1. This judgment disposes of O.M.P. No. 62 of 1982 and I.A. No. 1719 of 1982. The application (I.A. No. 1719 of 1982) is for issue of a temporary injunction restraining the State Bank of Patiala, Shardhanand Marg, Delhi, from encashment of the bank guarantee given at the instance of M/S. Banwari Lal Radhe Mohan (hereinafter referred to as 'the petitioners') in favor of the Punjab State Co-operative Supply and Marketing Federation Ltd. (hereinafter referred to and commercially known as 'the MARKFED'). O.M.P. No. 62 of 1982 is for issue of a direction to the MARKFED that the latter should not withhold payment of Rs. 24,39,431.96 during the pendency of the arbitration proceedings between the parties.
2. There is no dispute of some of the facts. On May 14, 1981, a contract was entered into between the State Trading Corporation Ltd. (hereinafter referred to as 'the STC') and M/s. Sulaiman Al-Mohammad Al-Rashid of Saudi Arabia (hereinafter referred to as 'the foreign buyer') for supply of superior basmati sela rice by the former to the latter. The STC then entered in to some agreements with various parties including the MARKFED for the supply of a portion of the contracted rice for onward shipment to the foreign buyer. The agreement which was entered into with MARKFED is dated June 29, 1981. Then the MARKFED entered into an agreement dated July 16, 1981, with the petitioners for supply of 2,000 metric tons of superior basmati sela rice at the railhead at Delhi in August/September, 1981, according to that agreement, the petitioners had to furnish a bank guarantee to the extent of Rs. 5.27 lakhs for the performance of the agreement. Accordingly, the petitioners furnished a bank guarantee of that amount of the State bank of Patiala, Shardhanand Marg, Delhi. Pursuant to the said agreement, they supplied 13,71,928.215 kgs. of rice. The MARKFED paid a sum of Rs. 49,18,286.74 in satisfaction of the price of part of the rice supplied by the petitioners. The petitioners made a demand for payment of the balance of Rs. 24,39, 431.96. The reply of the MARKFED was that the rice which was supplied was not in accordance with the terms of the contract and that the same was sub-standard on account of which the same was rejected by the foreign buyer.
3. According to the petitioners, the rice supplied was in accordance with the specification and was not sub-standard and that they are entitled to the balance of the price.
4. The petitioners entertained an apprehension that instead of paying the balance price, the MARKFED would resort to encashment of the bank guarantee. They, thereforee, brought I.A. No. 4316 of 1981 in Suit No. 1392-A of 1981 for issue of an ex parte temporary injunction restraining the MARKFED from encashment of the aforesaid bank guarantee. That application was decided by H. L. Anand J. along with such other application in other matters. The judgment of H. L. Anand J. is in Banwari Lal Radhe Mohan V. Punjab State Co-operative Supply and Marketing Federation Ltd., : AIR1982Delhi357 . It was laid down by H. L. Anand J. that it is well settled that performance guarantees, even though having their genesis in the primary contract between the parties, are nevertheless autonomous and independent contracts, that a bank which gives a performance guarantee must honour that guarantee according to its terms and that it is not concerned in the least with the relations between the supplier and the customer, nor with the question whether the supplier has performed his contracted obligations or not nor with the question whether the supplier is in default or not and that the only exception is when there is a clear fraud, of which the bank has notice. In respect of the guarantee involved in this case, it was held that it was absolute and that the same could be got encased by way of making a demand in accordance with its terms by the MARKFED. In respect of this guarantee, the following observations were made in para. 7 (P. 361) which read as under :
'In the case of I.A. No. 4316 of 1981, on the ex parte interim injunction being granted by this court, the respondents have not as yet taken recourse to the guarantee bond. The question whether the demand in this case is in conformity with the bond or not does not, thereforee, arise. Such a question would arise only after the respondents take recourse to the bond and call upon the bank to pay. The interim order is liable to be vacated so as to entitle the respondent to take recourse to the guarantee in accordance with its terms. The further interim relief by way of mandatory order for the payment of the balance amount was not pressed for obvious reasons.'
5. The application of the petitioners for issue of injunction was dismissed. The petitioners brought an application for review, which was also dismissed. Thereafter, they brought O.M.P. No. 62 of 1982 and I.A. No. 1719 of 1982.
