resorted to law Courts. Lord Scarman also observed that the development of law on this subject was well traced in Goff and Jones, The Law of Restitution, 2nd ed. (1978) Ch 9.

(ii) Mr. M. S. Sanghavi, the learned counsel for defendant No. 1, has submitted that the concept of coercion or duress could not be applied to a business transaction arrived at between the parties who were sui juris. With respect, this submission ignores the development of law and modem trends and this Court must assess as to whether the situation of jeopardising of viability of the plaintiff creating the crisis was brought about by misconduct of defendant No. 1 in resiling from the firm commitment already made and whether the plaintiff victim had any other choice in practical terms other than submitting to the illegitimate pressure exercised by defendant No. 1 at all stages from and after 17th December, 1983 when the plaintiff received the formal written order dated 12th 'December, 1983 setting out 'deemed export price' as the price payable for the supply made and to be made, although defendant No. 1 had originally agreed to pay the price for the contract goods at domestic rate subject to passing on of refund of Customs duty on raw materials used as and when received.

(iii) Mr. Cooper, the learned counsel for the plaintiff, cited the judgment of Lord Tucker of Queen Bench Division (Commercial Court) in the case of Atlas Express Ltd. v. Kafco (Importers and Distributors) Ltd., reported in (1989) 1 All ER 641. In this case, a national road carrier backed out of the contract already entered into and compelled the other side to re-negotiate the terms of the contract. The defendants were heavily dependent on the retail chain's contract and were unable at that time to find an alternative carrier. The defendant agreed to the newterms but later on refused to pay at the new rate. It was held by the Court as under:--

'Where a party to a contract was forced by the other party to re-negotiate the terms of the contract to his disadvantage and had no alternative but to accept the new terms offered, his apparent consent to the new terms was vitiated by economic duress.' The Court applied the dictum of Lord Scar-man Pao On v. Lau Yiu Long 1980 AC 614 (supra) and dismissed the plaintiff's claim. At page 645 of the report. Lord Tucker formulated a question as under:--

'The first question raises an interesting point of law, i.e. whether economic duress is a concept known to English law.' The learned Judge answered the question formulated in the affirmative, distinguishing the concept of economic duress from mere commercial pressure. Mere commercial pressure by itself is never sufficient to vitiate the consent. The learned Judge held that in appropriate cases, economic duress may afford a defence. The learned Judge relied on passages from Chitty on Contract and Goff and Jones on the Law of Restitution. During the course of his judgment, the learned Judge followed the following dictum of Lord Denning, M. R. in the case of D. & C. Builders Ltd. v. Rees, (1965) 3 All ER 837 :--

'No person can insist on a settlement procured by intimidation.' During the course of his judgment, the learned Judge also referred to the judgment of Kerr J. in the case of Occidental Worldwide Investment Corpn. v. Skibs A/s. Avanti,(1976) 1 L R 293, holding thateconomic duress could operate as a ground of relief in appropriate circumstances. Lord Tucker in terms relied upon the judgment of Scarman in Pao On v. Lau Yiu Long 1980 AC 614 (supra).) In the above-referred Privy Council judgment, the Privy Council in terms held that there was commercial pressure but no coercion. In the case of B & S Contracts and Design Ltd. v. Victor Green Publications. Ltd (1989) ICR 419, the Court followed the judgment of House of Lords inthe case of Universe Tankships Inc. of Monrovia v. International Transport Workers' Federation 1982 (2) WLR 803 and explained the difference between legitimate pressure and non-legitimate pressure as under:--

'For the purpose of this case, it is sufficient to say that if the claimant has been influenced against his will to pay money under the threat of unlawful damage to his economic interest, he will be entitled to claim that money back,' (iv) Mr. M. S. Sanghavi, tbe learned counsel for defendant No. 1, heavily relied on the judgment of Privy Council in the case of Pao On v. Lau Yiu Long, 1980 AC 614 (supra) in an appeal from the Court of Appeal of Hong Kong. At page 635 of the judgment, Lord Scarman accepted the finding of fact recorded by the Courts below in the following terms:--

