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CASE NO.: Appeal (civil)  5151 of 2006

PETITIONER: M/s. Reliance Salt Ltd

RESPONDENT: M/s. Cosmos Enterprises & Anr

DATE OF JUDGMENT: 22/11/2006

BENCH: S.B. Sinha & Dalveer Bhandari

JUDGMENT: J U D G M E N T (Arising out of SLP (C) No.2749 of 2006)

S.B. Sinha, J.

       Leave granted.   

The 1st Respondent herein was appointed as a Consignment Agent by  an agreement dated 23.12.1993 in regard to the sale of products of the  Appellant Company-plaintiff, namely, Salt and Tea in South and Central  Bihar.  In terms of the said agreement it was required to furnish a Bank  Guarantee for a sum of Rs.5 lakhs.  The transactions between the parties  started in January, 1994.  Some of the clauses in the said Bank Guarantee are  as under :

".......We................................(hereinafter referred to as  the Bank) do hereby agree to pay the Principal Co. an  amount not exceeding Rs.6,00,000/- (Rupees Six Lacs  only) against any loss or damage caused to or suffered or  would be caused to or suffered by the Principal Co. by  reason or any breach of contract by the consignment  agent as their due performance of their duties as  consignment agent for the Principal Co., the major term  being settlement of the Principal Co.’s bills by the  consignment agent within 30 days from the date of  receipt of material.

(2)     We......................(Bank) do .............. hereby  undertake to pay the amounts due and payable under this  guarantee without any demur merely on a demand from  the Managing Director or any other director of the  Principal Co. stating that the amount claimed is due by  way of loss or damage caused to suffered by the Principal  Co. by reason of any breach of contract for non payment  of the Principal Company’s bills within 30 days from the  date of receipts of materials by the consignment agent of  any of the terms and conditions agreed upon/to be agreed  in performance of their duties of consignment agent on  behalf of the Principal Co.  Any such demand made on  the ......... (Bank) shall be conclusive as regard the  amount due and payable by the Bank under this  guarantee.

(3)     We ....................... (Bank) further agree that the  guarantee shall remain in full force and effect for a  period of 12 (Twelve) months from the date of issue of  this guarantee or till the period that would be taken by the

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consignment agent for the due performance of their  duties as consignment agent on behalf of the Principal  Company on the terms and conditions mutually agreed  upon/to be agreed upon shall continue to be enforceable  till all the dues of the Principal Company have been fully  paid and its claims satisfied or discharged or till the  Managing Director or any other director of the Principal  Company certified that the due performance of their  duties as consignment agent have been fully and properly  carried by the consignment agent and accordingly  discharge the Guarantee, which ever date is earlier.

(4)     We .................. (Bank), further agree with the  Principal Company that the Principal Company have  been fullest liberty without our consent and without  AFFECTING IN ANY MANNER.  Our OBLIGATIONS  HEREUNDER to vary any of the terms and conditions  agreed/to be agreed with the consignment agent in the  due performance of their duties as consignment agent or  to extent time of performance by the consignment agent  from time to time any of the power exercisable by the  Principal Company against the consignment agent and to  forbear or enforce any of the terms and conditions agreed  upon and we shall not be relieved from our liabilities by  the reason for any such variation or extension being  granted to the consignment or any forbearance act or  omission on the part of the Principal Company or any  indulgence by the Principal Company or any indulgence  by the Principal Company to the Consignment Agent by  any such manner or thing whatsoever which under the  law relating to sureties would but for this provision have  effect of so relieving us."          

       Pursuant to or in furtherance of the agreement entered into by and  between the parties herein, the 1st Respondent furnished a Bank Guarantee  of Rs.5 lakhs issued by Respondent No.2, Bank of India, Muradpur,  Chouhatta Branch, Patna on 12.1.1994.            Indisputably, the business dealings between the parties continued upto  July, 1994.  Appellant’s bills allegedly remained unpaid for more than 30  days after the same had been raised amounting to Rs.5,04,739.92p.  The said  Bank Guarantee was invoked by letter dated 4.8.1994 whereabout  Respondent No.2 intimated to 1st Respondent.  A Title Suit No.316/94 was  filed by 1st Respondent herein in the Court of Subordinate Judge at Patna,  inter alia, for the following reliefs :

"(a)    declaration that the petitioner is not entitled to  invoke the Bank Guarantee for Rs.5 lakhs.