6. The contention of the petitioners is that the MARKFED had committed a fraud inasmuch as in proceedings under s. 20 of the Arbitration Act, 1940, brought against it by the STC, it had taken a plea that the contract of supply of rice stood performed while intentionally in the present litigation, with a view to have unjust enrichment by way of encashment of guarantee, it is misrepresenting that the performance of the contract did not take place as sub-standard rice was supplied by the petitioners.
7. A preliminary objection was raised by the learned counsel for the MARKFED. He stated that the present application were barred by the judgment aforementioned of H. L. Anand J. It was explained that although the question of fraud did not figure in the original application for issue of temporary injunction, yet the same was brought before the court by way of review petition which was dismissed thereby meaning that the plea of fraud had no substance.
8. I have already reproduced para 7 (page 361) of the judgment of H. L. Anand J. It is clear from the same that it was held that the previous application for issue of injunction of the petitioners was not maintainable because no demand for encashment of guarantee was made at that time by the MARKFED. That clearly means that the dismissal of the aforesaid application proceeded on the ground of the same being premature. It is true that the petitioners did bring a review petition in which they mentioned about the existence of fraud. That petition was dismissed in liming and no adjudication was made in respect of respect of perpetration of fraud or otherwise, obviously because till then the ground of the application being premature existed as no demand for encashment of bank guarantee was made by the MARKFED. thereforee, the present application are not barred by the judgment of H. L. Anand J. and I proceed to determine them on merits.
9. The proposition of law in respect of encashment of bank guarantees is well settled. There are two types of performance guarantees. The first are the ones which are absolute and they are excusable on the very demand of the beneficiary and the demand according to the terms of the guarantee is conclusive. In such types of guarantees, the beneficiary is the sole judge or arbiter as to whether there is any breach of the underlying or primary contract on the part of the other party and as to how much amount is due to the former. The other type is where guarantee is not excusable without proof of breach of the underlying contract. However, in both types of guarantees, the bank issuing the performance guarantee is not concerned with the underlying contract. The duties of a bank in such guarantees are created by the document itself which, in other words, is 'independent' and autonomous and is not concerned with the underlying contract unless the guarantee itself says that it will be enforceable on the proof of breach of the primary underlying contract. There is, however, only one exception which is stated in the following words in United Commercial Bank v. Bank of India, : 3SCR300 :
'Except possibly in clear cases of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or as stipulated in the contracts.'
10. It is on the exception that the petitioners rely in this case and there is no dispute that guarantee in this case was absolute in terms as held by H. L. Anand J. in Banwari Lal Radhe Mohan v. Punjab State Co-operative Supply and Marketing Federation Ltd., : AIR1982Delhi357 . The guarantee can be excusable on a mere demand couched in the language in terms of the guarantee. As already mentioned, the case of the petitioners is that the MARKFED is pleading performance of the contract as against the STC with a view to save it self from the encashment of guarantee furnished by it to the STC while as against the petitioners, the same MARKFED is misrepresenting that there was no performance of the contract for the supply of the very same rice with a view to have unjust enrichment by way of wrongful encashment if the guarantee furnished by the petitioners. The counsel for the MARKFED contended that, firstly, there was no question of any fraud or attempt at fraud because actually it was the petitioners who are guilty of fraud and misconduct inasmuch as in spite of the fact that sub- standard rice was supplied, they misrepresented to MARKFED that rice was in accordance with the specifications and obtained a huge amount of Rs. 49,18,286.74. It is also contended by the counsel for the MARKFED (Shri Kapil Sibel) that fraud which is contemplated by the exception is the one which relates to the contract of guarantee it self, for instance in its obtaining in respect of documents relating thereto and that the said fraud does not relate to underlying or primary contract while in the present case, fraud pleaded by the petitioners relates to the performance of the underlying contract.
11. thereforee, the first question is as to what type of fraud is contemplated (as exception to the general rule regarding the contract of guarantee) in the aforesaid Supreme Court authority as well as other authorities : Banwari Lal Radhe Mohan v. Punjab State Co- operative Supply & Marketing Federation Ltd., : AIR1982Delhi357 , and National Oils & Chemical Industries v. Punjab and Sind Bank Ltd., : AIR1979Delhi9 .
12. As already mentioned the contract of guarantee is independent of the underlying contract and is autonomous. The necessary corollary of such independence and autonomy is that one is not to go beyond that contract and has not to look to any other contract including the underlying or primary one. As already stated, performance of underlying contract comes into the picture only if the guarantee itself makes its encashment subject to proof of performance of former contract. If scrutiny is commenced in respect of the performance of the underlying contract, obviously the 'autonomy' and 'independence' of the contract of an absolute guarantee will be lost and the enforcement of the same will acquire 'dependence' upon the result of the enquiry relating to the former (underlying) contract. Hence, the fraud which is contemplated by the exception is one which has direct connection with the contract of guarantee in respect of its coming into existence, continuance, etc.