'In the present case there is unanimity amongst the Judges below that there was no coercion of the first defendant's will.....Even if this Board was disposed, which it is not, to take a different view, it would not substitute its opinion for that of the Judges below on this question of fact.' Having recorded the above finding, the Privy Council observed in terms that it was therefore unnecessary for the Board to embark upon an inquiry into the question 'whether English law recognises a category of duress known as 'Economic duress''. After making the above observations, Lord Scarman indicated very briefly the opinion which the Privy Council had formed on this question. Lord Scarman in terms held that the American law as well as English law recognised the ground of economic duress. On this aspect, it is worthwhile quoting a short passage from this judgment enunciating the principles to be applied in such cases as the obiter observations of the Privy Council in this case have been approved and followed in subsequent English cases:--

'The commercial pressure alleged to constitute such duress must, however, be such that the victim must have entered the contractagainst his will, must have had no alternative course open to him and must have been confronted with coercive acts (1970) Section 1603.' Thereafter Lord Scarman referred to similarprinciples enunciated by American authorsand in American judgments and the judgmentof Macotta J. in North Ocean Shipping Co.Ltd. v. Hyundai Construction Co. Ltd., (1979) QB 705.

(v) Mr. M. S. Sanghavi, the learned counsel for defendant No. 1, relied on the following passage from Commentary of Pollock and Mulla on Indian Contract and Specific Relief Act, 10th Edition, at page 148. The said passage is based on the understanding and analysis of the above referred Privy Council judgment in Pao On v. Lau Yiu Long 1980 AC 614 referred to hereinabove and reads as under:--

'Duress -- Commercial or economic pressure-- The Privy Council has held in a later case that a guarantee is not voidable because of duress on the plaintiff's part.' The Privy Council has not said so and with respect the Commentary to this extent is misleading and incorrect. In the case before the Privy Council, it was held that there was no coercion as a matter of fact. The Privy Council as well as the House of Lords have made clear distinction between economic duress amounting to coercion and mere commercial pressure. Some of the judgments to which reference is already made make distinction between lawful pressure and unlawful pressures. Tt is clear from the judgment of the Privy Council in Pao On's case that the Privy Council would have granted the relief to the appellant if the factual allegations were proved and if these allegations constituted 'economic duress' as known to law. At any rate, with respect, the formulation of the Editor of the above-referred Commentary is much wider and does not correctly summarise the Privy Council's judgment. Lord Scarman has himself explained the above-referred Privy Council judgment in his own words as a member of House of Lords in his dissenting judgment in the case of Universe TankshipsInc. of Monrovia v. International Transport Worker's Federation 1982 (2) WLR 803.

(vi) Mr. Cooper, the teamed counsel for the plaintiff, has heavily relied on the judgment of Macotta J. in the case of North Ocean Shipping Co. Ltd. Hyundai Construction Co. Ltd., (1979) 1 QB 705. In this case, the shipbuilders refused to honour the contract unless the stipulated payment was increased. In this case, a special case was stated by the Arbitrators. In this case, two questions arose; (1) Whether the threat of the shipbuilding company to break the contract without any legal justification unless increase in price by 10% was agreed upon constituted duress and the re-negotiated agreement was therefore voidable by the victim of duress and (2) Whether the alleged victim of duress had conducted themselves so as to affirm the renegotiated contract? The dictum of House of Lords in the case of Universe Tankships's case, (1982) 2 WLR 803 reopening the Court to consider as to whether the alleged victim of duress had approbated in the matter or affirmed the impugned transaction expressly or by implication after the illegitimate pressure had ceased to operate on the mind of the victim must be kept in mind while appreciating and analysing the judgment of Macotta J. in North Ocean Shipping v. Hyundai & Co. (supra). In the above-referred judgment, Mocatta, J referred to large number of cases decided by the Courts in various countries of the world including Australian and American Courts. The learned Judge held that the threat to break the contract unless the price was increased in the circumstances amounted to economic duress. Mocatta J. agreed with the proposition of law formulated by Issac J. of High Court of Australia in Smith v. William Charlick Ltd., (1924) 34 CLR 28. The learned Judge held that the owners were free from duress on November 27, 1974 and took no action by way of protest or otherwise till 30th July 1975. It was therefore held that there was no danger in registering protest at the time when the final payments were made without any qualification. It was held in substance that the shipowners had affirmed the contract after the duress had ceased to operate and theowners could not avoid their liability at a late stage and plead duress.