(b)     order of injunction restraining the respondent No.2  from encashing the Bank Guarantee at the instance  of the petitioner"

       In the said suit, whereas Appellant filed a written statement, the Bank  did not choose to file any.  The suit was decreed on contest against  Appellant and ex parte against Respondent No.2.  An appeal taken therefrom  by Appellant before the Patna High Court being First Appeal No.28/1997  was dismissed by a learned Single Judge by an order dated 31.7.2000.  An  intra-court appeal was filed as against by Appellant, which was found to be  not maintainable, purported to be in view of the amended provisions of  Section 100-A of the Code of Civil Procedure.           The learned Trial Judge framed several issues, the issue No.7 being :

"VII.        Is the defendant no.1 is entitled to invoke the     

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             bank guarantee in question?"       

       The learned Trial Judge, inter alia, found that (i) the invocation of  Bank guarantee was vitiated by fraud; and (ii) the 1st Respondent would  suffer irreparable injury in regard to the issue of fraud.   

       It was held :

"So, I find that plaintiff has made a specific plea of the  case of fraud and irreparable harm in his pleading and  therefore, the plaintiff is entitled to establish the fact of  fraud and irreparable harm, the exceptions for granting  injunction in case of invoking bank guarantee."

       In the very nature of the things fraud is secret in its  origin or inception and in the means adopted for its  success.  Each circumstances of by itself may not mean  much, but taking all of them together they may reveal a  fraudulent and dishonest plea.

       So, the plaintiff is able to establish that the dealing  of the plaintiff was sincere for the business whereas the  defendant No.1 has not made sincere dealing which  caused irregularity in supply and other difficulties for  which the plaintiff made complaint to the defendant No.1  time to time.

       Now from the perusal of the Ext. E, the original  bank guarantee, it is clear that the bank guarantee was  revocable on the ground of any loss and damage caused  to the defendant No.1 due to breach of the contract by the  plaintiff or due to no-settlement of the bills of the  defendant No.1 within 30 days from the date of those  bills.

       From the perusal of the letter dated 4.8.94 of  Defendant No.1 to the Bank of India, Muradpur,  Chouhatta Branch, Patna, it is clear that the ground for  invoking the Bank Guarantee as stated in the letter dated  4.8.94 is only non payment of the bills within the  stipulated period.  Therefore there is no ground of loss or  damage caused to the Defendant No.1 due to non  performance of work in business by the plaintiff or due to  any breach of contract by the plaintiff."     

       The learned Trial Judge further opined that the evidence of the  plaintiff corroborated in the form of contemporary documents as well as the  unexplained failure of the beneficiary to respond thereto would lead to the  conclusion that the only realistic inference to draw would be fraud, holding :

"The defendant No.1 has not submitted any document in  support of the balance amount as given in the written  statement whereas the plaintiff has filed all the relevant  documents regarding his accounting in order to prove  that actually up to 31.7.94 only Rs.32,864.35 paise was  due."

"Besides, the defendant had filed objection petition of the  injunction petition of the plaintiff on 23.8.94 and there  has been annexure given as Annexure A in which  detailed account of the dealing of business has been also  given.  In this, bill dated 16.7.94 is given as the last bill  amounting to Rs.28,000/-."

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"So it appears that up to 16.7.94 the defendant No.1 has  sent goods to the plaintiff and in that case the bill dated  16.7.94 is liable to be paid up to 16.8.94 i.e. within 30  days as per the terms of the agreement vide Ext. (1) and  defendant No.1 is entitled to invoke the bank guarantee  only after the lapse of 30 days from the date of bill as  stipulated in the deed of bank guarantee Ext. E."

"In this view of the fact the amount given in Ext. D does  not seem to be correct and the account given in the  written statement vide para 9 also does not seem to be  correct."

"The absence of these things indicate that the action of  defendant no.1 was not clean and honest rather it was  fraudulent one and therefore, the invocation of bank  guarantee was made by way of fraud."