13. Even otherwise, there is no prima facie case of fraud. The conduct of MARKFED has been fair. It paid such a huge amount of Rs. 49,18,286.74 to the petitioners. That clearly indicated that the MARKFED genuinely and bona fide entertained a belief that the petitioners had performed the contract. Learned counsel for the MARKFED contended that in fact it was the petitioners who committed fraud by way of supplying sub- standard rice thereby exposing MARKFED to the risk of paying damages to the STC. He also contended that it was for committing fraud and by underhand means that the petitioners obtained a report of M/s. S. G. B. (India) P. Ltd. for the purposes of showing that the quality of rice was according to the specification contained in the contract and thereby misled and cheated the MARKFED to part with a huge amount or more than Rs. 49,00,000 and the aforesaid allegation of MARKFED require determination in appropriate legal proceedings which, as it appears, will be arbitration proceedings. So, it cannot be said even on the face of it that the MARKFED should be tied down with its admission about the performance of the contract of supply of rice and it should be held that its move to get an encashment of guarantee is based on misrepresentation, that there was no non, performance of the contract and its object is to have wrongful gain or what Dr. L. M. Singhvi, counsel for the petitioners, described as 'unjust enrichment'.
14. Counsel for the petitioners contended that, according to the contract between MARKFED and the petitioners, the only obligation of the petitioners was to get the rice inspected by M/s. S. G. S. (India) P. Ltd. and deliver the same at the railhead at Delhi, that they got the rice inspected by M/s. S. G. S. (India) P. Ltd. who had approved the quality, that the rice was duly delivered at the railhead at Delhi and thus the contract of the petitioners stood performed and that hence there was not question of any breach on their part so as to justify the forfeiture of the security by way of encashment of guarantee. The learned counsel also relied upon s. 7 of the Export (Quality Control and Inspection) Act, 1963 (hereinafter referred to as 'the Export Act'). Section 7, inter alia, says that the Central Government may by notification in the Official Gazette establish or recognise agencies for quality control or inspection or both and that the opinion of such recognised agency shall be final subject to filing of an appeal against opinion. Learned counsel further points out that by way of notification dated September 30, 1980, published in the Gazette of India, Extraordinary, dated February 24, 1982, M/s. S. G. S. (India) P. Ltd. was recognised as one of the agencies for the aforesaid inspection under s. 7 of the Export Act, that, in the present case, the said agency inspected the rice and that, thereforee, the opinion of that agency in favor of the petitioners had statutory finality.
15. But the aforesaid matters relate to the performance of the underlying contract and will have to be considered in appropriate legal proceedings. They cannot be taken into consideration in respect of the matter of encashment of bank guarantee because the contract of guarantee is to be dealt with independently of the underlying contract. It may, however, be mentioned that the learned counsel for the MARKFED stated at the Bar that it was by way of underhand means that the certificate of M/s S. G. S. (India) P. Ltd. was procured by the petitioners, that consequently inspection was got done from other agencies recognised under the Export Act and that they gave an opinion that the rice supplied by the petitioners was substandard. That contention of the MARKFED will have to be taken into consideration in the appropriate proceedings.
16. For the foregoing reasons, the petitioners are not entitled to any injection and thus their application, I.A. No. 1719 of 1982, is liable to be dismissed. They are not also entitled to the relief prayed for in O.M.P. No. 62 of 1982. In case that relief to the effect that the MARKFED should not withhold payment of Rs. 24,39,431.96 to the petitioners is granted, it will obviously mean that the MARKFED would be directed to pay the said amount to the petitioners without affording the former any opportunity of being heard and present its case. It will be only during the appropriate legal proceedings (which in the present case most probably would be arbitration proceedings) that it would be found if the petitioners are entitled to recover any amount, at all, from MARKFED and, if so, how much.
17. Whatever has been stated above is merely tentative without prejudice to the ultimate decision of the disputes between the parties in appropriate legal proceedings.
18. Under the above circumstances, I dismiss both I.A. No. 1719 of 1982 and O.M.P. No. 62 of 1982 and vacate the injunction order already issued. However, I leave the parties to bear their own costs.