(vii) Most of the above-referred cases were noticed by our Supreme Court in paragraph 52 of its judgment in the case of Central Inland Water Transport Corporation Ltd. v. Brojo Nath, : (1986)IILLJ171SC . Paragraph 82 of the above referred judgment reads as under :--

'82. It would appear from certain recent English cases that the Courts in that country have also begun to recognize the possibility of an unconscionable bargain which could be brought about by economic duress even between parties who may not in economic terms be situate differently.' I am in complete agreement with the principles of law to be applied in cases involving economic duress. It is not possible to accept the submission of Mr. M. S. Sanghavi, the learned counsel for defendant No. 1, that the principles of law enunciated in English, American and Australian judgments have no relevance in Indian legal system. The Indian Contract Act, 1872 is not exhaustive. The, above-referred principles are also relevant for interpretation and elucidation of law of coercion contained in Section 15 of Indian Contract Act, 1872. These principles was broadly approved by our Supreme Court in a different context in the case of Central Inland Water Transport's case and cannot be ignored in a case pertaining to bank guarantee as bank guarantee is also a contract governed by the same provisions. Section 15 of the Indian Contract Act, 1872 defines 'coercion' as under:--

' 'Coercion' is the committing, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.' The underlined portion of the Section brings within its sweep the concept of 'Economic Duress'. If the consent of a party to any transaction is not a free consent, such consentwill be revocable at the option of the party whose consent was obtained by coercion, undue influence, fraud etc. It is open to the victim of duress to impugn the part of the transaction or even a particular stipulation which was got incorporated in the contract by use of duress. Sometimes it may happen that the entire transaction is not vitiated by duress or fraud and only a particular stipulation is vitiated. It all depends upon facts of each case. The plaintiff is entitled to rely on Sections 14 and 15 of Indian Contract Act, 1872 as well as the general principles of law of economic duress now being recognised in English, American and Australian legal system. Whenever the duress results in a varied contract, the victim of duress may refuse to abide only by the new term introducing the variation. In certain situations, the victim of duress may seek an injunction restraining enforcement of the impugned term imposed on him by the other side by use of economic duress without setting aside the entire transaction and in appropriate case subject to consideration of equities of the situation, the Court may be persuaded to grant permanent or temporary injunction if the allegations made are substantiated by the plaintiff. In my judgment, Courts must always bear in mind the distinction between mere commercial or business pressures permissible in the trade conforming no cause of action and the 'economic duress' amounting to coercion vitiating the consent. The distinction between the two concepts is well-recognised although the divided line in a given case may appear to be every thin. If the beneficiary under a bank guarantee invokes a stipulation in the bank guarantee, brought about by economic duress and the conscience of Court of equity is shocked and the conduct of beneficiary is inequitable, it shall be duty of the Court to grant the injunction and protect the victim of the duress.

(viii) Reference may now be made to Anson's Law of Contract, 26th Edition, edited by A. G. Guest, pages 240-241 summarising the leading judgments on law of economic duress. Referring to the judgment in Shipbuilder's case reported in (1979) QB 705, the learned author observes as under;--

'In particular, one party may threaten to break an existing contract unless the contract is re-negotiated in his favour, and the other party accedes to this demand in order to avoid the adverse financial consequences which would ensure from the threatened breach.' In this case, it was held that the shipbuilders' threatened breach of contract amounted in the circumstances to economic duress rendering the variation voidable at their option. One finds the same principles enunciated and summarised in Law of Contract by Cheshire, Fifoot and Furmston, Eleventh Edition, at pages 300-301. At page 300 of the above standard work, the learned authors refer to the contribution of Lord Denning to this branch of law by introducing two new doctrines, economic duress and inequality of bargaining power, and his two judgments inD & C Builders Ltd. v. Rees and Llod's BankLtd. v. Bundy, reported in (1966) 2 QB 617 and (1975) QB 326 respectively. In the case of Llyods Bank Ltd. v. Bundy, the Court of Appeal set aside the guarantee and the charge. Both the above doctrines have been accepted by our Supreme Court as a part of Indian legal system in its leading judgment in the case of Central Inland Water Corporation v. Brojo Nath, : (1986)IILLJ171SC (supra). Thedeclaration of law by our Supreme Court in the above case is reiterated once again with full force in the case of Delhi Transport Corporation v. D.T.C. Mazdoor Congress, : (1991)ILLJ395SC . Paragraphs 486 to 501 of Chitty on Contracts, 25th Edition, may usefully be referred to for clear enunciation of the relevant principles on the subject. Relevant portion of paragraph 490 of Chitty on Contracts reads as under:--