"Therefore, the defendant No.1 had difference with the  consigning agent in the State of Uttar Pradesh and  Andhra Pradesh.  This circumstance also leads to show  that the action of the defendant No.1 was of a fraudulent  nature."   

       In regard to the issue of irreparable injury, it was held :

"In the instant case, as discussed above, on the basis of  oral and documentary evidence, I find that the defendant  No.1 had played fraud for withdrawing the amount of  bank guarantee and it will also cause irreparable harm to  the plaintiff.  Therefore this case comes in purview of the  exception given in the settled law and accordingly,  injunction can be granted and defendant No.1 can be  prevented from invoking the bank guarantee.  Thus, this  issue is also decided in favour of the plaintiff and against  the defendant."

       The High Court in its judgment opined that although the bank cannot  be prevented from honouring the Bank Guarantee as and when demanded by  the beneficiaries except in the case of fraud which would vitiate the entire  transaction.  It was further opined that the plaintiff in paragraph 11, 16 and  19 of the plaint, specifically and clearly pleaded about the fraud played on  the part of Appellant herein.  It was furthermore stated that Appellant ought  to have produced and proved all its Books of Accounts to show that the  accounts furnished by the plaintiff were not correct.   

       Before we embark upon the rival contentions of the parties, it would  be necessary to notice the salient features of the Bank Guarantee.  The Bank  Guarantee was limited to the extent of Rs.5 lakhs.  It was given only against  any loss or damage caused to or suffered by the Principal Company, by  reason or any breach of contract by the consignment agent their due  performance of the duties of consignment agent of the Principal Company,  the major terms being settlement of the Principal Company’s bills by the  consignment agent within 30 days from the date of those bills.  The Bank  undertook to pay the amounts due without any demur and merely on demand  by the Company.  Such payment was merely to be made on the basis of a  statement that the amount claimed, inter alia, is due by way of loss or  damage caused to suffer by the Principal Company by reason of any breach  of contract for non-payment of the Principal Company’s bill by the  consignment agent of any of the terms and conditions to be agreed upon in  performance of their duties of Consignment Agent on behalf of the Principal  Company.  Any such demand made on the Bank of India should be  conclusive as regards the amount due and payable by the Bank under the  said Bank Guarantee.  It was furthermore stated :

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"......that the Bank Guarantee shall remain in full force  and effect for a period of 12 (twelve) months from the  date of issue of this guarantee or till the period that would  be taken by the Consignment Agent on behalf of the  Principal Company as the terms and conditions mutually  agreed upon shall continue to be enforceable till all the  dues of the Principal Company have been fully paid and  its claim satisfied or discharged or till the managing  director or any other director of the Principal Company  certified that the due performance of their duties as  Consignment Agent have been fully and properly carried  out by the Consignment Agent and accordingly discharge  the guarantee whichever date is earlier."     

       In its judgment, the learned Single Judge referring to paragraphs 11,  16 and 19 of the plaint, stated :

".......In para 11 it has been stated that "they are not ready  for settlement of the account as that would reveal their  own fault and misconduct" and the defendant No.1 intent  to somehow or other to obtain huge amount of the  plaintiff and thereafter vex and harassed the plaintiff in  refunding the same."  Similarly, in para 16 of the plaint it  has been stated that defendant No.1 is guilty of  misconduct, irregularity, deception, misrepresentation  and fraud etc. and under the circumstances, the defendant  has no right to invoke the bank guarantee."  

       Paragraphs 11, 16 and 19 of the pleadings and the evidences adduced  on behalf of 1st Respondent, thus, were confined to the issue of inferior  quality of supply, late supply and short supply of consignments.                    "Fraud" is defined in Section 17 of the Indian Contract Act, 1872 in  the following terms :

"S.17.   "Fraud" defined.\026 "Fraud" means and includes  any of the following acts committed by a party to a  contract, or with his connivance, or by his agent, with  intent to deceive another party thereto or his agent, or to  induce him to enter into the contract :

(1)     the suggestion, as a fact, of that which is not true,  by one who does not believe it to be true; (2)     the active concealment of a fact by one having  knowledge or belief of the fact; (3)     a promise made without any intention of  performing it; (4)     any other act fitted to deceive;  (5)     any such act or omission as the law specifically  declares to be fraudulent.       