'But other cases can be put in which a threat not to act, or not to contract, may be lawful in itself, and yet may be strongly coercive, for example where the threatened is in a monopoly position,' In the American case of Thompson Crane & Trucking Co. v. Eyman, (1954) 267 P. 2d. 1043, the Court set aside a contract obtained by economic duress. In a given situation, economic duress and fraud may overlap. The conduct of wrongdoer in causing the consentof the victim to variation may amount to economic duress. The enforcement of such a stipulation in breach of understanding and assurances given may amount to committing of fraud. All these concepts affecting the validity of consent given by the innocent party are overlapping in a way at least to a certain extent although the two concepts are separate and distinct in their content and meaning. 'Economic duress' would be available to the plaintiff as an additional exception to the general rule of refusing injunction in Bank guarantee cases if it is duly established.

(ix) Applying the above principles to the acts of this case, I am of the opinion that the plaintiff has made out a strong prima facie case of a concluded and binding commitment on the part of defendant No. 1 to pay the domestic price prior to 12th December 1983 and inducing the plaintiff to proceed on that footing requiring investment of about Rs. 2 1/2 crores with speed and thereafter coercing the plaintiff to renegotiate the contract coupled with threat not to perform the original contract at a time when the plaintiff would be placed in great jeopardy of adverse financial consequences affecting the economic viability of the plaintiff if the defendant No. 1 refused to take delivery of the contract goods. In my judgment, the defendant No. 1 coerced the plaintiff to agree to accept the amount of difference in price between domestic price and deemed export price as a so-called advance against bank guarantee to be enforced only if the plaintiff did not refund the Customs duty on imported raw materials within 10 days from receipt thereof from the authorities. On the basis of the representation and the varied stipulation in the bank guarantee to be furnished in terms aforesaid, the defendant No. 1 procured delivery of balance of goods from the plaintiff. In my judgment, the plaintiff has made out a strong prima facie case to prove that the defendant No. 1 once again withheld Rs. 1 crore and 48 lacs without any justification and ultimately coerced and dressed the plaintiff to agree to a stipulation in the bank guarantee that the bank guarantee for an amount up to Rs. 1,50,00,000/- shall be enforceable by defendant No. 1 even if the plaintiff was notable to obtain refund of the Customs duty from the Government of India. Prima facie, the defendant No. 1 was not entitled to invoke the bank guarantee unless the refund of Customs duty was made available by the Government of India to the plaintiff.

(x) The question still arises as to whether the plaintiff approbated the transaction of bank guarantee with all its stipulations in writing as they stand by its conduct after the illegitimate pressure had ceased to operate. The plaintiff has not been able to make out an equally strong prima facie case on this aspect. The plaintiff has renewed the bank guarantee many times. Mr. Cooper submits that the plaintiff has not affirmed the variation brought about by duress or fraud and it is of considerable significance that the defendant No. 1 did not enforce the stipulation of bank guarantee becoming payable irrespective of receipt of refund of Customs duty for several years and the conduct of both parties indicates that the bank guarantee was to be enforced only if the plaintiff obtained the amount of refund of Customs duty which has been denied by the Government of India. Mr. M. S. Sanghavi has invited me to infer approbation or affirmation of written transaction of bank guarantee from subsequent conduct of the plaintiff and bind the plaintiff by written terms of guarantee in view of about 19 extensions thereof at the instance of the plaintiff prior to the suit. The defendant No. 1 has contended that the plaintiff has waived its rights to complain of duress and fraud and the plaintiff is in any event estopped from raising the said plea. On this aspect, the case of both sides appear to be almost equally balanced and nothing more can be said unless oral evidence is led at the trial. This aspect of the case has given me some anxiety as I am considerably impressed by the plaintiff's case on the first part of the case and not similarly impressed on the second part thereof as discussed above.

37. It was argued that all these pleas are not to be found in the plaint and chips Court cannot go beyond the plaint. I have carefully examined this submission. In my judgment, by and large, the plaint is quite adequate.In paragraph 17 of the plaint, it is clearly stated that an agreement was arrived at between the plaintiff and defendant No. 1 that PPD would be supplied at the domestic/ normal price. In paragraph 20 of the plaint, it is stated that by the time the defendant No. 1 backed out of the transaction, the plaintiff had already incurred expenses of about Rs. 1.7crores towards payment of Customs duty, that the plaintiff was saddled with huge liability and that the very financial viability of the plaintiff was in jeopardy. It is also stated in the said paragraph that the 1st defendant obtained an unfair advantage and bargaining position over the plaintiff and the plaintiff was compelled to accede to the demands of the 1st defendant to furnish the bank guarantee. It is stated in the plaint that it was the mandate of written bank guarantee itself that the said bank guarantee would not be invoked if the amount of refund was not received by the plaintiff from the Government of India. The bank guarantee does not say so. The bank guarantee in terms provides that even if the amount was not refunded, the plaintiff would be liable to pay the amount to the 1 st defendant. To this extent the statement in the plaint appears to be erroneous. If there are any minor lacunae in the plaint, the same can be remedied, but 1 am not prepared to non-suit the plaintiff on such a ground at this stage, as by and large the pleading in the plaint is adequate.

38. It must be stated that in the affidavits filed on behalf of the 1st defendant, the factual statements made in the plaint are not denied, even though the submissions based thereon are denied. 1 need not say anything more on this aspect at this stage.

39. Mr. M. S. Sanghavi, the learned counsel for the defendant No. 1, has submitted that the principles of economic duress cannot be applied in this case as the transaction is a commercial transaction and the plaintiff is not a Parda Nashin lady, but is a professionally managed Corporation. With respect to the learned counsel, it is taking too narrow a view of the law of economic duress and paragraph 82 of the judgment of the Supreme Court in the case of Central InlandWater Transport Corporation Ltd. v. Brojo Nath : (1986)IILLJ171SC (supra) is a complete answer to this submission. Mr. Sanghavi has further submitted that the plaintiff should have stopped further supplies to the defendant unless the defendant No. 1 agreed to pay the domestic price and ought to have taken steps to recover the balance of the price computed on the footing of domestic price by adopting appropriate proceeding in a Court of law. The plaintiff could have done so, but law of economic duress and fraud proceeds on the footing that the wrongdoer cannot take advantage of its own wrong merely because the victim of the wrong was compelled to submit to the wrongful demand of the other party to the contract or the beneficiary of the bank guarantee. In my judgment, there is no merit in this contention also. Mr. Sanghavi has then submitted that the draft of the bank guarantee was mutually approved and the plaintiff executed the same after the draft thereof was approved. It is so. Still the Court will have to consider the circumstances in which the said bank guarantee was executed by the plaintiff and all other facts and circumstances. If the bank guarantee is taken at its face value and the surrounding circumstances are not even to be analysed, the question of examining as to whether the recognised exception is made out or not can never arise. Mr. Sanghavi has submitted that the injunction was refused in the case of Edward Owen Engineering Ltd. v. Barclays Bank, (1978) 1 All ER 976, even though the conduct of the beneficiary could be termed as fraudulent conduct. I respectfully disagree. The Court came to the conclusion that the allegations of fraud were not substantiated and the relief was therefore denied. Mr. Sanghavi has submitted that the judgment of the High Court of Calcutta in Texmaco Ltd.'s case : AIR1979Cal44 , is overruled by the subsequent judgment of the Supreme Court in U.P. Co-operative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd., : [1988]1SCR1124 (supra). It is not possible to agree with this submission. In paragraph 22 of the written submissions it is contended on behalf of the 1st defendant that the real dispute was in respect of subsequentsupplies and not in respect of the order dated 12th December 1983. Mr. Sanghavi has tried to create an impression on the mind of the Court as if the plaintiff had received certain benefits from the Government of India in respect of its claim for drawback etc. It is not possible to accept this submission. It is not to be found in any of the affidavits filed on behalf of the 1st defendant and it is not borne out by the correspondence or other documents on record.