Explanation. \026 Mere 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."

       A bare perusal of the contents of the Bank Guarantee, as noticed  hereinbefore, shows that there is no escape from arriving at a conclusion that  the guarantee furnished was an unconditional one.  It not only provided for  loss or damage in case of breach of contract, but also loss or damage by  reason of non-settlement of bills.  Such bills under the agreement of

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consignment were to be settled within a period of 30 days.  In the event the  bills are not settled within the period stipulated in the agreement, the parties  intended, as it appears from the tenor of the Bank Guarantee, that the same  would constitute a breach of contract.  It is not in dispute that some amount  was due to the Appellant from the Respondent.  The suit was not a suit for  settlement of accounts.  The suit was, inter alia, only for a decree for  injunction restraining Appellant from invoking the Bank Guarantee.   Respondent No.2-Bank, indisputably, did not controvert allegations  contained in the demand of the appellant.  It did not contest the suit.  It even  did not support Plaintiff-Respondent No.1 before the learned Trial Judge or  before the High Court.                    A claim which is denied or disputed, in the event of necessity for  determination of the lis, may not be found to be correct.       If Appellant was to  allege a breach of contract in a properly framed suit, Respondent No.1 could  also allege the breach of contract on the part of Appellant herein.  Breach of  contract by reason of supply of inferior quality of tea or salt or delay in  supply or a short supply may render a party responsible for damages for  commission of breach of contract, but, breach of contract alone does not lead  to the conclusion that a fraud had been committed thereby.  It is contended  that commission of fraud would include any act to deceive but then such act  must be confined to acts committed by a party to a contract with intention to  deceive another party or his agent or to induce him to enter into a contract.   Fraud, which vitiates the contract, must have a nexus with the acts of the  parties prior to entering into the contract.  Subsequent breach of contract on  the part of a party would not vitiate the contract itself.   

       "Contract of guarantee" is defined under Section 126 of the Indian  Contract Act in the following terms :                  "126. ’Contract of guarantee’, ’surety’,  ’principal debtor’ and ’creditor’ \026 A ’contract of  guarantee’ is a contract to perform the promise, or  discharge the liability, of a third person in case of his  default.  The person who gives the guarantee is called the  ’surety’; the person in respect of whose default the  guarantee is given is called the ’principal debtor’ and the  person to whom the guarantee is given is called the  ’creditor’.  A guarantee may be either oral or written."         

       Bank Guarantee constitutes an agreement between the Banker and the  Principal, albeit, at the instance of the promisor.  When a contract of  guarantee is sought to be invoked, it was primarily for the bank to plead a  case of fraud and not for a promisor to set up a case of breach of contract.   

       The discrepancies in the bills or non-submission of the detailed  account in respect of business cannot be a ground for denial of encashment  of Bank Guarantee if it is otherwise invokable.   

       Although, the learned Trial Judge as also the High Court observed that  the Bank Guarantee was invokable after lapse of 30 days from date of the  bill, as stipulated therein, on its own terms the Bank was bound to pay the  amount in question on its invokation, subject of course to the fulfillment of  the other conditions laid down therein.  It could not have refused to honour  its commitment only because the purported accounts were not settled  between the parties or the accounts furnished to the Court were wrong ones.   The other reasons assigned by the learned Trial Judge as also the High Court  that the conduct of Appellant was not clean or it had tried to defraud  other  customers in other parts of the State, in our considered opinion, are of not  much significance in view of the nature of the guarantee furnished by the  Bank.  

       Submission of Mr. Ranjit Kumar that after the judgment of the High  Court the 1st Respondent has got all documents released, cannot be a ground  to refuse invokation of Bank Guarantee by Appellant, if it was otherwise

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entitled thereto.   

       We, therefore, are of the opinion that the impugned judgments cannot  be sustained.  They are set aside accordingly.  The appeal is allowed.  This  order shall not, however, come in the way of Respondents to file a suit for  accounts or take other measures which are available to them in law.   Respondent No.1 shall pay and bear the costs of Appellant in the appeal.   Counsel fee assed at Rs.10,000/-.