40. In the conclusion, 1 hold that the plaintiff has made out a strong prima facie case establishing at this stage that the 1st defendant had procured the consent of the plaintiff to the stipulation in the bank guarantee for its invocation irrespective of non-receipt of the amount of refund of Customs duty as a result of economic duress and fraud committed by it on the plaintiff and the special equities of the situation also warrant grant of an injunction in favour of the plaintiff as sought for. I must, however, state that the plaintiff has not made out an equally strong prima facie case on the second question i.e. whether the plaintiff has approbated or affirmed the varied transaction by renewal of the bank guarantee after the economic duress has ceased to operate on the mind of the plaintiff. On this aspect as to whether the plaintiff's conduct after release of Rs. 1,48,00,000/- by defendant No. 1 to the plaintiff is consistent with the 1st defendant's case of approbation of the transaction or with the plaintiff's case that the said extensions of the bank guarantee were also obtained by the 1st defendant as a result of duress exercised would, in any event, require recording of oral evidence at the trial. At this stage, both the sides appear to have an equally arguable case on this aspect and it cannot be said that the plaintiff has a strong case and the 1st defendant has a weaker case. I am of the opinion that the plaintiff shall suffer an irreparable loss unless the plaintiff is protected by grant of an interim injunction. I am recording this prima facie conclusion for completion of record, although this aspect is not much relevant in bank guarantee cases.

41. In this view of the matter, the question which I have to ask myself is as to whetherI should dismiss the notice of motion or grant the interim relief by imposing suitable conditions on the plaintiff. However, after carefully considering the various pros and cons of the matter I have come to the conclusion that in view of my prima facie finding on the first question, injunction will have to be granted in favour of the plaintiff, but not unconditionally. The question as to whether the plaintiff can be said to have waived its right to raise the plea against invocation of bank guarantee or is estopped from raising the pleas raised is not free from doubt.

42. In the result, I make the notice of motion absolute in terms of prayer (a), subject to the following conditions:--

(1) The plaintiff shall file written undertaking in Court, within a period of two weeks from today, to renew the said bank guarantee and to keep the same alive during the pendency of the suit till its final disposal and for a period of 8 weeks thereafter.

(2) The plaintiff shall file a written undertaking in Court, signed by its Director, supported by a Board Resolution, within a period of two weeks from today, stating therein that in the event of the suit failing, in addition to the amount of the bank guarantee being available to defendant No. 1, the plaintiff shall also pay amount of interest on the said sum of Rs. 1,48,00,000/ - at the rate of 18% per annum from the date of filing of the suit till payment.

(3) The plaintiff shall deposit a sum of Rs. 50,00,000/- in Court by the following instalments:

(i) Rs. 20 lacs on or before 15th March 1991;

(ii) Rs. 15 lacs on or before 15th May 1991; and

(iii) Rs. 15 lacs on or before 30th June 1991.

43. The hearing of the suit is expedited. The defendants are already directed to file their written statements within a period of four weeks from 17th January 1991. Parties shall complete discovery and inspection within a period of two weeks thereafter. The suit shall be peremptorily placed on board for hearing on 8th July 1991.

44. In the event of the plaintiff committing default in respect of any of Us above-referred obligations, interim injunction shall stand vacated.

45. In case defendant No. 1 desires to withdraw the said amount of Rs. 50 lacs or any part thereof, the defendant No. 1 shall be at liberty to make necessary application to the Court in that behalf and the defendant No. 1 may be permitted to withdraw such amount, subject to their undertaking to refund the amount back with such interest as the Court may award in case the suit succeeds.

46. The Prothonotary shall invest the said amount with a nationalised bank in fixed deposit for such duration as he deems fit, unless the defendant No. 1 exercises the liberty to withdraw the said amount on terms aforesaid.

47. Costs of the notice of motion shall be costs in the cause.

48. Notice of motion made absolute.


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